SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE TRANSITION PERIOD FROM ______ TO ______

                         COMMISSION FILE NUMBER: 0-22985

                           CASTLE DENTAL CENTERS, INC.

                                    DELAWARE
         (State or other jurisdiction of incorporation or organization)

                                   76-0486898
                      (I.R.S. Employer Identification No.)

                         1360 POST OAK BOULEVARD, SUITE 1300
                                 HOUSTON, TEXAS

                    (Address of principal executive offices)

                                      77056
                                   (Zip Code)

                                 (713) 479-8000
              (Registrant's telephone number, including area code)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes.[X]   No. __

        Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (ss.229.405 under the Securities Exchange Act of
1934) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

        As of March 26, 1998, there were 6,237,581 shares of Castle Dental
Centers, Inc. Common Stock, $.001 par value, issued and outstanding 3,252,338
of which, having an aggregate market value of approximately $34.1 million were
held by non-affiliates of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the proxy statement related to the registrant's 1997 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1997, are incorporated by reference into Part III
of this Form 10-K.
<PAGE>
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                             PAGE
<S>  <C>
Item 1.    Business.......................................................................     1
           The Company....................................................................     1
           The Dental Industry............................................................     2
           Business Strategy..............................................................     3
           Dental Network Development.....................................................     4
           Services.......................................................................     6
           Operations.....................................................................     6
           Sales & Marketing..............................................................     8
           Competition....................................................................     8
           Management Information Systems.................................................     8
           Regulation.....................................................................     9
           Employees......................................................................    11
           Corporate Liability and Insurance..............................................    11
Item 2.    Properties.....................................................................    11
Item 3.    Legal Proceedings..............................................................    12
Item 4.    Submission of Matters to a Vote of Security Holders............................    12
Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters..........    13
Item 6.    Selected Financial Data........................................................    14
Item 7.    Management's Discussion and Analysis of Financial Condition
               and Results of Operations..................................................    15
           Introduction...................................................................    15
           Results of Operations..........................................................    16
           Liquidity and Capital Resources................................................    21
           Recently Issued Pronouncements.................................................    23
Item 8.    Financial Statements and Supplementary Data....................................    24
Item 9.    Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure...................................................    24
Item 10.   Directors and Executive Officers of the Registrant.............................    25
Item 11.   Executive Compensation.........................................................    25
Item 12.   Security Ownership of Certain Beneficial Owners and Management.................    25
Item 13.   Certain Relationships and Related Transactions.................................    25
Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K................    27
</TABLE>

                       NOTE ON FORWARD-LOOKING STATEMENTS

        This Form 10-K contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K are forward-looking
statements. When used in this document, the words, "anticipate," "believe,"
"estimate" and "expect" and similar expressions are intended to identify such
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and are subject to certain uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from expectations ("Cautionary Statements") are disclosed in this
Form 10-K, including without limitation in conjunction with the forward-looking
statements included in this Form 10-K. Should one or more of these uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from expectations. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
<PAGE>
ITEM 1.    BUSINESS

THE COMPANY

        The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and multi-specialty
dental practices in the United States. The Company currently conducts operations
in the states of Texas, Florida and Tennessee. In January 1998, the Company
signed a definitive agreement to acquire 80% of a dental practice management
company in Los Angeles, California. The Company does not engage in the practice
of dentistry but rather establishes integrated dental networks by entering into
management services agreements with affiliated dental practices to provide on an
exclusive basis management and administrative services to affiliated dental
practices. The Company's strategy is to provide high-quality care in selected
markets with a view to achieving broad geographic coverage within those markets.
The Company seeks to achieve operating efficiencies by consolidating and
integrating affiliated practices into regional networks, realizing economies of
scale in such areas as marketing, administration and purchasing and enhancing
the revenues of its affiliated dental practices by increasing both patient
visits and the range of specialty services offered. As of December 31, 1997, the
Company provided management services to 42 dental centers with 125 affiliated
dentists, orthodontists and other dental specialists.

        The Company's objective is to make each of its dental networks the
leading group dental care provider in each market it serves. Since its
formation, the Company has applied traditional retail principles of business and
marketing techniques to the practice of dentistry, including locating practices
in high-profile locations, offering more affordable fees and payment plans,
expanding the range of services offered, increasing market share through
targeted advertising and offering extended office hours. By using the Castle
Dental Centers' approach to managing affiliated dental practices, the Company
believes it will enable affiliated dentists, orthodontists and other dental
specialists to focus on delivering quality patient care and to realize
significantly greater productivity than traditional individual and small-group
dental practices.

        The Company believes that the provision of a full range of dental
services through an integrated network is attractive to managed care payors and
intends to continue to pursue managed care contracts. The Company's affiliated
dental practices currently maintain an aggregate of 20 capitated managed care
contracts covering approximately 55,000 members. The Company believes that the
continued development of its networks will assist it in negotiating national and
regional capitated arrangements with managed care payors on behalf of the
affiliated practices.

        The Company intends to utilize the practice management principles
employed in its Houston operations to establish a consistent national identity
for its business. Moreover, the Company believes that its experience and
expertise in managing multi-specialty dental group practices, as well as the
development of name recognition associated with the name "Castle Dental
Centers," will provide its affiliated dental practices with a competitive
advantage in attracting and retaining patients and realizing practice
efficiencies.

        The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through 1996, the Company expanded to a total of 10 locations
with 39 dentists in the Houston metropolitan area. During this period the
Company developed, implemented and refined the integrated dental network
approach that it intends to utilize as a basis for its national expansion.

        There presently are 13 Castle Dental Centers operating in the Houston,
Texas area and 3 additional centers in Houston in various stages of development.
In May 1996, the Company acquired the assets of and entered into long-term
management services agreements with 1st Dental Care, a dental practice with 11
locations in the Tampa/Clearwater, Florida area, and Mid-South Dental Centers, a
dental practice with six dental centers in various locations in Tennessee. In
August 1996, the Company increased its dental practices under management in
Texas by acquiring the assets of Horizon Dental Centers, a dental practice with
four dental centers in Fort Worth, Texas and four dental centers in Austin,
Texas. In September 1997, the Company acquired SW Dental Associates, LC, a
dental practice with four dental centers in the Austin,


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<PAGE>
Texas metropolitan area. In December 1997, the Company acquired substantially
all the assets of two individual practices in Ft. Worth, Texas and Nashville,
Tennessee. (All of the acquisitions are collectively referred to as the
"Completed Acquisitions.")

THE DENTAL INDUSTRY

        Dental care services in the United States are generally delivered
through a fragmented system of local providers, primarily sole practitioners, or
small groups of dentists, orthodontists or other dental specialists, practicing
at a single location with a limited number of professional assistants and
business office personnel. According to the American Dental Association 1995
Survey of Dental Practice ("ADA Survey"), there were approximately 150,800
actively practicing dental professionals in the U.S., of which approximately
8,900 were practicing orthodontists. Nearly 81% of the nation's private
practitioners work either as sole practitioners or in a practice with one other
dentist. The balance of these dentists practice in about 4,700 groups of three
or more dentists. However, dental, orthodontic and other specialty practices
have followed the trend of the health care industry generally and are
increasingly forming larger group practices.

        The annual aggregate domestic market for dental services was estimated
by the Health Care Financing Administration, Health Care Financing Review (1995)
to be approximately $42.9 billion for 1995, representing approximately 4.3% of
total health care expenditures in the United States, and is projected to reach
$79.1 billion by 2005. Within the total market for dental services in the United
States, there are, in addition to general dentistry, a number of specialties,
including orthodontics (the straightening of teeth and remedy of occlusion),
periodontics (gum care), endodontics (root canal therapy), oral surgery (tooth
extraction) and pedodontics (care of children's teeth). The dental services
market has grown at a compound annual growth rate of approximately 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% through the year 2005. In contrast to other health care
expenditures, dental services are primarily paid for by the patient. According
to the U.S. Department of Health and Human Services, in 1995, consumer
out-of-pocket expenditures accounted for 53% of the payment for dental services,
compared to 19% for other medical services.

        The Company believes that the growth in the dental industry has largely
been driven by four factors: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic; and (iv) an increased focus on preventive and cosmetic dentistry.

        Concerns over the accelerating cost of health care have resulted in the
increasing importance of managed care in the dental industry. Managed care
typically involves a third party (frequently the payor) assuming responsibility
for ensuring that health care is provided in a high-quality, cost-effective
manner. According to industry sources, approximately 18.6% of the estimated
118.5 million people covered by dental benefits in 1995 were enrolled in managed
care programs. It is estimated that managed care's penetration of this group
will increase to 35% of the 131 million people expected to be covered by dental
benefits in the year 2000. Enrollment in managed dental care plans, according to
the National Association of Dental Plans, is estimated to have grown from 7.8
million patients in 1990 to 22.8 million patients in 1995.

        The Company believes that the provision of dental, orthodontic and other
specialty care will follow the pattern set by other segments of the health care
industry, moving away from the sole practitioner model to a group practice
environment in which a separate professional management team handles personnel,
management, billing, marketing and other business functions. The trends which
are leading dentists to affiliate with dental practice management companies
include: (i) the increasingly capital intensive nature of acquiring and
maintaining state-of-the-art dental equipment, laboratory and clinical
facilities; (ii) the growing need to develop and maintain specialized management
information

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<PAGE>
and billing systems to meet the increasing demands of payors; and (iii) the
increasingly more complicated, competitive and regulated business environment
for dentists.

BUSINESS STRATEGY

        The Company's strategy is to develop integrated networks for the
provision of a broad range of dental services through practice affiliations that
provide high-quality, cost-effective dental care in target markets. Key elements
of this strategy are to:

        PROVIDE HIGH-QUALITY, COMPREHENSIVE, ONE-STOP FAMILY DENTAL HEALTH CARE.
        The prototypical Castle Dental Center provides general dentistry as well
        as a full range of dental specialties (including orthodontics,
        pedodontics, periodontics, endodontics, oral surgery and implantology),
        thereby allowing the majority of specialty referrals to remain in-house
        within the Company's network of facilities. By bringing together
        multi-specialty dental services within a single practice, the Company is
        able to realize operating efficiencies and economies of scale and to
        promote increased productivity, higher utilization of professionals and
        facilities, and the sharing of dental specialists among multiple
        locations. The Company's practice model also incorporates quality
        assurance and quality control programs, including peer review and
        continuing education and technique enhancement. The Company believes
        that its multi-specialty strategy significantly differentiates it from
        both individual and multi-center practices that typically offer only
        general dentistry, orthodontics or other single specialty dental
        services.

        DEVELOP COMPREHENSIVE DENTAL NETWORKS IN TARGET MARKETS. The Company
        intends to build its networks through acquisition of existing practices
        and DE NOVO development of additional practices within target markets.
        The Company seeks to consolidate and integrate its affiliated practices
        to establish regional dental care networks. The Company believes this
        network system will enable it to reduce the operating costs of its
        affiliated practices by centralizing certain functions such as
        telemarketing and advertising, billing and collections, payroll and
        accounting and by negotiating regional and national contracts for
        supplies, equipment, services and insurance. Once practice affiliations
        are established in a market, the Company seeks to assist the affiliated
        practices in expanding their range of services to make available
        specialty dental services not previously offered.

        APPLY TRADITIONAL RETAIL PRINCIPLES OF BUSINESS TO DENTAL CARE. The
        Company believes it can enhance revenues and profitability by applying
        traditional retail principles of business to the provision of dental
        services in its target markets. These principles include professionally
        produced broadcast and print advertisements targeting specific
        audiences, and extended hours of operation which are convenient for
        patients, including weekend and evening hours. As part of its retail-
        oriented strategy, the Company will seek to establish or, where
        appropriate, relocate each Castle Dental Center in a convenient location
        in or near a high-profile neighborhood retail area and utilize
        innovative sales and marketing programs designed to achieve strong name
        recognition and increase patient visits. In addition, the Company
        stresses the breadth and affordability of its services and works closely
        with patients to establish treatment schedules and affordable payment
        plans tailored to the patients' needs.

        MARKET ITS NETWORKS TO MANAGED CARE ENTITIES. The Company believes that
        managed care will play an increasing role in the provision of dental
        services and therefore intends to market the services of its dental
        practice networks to the managed care community. The Company believes
        that contracting with managed care entities will facilitate entry into
        new markets and the expansion of existing networks, as well as improve
        the utilization of existing facilities by providing a source of patients
        to dentists with whom the Company is affiliated. In addition, such
        contracts, including capitated contracts, enable the Company to leverage
        its infrastructure and marketing efforts by increasing patient visits.

                                       3
<PAGE>
DENTAL NETWORK DEVELOPMENT

        The Company seeks to build its dental networks through the acquisition
of existing dental practices and the DE NOVO development of dental practices in
retail environments.

ACQUISITION CRITERIA

        The Company's acquisition strategy is to identify successful group
dental practices in its target markets, acquire certain assets of the identified
practices, enter into long-term management services agreements, and utilize
these core practices as a base from which to expand within the target markets.
Prior to entering any market, the Company considers such factors as population,
demographics, market potential, competitive environment, supply of available
dentists, dental regulatory environment, patient-provider ratios, advertising
costs and the economic condition of the local market. Core acquisition
candidates are successful group dental practices that the Company believes are
leaders in their regional markets. Subsequent acquisitions target practices that
strategically complement the core practices within a market. In considering
acquisitions, the Company evaluates qualitative issues such as the dental
professionals' qualifications, experience and reputation in the local
marketplace and their operating histories, as well as the ability to demonstrate
potential for revenue growth and continued profitability.

COMPLETED ACQUISITIONS

  The following table describes acquisitions completed as of December 31, 1997:
<TABLE>
<CAPTION>
                                                                     NUMBER       NUMBER OF
                                                                       OF        AFFILIATED
    AFFILIATED DENTAL PRACTICE           PRINCIPAL LOCATIONS         CENTERS      DENTISTS*
    --------------------------           -------------------         -------      ---------
<S>                                                                     <C>           <C>
 1st Dental Care                       Clearwater/Tampa, Florida        11            16

 Mid-South Dental Centers         Nashville and Chattanooga, Tennessee   6            21

 Horizon Dental Centers            Austin and Fort Worth, Texas          8            23

 SW Dental Associates, LC                    Austin, Texas               4            17

 Steve W. Lebo, D.D.S.                     Fort Worth, Texas             1             2

 Frederec B. Cothren, II,
   D.D.S., M.S., P.C.                  Nashville, Tennessee              -             1
</TABLE>

        *  Includes full-time and part-time dentists.

        The contractual arrangements pursuant to which the Completed
Acquisitions were made include representations and warranties from the sellers
regarding the assets being acquired, and employment agreements with the
affiliated practices containing noncompetition provisions with the former owners
of such practices. Additionally, the Company typically enters into an option
agreement with the owner of the affiliated dental practice which entitles the
Company to select successor owners of the affiliated dental practice.

AFFILIATION AND INTEGRATION OF DENTAL CENTERS

        In affiliating with dental practices, the Company typically: (i)
acquires certain assets of the practice, and, in certain situations, laboratory
or other ancillary facilities that are either owned by or affiliated with such
practice as allowable by federal and state law; (ii) enters into a long-term
management services agreement with such dental practice pursuant to which the
Company provides comprehensive management services to the affiliated practice;
(iii) requires that the affiliated dentists enter into employment agreements
with the affiliated practices containing non-compete and liquidated damages
provisions; and (iv) assumes the principal administrative, financial, marketing
and general management functions of the affiliated practice, including
employment of most administrative personnel. As soon as practicable following
the acquisition of an affiliated dental practice, when market conditions

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permit, the Company initiates the process of converting the affiliated practice
into a Castle Dental Center. Management will retain the name of an affiliated
practice in situations where brand recognition has been established. This
conversion process, the implementation and timing of which will vary from market
to market, typically includes the addition of specialty dental services not
previously offered by the center, implementation of retail business concepts
applied by the Company in its Houston operations, and, where appropriate, the
relocation of the center to a more desirable location.

        In certain markets, the Company intends to grow through DE NOVO
development to expand in market areas that are either under-served or are
otherwise attractive market opportunities and in which there is no suitable
acquisition candidate. The Company will use its experience in building and
staffing DE NOVO dental centers in Houston, Texas for the implementation of this
expansion strategy.

MANAGEMENT SERVICES AGREEMENT

        The Company has entered into a management services agreement with each
of its affiliated dental practices pursuant to which the Company becomes the
exclusive manager and administrator of all non-dental services relating to the
operation of the practice. The Company anticipates that it will enter into a
similar management services agreement with each new affiliated dental practice.
The amount of the management fee charged by the Company to an affiliated dental
practice is intended to reflect and is based on the fair value of the management
services rendered by the Company to the affiliated dental practice. Subject to
applicable law, the Company is paid a monthly management fee comprised of three
components: (i) the costs incurred by it on behalf of the affiliated practice;
(ii) a base management fee in an amount ranging from 12.5% to 15.0% of adjusted
gross revenues; and (iii) a performance fee equal to the patient revenues of the
affiliated dental practice less (a) the expenses of the affiliated dental
practice and (b) the sum of (i) and (ii), as described in each agreement. The
amount of the management fee is reviewed by the Company and the affiliated
dental practice not less frequently than annually in order to determine whether
such fee should be adjusted, up or down, to continue to reflect the fair value
of the management services rendered by the Company.

        The obligations of the Company under the typical management services
agreement include assuming financial and other responsibility, either on its own
or with the input and participation of the policy board of the affiliated
practice, for the following (subject to limitations imposed by applicable state
law): facilities, equipment and supplies; advertising, marketing and sales;
training and development; operations management; provision of support services;
risk management and utilization review; application and maintenance of
applicable local licenses and permits; negotiation of contracts between the
affiliated dental practice and third parties, including third-party payors,
alternative delivery systems and purchasers of group health care services;
establishing and maintaining billing and collection policies and procedures;
fiscal matters, such as annual budgeting, maintaining financial and accounting
records, and arranging for the preparation of tax returns; and maintaining
insurance. The Company does not assume any authority, responsibility,
supervision or control over the provision of dental services to patients or for
diagnosis, treatment, procedure or other health care services, or the
administration of any drugs used in connection with any dental practice.

        The typical management services agreement is for an initial term of 25
to 40 years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. Additionally, the typical management services agreement may be terminated
by the Company or the affiliated dental practice in the event of the bankruptcy
or default in the performance of the material duties of the nonterminating
party.

DENTIST EMPLOYMENT AGREEMENTS

        As a part of the process of converting an affiliated dental practice
into a Castle Dental Center, each affiliated dental practice has entered into
employment agreements with substantially all of its full-time dentists,
orthodontists and other dental specialists. The Company anticipates that this
practice will continue when market conditions permit. Although the form of
contract varies somewhat among

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practices and among dentists with different specialties, the typical contract
for a full-time dentist provides for a defined compensation arrangement,
including performance-based compensation and, where market conditions permit and
to the extent deemed enforceable under applicable law, a covenant not to
compete. Each full-time dentist, whether or not a party to a dentist employment
agreement, is required to maintain professional liability insurance, and
mandated coverage limits are generally at least $1.0 million per claim and $3.0
million in the aggregate. In addition, many affiliated dental practices employ
part-time dentists. Not all part-time dentists have employment agreements, but
all part-time dentists are required to carry professional liability insurance in
specified amounts. Certain part-time dentists retained by the affiliated dental
practices are independent contractors and have entered into independent
contractor agreements.

SERVICES

        The Company provides management expertise, marketing, information
systems, capital resources and acquisition services to its affiliated dental
practices. As a result, the Company is involved in the financial and
administrative management of the affiliated dental practices, including legal,
financial reporting, cash management, human resources and insurance assistance.
The Company's goals in providing such services are (i) to allow the dentists
associated with affiliated dental practices to dedicate their time and efforts
more fully to patient care and professional practice activities; (ii) to improve
the performance of affiliated dental practices in these administrative and sales
activities; and (iii) to enhance the financial return to the Company.

        Aside from the centralization of functions mentioned above, the
affiliated dental practices are encouraged to administer their practices in
accordance with the needs of their specific patient populations. The practice of
dentistry at each affiliated dental practice is under the exclusive control of
the dentists who practice at such location.

        The majority of the practices whose non-dental assets are available to
the Company for acquisition are general dentistry practices. General dentistry
includes diagnostics, treatment planning, preventive care, removal of infection,
fillings, crowns, bridges, partials, dentures, and extractions, all of which are
currently being provided by the affiliated dental practices. Within its network,
the Company provides a wide range of specialty services. The Company seeks to
expand the services offered by affiliated practices beyond general dentistry to
include other dental specialty services and to improve efficiency by improving
appointment availability, increasing practice visibility and assisting the
practices in adding complementary services. These complementary services include
orthodontics, periodontics (the diagnosis, treatment and prevention of infection
of the gums and supporting bone around the teeth), endodontics (the diagnosis,
treatment and prevention of infection of the oral tissues), oral surgery and
implantology (the placement of abutments (implants) in the jaw bones to support
tooth replacement). By adding these complementary services to the practice, the
affiliated dental practices will retain the majority of specialty service
referrals in-house, thereby increasing patient revenues.

OPERATIONS

CENTER DESIGN AND LOCATION

        The affiliated dental practices are generally located in retail
environments. Many of the affiliated practices include semi-private general
dentistry treatment rooms, private treatment rooms and orthodontic bays.
Currently, affiliated dental practices include from four to 22 treatment rooms
and range in size from approximately 2,000 square feet to approximately 6,000
square feet.

        Where an acquired practice is not able, due to limitations of floor
space, zoning or other reasons, to accommodate new services or specialists, the
Company may seek to relocate such affiliated practice to a more desirable retail
location as soon as practicable. Since its formation, the Company has adapted
its locations in Houston, Texas to accommodate the full range of dental
specialties. The Company believes

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the application of its method of designing and locating dental centers will
facilitate the expansion of services offered by the acquired practices.

STAFFING AND SCHEDULING

        The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many affiliated practices opening as early as 7:00 a.m. and closing as late
as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The affiliated practices
are staffed with dentists and dental assistants every day they are open, with
orthodontists and other specialists rotating among several centers in order to
utilize their time optimally. Each patient typically is assigned to and sees the
same dentist or specialist on all visits to the center. Each affiliated dental
practice is also regularly staffed with an office manager, front office staff,
dental assistants and other support staff.

        The Company's dental centers are staffed with patient care coordinators
who are responsible for the non-clinical aspects of the patient's experience
with the practice. The patient care coordinator's function is (i) to act as a
liaison between the dentist and patient; (ii) to work with the patient to
develop a treatment schedule with payments tailored to the patient's needs
within the Company's established credit policies; and (iii) to optimize the
dentist's time spent with patients.

FEES AND PAYMENT PLANS

        The Company believes that fees charged by its affiliated practices are
typically lower than usual and customary fees within their respective markets.
The affiliated practices generally provide a wide range of payment options,
including cash, checks, credit cards, third party insurance and various forms of
credit. In general, most general dentistry and specialty services, other than
orthodontics, are paid for by the patient, or billed to the patient's insurance
carrier, on the date the service is rendered. In some instances, the Company
will extend credit in accordance with its established credit policies. The
Company believes that its lower fees and ability to assist patients in obtaining
financing provides it with a competitive advantage compared to sole
practitioners and small group practices.

        The Company's typical orthodontic payment plan consists of no initial
down payment and equal monthly payments during the term of treatment ranging
from $89 to $98 per month. After consultation with the patient care coordinator
at the initial visit, the patient signs a contract outlining the terms of the
treatment, including the anticipated length of treatment and the total fees. The
number of required monthly payments is fixed at the beginning of the case and
corresponds to the anticipated number of monthly treatments. Patients are billed
in advance by the Company on a monthly basis.

QUALITY ASSURANCE

        Affiliated dental practices are solely responsible for all aspects of
the practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. The Company's management structure is designed to
bring to its affiliated dental practices improvements in their recruiting and
professional training. The Company expects that the increased visibility of the
Company, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets will give it an advantage in
recruiting and retaining dentists. In addition, the Company believes that the
ability to offer dentists in private practice the chance to practice in an
environment where they do not assume capital risks and administrative burdens
normally associated with private practice will make joining the Company an
attractive choice for private practitioners.

        Most affiliated dental practices have policy boards comprised of
representatives of both the Company and the affiliated dental practice. The
policy boards are responsible for developing and implementing management and
administrative policies for the overall operation of the affiliated dental
practice. Specifically, the policy board has the authority to review and approve
capital improvements and expansion, marketing and advertising, collection
policies, provider and payor relationships, strategic

                                       7
<PAGE>
planning and capital expenditures. However, in recognition of the laws and
regulations applicable to the licensure and practice of dentistry, the policy
board does not make clinical decisions, recommendations or other decisions that
are required to be made by a licensed dentist.

SALES AND MARKETING

        The Company intends to implement the practice management principles
employed in its Houston operations to establish a consistent national identity
for its business and to utilize the "Castle Dental Centers" name and logo. When
acquired practices already have high existing name recognition within their
local markets, the Company may seek to capitalize on that name recognition and
implement the Castle model while maintaining the existing practice name. The
Company applies traditional retail principles of business to the provision of
dental care. These principles include network development, extended hours of
operation, location optimization, signage, customized treatment schedules,
affordable fees and payment plans. The Company has used both print advertising
and professionally produced broadcast advertising to market its dental services
to potential patients in Houston, Texas and the Company intends to use the same
marketing techniques in its regional markets.

        The Company has also established a regional telemarketing system in
Houston and Austin, Texas to field calls generated by advertising, to confirm
upcoming scheduled patient visits and to encourage patients to return for
follow-up visits and regularly scheduled six-month periodic exams. Where
feasible, the Company intends to establish additional telemarketing systems in
other regional markets. The telemarketers can enter all relevant information
into the Company's management information system for patients making
appointments for an initial visit, including pre-screening patients for
insurance and other credit information.

COMPETITION

        The dental care industry is highly fragmented, comprised principally of
sole practitioners and group practices of dental and orthodontic services. The
dental practice management industry is subject to continuing changes in the
provision of services and the selection and compensation of providers. The
Company is aware of several dental practice management companies, both
publicly-traded and privately owned, that are acquiring and managing dental
practices. Publicly-Traded dental practice management companies that compete
with the Company include Monarch Dental Corporation, Gentle Dental Service Corp.
and Coast Dental Services, Inc., as well as others. Certain of the Company's
competitors are larger and better capitalized, may provide a wider variety of
services, may have greater experience in providing dental care management
services and may have longer established relationships with buyers of such
services. The existence of other dental practice management companies may also
increase competition for acquisition candidates, thereby increasing amounts
that must be paid for acquired practice management businesses.

        In certain markets, the demand for dental care professional personnel
presently exceeds the supply of qualified personnel. As a result, the Company
experiences competitive pressures for the recruitment and retention of qualified
dentists to deliver their services. The Company's future success depends in part
on its ability to continue to recruit and retain qualified dentists to serve as
employees or independent contractors of the affiliated dental practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of competent dentists to continue to expand its operations.

MANAGEMENT INFORMATION SYSTEMS

        The Company and its affiliated dental practices presently utilize two
dental practice management software systems to monitor and control patient
treatment, scheduling, invoicing of patients and insurance companies,
productivity of clinical staffs and other practice related activities. The
Company has identified the practice management software system that it currently
employs in its Houston operations as its preferred system and intends, where
appropriate, to use the Houston system as a common practice management system
for use by its affiliated practices. The Company is presently implementing a
client-server based management information system designed to enable the Company
to compare financial performance of affiliated dental practices, to track and
control costs, and to facilitate the accounting and financial reporting process
between the affiliated dental practices and corporate

                                       8
<PAGE>
headquarters. The Company intends to use its financial information system in
conjunction with existing practice management systems at the affiliated dental
practices.

REGULATION

GENERAL

        The practice of dentistry is highly regulated, and there can be no
assurance that the regulatory environment in which the affiliated dental
practices and the Company operate will not change significantly in the future.
In general, regulation of health care related companies also is increasing.

        Every state imposes licensing and other requirements on individual
dentists and dental facilities and services. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
for which dentists may be providers. In connection with its operations in
existing markets and expansion into new markets, the Company may become subject
to compliance with additional laws, regulations and interpretations or
enforcements thereof. The ability of the Company to operate profitably will
depend in part upon the Company and its affiliated dental practices obtaining
and maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable health care regulations.

        Dental practices must meet federal, state and local regulatory standards
in the areas of safety and health. Historically, those standards have not had
any material adverse effect on the operations of the dental practices managed by
the Company. Based on its familiarity with the operations of the dental
practices managed by the Company, management believes that it, and the practices
it manages, are in compliance in all material respects with all applicable
federal, state and local laws and regulations relating to safety and health.

MEDICARE AND MEDICAID FRAUD AND ABUSE

        Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Because dental services are
covered under various government programs, including Medicare, Medicaid or other
federal and state programs, the law applies to dentists and the provision of
dental services. Pursuant to this anti-kickback law, the federal government
announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Many states have similar
anti-kickback laws, and in many cases these laws apply to all types of patients,
not just Medicare and Medicaid beneficiaries. The applicability of these federal
and state laws to many business transactions in the health care industry,
including the Company's operations, has not yet been subject to judicial
interpretation.

        Significant prohibitions against physician self-referrals, including
those by dentists, for services covered by Medicare and Medicaid programs were
enacted, subject to certain exceptions, by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II,"
amended prior physician and dentist self-referral legislation known as "Stark I"
(which applied only to clinical laboratory referrals) by dramatically enlarging
the list of services and investment interests to which the referral prohibitions
apply. Effective January 1, 1995 and subject to certain exceptions, Stark II
prohibits a physician or dentist or a member of his immediate family from
referring Medicare or Medicaid patients to any entity providing "designated
health services" in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has entered into a
compensation arrangement, including the physician's or dentist's own group
practice unless such practice satisfies the "group practice" exception. The
designated health services include the provision of clinical laboratory
services, radiology and other diagnostic services (including ultrasound
services), radiation

                                       9
<PAGE>
therapy services, physical and occupational therapy services, durable medical
equipment, parenteral and enteral nutrients, certain equipment and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. A number of states also have laws
that prohibit referrals for certain services such as x-rays by dentists if the
dentist has certain enumerated financial relationships with the entity receiving
the referral, unless an exception applies.

        Noncompliance with, or violation of, the federal anti-kickback
legislation or Stark II can result in exclusion from Medicare and Medicaid as
well as civil and criminal penalties. Similar penalties are provided for
violation of state anti-kickback and self-referral laws. To the extent that the
Company or any affiliated dental practice is deemed to be subject to these
federal or similar state laws, the Company believes its intended activities will
comply in all material respects with such statutes and regulations.

STATE LEGISLATION

        In addition to the anti-kickback laws and anti-referral laws noted
above, the laws of many states prohibit dentists from splitting fees with
non-dentists and prohibit non-dental entities such as the Company from engaging
in the practice of dentistry and from employing dentists to practice dentistry.
The specific restrictions against the corporate practice of dentistry, as well
as the interpretation of those restrictions by state regulatory authorities,
vary from state to state. However, the restrictions are generally designed to
prohibit a non-dental entity from controlling the professional assets of a
dental practice (such as patient records and payor contracts), employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or professional practice or sharing professional fees. The laws of
many states also prohibit dental practitioners from paying any portion of fees
received for dental services in consideration for the referral of a patient. In
addition, many states impose limits on the tasks that may be delegated by
dentists to dental assistants.

        State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; licensed
dentists have control over the manner in which dental care is provided and all
decisions affecting the provision of dental care. State laws generally require
that the amount of a management fee be reflective of the fair market value of
the services provided by the management company and certain states require that
any management fee be a flat fee or cost-plus fee based on the cost of services
performed by the Company. In general, the state dental practice acts do not
address or provide any restrictions concerning the manner in which companies
account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.

        The Company does not control the practice of dentistry or employ
dentists to practice dentistry. Moreover, in states in which it is prohibited
the Company does not employ dental hygienists or dental assistants. The Company
provides management services to its affiliated practices, and the management
fees the Company charges for those services are consistent with the laws and
regulations of the jurisdictions in which it operates.

        In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is subject to interpretation by regulators with broad discretion. As the
Company or its affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service basis arrangements, the
Company or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the affiliated practices are determined
to

                                       10
<PAGE>
be engaged in the business of insurance, these parties could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third-party payors, and may become subject to regulatory
enforcement actions. In such events, the Company's revenues may be adversely
affected.

REGULATORY COMPLIANCE

        The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations or marketing from time to time in response to changes in the
business, statutory and regulatory environments. The Company plans to structure
all of its agreements, operations and marketing in compliance with applicable
law, although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not have a material adverse
effect on operations or profitability.

EMPLOYEES

        As of December 31, 1997, the Company and its affiliated dental practices
employed approximately 625 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 100 general dentists and 25 specialists on a full-time or
part-time basis. As a component of its acquisition strategy, the Company
frequently enters into employment or consulting agreements for ongoing
management and administrative services with the dentists from whom it acquires
affiliated practices. The Company believes that its relations with its employees
are good. The Company believes that it may need to hire additional personnel to
accommodate the demands prompted by the provision of services to each of the
affiliated practices under the management services agreements, as well as to
pursue its growth strategies.

CORPORATE LIABILITY AND INSURANCE

        The provision of dental services entails an inherent risk of
professional malpractice and other similar claims. Although the Company does not
influence or control the practice of dentistry by dentists or have
responsibility for compliance with certain regulatory and other requirements
directly applicable to dentists and dental groups, the contractual relationship
between the Company and the affiliated dental practices may subject the Company
to some medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services and products provided by managed practices will not be asserted
against the Company in the future. The availability and cost of professional
liability insurance has been affected by various factors, many of which are
beyond the control of the Company. The cost of such insurance to the Company and
its affiliated dental practices may have an adverse effect on the Company's
operations.

        The Company requires each affiliated dental practice to maintain
comprehensive general liability and professional liability coverage covering the
practice and each dentist retained or employed by the affiliated dental
practice, which normally provide for comprehensive general liability coverage of
$1.0 million for each occurrence and $3.0 million annual aggregate, and
professional liability coverage of not less than $1.0 million for each
occurrence and $3.0 million annual aggregate.

        The Company maintains other insurance coverages including general
liability, property, business interruption and workers' compensation, which
management considers to be adequate for the size of the Company and the nature
of its business.

ITEM 2.    PROPERTIES

        The Company leases approximately 12,000 square feet of space for
executive, administrative, sales and marketing and operations offices in
Houston, Texas. The Company's initial lease term expires May 2000, which may be
extended at the Company's option for an additional 60 months.

                                       11
<PAGE>
        All of the Company's existing centers are leased. Two of the centers are
owned by affiliates of the companies from whom the Company acquired affiliated
dental practices. All such facilities leased by the Company are leased on a
basis not less favorable to the Company than fair market value basis.

        The Company intends to lease centers or enter into build-to-suit
arrangements with third parties for dental centers to be leased by the Company.
Certain leases provide for fixed minimum rentals and provide for additional
rental payments for common area maintenance, insurance and taxes. The leases
carry varying terms expiring between 1998 and 2006 excluding options to renew.

        The majority of the centers are located in retail locations. The Company
believes that its leased facilities are well maintained, in good condition and
adequate for its current needs. Furthermore, the Company believes that suitable
additional or replacement space will be available when required.

ITEM 3.    LEGAL PROCEEDINGS


        In July and August 1997, a dentist from whom the Company acquired
Horizon Dental Centers in August 1996 contacted the Company asserting that the
Company misrepresented the value of the Common Stock issued to him as a part of
the consideration for the acquisition and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that these asserted claims are without merit and has denied
the demand for the issuance of additional shares of Common Stock. In the event,
that litigation is initiated against the Company, the Company intends to defend
itself vigorously.

        The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.

        The Company carries insurance with coverages and coverage limits that it
believes to be customary in the dental industry. Although there can be no
assurance that such insurance will be sufficient to protect the Company against
all contingencies, management believes that its insurance protection is
reasonable in view of the nature and scope of the Company's operations.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None


                                       12
<PAGE>
                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock is traded in the over-the-counter market and
quoted on the Nasdaq National Market under the symbol "CASL." The following
table presents the quarterly high and low sale prices as reported by the Nasdaq
National Market since the shares became publicly traded on September 12, 1997.
These quotations reflect the inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

 1997:                                                          HIGH        LOW
 -----                                                          ----        ---

Third Quarter (beginning September 12, 1997) ............      14.438      13.00
Fourth Quarter ..........................................      14.125       7.50


        As of March 26, 1998, there were 6,237,581 shares of the Company's
Common Stock outstanding held by approximately 150 stockholders of record. The
Company believes there are approximately 1,650 beneficial owners of the
Common Stock.

        The Company has never paid a cash dividend on its Common Stock. The
Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. In addition, the Company's credit
facility (the "Credit Facility") permits the payment of dividends only to the
extent the Company maintains a specified minimum net worth. The Company's net
worth as of December 31, 1997 was approximately $31.1 million. Any future change
in the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings and prospects of the Company and any restrictions under credit
agreements, as well as other factors the Board of Directors may deem relevant.


                                       13
<PAGE>
ITEM 6.    SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                             1993      1994       1995      1996       1997
                                             ----      ----       ----      ----       ----
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>        <C>        <C>      <C>        <C>
 STATEMENT OF OPERATIONS DATA:
 Patient revenues of affiliated dental
  practices (1) .......................    15,053     17,083     18,257   $ 29,601   $ 46,225
Amounts retained by affiliated dental
  practices (1) .......................      --         --         --        9,981     14,813
                                         --------   --------   --------   --------   --------

Net revenues (1) ......................    15,053     17,083     18,257     19,620     31,412

Expenses:
   Dentists' salaries (1) .............     2,684      2,853      3,345       --         --
   Clinical salaries ..................     1,529      1,811      1,879      4,233      6,760
   Dental supplies and laboratory fees      1,565      1,907      2,185      3,120      4,335
   Rental and lease expense ...........       504        681        836      1,592      2,590
   Advertising and marketing ..........       729      1,062        959      1,522      2,033
   Depreciation and amortization ......       245        309        336      1,088      2,132
   Other operating expenses ...........     1,871      2,205      2,260      2,913      4,314
   General and administrative (2) .....     4,947      5,319      9,109      4,292      5,929
                                         --------   --------   --------   --------   --------

     Total expenses ...................    14,074     16,147     20,909     18,760     28,093
                                         --------   --------   --------   --------   --------

Operating income (loss) ...............       979        936     (2,652)       860      3,319
Interest expense ......................       130        112         87      2,596      2,792
Other income (3) ......................      --         --         --          (89)       (84)
                                         --------   --------   --------   --------   --------

Income (loss) before income taxes and
   extraordinary loss .................       849        824     (2,739)    (1,647)       611
Provision (benefit) for income taxes(4)        40         43       (325)      (561)       200
                                         --------   --------   --------   --------   --------

Income (loss) before extraordinary loss       809        781     (2,414)    (1,086)       411
Extraordinary loss ....................      --         --         --         --       (3,195)
                                         --------   --------   --------   --------   --------

Net income (loss) (4) .................       809        781     (2,414)    (1,086)    (2,784)
Preferred stock dividends (5) .........      --         --         --         --       (1,930)
                                         --------   --------   --------   --------   --------
Net income (loss) attributable to
  common stock ........................  $    809   $    781   $ (2,414)  $ (1,086)  $ (4,714)
                                         ========   ========   ========   ========   ========

Income (loss) per common share:
   Basic and diluted:
     Income (loss) before extraordinary
       loss ...........................                                   $  (0.34)  $   0.10
     Extraordinary loss ...............                                                 (0.78)
                                                                          --------   --------
     Net loss..........................                                   $  (0.34)  $  (0.68)
                                                                          ========   ========

Weighted average number of common and common
   equivalent shares outstanding
     Basic ............................                                      3,191      4,100
                                                                          ========   ========
     Diluted ..........................                                      3,191      4,132
                                                                          ========   ========
</TABLE>



                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                        1993    1994     1995       1996       1997
                                        ----    ----     ----       ----       ----
                                                     (IN THOUSANDS)
<S>                                   <C>     <C>     <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents ..........  $   34  $   22  $  6,439   $    119   $ 2,908
Working capital ....................     773   1,212     6,208     (3,244)    3,917
Total assets .......................   4,130   4,711    12,677     29,098    44,513
Long-term liabilities, less current
  portion ..........................     496     162     9,462     20,529     3,659
Redeemable preferred stock .........    --      --       2,928      2,928     1,550
Total stockholders' equity (deficit)   1,796   2,577    (5,743)    (3,509)   31,113
</TABLE>

(1)     In periods prior to 1996, the Company operated as a dental service
        company and reported all of its revenues as patient revenues. Effective
        December 31, 1995, as part of a reorganization and recapitalization plan
        (the "Reorganization"), the Company provides practice management
        services to the affiliated dental practices, and, as a result, its net
        revenues beginning January 1, 1996 consist of amounts earned by the
        Company under the terms of its management services agreements with
        affiliated dental practices, which equal patient revenues less amounts
        retained by affiliated dental practices. Amounts retained by affiliated
        dental practices consist primarily of compensation paid to dental
        professionals, which were classified as expenses of the Company prior to
        the Reorganization.

(2)     In 1995, the Company expensed $2.6 million of deferred compensation in
        connection with the Reorganization.

(3)     Represents primarily gain or loss on sale of assets and interest income.

(4)     Prior to the Reorganization, significant operations of the Company were
        conducted through a subchapter S corporation and accordingly were not
        subject to federal and state income taxes. If all of the Company's
        operations had been subject to income taxes, net income (loss) would
        have been $546,000, $515,000 and ($1.7 million) for the years ended
        December 31, 1993, 1994 and 1995, respectively. Subsequent to December
        31, 1995, the Company's operations are subject to income taxes and such
        taxes have been reflected in the historical consolidated statement of
        operations data for the year ended December 31, 1996 and 1997.

(5)     The Company recorded a $1,930,000 non-cash dividend to accrete the
        Series A Convertible Preferred Stock and the Series C Convertible
        Preferred Stock to their estimated fair value.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

INTRODUCTION

        The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and multi-specialty
dental practices in Texas, Florida and Tennessee. In January 1998, the Company
signed a definitive agreement to acquire 80% of a dental practice management
company in Los Angeles, California. The Company does not engage in the practice
of dentistry but rather establishes integrated dental networks through
affiliations with dental practices providing quality care in selected markets
with a view to establishing broad geographic coverage within those markets. The
Company seeks to achieve operating efficiencies by consolidating and integrating
affiliated practices into regional networks, realizing economies of scale in
such areas as marketing, administration and purchasing and enhancing the
revenues of its affiliated dental practices by increasing both patient visits
and the range of specialty services offered. At December 31, 1997, the Company
managed 42 dental centers with 125 affiliated dentists, orthodontists and
specialists.

        The Company's objective is to make each of its dental networks the
leading group dental care provider in each market it serves. The Company applies
traditional retail principles of business to the

                                       15
<PAGE>
practice of dentistry, including situating practices in high-profile locations,
offering affordable fees and payment plans, expanding the range of services
offered, increasing market share through targeted advertising and offering
extended office hours. By using the Castle Dental Centers' approach to managing
affiliated dental practices, the Company believes it will enable affiliated
dentists, orthodontists and other dental specialists to focus on delivering
quality patient care and to realize greater productivity than traditional retail
and small group dental practices.

        Certain of the affiliated dental practices derive a significant portion
of their revenues from managed care contracts, preferred provider arrangements
and other negotiated price agreements. While the laws of some states permit the
Company to participate in the negotiations by affiliated dental practices of
managed care contracts, preferred provider arrangements and other negotiated
price agreements, the affiliated dental practices are the contracting parties
for all such relationships, and the Company is dependent on its affiliated
dental practices for the success of such relationships.

COMPONENTS OF REVENUES AND EXPENSES

        Patient revenues from affiliated dental practices represent amounts
billed by the affiliated dental practices to patients and third-party payors for
dental services rendered. Such amounts also include monthly capitation payments
received from third-party payors pursuant to managed care contracts. Amounts
retained by group dental practices include compensation paid to dentists,
hygienists and other dental care personnel employed by the affiliated dental
practices, as well as other costs directly incurred by the affiliated practices
such as employment taxes, personnel benefits and insurance costs. Net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the affiliated dental practices, which generally equal
patient revenues less amounts retained by the affiliated practices. The
Company's net revenues, therefore, are dependent upon patient revenues realized
by the affiliated practices as well as compensation and other expenses of the
affiliated practices.

        Under the terms of the typical management services agreement with an
affiliated dental practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
practice. The obligations of the Company include assuming responsibility for the
operating expenses incurred in connection with managing the dental centers.
These expenses include salaries, wages and related costs of non-dental
personnel, dental supplies and laboratory fees, rental and lease expenses,
advertising and marketing costs, management information systems, and other
operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to the
billing and collection of accounts receivable, financial management and control
of the dental operations, insurance, training and development, and other general
corporate expenditures. As compensation for its services under the typical
management services agreement and subject to applicable law, the Company is paid
a management fee comprised of three components: (i) the costs incurred by it on
behalf of the affiliated practice; (ii) a base management fee in an amount
ranging from 12.5% to 15.0% of adjusted gross revenues; and (iii) a performance
fee equal to the patient revenues of the affiliated dental practice less (a) the
expenses of the affiliated dental practice and (b) the sum of (i) and (ii).

RESULTS OF OPERATIONS

The following table sets forth the percentages of patient revenues represented
by certain items reflected in the Company's Statements of Operations. The
information that follows represents historical results of the Company and does
not include pre-acquisition results of the dental practices that the Company has
acquired. The Company acquired 1st Dental Care of Clearwater, Florida in May
1996, Mid-South Dental of Nashville, Tennessee in May 1996, Horizon Dental
Centers of Ft. Worth and Austin, Texas in August 1996 and Southwest Dental
Associates of Austin, Texas in September 1997, and two individual practices
located in Ft.Worth, Texas and Nashville, Tennessee in December 1997.

                                       16
<PAGE>
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           1995      1996      1997
                                                          -----     -----       ----
<S>                                                       <C>        <C>      <C>
Patient revenues of affiliated dental practices ........  100.0 %    100.0%   100.0 %
Amounts retained by affiliated dental practices ........    --        33.7     32.0
                                                          ------    ------   ------

Net revenues ...........................................   100.0      66.3      68.0

Expenses:

   Dentists' salaries ..................................    18.3        --       --
   Clinical salaries ...................................    10.3      14.3      14.6
   Dental supplies and laboratory fees .................    12.0      10.5       9.4
   Rental and lease expense ............................     4.6       5.4       5.6
   Advertising and marketing ...........................     5.3       5.1       4.4
   Depreciation and amortization .......................     1.8       3.7       4.6
   Other operating expenses ............................    12.4       9.8       9.3
   General and administrative ..........................    49.9      14.6      12.8
                                                           ------    ------   ------

     Total expenses ....................................   114.6      63.4      60.7
                                                           ------    ------   ------

Operating income (loss) ................................   (14.6)      2.9       7.3
Interest expense .......................................     0.5       8.8       6.0
Other income ...........................................     --       (0.3)     (0.2)
                                                           ------    ------   ------

Income (loss) before income taxes and extraordinary item   (15.1)     (5.6)      1.5
Provision (benefit) for income taxes ...................    (1.8)     (1.9)      0.4
                                                           ------    ------   ------

Income (loss) before extraordinary item ................   (13.3)     (3.7)      1.1
Extraordinary item .....................................     --        --       (6.9)
                                                           ------    ------   ------

Net loss......... ......................................   (13.3)     (3.7)     (5.8)
Preferred stock dividends ..............................     --        --       (4.2)
                                                           ------    ------   ------

Net loss attributable to common stock ..................   (13.3)%    (3.7)%   (10.0)%
                                                           ======    ======   ======
</TABLE>


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

        PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $29.6 million for the year ended
December 31, 1996 to $46.2 million for the year ended December 31, 1997, an
increase of $16.6 million or 56%. Approximately $12.6 million of the increase
was attributable to the acquisitions of 1st Dental Care in Clearwater, Florida,
Mid-South Dental Centers in Nashville, Tennessee, and Horizon Dental Centers in
Ft. Worth and Austin, Texas, completed during 1996, and SW Dental Associates in
Austin, Texas, completed in September 1997. Patient revenues in Houston
increased from $18.6 million in 1996 to $20.5 million in 1997, primarily the
result of the opening of three new dental centers in Houston during 1997.

        AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - Amounts retained by
affiliated dental practices primarily consist of compensation paid to dentists,
orthodontists, hygienists and other dental care personnel employed by the
affiliated dental practice. For the year ended December 31, 1997, amounts
retained by affiliated dental practices were $14.8 million, an increase of $4.8
million, or 48.4% from the prior year, primarily resulting from the Completed
Acquisitions. Expressed as a percentage of patient revenues, amounts retained by
dental practices decreased from 33.7% in 1996 to 32.0% in 1997, primarily
resulting from improved productivity of the Company's dentists and dental
staffs.

                                       17
<PAGE>
        NET REVENUES - For the year ended December 31, 1997, net revenues were
$31.4 million, an increase of $11.8 million or 60.1%. The Completed Acquisitions
accounted for $8.2 million of the increase in net revenues. Expressed as a
percentage of patient revenues, net revenues increased from 66.3% in 1996 to
68.0% in 1997, primarily as a result of the percentage reduction in amounts
retained by dental practices.

        CLINICAL SALARIES - Clinical salaries increased from $4.2 million for
the year ended December 31, 1996 to $6.8 million for the year ended December 31,
1997, an increase of $2.6 million or 59.7%. The Completed Acquisitions accounted
for the increase in clinic employee salaries. Expressed as a percentage of
patient revenues, clinical salaries increased from 14.3% to 14.6% for the years
ended December 31, 1996 and 1997, respectively.

        DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory
fees increased from $3.1 million for the year ended December 31, 1996 to $4.3
million for the year ended December 31, 1997, an increase of $1.2 million or
39.0%. This increase resulted primarily from the Completed Acquisitions, which
incurred $1.2 million in dental supplies and laboratory expenses. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees decreased
from 10.5% in 1996 to 9.4% in 1997, primarily resulting from the centralization
of the Company's purchasing function and the institution of national supply
agreements with certain vendors of dental supplies and laboratory work.

        RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.6
million for the year ended December 31, 1996 to $2.6 million for the year ended
December 31, 1997, an increase of $1.0 million or 62.7%. Rental expense from the
acquisitions in Florida, Tennessee and Texas accounted for $765,000 of the
increase with the balance resulting from the opening of four new dental centers
in Houston in 1996 and 1997. Expressed as a percentage of patient revenues,
rental and lease expense increased from 5.4% in 1996 to 5.6% in 1997.

        ADVERTISING AND MARKETING - Advertising and marketing expense increased
from $1.5 million for the year ended December 31, 1996 to $2.0 million for the
year ended December 31, 1997, an increase of 33.6%. The Completed Acquisitions
accounted for all of the increase. Expressed as a percentage of patient
revenues, however, advertising and marketing costs decreased from 5.1% in 1996
to 4.4% in 1997 as the Completed Acquisitions generally had lower advertising
and marketing costs than the Company's operations in Houston. The Company plans
to increase advertising and marketing costs in the acquired markets on a
selective basis.

        DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
from $1.1 million for the year ended December 31, 1996 to $2.1 million for the
year ended December 31, 1997, an increase of $1.0 million or 96.0%, primarily
resulting from higher depreciation and amortization of goodwill related to the
Completed Acquisitions. As a percentage of patient revenues, depreciation and
amortization increased from 3.7% to 4.6% for the years ended December 31, 1996
and 1997, respectively.

        OTHER OPERATING EXPENSES - Other operating expenses increased from $2.9
million for the year ended December 31, 1996 to $4.3 million for the year ended
December 31, 1997, an increase of approximately $1.4 million or 48.1%. Other
operating expenses include certain expenses related to the operation of the
Company's dental centers and bad debt expense incurred in the financing of
patient receivables at the affiliated dental practices. The increase from 1996
to 1997 resulted from the Completed Acquisitions and the new dental centers
opened in Houston during 1997. Expressed as a percentage of revenues, however,
other operating expenses decreased from 9.8% to 9.3%, for the years ended
December 31, 1996 and 1997, respectively.

                                       18
<PAGE>
        GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $4.3 million for the year ended December 31, 1996 to $5.9 million
for the year ended December 31, 1997, an increase of $1.6 million or 38.2%. The
increase resulted from the addition of general and administrative expenses of
the Completed Acquisitions and increased personnel and general corporate
expenses at the Company's headquarters in Houston. Expressed as a percentage of
patient revenues, general and administrative expense, however, decreased from
14.6% to 12.8% for years ended December 31, 1996 and 1997, respectively, due to
relatively higher percentage increase in the Company's patient revenues.

        INTEREST EXPENSE - Interest expense increased from $2.6 million for the
year ended December 31, 1996 to $2.8 million for the year ended December 31,
1997, as a result of higher average borrowing levels and increased interest
rates in 1997. In September and October 1997, the Company repaid approximately
$23.9 million of its outstanding debt with the net proceeds of the initial
public offering of the Company's common stock.

        INCOME TAXES - For the year ended December 31, 1997, the Company
recorded a provision for income taxes of $200,000 resulting from income before
income taxes and extraordinary loss of $611,000. For the year ended December 31,
1996, the Company recorded a benefit for income taxes of $561,000 resulting from
the loss before income taxes of $1.6 million. The Company's average tax rate for
1997 was 30.3% as it realized some benefit from its net operating loss
carryforwards. At December 31, 1997, the Company had net operating loss
carryforwards available to reduce future taxable income of approximately $6.0
million expiring in 2017.

        EXTRAORDINARY LOSS - During 1997, the Company recorded an extraordinary
loss of $3.2 million, net of income tax benefit of $490,000, to record the write
off of deferred loan costs and unamortized discounts associated with early
retirement of the Company's 12% Senior Subordinated Notes in the aggregate
amount of $10.4 million, including accrued interest. The Senior Subordinated
Notes had been issued in December 1995 and in June 1997 in original principal
amounts of $7.5 million and $2.0 million, respectively, and were retired
utilizing a portion of the proceeds of the Company's initial public offering.

        PREFERRED STOCK DIVIDENDS - Coincident with the completion of the
initial public offering in September 1997, the holders of the Company's Series A
and Series C Preferred Stock converted such shares into an aggregate of 948,243
shares of Company Common Stock. As a result, the Company recorded $1.9 million
in non-cash dividends in the third quarter 1997, representing the accretion of
the difference between the recorded value of the Preferred Stock and its
redemption value.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

        PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $18.3 million for the year ended
December 31, 1995 to $29.6 million for the year ended December 31, 1996, an
increase of $11.3 million or 62.1%. Approximately $11.0 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $18.3 million in 1995 to $18.6 million in 1996, primarily the
result of the opening of the Company's ninth dental center in Houston in April
1996.

        AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the year ended
December 31, 1996, amounts retained by affiliated dental practices were $10.0
million, or 33.7% of patient revenues. For the year ended December 31, 1995,
compensation paid to dental professionals was classified as dentist salaries and
clinical salaries. The Company estimates that amounts retained by the affiliated
dental practice in 1995, calculated on a basis comparable to 1996, was $5.2
million, or 28.6% of patient revenues. The percentage increase from 1995 to 1996
resulted from the relatively higher percentage of dentist and clinical salaries
from the Completed Acquisitions.

        NET REVENUES -- Net revenues of $19.6 million for the year ended
December 31, 1996 represent management fees earned by the Company in accordance
with management services agreements with the affiliated practices. In periods
prior to 1996, the Company's predecessor companies, Family Dental and

                                       19
<PAGE>
Jack H. Castle D.D.S., Inc, operated as a combined entity, and did not
distinguish between patient revenues and net revenues.

        DENTISTS' SALARIES -- Compensation paid to dentists for the year ended
December 31, 1995 was $3.3 million, or 18.3% of patient revenues. Dentist
salaries in 1996, which are included in amounts retained by affiliated dental
practices, were $5.9 million, or 20% of patient revenues. Dentist salaries from
the 25 dental centers of the Completed Acquisitions accounted for $2.4 million
of the increase. The addition of one DE NOVO dental center and higher
compensation paid to dentists in Houston accounted for the balance of the
increase.

        CLINICAL SALARIES -- Clinical salaries increased from $1.9 million for
the year ended December 31, 1995 to $4.2 million for the year ended December 31,
1996, an increase of $2.4 million or 125.3%. The Completed Acquisitions
accounted for the increase in clinic employee salaries. Expressed as a
percentage of patient revenues, clinical salaries increased from 10.3% to 14.3%
for the years ended December 31, 1995 and 1996, respectively, as the Completed
Acquisitions had relatively higher percentage clinical salaries costs than the
Houston operations.

        DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory
fees increased from $2.2 million for the year ended December 31, 1995 to $3.1
million for the year ended December 31, 1996, an increase of $935,000 or 42.8%.
This increase resulted primarily from the Completed Acquisitions, which incurred
$1.1 million in dental supplies and laboratory expenses. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees decreased
from 12.0% in 1995 to 10.5% in 1996.

        RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$836,000 for the year ended December 31, 1995 to $1.6 million for the year ended
December 31, 1996, an increase of 90.4%. Rental expense from the Completed
Acquisitions accounted for nearly all of the increase. Expressed as a percentage
of patient revenues, rental and lease expense increased from 4.6% in 1995 to
5.4% in 1996, as the Completed Acquisitions had relatively higher percentage
rental and lease expense than the Houston operation.

        ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $1.0 million for the year ended December 31, 1995 to $1.5 million for the
year ended December 31, 1996, an increase of 58.7%. The Completed Acquisitions
accounted for $420,000 of the increase. Higher expenditures for television
advertising and direct mail campaigns conducted in conjunction with the opening
of two new dental centers in Houston resulted in increased advertising and
marketing costs of approximately $150,000 in Houston. Expressed as a percentage
of patient revenues, however, advertising and marketing costs decreased from
5.3% in 1995 to 5.1% in 1996.

        DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $336,000 for the year ended December 31, 1995 to $1.1 million for the year
ended December 31, 1996, an increase of approximately $752,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles incurred in the period following the completion of
the acquisitions was $231,000 in 1996. As a percentage of patient revenues,
depreciation and amortization increased from 1.8% to 3.7% for the years ended
December 31, 1995 and 1996, respectively.

        OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.3
million for the year ended December 31, 1995 to $2.9 million for the year ended
December 31, 1996, an increase of $653,000 or 28.9%. Other operating expenses
include certain expenses related to the operation of the Company's dental
centers and bad debt expense incurred in the financing of patient receivables at
the affiliated dental practices. The Completed Acquisitions accounted for all of
the increase in other operating expenses from 1995 to 1996. Expressed as a
percentage of patient revenues, other operating expenses decreased from 12.4% to
9.8% for the years ended December 31, 1995 and 1996, respectively,

                                       20
<PAGE>
primarily due to the lower percentage of bad debt expense of the Completed
Acquisitions as compared to the Houston dental centers.

        GENERAL AND ADMINISTRATIVE -- General and administrative expense
decreased from $9.1 million for the year ended December 31, 1995 to $4.3 million
for the year ended December 31, 1996, a decrease of $4.8 million or 52.9%.
Compensation paid to the Company's owners was $5.3 million in 1995 including
$2.6 million in accrued deferred compensation payable to a shareholder.
Compensation to stockholders declined to $592,000 in 1996. This reduction was
partially offset by general and administrative expense of $1.2 million from the
Completed Acquisitions. In addition, the Company incurred approximately $400,000
in 1996 related to potential acquisitions that were not completed and
approximately $200,000 in personnel severance costs. Expressed as a percentage
of patient revenues, general and administrative expense decreased from 49.9% to
14.4% for years ended December 31, 1995 and 1996, respectively.

        INTEREST EXPENSE -- Interest expense increased from $87,000 for the year
ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. In
the period from December 1995 through August 1996, the Company borrowed
approximately $25.0 million in order to fund the Reorganization and the
acquisition of affiliated dental practices in Florida, Tennessee and Texas,
resulting in $2.1 million in higher interest costs in 1996. In addition, the
amortization of the discount on the Senior Subordinated Notes was $522,000 for
the year ended December 31, 1996.

        INCOME TAXES -- Prior to 1996, the Company did not accrue significant
corporate income taxes because a major portion of the Company's operations were
conducted through a Subchapter S corporation. Subsequent to the Reorganization
in December 1995, all of the Company's operations became subject to corporate
income taxes. For the year ended December 31, 1996 the Company recorded a
benefit for income taxes of $561,000, related to the loss before taxes of $1.6
million for the year. At December 31, 1996, the Company had net tax loss
carryforwards of $2.1 million, which may be used in future periods to offset
taxable income.

LIQUIDITY AND CAPITAL RESOURCES

        Since 1996, the Company has relied on cash flow from operations and
third party borrowings to finance its operations, and on a combination of third
party borrowings, the issuance of Company common stock and seller notes payable,
and the assumption of certain debt and lease obligations to finance its
acquisitions.

        At December 31, 1997, the Company had net working capital of $3.9
million, representing an increase of $7.2 million from the net working capital
deficit of $3.2 million at December 31, 1996. Current assets consisted of cash
of $2.9 million, billed and unbilled accounts receivable of $8.4 million and
other current assets of $838,000. These were partially offset by current
liabilities of $8.2 million at December 31, 1997, consisting primarily of $2.6
million in current maturities of long-term debt, $4.9 million in accounts
payable and accrued liabilities, $658,000 in accrued deferred compensation
payments.

        For the year ended December 31, 1997, net cash used in operating
activities was approximately $502,000. Cash used in investing activities in 1997
totaled approximately $6.5 million. Cash provided by financing activities
amounted to approximately $9.8 million. Significant components of cash used in
operations included net income before extraordinary item and other non-cash
adjustments of $5.3 million offset by increased patient and unbilled patient
receivables of $4.7 million and decreased liabilities of $385,000. These changes
resulted primarily from the addition of new dental centers, increased
orthodontic revenues and a reduction in accounts payable. Significant components
of cash used in investing activities included $5.0 million to complete the
acquisition of SW Dental Associates located in Austin, Texas and $1.5 million in
capital expenditures used primarily to develop three de novo dental centers in
Houston, Texas and to upgrade the Company's practice management software.
Significant

                                       21
<PAGE>
components of cash provided by financing activities included net proceeds of
$33.7 million from the initial public offering of the Company's common stock in
September 1997 and $2.0 million in additional subordinated debt partially offset
by debt reductions totaling $24.4 million. Significant debt reductions included
$10.4 million in Senior Subordinated Debt, $9.1 million due under the Company's
bank credit facility and $4.4 million in subordinated seller notes. In
connection with the repayment of $10.4 million of 12% Senior Subordinated Notes,
the Company recognized a $3.2 million extraordinary loss, net of income tax
benefit, associated with the early retirement of such debt.

        For the year ended December 31, 1996 cash provided by operations was
$446,000. Cash used in investing activities in 1996 was $11.6 million,
consisting primarily of $10.3 million to acquire three group dental practices in
Florida, Tennessee and Texas, and of capital expenditures of $730,000 to develop
two de novo dental centers in Houston. Cash provided by financing activities was
$4.8 million for the year ended December 31, 1996 and consisted of bank
borrowings of $7.3 million, offset by debt repayments of $1.5 million and
prepaid offering and debt issuance costs of $908,000.

        During 1996, the Company financed its acquisitions, capital expenditures
and working capital requirements through a combination of borrowings under its
bank credit facility, the sale of senior subordinated notes, the issuance of
common stock and subordinated seller notes, and the assumption of certain debt
and lease obligations of the acquired dental practices. In the aggregate, the
total consideration for acquisitions made in 1996 consisted of $9.3 million in
cash, $894,000 of assumed debt and capital lease obligations, $4.5 million in
subordinated seller notes and 331,996 shares of Company common stock. During
1997, the Company acquired two dental practices in Texas and one in Tennessee
for total consideration of $10.2 million, consisting of $5.5 million in cash,
$138,000 of assumed debt and capital lease obligations, 119,231 shares of Series
B Convertible Preferred Stock, $1.4 million in seller notes, and 165,000 shares
of Company common stock. The Company paid the $1.5 million seller note on
January 5, 1998, utilizing proceeds from borrowings under its bank credit
facility.

        On September 17, 1997, the Company received approximately $30.3 million
in net proceeds from the initial public offering of 2,500,000 shares of Company
Common Stock at $13.00 per share. In October 1997, the underwriter's exercised
the overallotment option and the Company received an additional $3.4 million in
net proceeds from the issuance of 284,000 shares of Company Common Stock at
$13.00 per share.

        The Company's principal sources of liquidity as of December 31, 1997
consisted of cash and cash equivalents, net accounts receivable and borrowing
availability under the Company's bank credit facility. In November 1997, the
Company entered into a new Credit Agreement with its existing bank and
refinanced the outstanding balance due under the previous bank credit facility.
The Credit Agreement initially provided for borrowings up to $25.0 million and
matures November 2002. The principal balance of $3.0 million under the bank
credit facility at November 7, 1997 is payable in 16 quarterly payments
beginning in March 1998. Future advances under the bank credit facility require
quarterly interest payments through November 1999 when principal becomes payable
based on a five-year amortization and a final payment at maturity. Borrowings
under the bank credit facility may at no time exceed a specified borrowing base,
which is calculated as a multiple of the Company's earnings before taxes,
depreciation and amortization ("EBITDA"), as adjusted. The bank credit facility
bears interest at variable rates, which are based upon either the bank's base
rate or LIBOR, plus, in either case, a margin which varies according to the
ratio of the Company's funded debt to the EBITDA, each as defined in the bank
credit facility. A commitment fee is payable quarterly at rates ranging from
0.125 percent to 0.5 percent of the unused amounts for such quarter. The bank
credit facility contains affirmative and negative covenants that require that
Company to maintain certain financial ratios, limit the amount of additional
indebtedness, limit the creation or existence of liens, set certain restrictions
on acquisitions, mergers and sales of assets and restrict the payment of
dividends. At December 31, 1997, $3.0 million was outstanding under the bank
credit facility. In January 1998, the Company borrowed $1.5 million under the
bank credit facility that was used to repay certain short-term notes payable. In
February 1998,

                                       22
<PAGE>
the Company and the Bank amended the bank credit facility and increased the
available borrowing to $42.5 million.

        In March 1998, the Company entered into definitive agreements to acquire
two dental practice management companies located in Houston, Texas and Los
Angeles, California. The acquisitions consist of a combination of cash, notes,
common stock and assumed indebtedness, totaling approximately $22.5 million. The
Company currently expects to acquire additional dental practice management
companies and dental practices in 1998. The Company anticipates that the
consideration for future acquisitions will consist of a combination of cash,
borrowings under the Company's bank credit facility, the issuance of Company
common stock and the assumption of existing indebtedness of the acquired
business. The Company anticipates making ongoing capital expenditures of
approximately $3.0 million in 1998, primarily to develop new dental centers in
its existing markets.

        Management believes that cash flow from operations and borrowings
available under the bank credit facility should be sufficient to meet its
anticipated capital expenditures and other operating requirements and to fund
anticipated acquisitions for the next 12 months. However, because future cash
flows and the availability of financing are subject to a number of variables,
such as the number and size of acquisitions made by the Company, the Company's
financial performance and other factors, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures or to fund future acquisitions. Additional debt
and equity financing may be required in connection with future acquisitions. The
availability of these capital sources will depend on prevailing market
conditions and interest rates and the then-existing financial condition of the
Company.

YEAR 2000

        The year 2000 issue is the result of computer programs using two digits
to define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system which is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.

        As part of the Company's continuing program to update its information
systems in anticipation of future growth, the Company has recently completed the
purchase and installation of year 2000 compliant software for its operations.
The Company is also currently evaluating software systems for its operations and
expects to have year 2000 compliant software in place by the end of 1998.
Accordingly, the Company does not expect the year 2000 issue to have a material
effect on its financial position, results of operations or cash flows.

INFLATION

        Inflation has not had a significant impact on the results of operations
of the Company during the last three years.

RECENTLY ISSUED PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 131 establishes standards for the way that public
enterprises report segment information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. These statements are both
effective for fiscal years beginning after December 15, 1997. The Company does
not believe implementation of SFAS 130 and 131 will have a material effect on
its financial position, results of operation or cash flows.

                                       23
<PAGE>
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The financial statements required by this Item 8 are incorporated
under Item 14 in Part IV of this Annual Report on Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

           None.

                                       24
<PAGE>
                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "-Election of Directors - Directors and Nominees
for Director," "-Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement which involves
the election of directors and is to be filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), within 120 days of the end of the Company's
fiscal year ended December 31, 1997.

ITEM 11.   EXECUTIVE COMPENSATION

        The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Voting Securities and Principal
Stockholders" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        In September 1997, Mr. G. Daniel Siewert, the Company's President and
Chief Operating Officer, received a $130,000 loan from the Company in connection
with his employment agreement. The loan does not bear interest.

        Mr. Kahle, a director of the Company, is a Managing Director of The
GulfStar Group, Inc., which has provided investment banking and advisory
services to the Company. In 1995, the Company paid $540,000 in investment
banking fees to The GulfStar Group, and issued the GulfStar Warrant for 56,579
shares of Common Stock to GulfStar Investments, Ltd. The Company has paid The
GulfStar Group, Inc. for investment banking and financial advisory services
provided to the Company in an amount equal to one percent of the total
consideration for each of the Company's acquisitions which has been consummated.
The GulfStar Group received approximately $195,000 in investment banking and
financial advisory fees from the Company in 1996. The directors of the Company
other than Mr. Kahle approve the payments made to The GulfStar Group, Inc. by
the Company.

        Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
held in the aggregate 1,244,737 shares of Series A Convertible Preferred Stock
and 485,382 shares of Series C Convertible Preferred Stock and the Senior
Subordinated Notes. Upon completion of the Company's initial public offering in
September 1997, the Series A and Series C Convertible Preferred Stock was
converted into 948,243 shares of Common Stock. Pursuant to the provisions of the
Securities Purchase Agreement, for so long as certain ownership thresholds with
respect to the Common Stock are maintained, these investors have the contractual
right to nominate one member of the Company's Board of Directors. See
"Management -- Directors and Executive Officers."

        In December 1995, the Company acquired all of the stock of Jack H.
Castle, D.D.S., Inc., a professional corporation of which Dr. Castle, a director
of the Company, was the sole owner. In connection with that transaction, the
Company paid Dr. Castle $6.0 million in cash and entered into a Deferred
Compensation Agreement with Dr. Castle pursuant to which the Company has agreed
to pay

                                       25
<PAGE>
Dr. Castle $2.6 million in 20 quarterly installments beginning March 1996. In
connection with the purchase of the stock of Jack H. Castle, D.D.S., Inc., the
Company also entered into a management services agreement with Jack H. Castle,
D.D.S., P.C., a professional corporation of which Dr. Castle is the sole owner.
Pursuant to the management services agreement, Dr. Castle receives an annual
payment of $100,000 for services performed in connection therewith.

        The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.

        Pursuant to a Registration Rights Agreement dated as of December 18,
1995, as amended, the Pecks Investors, GulfStar Investments, Ltd. and the
members of the Castle Family have been granted certain registration rights by
the Company with respect to the shares of Common Stock owned by them or acquired
on conversion of Series A Convertible Preferred Stock and Series C Convertible
Preferred Stock and exercise of the GulfStar Warrant.

        Pursuant to the Securityholders Agreement, the Pecks Investors are
entitled to certain rights with respect to their shares of capital stock.


                                       26
<PAGE>
                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)     1      FINANCIAL STATEMENTS

        The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated:

                                                                            PAGE

Report of Independent Accountants .........................................  F-2
Balance Sheets as of December 31, 1996 and 1997 ...........................  F-3
Statements of Operations for the Years Ended
  December 31, 1995, 1996 and 1997 ........................................  F-4
Statements of Changes in Stockholders' Equity (Deficit) for the Years
  Ended December 31, 1995, 1996 and 1997 ..................................  F-5
Statements of Cash Flows for the Years Ended December 31, 1995,
  1996 and 1997 ...........................................................  F-6
Notes to Financial Statements .............................................  F-7

(a)     2      FINANCIAL STATEMENT SCHEDULES

        The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:

                                                                            PAGE

Report of Independent Accountants on Financial Statement Schedule .........  S-1
Financial Statement Schedule

  II - Valuation and Qualifying Accounts ..................................  S-2


All other schedules are omitted because the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.

(a)     3      EXHIBITS

        The exhibits to this report have been included only with the copies of
this report filed with the Commission. Copies of individual exhibits will be
furnished to stockholders upon written request to the Company and payment of a
reasonable fee.

(b)     REPORTS ON FORM 8-K

        None.


                                       27
<PAGE>
                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas on March 31, 1998.

                                                   CASTLE DENTAL CENTERS, INC.

                                                 By:  /s/ JACK H. CASTLE, JR.
                                                      --------------------------
                                                       Jack H. Castle, Jr.
                                                       Chairman of the Board and
                                                       Chief Executive Officer

                                POWER OF ATTORNEY

        We, the undersigned, directors and officers of Castle Dental Centers,
Inc. (the "Company"), do hereby severally constitute and appoint Jack H. Castle,
Jr. and John M. Slack and each or any of them, our true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, and to file the same with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys and agents, and each or any of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys and agents, and
each of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

        PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

             SIGNATURE                  TITLE                          DATE
             ---------                  -----                          ----

/s/  JACK H. CASTLE, JR.            Chairman of the Board, Chief  March 31, 1998
     Jack H. Castle, Jr             Executive Officer (Principal
                                    Executive Officer)

/s/  G. DANIEL SIEWERT              President, Chief Operating    March 31, 1998
     G. Daniel Siewert              Officer

/s/  JOHN M. SLACK                  Vice President - Chief        March 31, 1998
     John M. Slack                  Financial Officer (Principal
                                    Financial and Accounting Officer)

/s/  JACK H. CASTLE, D.D.S.         Director                      March 31, 1998
     Jack H. Castle, D.D.S.

/s/  G. KENT KAHLE                  Director                      March 31, 1998
     G. Kent Kahle


                                       28
<PAGE>
/s/  ROBERT J. CRESCI                     Director                March 31, 1998
     Robert J. Cresci

/s/  ELIZABETH A. TILNEY                  Director                March 31, 1998
     Elizabeth A. Tilney

/s/  EMMETT E. MOORE                      Director                March 31, 1998
     Emmett E. Moore

/s/  LOUIS A. WATERS                      Director                March 31, 1998
     Louis A. Waters




                                       29

<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX TO FINANCIAL STATEMENTS

                                                                           PAGE
AUDITED FINANCIAL STATEMENTS

        Report of Independent Accountants.                                 F-2

        Balance Sheets as of December 31, 1996 and 1997                    F-3

        Statements of Operations for the years ended
          December 31, 1995, 1996 and 1997                                 F-4

        Statements of Changes in Stockholders' Equity (Deficit)
          for the years ended December 31, 1995, 1996 and 1997             F-5

        Statements of Cash Flows for the years ended December
          31, 1995, 1996 and 1997                                          F-6

        Notes to Financial Statements                                      F-7

                                      F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:

We have audited the accompanying balance sheets of Castle Dental Centers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1997 and the related statement of
operations, changes in stockholders' equity (deficit) and cash flows of its
combined predecessor companies for the year ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Castle Dental Centers, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the two years in the period ended December 31, 1997 and the results of
operations and cash flows of its combined predecessor companies for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.

                                                        COOPERS & LYBRAND L.L.P.

Houston, Texas
February 26, 1998

                                      F-2
<PAGE>
CASTLE DENTAL CENTERS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                       ----------------------------
                                                                            1996           1997
                                                                       -------------  -------------
<S>                                                                    <C>            <C>
 ASSETS
 Current assets:
    Cash and cash equivalents                                          $        119   $      2,908
    Patient receivables, net of allowance for uncollectible
      accounts of $2,425 and $3,879 in 1996 and 1997, respectively            3,649          5,841
    Unbilled patient receivables, net of allowance for
      uncollectible accounts of $361 and $568 in 1996 and 1997,
      respectively                                                            1,637          2,521
    Prepaid expenses and other current assets                                   366            838
    Deferred income taxes                                                       135         -
                                                                       -------------  -------------

      Total current assets                                                    5,906         12,108
                                                                       -------------  -------------

 Property and equipment, net                                                  3,882          5,189
 Intangibles, net                                                            16,432         25,565
 Deferred income taxes                                                          600          1,125
 Other assets                                                                 2,278            526
                                                                       -------------  -------------
      Total assets                                                     $     29,098   $     44,513
                                                                       =============  =============

 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 Current liabilities:
    Revolving line of credit                                           $      1,200   $     -
    Current portion of long-term debt                                         2,371          2,598
    Accounts payable and accrued liabilities                                  4,790          4,935
    Deferred compensation payable, related party                                789            658
                                                                       -------------  -------------

      Total current liabilities                                               9,150          8,191
                                                                       -------------  -------------

 Long-term debt, net of current portion                                      13,616          2,607
 Long-term debt, related party                                                5,335         -
 Other long-term liabilities, related party                                   1,578          1,052

 Commitments and contingencies

 Preferred stock, $.001 par value, 5,000,000 shares authorized;
 1,244,737 shares Series A and 485,382 shares Series C issued
 and outstanding at December 31, 1996 and 119,231 shares
 Series B issued and outstanding at December 31, 1997                         2,928          1,550
 Stockholders' equity (deficit):
    Common stock,  $.001 par value,  30,000,000  shares  authorized,
      2,331,996 and 6,229,239 shares issued and outstanding in
      1996 and 1997, respectively                                                 2              6
    Additional paid-in capital                                                3,416         40,818
    Accumulated deficit                                                      (6,927)        (9,711)
                                                                       -------------  -------------

      Total stockholders' equity (deficit)                                   (3,509)        31,113
                                                                       -------------  -------------

      Total liabilities and stockholders' equity (deficit)             $     29,098   $     44,513
                                                                       =============  =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

                                      F-3
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                        COMBINED
                                                        PREDECESSOR
                                                        COMPANIES            CONSOLIDATED
                                                        -------------  ---------------------------
                                                        YEAR ENDED             YEAR ENDED
                                                        DECEMBER 31,           DECEMBER 31,
                                                                       ---------------------------
                                                            1995           1996           1997
                                                        -------------  -------------  ------------
<S>                                                     <C>            <C>            <C>
 Patient revenues of affiliated dental practices        $     18,257   $     29,601   $    46,225
 Amounts retained by affiliated dental practices              -               9,981        14,813
                                                        -------------  -------------  ------------

    Net revenues                                              18,257         19,620        31,412
                                                        -------------  -------------  ------------

 Expenses:
    Dentist salaries                                           3,345         -             -
    Clinical salaries                                          1,879          4,233         6,760
    Dental supplies and laboratory fees                        2,185          3,120         4,335
    Rental and lease expense                                     836          1,592         2,590
    Advertising and marketing                                    959          1,522         2,033
    Depreciation and amortization                                336          1,088         2,132
    Other operating expenses                                   2,260          2,913         4,314
    General and administrative                                 3,825          3,700         5,575
    Compensation to stockholders                               5,284            592           354
                                                        -------------  -------------  ------------

      Total expenses                                          20,909         18,760        28,093
                                                        -------------  -------------  ------------

      Operating income (loss)                                 (2,652)           860         3,319

 Interest expense                                                 57          1,174         1,314
 Interest expense, related party                                  30          1,422         1,478
 Other income                                                 -                 (89)          (84)
                                                        -------------  -------------  ------------
 Income (loss) before income taxes and extraordinary
   loss                                                       (2,739)        (1,647)          611
 Provision (benefit) for income taxes                           (325)          (561)          200
                                                        -------------  -------------  ------------
 Income (loss) before extraordinary loss                      (2,414)        (1,086)          411
 Extraordinary loss, net of tax benefit of $490               -              -             (3,195)
                                                        -------------  -------------  ------------
 Net loss                                                     (2,414)        (1,086)       (2,784)
 Preferred stock accretion                                    -              -             (1,930)
                                                        -------------  -------------  ------------

 Loss attributable to common stock                      $     (2,414)  $     (1,086)  $    (4,714)
                                                        =============  =============  ============
 Income (loss) per common share:
    Basic and diluted:

      Income (loss) before extraordinary loss                          $     (0.34)   $      0.10
      Extraordinary loss                                                      -             (0.78)
                                                                       -------------  ------------
        Net loss                                                       $     (0.34)   $     (0.68)
                                                                       =============  ============

 Weighted average number of common and common
   equivalent shares outstanding

      Basic                                                                   3,191         4,100
                                                                       =============  ============
      Diluted                                                                 3,191         4,132
                                                                       =============  ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>

                                      F-4
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                               ADDITIONAL            STOCKHOLDERS'
                                             COMMON STOCK        PAID-IN   ACCUMULATED   EQUITY
                                         ---------------------
                                           SHARES      AMOUNT    CAPITAL     DEFICIT    (DEFICIT)
                                         ----------  ---------  ---------  -----------  ----------
<S>                                            <C>                     <C>      <C>         <C>
 Balance, January 1, 1995                 2,000,000  $      2   $      3   $    2,572   $   2,577
    Issuance   of  common   stock  and
      distribution in connection with
      the Reorganization                        500      -             1       (6,000)     (5,999)
    Cancellation  of  common  stock in
      connection with the Reorganization       (500)     -            (1)           1       -
    Issuance of warrant                      -           -            93        -              93
    Net loss                                 -           -          -          (2,414)     (2,414)
                                         ----------  ---------  ---------  -----------  ----------

 Balance, December 31, 1995               2,000,000         2         96       (5,841)     (5,743)
    Issuance of common stock                331,996      -         3,320        -           3,320
    Net loss                                 -           -          -          (1,086)     (1,086)
                                         ----------  ---------  ---------  -----------  ----------

 Balance, December 31, 1996               2,331,996         2      3,416       (6,927)     (3,509)

    Issuance of common stock
     Initial Public Offering              2,784,000         3     31,743                   31,746
     Conversion  of Series A Preferred
       Stock                                705,552         1      3,228                    3,229
     Conversion  of Series C Preferred
       Stock                                242,691      -         2,670                    2,670
     In connection with an acquisition      165,000      -         1,691                    1,691
    Accretion of discount on
      preferred stock                        -           -        (1,930)                  (1,930)
    Net loss                                 -           -                     (2,784)     (2,784)
                                         ----------  ---------  ---------  -----------  ----------
 Balance, December 31, 1997               6,229,239  $      6   $ 40,818   $   (9,711)  $  31,113
                                         ==========  =========  =========  ===========  ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

                                      F-5
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                                        COMBINED
                                                       PREDECESSOR
                                                       COMPANIES              CONSOLIDATED
                                                      --------------   ----------------------------
                                                      YEAR ENDED                YEAR ENDED
                                                      DECEMBER 31,              DECEMBER 31,
                                                                       ----------------------------
                                                            1995             1996          1997
                                                      --------------   ------------  --------------

<S>                                                   <C>              <C>           <C>
 Cash flows from operating activities:
    Net loss                                          $      (2,414)   $    (1,086)  $      (2,784)
    Adjustments:
      Provisions for bad debts                                1,399          1,227           1,897
      Depreciation and amortization                             336          1,088           2,132
      Gain on sale of property and equipment                -                  (16)        -
      Amortization of debt discount                         -                  522             712
      Deferred income taxes (benefit)                          (325)          (561)            100
      Issuance of deferred compensation agreement             2,630         -              -
      Extraordinary loss                                    -               -                3,195
      Changes in operating assets and liabilities:
        Patient receivables                                  (1,285)        (1,514)         (3,654)
        Unbilled patient receivables                           (578)          (748)         (1,046)
        Prepaid expenses and other current assets           -                 (246)           (651)
        Other assets                                            (13)          (283)            (18)
        Accounts payable and accrued liabilities                748          2,326             272
        Deferred compensation payments to
          shareholder                                       -                 (263)           (657)
                                                      --------------   ------------  --------------
          Net cash provided by (used in) operating
            activities                                           498            446            (502)
                                                      --------------   ------------  --------------
 Cash flows used in investing activities:
    Capital expenditures                                       (441)        (1,337)         (1,515)
    Proceeds  from  sale  of  property,  plant  and
      equipment                                             -                  607         -
    Acquisition  of  affiliated  dental  practices,
      net of cash acquired                                  -              (10,335)         (5,015)
      Escrow deposit                                        -                 (500)        -
                                                      --------------   ------------  --------------
          Net cash used in investing activities                (441)       (11,565)         (6,530)
                                                      --------------   ------------  --------------

 Cash flows from financing activities:
    Proceeds from issuance of common stock                  -               -               33,659
    Proceeds from debt                                       10,362          7,250           2,074
    Repayment of debt                                          (328)        (1,543)        (24,376)
    Issuance of redeemable preferred stock                    3,138         -              -
    Distribution to shareholder                              (6,000)        -              -
    Offering costs                                          -                 (650)         (1,263)
    Debt and preferred stock issuance costs                    (812)          (258)           (273)
                                                      --------------   ------------  --------------

          Net cash provided by financing activities           6,360          4,799           9,821
                                                      --------------   ------------  --------------

 Net change in cash and cash equivalents                      6,417         (6,320)          2,789
 Cash and cash equivalents, beginning of period                  22          6,439             119
                                                      --------------   ------------  --------------
 Cash and cash equivalents, end of period             $       6,439    $       119   $       2,908
                                                      ==============   ============  ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
                                      F-6
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION AND BASIS OF PRESENTATION

Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida and Tennessee
under long-term management services agreements. These professional corporations
are collectively referred to as the affiliated dental practices.

The Company has entered into a long-term management services agreement with each
of the affiliated dental practices, under which the Company provides equipment,
facilities, administrative personnel and management services, in exchange for a
contracted management fee based on a formula. Each of these agreements is for an
initial term of 25 to 40 years with successive automatic five year renewal
terms, unless terminated at least 90 days before the end of the initial term or
any renewal term.

Through the management services agreement, the Company generally assumes full
responsibility for the operating expenses, has the right to purchase and has
responsibility for collection of all accounts receivable, and receives a
management fee for providing non-dental services. The Company generally has
perpetual, unilateral control over the assets and operations of the affiliated
dental practices (except with respect to those relating to the practice of
dentistry and other matters requiring licensure).

                                      F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
   CONTINUED:

CORPORATE ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED

The Company was formed in December 1995 and merged with Family Dental Services
of Texas, Inc. ("FDS"), a company wholly owned by members of the family of and
entities controlled by Jack H. Castle, D.D.S. (the "Castle Family"). The
Company's operations began on January 1, 1996. Simultaneously with this
transaction, the Company paid $6,000,000 to acquire all of the outstanding stock
of Jack H. Castle, D.D.S., Inc. ("JCD"), a professional corporation of which Dr.
Jack H. Castle was the sole owner. JCD provided dental care to patients from
1949 through December 31, 1995. FDS had been established in 1981 to carry out
administrative functions for the professional corporation and had no business
other than providing administrative services to JCD. All of FDS's revenues
consisted of reimbursement of its costs incurred on behalf of JCD. Effective
with the acquisition, JCD ceased to operate as a separate entity, and a new
professional corporation, Jack H. Castle, D.D.S., P.C. ("PC") was established to
continue the dental practice previously operated by JCD. Therefore, at December
31, 1995, the Company's financial statements included both the operations and
assets of FDS, the administrative and management services company, and JCD, the
professional corporation (together the "predecessor companies"). The combined
statements of operations, changes in stockholders' deficit and cash flows for
the year ended December 31, 1995 reflect the combined operations of predecessor
companies because these entities' activities were assumed by the Company and the
PC and they were under common control. All of the services provided by FDS to
JCD have been eliminated in combination of the predecessor companies' financial
statements.

In 1997, the Emerging Issues Task Force released Issue No. 97-2 "Application of
FASB statement No. 94, Consolidation of all Majority-Owned Subsidiaries, and APB
Opinion No. 16, Business Combinations, to Physician Practice Management Entities
And Certain Other Entities With Contractual Management Arrangements ("Issue No.
97-2).

Issue 97-2 allows consolidation by the physician practice management company
(the "PPM") with the affiliated physician practice when the PPM has controlling
financial interest through a contractual management arrangement. The Company's
management services agreement meet the criteria of Issue 97-2. The Company has
adopted the provisions of Issue 97-2 and retroactivity restated prior periods
based on the terms of the agreements that were in effect during the prior
periods.

At December 31, 1996 and 1997, and for the years ended December 31, 1996 and
1997, the consolidated financial statements include Castle Dental Centers, Inc.
and its wholly-owned management company subsidiaries and the affiliated
professional corporations.

All intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications of prior years have been made to
conform to current period classifications.

REVENUE RECOGNITION

Patient revenues from affiliated dental practices ("Patient Revenues") represent
the estimated realizable amounts to be received from patients, third-party
payors and others for services rendered by affiliated dentists. Patient Revenues
from general dentistry are recognized as the services are performed. Patient
Revenues from orthodontic services are recognized in accordance with the
proportional performance method. Under this method, revenue is recognized as
services are performed under the terms of contractual agreements with each
patient. Approximately 25% of the services are performed in the first month with
the remaining services recognized ratably over the remainder of the contract.
Billings under each contract, which average approximately 24 months, are made
equally throughout the term of the contract, with final payment at the
completion of the treatment.

                                      F-8
<PAGE>
1.  CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
    CONTINUED:

REVENUE RECOGNITION, CONTINUED

Amounts retained by affiliated dental practices consist primarily of
compensation paid to dental professionals, including dentists, orthodontists,
hygienists, and other medical personnel.

Net revenues represent management fees earned by the Company in accordance with
management services agreements with the affiliated dental practices and are
generally equal to Patient Revenues less amounts retained by affiliated dental
practices.

The management services fee charged to affiliated dental practices is comprised
of three components: (1) the reimbursable expenses of the Company, (2) a base
management fee ranging from 12.5% to 15.0% of net patient revenues of the
affiliated dental practices and (3) a performance fee equal to the patient
revenues of the affiliated dental practice less (a) the expenses of the
professional corporation and (b) the reimbursable expenses and base management
fees comprised of (1) and (2) above, if any.

Accounts receivable consist primarily of receivables from patients, insurers,
government programs and contracts between the affiliated dental practices and
third-party payors for dental services provided by dentists. The Company does
not believe that change in the reimbursement arrangements for its affiliated
dental practice contracts with third-party payors would have a material impact
on management fee revenues. An allowance for doubtful accounts is recorded by
the Company based on historical experience.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. The carrying amounts approximate fair value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the various classes of
depreciable assets, ranging from five to ten years. Fully depreciated assets are
retained in property and equipment until they are removed from service. Fully
depreciated assets in use as of December 31, 1996 and 1997 were approximately
$950,000 and $1,062,000, respectively. Maintenance and repairs are charged to
expense whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.

                                      F-9
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
   CONTINUED:

INTANGIBLE ASSETS

The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 1997, are 25 years.

In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and noncompete agreements with the dentist, or directly contract
with payors, the intangible asset created in the purchase allocation process is
associated solely with the management services agreement with the affiliated
dental practice.

The Company reviews intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amount of the asset may
not be recoverable, as determined based on the undiscounted cash flows of the
related operations over the remaining amortization period, the carrying value of
the asset is reduced to estimated fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each affiliated dental
practice's relative market share and local market competitive environment,
current period and forecasted operating results and cash flows of the affiliated
dental practice and its impact on the management fee earned by the Company, and
legal factors governing the practice of dentistry.

OTHER ASSETS

Other assets consist primarily of debt issuance costs and other receivables. The
costs related to the issuance of debt are capitalized and amortized using the
effective interest method over the lives of the related debt. The Company
provided a non-interest bearing loan for $130,000 to an officer which is
outstanding at December 31, 1997.


                                      F-10
<PAGE>
1.  CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
    CONTINUED:

INCOME TAXES

Prior to January 1, 1996, JCD was a subchapter S entity and, accordingly, all
federal tax liabilities were the responsibility of the shareholder. The
subchapter S election of JCD was automatically terminated when the entity became
a wholly-owned subsidiary of the Company and, therefore, became a C-Corporation
for federal income tax purposes. If all of the Company's operations had been
subject to income taxes, net loss for the year ended December 31, 1995, would
have been $1.7 million.

The Company accounts for income taxes under the liability method. Under this
method, deferred taxes are determined based on the differences between the
financial reporting and tax basis of assets and liabilities and are measured
using the enacted marginal tax rates currently in effect. All federal deferred
taxes of JCD were recognized upon becoming a C-Corporation.

EARNINGS PER SHARE

In June 1997, the Company's Board of Directors declared and the stockholders
approved a 1-for-2 reverse split of the Company's common stock. All share and
per share information in the accompanying financial statements has been
retroactively restated to reflect the effects of the reverse stock split. The
Company adopted the provisions of SFAS No. 128 "Earnings per Share," effective
January 1, 1997. All prior periods presented have been restated to conform to
the new requirements.

ADVERTISING

Costs incurred for advertising are expensed when incurred.

PREOPENING COST

Costs incurred prior to opening a dental center, primarily salaries and lease
expense, are expensed when incurred.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of net revenue and expenses during the reporting periods.
Actual results could differ from those estimates.


                                      F-11
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
   CONTINUED:

RECENTLY ISSUED PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 131 establishes standards for the way that
public enterprises report segment information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial statements to shareholders. These statements are
both effective for fiscal years beginning after December 15, 1997. The Company
does not believe implementation of SFAS 130 and 131 will have a material effect
on its financial position, results of operation or cash flows.

2.  REORGANIZATION AND RELATED TRANSACTIONS:

In December 1995, the Company completed a reorganization (the "Reorganization")
by (i) entering into a credit agreement that included a $3,000,000 revolving
line of credit and a $6,000,000 bank term loan (the "Bank Credit Facility"),
(ii) issuing $7,500,000 face amount of senior subordinated notes (the "Senior
Subordinated Notes") together with 1,244,737 shares of Series A Convertible
Preferred Stock (the "Series A Stock") and (iii) issuing 2,000,000 shares of
common stock to the former owner of JCD and certain related parties. A portion
of the proceeds from the Reorganization was used to acquire JCD, which
acquisition was recorded as a capital distribution to JCD's shareholder because
the Company and JCD were under common control. The Company applied these common
shares to a stock split.

In connection with the purchase of the stock of JCD, the Company entered into a
deferred compensation agreement (the "Deferred Compensation Agreement") with the
sole shareholder of JCD, who is a director of the Company, pursuant to which the
Company agreed to pay the shareholder $2,630,000 in 20 quarterly installments
beginning March 1996. The Company accrued the entire liability under the
agreement in December 1995 through a charge to compensation to shareholders.
Amounts not paid when scheduled under the original Deferred Compensation
Agreement bear interest at the rate of ten percent per year. As of December 31,
1997, there was $1,710,000 payable to the sole shareholder of JCD.

A warrant to purchase 56,579 shares of common stock at an exercise price of
$11.00 per share was issued to an investment advisor in connection with the
Reorganization. The warrant is exercisable at any time prior to its expiration
date of December 18, 2000.

                                      F-12
<PAGE>
2.  REORGANIZATION AND RELATED TRANSACTIONS, CONTINUED:

In September and October 1997, the Company completed an initial public offering,
including the underwriters' overallotment, of 2,784,000 shares of its common
stock at $13.00 per share. Proceeds of $31.7 million, net of underwriting
commission and offering expenses of $1,913,000, were used primarily to retire
debt and complete the SW Dental Associates, LC ("SW Dental") acquisition.

Coincident with the completion of the initial public offering, the holders of
1,244,737 shares of Series A and 485,382 shares of Series C Preferred Stock
converted such shares into an aggregate of 948,243 shares of Company common
stock. During the year ended December 31, 1997, the Company recorded
approximately $1.9 million in non-cash dividends which represents the accretion
of the difference between the recorded value of the Preferred Stock and the
redemption value. As of December 31, 1997, there were no shares of the Series A
Stock and Series C Convertible Preferred Stock (the "Series C Stock")
outstanding.

3.  SELECTED BALANCE SHEET INFORMATION:

The details of certain balance sheet accounts were as follows:
                                                                 DECEMBER 31,
                                                             -------------------
                                                                1996       1997
                                                             -------    --------
Property and equipment:
  Equipment ..............................................     $3,841     $5,249
  Leasehold improvements .................................      1,825      2,820
  Furniture and fixtures .................................        610        653
  Vehicles ...............................................         75         75
                                                               ------     ------

      Total property and equipment .......................      6,351      8,797

  Less accumulated depreciation and amortization .........      2,469      3,608
                                                               ------     ------

      Property and equipment, net ........................     $3,882     $5,189
                                                               ======     ======

                                      F-13
<PAGE>
3.             SELECTED BALANCE SHEET INFORMATION, CONTINUED:

Depreciation expense was approximately $336,000, $678,000 and $1,178,000 for the
years ended December 31, 1995, 1996 and 1997, respectively (in thousands).

                                                                 DECEMBER 31,
                                                             -------------------
                                                                1996       1997
                                                             -------    --------
Intangible assets:
  Management services agreements .....................      $16,513      $26,447
  Other ..............................................          150          150
                                                            -------      -------

      Total intangible assets ........................       16,663       26,597

  Less accumulated amortization ......................          231        1,032
                                                            -------      -------

      Intangible assets, net .........................      $16,432      $25,565
                                                            =======      =======

Accounts payable and accrued liabilities:
  Trade ..............................................      $ 2,791      $ 2,937
  Salaries, wages and payroll taxes ..................        1,204        1,577
  Other ..............................................          795          421
                                                            -------      -------

                                                            $ 4,790      $ 4,935
                                                            =======      =======

4.  ACQUISITIONS:

In May 1996, the Company acquired substantially all of the assets and assumed
certain liabilities of 1st Dental Care and Mid-South Dental Centers, group
dental practices headquartered in Clearwater, Florida, and Nashville, Tennessee,
respectively. In August 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of five dental practices and acquired the
stock of three dental practices operated by Horizon Dental Centers, a group
dental practice with offices in Austin and Ft. Worth, Texas.

The aggregate purchase price, including the payment of certain assumed debt and
related acquisition expenses, of $18.2 million consisted of $10.3 million in
cash, $4.6 million in seller notes payable (Note 5) and 332,000 shares of
Company common stock with a fair market value of $3.3 million. In connection
with these acquisitions, the Company entered into employment agreements with
certain employees and former owners of the businesses acquired and into
long-term management services agreements with each of the affiliated dental
practices.

                                      F-14
<PAGE>
4. ACQUISITIONS, CONTINUED:

In June 1997, the Company entered into a management services agreement and
option agreement to acquire all of the membership interest in SW Dental, a group
dental practice located in Austin, Texas. In September 1997, the Company
completed the acquisition. In December 1997, the Company acquired substantially
all the assets of two individual practices in Ft. Worth, Texas and Nashville,
Tennessee and entered into employment agreements with the dentists. The
aggregate purchase price, including related acquisition expenses, of
approximately $10.2 million consisted of $5.5 million in cash, $1.5 million in
Series B Preferred Stock (Note 6), $1.4 million in sellers notes payable (Note
5) and 165,000 shares of the Company common stock with a fair market value of
approximately $1.7 million. The cash portion included $1.5 million in previously
paid non-refundable deposits of which $500,000 was in escrow at December 31,
1996.

The assets and liabilities have been recorded at their estimated fair values at
the date of acquisition. The aggregate purchase price and related expenses
exceeded the fair market value of net assets, which has been assigned to
management services agreements, included in intangible assets. Patient Revenues,
management fees and related costs are included in the consolidated financial
statements from their acquisition dates.

The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:

                                                                 DECEMBER 31,
                                                             -------------------
                                                                1996       1997
                                                             -------    --------
                                                                (IN THOUSANDS)

Patient receivables, net ...............................   $    562    $    236
Unbilled patient receivables, net ......................         66          37
Prepaid expenses and other current assets ..............         99          31
Property and equipment, net ............................      2,104         554
Other assets ...........................................         10           3
Management services agreements .........................     16,663       9,934
Accounts payable and accrued liabilities ...............       (603)       (452)
Long-term debt, assumed ................................       (535)       (138)
Other liabilities ......................................        (80)       --
                                                           --------    --------
                                                             18,286      10,205

Less:  fair value of common stock issued and to be
  issued ...............................................      3,320       3,241
Less:  issuance of notes payable .......................      4,631       1,449
                                                           --------    --------
    Cash purchase price, net of cash acquired ..........   $ 10,335    $  5,515
                                                           ========    ========

                                      F-15
<PAGE>
4.  ACQUISITIONS, CONTINUED:

Unaudited pro forma combined results of operations, assuming all of the
acquisitions occurred at January 1, 1996, are as follows:

                                                             YEAR ENDED
                                                             DECEMBER 31,
                                                         -------------------
                                                           1996       1997
                                                         -------    --------
                                                      (in thousands,  except per
                                                               share data)

Net revenues .................................        $ 30,718         $ 34,116
Net loss .....................................            (988)          (2,558)

Basic and diluted net loss per share .........           (0.29)           (0.62)


The unaudited pro forma summary is not necessarily indicative either of results
of operations, that would have occurred had the acquisitions been made at the
beginning of the periods presented, or of future results of operations of the
combined companies.

5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:

Long-term debt consisted of the following:

                                                                 DECEMBER 31,
                                                             -------------------
                                                                1996       1997
                                                             -------    --------
                                                               (IN THOUSANDS)

             Term loan ........................................  $10,847  $3,000
             Senior subordinated notes ........................    7,950    --
             Seller notes .....................................    4,444   1,499
             Other various notes payable ......................      696     706
                                                                 -------  ------

                 Total debt ...................................   23,937   5,205

             Less discount on senior subordinated notes .......    2,615    --
                                                                 -------  ------
             Long-term debt, net of discount ..................   21,322   5,205
             Less current portion .............................    2,371   2,598
                                                                 -------  ------

                 Long-term debt ...............................  $18,951  $2,607
                                                                 =======  ======

             Long-term debt, net of current portion ...........  $13,616  $2,607
             Long-term debt, related party ....................    5,335    --
                                                                 -------  ------
                                                                 $18,951  $2,607
                                                                 =======  ======

                                      F-16
<PAGE>
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT,
   CONTINUED:

In November 1997, the Company entered into a new credit agreement with its
existing bank (the "Credit Agreement") and refinanced the outstanding balance
of $3.0 million due under the previous Bank Credit Facility. The Credit
Agreement provides for borrowings up to $25 million and matures November 2002.
The principal balance of $3.0 million due under the Credit Agreement at November
7, 1997 is payable in sixteen quarterly payments beginning March 1998. Future
advances under the Credit Agreement require quarterly interest payments through
November 1999 when principal becomes payable based on a five-year amortization
and a final payment at maturity. The Credit Agreement bears interest at variable
rates, which are based upon (a) either (i) the bank's base rate or (ii) LIBOR
plus (b) a margin which varies according to the ratio of the Company's funded
debt to EBITDA, each as defined in the Credit Agreement. The bank's base rate at
December 31, 1997 was 8.5%. A commitment fee is payable quarterly at rates
ranging from 0.125 percent to 0.5 percent of the unused amounts for such
quarter. The Credit Agreement is collateralized by substantially all of the
Company's assets and contains affirmative and negative covenants that require
the Company to maintain certain financial ratios, limit the creation or
existence of liens and set certain restrictions on acquisitions, mergers, sale
of assets and restrict the payment of dividends.

The Company retired approximately $23.9 million of long-term debt in 1997 with
proceeds of the initial public offering. The retirement of debt consisted of
$10.4 million of senior subordinated notes, $9.1 million of Bank Credit Facility
debt and $4.4 million of promissory notes in connection with certain
acquisitions. In connection with the repayment of $9.5 million in 12% Senior
Subordinated Debt in September 1997, the Company recognized a $3.2 million
extraordinary loss associated with the early retirement of such debt.

At December 31, 1997, approximately $268,000 (net of accumulated amortization of
$9,000) of debt issuance costs, had been capitalized in connection with the
issuance of the new Credit Agreement. All costs associated with the Bank Credit
Facility and the Senior Subordinated Notes were included with the extraordinary
loss.

The Company has issued various subordinated promissory notes payable in
connection with certain acquisitions ("Seller Notes") (Note 4). Through
September 1997, interest on the Seller Notes ranged from 6.36 percent to 10.0
percent. As of December 31, 1997, one noninterest bearing Seller Note issued in
December 1997 remained outstanding, which was paid in January 1998 from proceeds
borrowed under the Credit Agreement.

The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 1997 were as follows (in thousands):

   1998                                                      $     2,598
   1999                                                              911
   2000                                                              851
   2001                                                              839
   2002                                                                6
                                                            ------------
                                                             $     5,205
                                                            ============

                                      F-17
<PAGE>
6. PREFERRED STOCK:

The Company issued 119,231 shares of Series B Convertible Preferred Stock (the
"Series B Stock") in connection with the acquisition of SW Dental (Note 4).
The number of shares issued were equivalent to $1,550,000 divided by the initial
public offering price of the Company's common stock of $13.00 per share. The
Series B Stock will be convertible at the holder's option, for a thirty-day
period beginning one year after its issuance (the "Conversion Period"), into an
equivalent number of shares of the Company's common stock. Alternatively, during
the Conversion Period, the holder may require the Company to redeem the Series B
Stock in quarterly increments of $114,000. The Company may call the Series B
Stock at any time following the Conversion Period.

7. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1997 (in thousands):

   1998                                                   $     1,769
   1999                                                         1,618
   2000                                                         1,299
   2001                                                           961
   2002                                                           718
   Thereafter                                                   1,656
                                                         ------------

   Total minimum lease obligation                         $     8,021
                                                         ============


The Company has entered into operating leases for various types of office
equipment and for its building facilities. Certain building facility leases
include rent escalation clauses. Most leases contain purchase and renewal
options at fair market rental values.

LITIGATION

The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.

                                      F-18
<PAGE>
7.  COMMITMENT AND CONTINGENCIES, continued:

LITIGATION, CONTINUED

In July and August 1997, a dentist from whom the Company acquired Horizon Dental
Centers, in August 1996, contacted the Company asserting that the Company
misrepresented the value of the Common Stock issued to him as a part of the
consideration for the acquisition and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that these asserted claims are without merit and has denied
the demand for the issuance of additional shares of Common Stock. In the event,
that litigation is initiated against the Company, the Company intends to defend
itself vigorously. In the opinion of management, resolution of these claims
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.

DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY

Each Affiliated Dental Practice has entered into an employment agreement with
each full time dentist, orthodontist and other dental specialist it employs.
Although the form of contract varies somewhat among practices and among dentists
with different specialties, the typical contract provides for a defined
compensation arrangement, including performance-based compensation, liquidated
damages and a covenant not to compete. Each full-time dentist is required to
maintain professional liability insurance, and mandated coverage limits are
generally at least $1,000,000 per claim and $3,000,000 in aggregate. In
addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability insurance in specified amounts.

Year 2000

The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.

As part of the Company's continuing program to update its information systems in
anticipation of future growth, the Company has recently completed the purchase
and installation of year 2000 compliant software for its operations. The Company
is also currently evaluating software systems for its operations and expects to
have year 2000 compliant software in place by the end of 1998. Accordingly, the
Company does not expect the year 2000 issue to have a material effect on its
financial position, results of operations or cash flows.

                                      F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

8. INCOME TAXES:

Significant components of the Company's deferred tax assets (liabilities) were
as follows:

                                                                 DECEMBER 31,
                                                             -------------------
                                                                1996       1997
                                                             -------    --------
                                                                (IN THOUSANDS)

Deferred tax assets:
  Net operating loss carryforward ......................    $   758     $ 2,275
  Deferred compensation ................................        982         650
  Allowances for bad debts .............................        922        --
                                                            -------     -------

      Total deferred assets ............................      2,662       2,925
                                                            -------     -------

Deferred tax liabilities:
  Unbilled receivables .................................       (622)       (975)
  Loss of Subchapter S status in connection with
    changes in corporate form ..........................     (1,059)       (375)
  Management services agreements .......................       (122)       (250)
  Property and equipment ...............................       (108)       (125)
  Other ................................................        (16)        (75)
                                                            -------     -------

      Total deferred tax liabilities ...................     (1,927)     (1,800)
                                                            -------     -------

Net deferred tax assets ................................        735       1,125
Less current portion ...................................        135        --
                                                            -------     -------

      Noncurrent .......................................    $   600     $ 1,125
                                                            =======     =======


Significant components of the provision for income taxes on continuing
operations were as follows:

                                                               DECEMBER 31,
                                                        ------------------------
                                                       1995       1996      1997
                                                      -------  ---------  ------
Current tax provision:
   Federal ......................................     $--        $--        $--
   State ........................................      --         --         100
                                                      -----      -----      ----

     Total current ..............................      --         --         100

Deferred tax provision (benefit):

   Federal ......................................      (217)      (512)       90
   State ........................................      (108)       (49)       10
                                                      -----      -----      ----

     Total deferred .............................      (325)      (561)      100
                                                      -----      -----      ----

Provision (benefit) for income taxes ............     $(325)     $(561)     $200
                                                      =====      =====      ====


                                      F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

8. INCOME TAXES, CONTINUED:

The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows (in thousands):

                                                               DECEMBER 31,
                                                        ------------------------
                                                       1995       1996      1997
                                                      -------  ---------  ------

Tax at U.S. statutory rate (34%) ..............     $(931)     $(560)     $ 208
State income taxes, net of federal tax ........       (71)       (66)        24
Income not subject to corporate level
  federal tax .................................       (83)      --         --
Nondeductible expenses and other ..............        10         65        (32)
Effect of conversion to taxable entity ........       750       --         --
                                                    -----      -----      -----

                                                    $(325)     $(561)     $ 200
                                                    =====      =====      =====


At December 31, 1997, the Company had net operating loss carryforwards available
to reduce future taxable income of approximately $6.0 million, expiring in 2017.
The Company has not recorded a valuation allowance for the potential inability
to realize its net deferred tax assets because, after consideration of the
affiliated dental practices' historical operating results and the Company's
planned operations, management believes that it is more likely than not that the
Company will realize those assets.

 9. Stock Option Plans:

The Company grants stock options under the Castle Dental Centers, Inc. Omnibus
Stock and Incentive Plan, a stock-based incentive compensation plan (the
"Employees' Plan"), and the Non-employee Directors' Stock Option Plan (the
"Directors' Plan," together the "Plans") which are described below. The Company
applies APB Opinion 25 and related Interpretations in accounting for the Plan.
In 1995, the FASB issued FASB Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") which, if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of the Plan. Adoption of
the cost recognition provisions of SFAS 123 is optional and the Company has
decided not to elect these provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of SFAS
123 in 1995 are required by SFAS 123 and are presented below.

Under the Employees' Plan, the Company is authorized to issue 750,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options and restricted stock. Under the Directors' Plan, the
Company is authorized to issue 150,000 shares of Common Stock to non-employee
directors of the Company. There are 505,000 and 125,000 options granted under
the Employees' Plan and the Directors' Plan, respectively, at December 31, 1997.
The Compensation Committee administers the Plans.

                                      F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

9.   Stock Option Plans, CONTINUED:

These stock options have contractual terms of 10 years and have an exercise
price no less than the fair market value of the stock at grant date. The options
vest at 20% per year over a five year period, beginning on the first anniversary
of the date of grant.

Following is a summary of the status of the Company's stock options as of
December 31, 1997 and the changes during the two-year period then ended:
<TABLE>
<CAPTION>
                                                 STOCK OPTIONS
              -------------------------------------------------------------------------------------
                                                        1996                  1997
                                                        --------------------  ---------------------

                                                        NUMBER OF  WEIGHTED   NUMBER OF  WEIGHTED
                                                        SHARES OF  AVERAGE    SHARES OF  AVERAGE
                                                        UNDERLYING EXERCISE   UNDERLYING EXERCISE
                                                        OPTIONS    PRICES     OPTIONS    PRICES
                                                        ---------- ---------  ---------  ----------
<S>                                                                             <C>        <C>
            Outstanding at beginning of the year            -         n/a       92,250     $10.29
                                                        ----------            ---------
              Granted at the money                         64,250    $10.00    437,750     $10.00
              Granted at a premium                         28,000    $11.00    125,000     $13.00
                                                        ----------            ---------
              Total granted during the year                92,250    $10.29    562,750     $10.67
                                                        ----------            ---------
            Exercised                                       -         n/a         -          n/a
            Forfeited                                       -         n/a       25,000     $11.00
            Expired                                         -         n/a         -          n/a
                                                        ---------- ---------  ---------  ----------
            Outstanding at end of year                     92,250    $10.29    630,000     $10.60
                                                        ========== =========  =========  ==========
            Exercisable at end of year                      -         n/a       14,350     $10.04
                                                        ==========            =========  ==========

            Weighted-average  FV of  options  granted
            at the money                                       3.03                   5.24
            Weighted-average  FV of  options  granted
            at a premium                                       2.46                   4.48
            Weighted-average  FV of  options  granted
            during the year                                    2.86                   5.07
</TABLE>
The fair value of each stock option granted by the Company is estimated on the
date of grant using the minimum value method for 1996 and Black-Scholes option
pricing model for 1997 with the following weighted-average assumptions: dividend
yield of 0% for both years; expected volatility of 0% for 1996 and 45% for 1997;
risk-free interest rates are 6% for 1996 and 1997; and the expected lives of the
options average six years.

The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                               -----------------------------------  ------------------------
                                           WEIGHTED     WEIGHTED                 WEIGHTED
                               NUMBER      AVERAGE      AVERAGE     NUMBER       AVERAGE
             RANGE OF          OUTSTANDING REMAINING    EXERCISE    EXERCISABLE  EXERCISE
                               AT          CONTRACT                 AT
             EXERCISE PRICES   12/31/97    LIFE         PRICE       12/31/97     PRICE
             ----------------  ----------  -----------  ----------  -----------  -----------
<S>          <C>       <C>      <C>          <C>         <C>           <C>        <C>
             $10.00 to $13.00   630,000      10 years    $10.60         14,350     $10.04
</TABLE>

                                      F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

9. Stock Option Plans, CONTINUED:

Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net loss and basic and
diluted net loss per common share for 1997 would approximate $2,920,000 or $0.71
per share. The pro forma effect for 1996 is immaterial.

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995.

10. EARNINGS PER SHARE:

A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:

                                                               DECEMBER 31,
                                                        ------------------------
                                                                  1996      1997
                                                            ---------  ---------
                                                              (IN THOUSANDS)
Net Loss Attrib. To Common Stock(1) ....................     (1,086)     (4,714)

Preferred Stock Accretion...............................                  1,930
                                                            --------------------
Net Loss................................................     (1,086)     (2,784)
Less Extraordinary loss.................................         -        3,195
                                                            ---------  ---------
Income (Loss) Before
Extraordinary Loss......................................    $(1,086)    $   411
                                                            =======     =======

Shares (denominator)
  Shares - basic .......................................      3,191       4,100
  Options and warrants .................................       --            32
                                                            -------     -------
  Shares - diluted .....................................      3,191       4,132
                                                            =======     =======

(1)     The effect of the preferred stock acretion is excluded from earnings per
        share. The preferred stock was converted to common stock at a nominal
        value and those common shares were included in the calculation of Basic
        shares outstanding for all periods.

Options to purchase an aggregate 125,000 shares of common stock at exercise
prices of $13.00 per share were excluded from the calculation of diluted
earnings per share for 1997 because their effect would have been antidilutive.
The options, which expire in 2007, were still outstanding at December 31, 1997.

                                      F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

11. DEFINED CONTRIBUTION PLANS:

In August 1996, the Company adopted a defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan"). All
permanent employees of the Company, except those of the Tennessee subsidiary,
are eligible to participate in the 401(k) Plan upon the completion of six months
of service. The Company maintains a separate defined contribution 401(k) plan
for all permanent employees of the Company's Tennessee subsidiary ("Tennessee
401(k) Plan"). Employees are eligible to participate in the Tennessee 401(k)
Plan upon the completion of four months of service. The Company may match
contributions made by participants under both Plans each year in an amount
determined by the Company on a year-to-year basis.

The Company did not make any contributions to either Plan in 1996 or 1997.

12.     SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                        ------------------------------------------
                                                        1995           1996           1997
                                                        -------------  ------------   ------------
                                                        (in thousands)
<S>                                                     <C>            <C>            <C>
             Cash paid during the period for:
                Interest                                $         87   $     1,358    $     1,707
                Income taxes                                       1        -                  44

             Supplemental disclosure of noncash
               investing and financing activities:
                  Effect of reorganization on
                    capital structure                             39        -
                  Issuance of warrant                             93        -
                  Issuance of notes payable for
                    accrued interest and purchase
                    of property and equipment                 -                576            450
                  Issuance of capital lease
                    obligation for
                    property and equipment                    -             -                 416
                  Issuance of Series B Preferred
                    Stock in connection with an acquisition   -             -               1,550
                  Issuance of Preferred Stock in
                    connection with related party
                    financing                                 -             -               1,144
                  Conversion to common stock of
                    Series A and Series C Preferred Stock     -             -               5,898
</TABLE>
                                      F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

13. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

The Company grants customers credit in the normal course of business. The
Company does not require collateral on the extension of credit. Procedures are
in effect to monitor the creditworthiness of customers and appropriate
allowances are made to reduce accounts to their net realizable values.

The Company maintains cash balances at various financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. The Company's accounts at these institutions may, at times, exceed
the federally insured limits. The Company has not experienced any losses in such
accounts.

FAIR VALUE oF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and the revolving line of credit approximate fair values due to the
short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings and preferred stock as of December 31, 1996 and
1997, respectively, approximate their fair value based on the Company's current
incremental borrowing rates for similar type of borrowing arrangements.

The carrying amounts of the Company's Series B Stock and warrants approximate
their fair value based on the Company's financial condition at December 31,
1997.

14.     RELATED PARTY TRANSACTIONS:

The Company maintains a management services agreement with one of the Company's
Texas affiliated dental practices (organized as professional corporations)
pursuant to which the shareholder receives an annual salary of $100,000 to take
actions necessary to maintain the dental license for the affiliated dental
practice in the state of Texas, for as long as he holds such license and is the
sole shareholder of the practice. Such compensation arrangement was negotiated
between the shareholder and previously unaffiliated investors in the Company. In
addition, the shareholder receives $131,500 per quarter pursuant to the terms of
the Deferred Compensation Agreement (Note 2).

During 1995, the Company entered into a lease agreement with Goforth, Inc., a
company owned by the Company's chairman and chief executive officer (the
"Affiliate"). The Company has agreed to pay the Affiliate a minimum guaranteed
rental of $12,000 per month through January 2001 and $13,200 per month from
January 2001 through January 2006 for rental of a dental center. The Company has
also agreed to pay additional rent of approximately $1,600 per month for
insurance, taxes and common area maintenance. The Company paid $188,000,
$235,000 and $174,000 under this agreement during 1995, 1996 and 1997,
respectively.

                                      F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:

15.     Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
                                                     FIRST       SECOND      THIRD      FOURTH
                                                     ---------   ---------   ---------  ----------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>         <C>         <C>        <C>
             1996
                Net revenues                         $  3,216    $  4,106    $  5,924   $   6,374
                Operating income (loss)                   580         430         330        (480)
                Net income (loss)                          77         (46)       (283)       (835)
                Earnings (loss) per share                0.02       (0.02)      (0.09)      (0.25)

             1997(1)
                Net revenues                            7,050       7,323       8,053       8,986
                Operating income                          803         740         835         941
                Income (loss) before
                  extraordinary loss                       21        (101)        (30)        521
                Extraordinary loss                       -           -         (3,195)       -
                Net income (loss)                          21        (101)     (3,225)        521
                Basic and diluted
                earnings per share:
                  Income (loss) before
                    extraordinary loss                   0.01       (0.03)      (0.01)       0.09
                  Extraordinary loss                     -           -          (0.85)       -
                                                     ---------   ---------   ---------  ----------
                  Net income (loss)                      0.01       (0.03)      (0.86)       0.09
                                                     =========   =========   =========  ==========
</TABLE>

        (1)Earnings per share are computed independently for each of the
           quarters presented. Therefore, the sum of the quarterly earnings per
           share does not equal the total computed for the year due to stock
           transactions which occurred.

The Company has restated its previously issued financial statements on Form 10-Q
for the third quarter of 1997. The restatement is attributable to a tax benefit
for the extraordinary loss with the early extinguishment of debt. The impact of
this adjustment is to decrease the extraordinary loss and net loss by $490,000
for the third quarter of 1997.

16.     SUBSEQUENT EVENTS:

In February 1998, the Company entered into a definitive agreement to acquire 80%
of Dental Consulting Services L.L.C. ("DCS"), a California-based dental practice
management company. Consideration for the acquisition consists of a combination
of cash, notes and stock, of approximately $18.0 million.

In February 1998, the Company reached an agreement with its bank to increase its
bank credit facility to $42.5 million from $25.0 million.

In March 1998, the Company entered into a definitive agreement to acquire Dental
World, Inc., a dental practice management company in Houston, Texas.
Consideration for the acquisition consists of a combination of cash, notes and
stock, of approximately $3.8 million.

                                      F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:

Our report on the financial statements of Castle Dental Centers, Inc. is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in item 14(a) in this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.

                                                        COOPERS & LYBRAND L.L.P.

Houston, Texas
February 26, 1998

                                       S-1
<PAGE>
CASTLE DENTAL CENTERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                        BALANCE     CHARGED TO                           BALANCE
                                        BEGINNING   -----------------------              AT END OF
                                        OF YEAR     EXPENSES    DEDUCTIONS      OTHER       YEAR
                                        ----------  ----------  -----------   ---------  ----------
<S>                                     <C>         <C>         <C>           <C>        <C>
 Year ended December 31, 1995:
    Allowance for uncollectible
      accounts - patient receivables    $   2,596   $   1,284   $    1,443    $   -      $    2,437
                                        ==========  ==========  ===========   =========  ==========

 Year ended December 31, 1996:
    Allowance for uncollectible
      accounts - patient receivables    $   2,437   $   1,137   $    1,324    $    175(1) $   2,425
                                        ==========  ==========  ===========   =========  ==========

 Year ended December 31, 1997:
    Allowance for uncollectible
      accounts - patient receivables    $   2,425   $   1,698   $      451    $    207   $    3,879
                                        ==========  ==========  ===========   =========  ==========




                                        BALANCE     CHARGED TO                           BALANCE
                                        BEGINNING   -----------------------              AT END OF
                                        OF YEAR     EXPENSES    DEDUCTIONS      OTHER      YEAR
                                        ----------  ----------  -----------   ---------  ----------
 Year ended December 31, 1995:
    Allowance for uncollectible
      accounts - unbilled patient
        receivables                     $     113   $     115   $    -        $   -      $      228
                                        ==========  ==========  ===========   =========  ==========

 Year ended December 31, 1996:
    Allowance for uncollectible
      accounts - unbilled patient
        receivables                     $     228   $      90   $    -        $     43(1) $     361
                                        ==========  ==========  ===========   =========  ==========

 Year ended December 31, 1997:
    Allowance for uncollectible
      accounts - unbilled patient
        receivables                     $     361   $     199   $    -        $      8   $      568
                                        ==========  ==========  ===========   =========  ==========
</TABLE>
(1) ACQUIRED ALLOWANCES FOR UNCOLLECTIBLE ACCOUNTS OF AFFILIATED DENTAL
PRACTICES.

                                      S-2
<PAGE>
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)  Exhibits

       EXHIBIT
       NUMBER                           DESCRIPTION OF EXHIBIT
--------------------    --------------------------------------------------------
          *3.1       -- Certificate of Incorporation of
                        Castle Dental Centers, Inc., as
                        amended.
          *3.2       -- Certificate of Amendment to
                        Certificate of Incorporation of
                        Castle Dental Centers, Inc. dated
                        August 28, 1996.
          *3.3       -- Bylaws of Castle Dental Centers, Inc.
          *3.4       -- Amendment to Bylaws of Castle Dental
                        Centers, Inc. dated August 16, 1996.
          *3.5       -- Certificate of Amendment of
                        Certificate of Incorporation of
                        Castle Dental Centers, Inc. dated
                        June 16, 1997.
          *3.6       -- Form of Certificate of Designation of
                        Series B Convertible Preferred Stock.
          *3.7       -- Certificate of Designation of Series
                        C Convertible Preferred Stock, dated
                        June 16, 1997.
          *4.1       -- Form of Certificate representing the
                        Common Stock, par value $.001 per
                        share, of Castle Dental Centers, Inc.
          *4.2       -- Securityholders Agreement dated
                        December 18, 1995, among Castle
                        Dental Centers, Inc., Jack H. Castle,
                        D.D.S., P.C., certain investors in
                        the Company, certain stockholders of
                        Castle Dental Centers, Inc., and
                        certain shareholders of Jack H.
                        Castle, D.D.S., P.C.
          *4.3       -- Amendment, Waiver and Consent dated
                        August 20, 1996 given by Pecks
                        Management Partners Ltd. on behalf of
                        Delaware State Employees' Retirement
                        Fund and the pension plans of Zeneca
                        Holdings, Inc. and ICI American
                        Holdings, Inc.
          *4.4       -- Stockholders' Agreement dated May 19,
                        1996 among Castle Dental Centers,
                        Inc. and certain stockholders.
          *4.5       -- Stockholders' Agreement dated May 31,
                        1996 by and among Castle Dental
                        Centers, Inc. and certain
                        stockholders.
          *4.6       -- Stockholders' Agreement dated August
                        9, 1996 by and among Castle Dental
                        Centers, Inc. and certain
                        stockholders.
          *4.7       -- Registration Rights Agreement dated
                        December 18, 1995, among Castle
                        Dental Centers, Inc. and Delaware
                        State Employees' Retirement Fund,
                        Declaration of Trust for Defined
                        Benefit Plan of ICI American
                        Holdings, Inc., Declaration of Trust
                        for Defined Benefit Plan of Zeneca
                        Holdings, Inc. and certain
                        stockholders and investors in the
                        Company.
          *4.8       -- Registration Rights Agreement dated
                        May 19, 1996 between Castle Dental
                        Centers, Inc. and 1st Dental Care,
                        Inc.
          *4.9       -- Registration Rights Agreement dated
                        May 31, 1996 by and between Castle
                        Dental Centers, Inc. and G. Powell
                        Bilyeu, D.D.S.
          *4.10      -- Registration Rights Agreement dated
                        August 9, 1996 by and between Castle
                        Dental Centers, Inc., Joseph A.
                        Bonola, D.D.S. and Larry C. Jackson,
                        D.D.S.
           4.11      -- Reserved.
          *4.12      -- Amended and Restated Securityholders
                        Agreement dated June 16, 1997, among
                        Castle Dental Centers, Inc., Jack H.
                        Castle, D.D.S., P.C., certain
                        investors in the Company, certain
                        stockholders of Castle Dental
                        Centers, Inc., and certain sharehold-
                        ers of Jack H. Castle, D.D.S., P.C.
          *4.13      -- Amended and Restated Registration
                        Rights Agreement dated June 16, 1997,
                        among Castle Dental Centers, Inc. and
                        Delaware State Employees' Retirement
                        Fund, Declaration of Trust for
                        Defined Benefit Plan of ICI American
                        Holdings, Inc., Declaration of Trust
                        for Defined Benefit Plan of Zeneca
                        Holdings, Inc. and certain
                        stockholders and investors in the
                        Company.

                                      II-4
<PAGE>
       EXHIBIT
       NUMBER                           DESCRIPTION OF EXHIBIT
--------------------    --------------------------------------------------------
          *4.14      -- Registration Rights Agreement dated
                        as of June   , 1997, by and between
                        Castle Dental Centers, Inc. and John
                        Goodman, D.D.S.
           4.15      -- Registration Rights Agreement dated
                        December 31, 1997 between Castle Dental
                        Centers, Inc. and Steve W. Lebo, D.D.S.

         *10.1       -- Securities Purchase Agreement dated
                        December 18, 1995 among Castle Dental
                        Centers, Inc., Jack H. Castle,
                        D.D.S., P.C., JHCDDS, Inc. and
                        certain investors.
         *10.2       -- Amendment No. 1 to Securities
                        Purchase Agreement dated June 16,
                        1997 among Castle Dental Centers,
                        Inc., Jack H. Castle, D.D.S., P.C.,
                        JHCDDS, Inc. and certain investors.
         *10.3       -- 12% Senior Subordinated Note due
                        December 18, 2002 between Castle
                        Dental Centers, Inc. and NAP &
                        Company in the principal amount of
                        $5,050,000.
         *10.4       -- 12% Senior Subordinated Note due
                        December 18, 2002 between Castle
                        Dental Centers, Inc. and Fuelship &
                        Company in the principal amount of
                        $1,000,000.
         *10.5       -- 12% Senior Subordinated Note due
                        December 18, 2002 between Castle
                        Dental Centers, Inc. and Northman &
                        Company in the principal amount of
                        $1,450,000.
         *10.6       -- Management Services Agreement
                        effective December 18, 1995 by and
                        between Castle Dental Centers, Inc.
                        and Jack H. Castle, D.D.S., P.C.
         *10.7       -- Amendment to Management Services
                        Agreement between Castle Dental
                        Centers, Inc. and Jack H. Castle,
                        D.D.S., P.C., dated as of August 15,
                        1996.
         *10.8       -- Accounts Receivable Purchase
                        Agreement dated December 18, 1995,
                        between Jack H. Castle, D.D.S., P.C.
                        and Castle Dental Centers, Inc.
         *10.9       -- Plan and Agreement of Merger of
                        Family Dental Services of Texas, Inc.
                        with and into Castle Dental Centers,
                        Inc. dated December 18, 1995.
         *10.10      -- Stock Purchase Agreement dated
                        December 18, 1995 by and between Jack
                        H. Castle, D.D.S. and Castle Dental
                        Centers, Inc.
         *10.11      -- Amendment to Stock Purchase Agreement
                        by and between Jack H. Castle, D.D.S.
                        and Castle Dental Centers, Inc.,
                        dated as of August 15, 1996.
         *10.12      -- Deferred Compensation Agreement
                        effective December 18, 1995 by and
                        between Castle Dental Centers, Inc.
                        and Jack H. Castle, D.D.S.
         *10.13      -- Indemnity Agreement dated December
                        18, 1995 by and between Castle Dental
                        Centers, Inc. and G. Kent Kahle.
         *10.14      -- Indemnity Agreement dated December
                        18, 1995, by and between Castle
                        Dental Centers, Inc. and Jack H.
                        Castle, D.D.S.
         *10.15      -- Indemnity Agreement dated December
                        18, 1995 by and between Castle Dental
                        Centers, Inc. and Jack H. Castle, Jr.
         *10.16      -- Indemnity Agreement dated December
                        18, 1995 by and between Castle Dental
                        Centers, Inc. and Robert J. Cresci.
         *10.17      -- Indemnity Agreement dated August 16,
                        1996 by and between Castle Dental
                        Centers, Inc. and Bannus B. Hudson.
         *10.18      -- Indemnity Agreement dated August 16,
                        1996 by and between Castle Dental
                        Centers, Inc. and Elizabeth A.
                        Tilney.
         *10.19      -- Asset Purchase Agreement dated May
                        19, 1996 by and among Castle Dental
                        Centers of Florida, Inc., and 1st
                        Dental Care, Inc., Hernando Dental
                        Center-Lester B. Greenberg, D.D.S.,
                        P.A., M&B Dental Lab, Inc., Lester B.
                        Greenberg, D.D.S. and Elisa
                        Greenberg.
         *10.20      -- 10% Note due May 19, 2001 by and
                        between Castle Dental Centers, Inc.
                        and 1st Dental Care, Inc. in the
                        principal amount of $1,787,938.
         *10.21      -- 6.36% Note due May 19, 2000 by and
                        between Castle Dental Centers, Inc.
                        and 1st Dental Care, Inc. in the
                        principal amount of $656,588.

                                      II-5
<PAGE>
       EXHIBIT
       NUMBER                           DESCRIPTION OF EXHIBIT
--------------------    --------------------------------------------------------
         *10.22      -- 6.36% Note due May 19, 2000 by and
                        between Castle Dental Centers, Inc.
                        and M&B Dental Lab, Inc. in the
                        principal amount of $286,775.
         *10.23      -- Management Services Agreement
                        effective May 19, 1996 by and between
                        Castle Dental Centers of Florida,
                        Inc. and Castle 1st Dental Care, P.A.
         *10.24      -- Amendment to Management Services
                        Agreement between Castle Dental
                        Centers of Florida, Inc. and Castle
                        1st Dental Care, P.A., dated as of
                        August 16, 1996.
         *10.25      -- Accounts Receivable Purchase
                        Agreement dated May 19, 1996, between
                        Castle 1st Dental Care, P.A. and
                        Castle Dental Centers of Florida,
                        Inc.
         *10.26      -- Trade Name License Agreement
                        effective May 19, 1996 by and between
                        Castle Dental Centers of Florida,
                        Inc. and Castle 1st Dental Care, P.A.
         *10.27      -- Trademark License Agreement effective
                        May 19, 1996 by and between Castle
                        Dental Centers of Florida, Inc. and
                        Castle 1st Dental Care, P.A.
         *10.28      -- Employment Agreement dated May 19,
                        1996 by and between Castle Dental
                        Centers of Florida, Inc. and Lester
                        B. Greenberg, D.D.S.
         *10.29      -- Asset Purchase Agreement dated April
                        29, 1996 by and among Castle Dental
                        Centers of Tennessee, Inc. and
                        Mid-South Dental Center, P.C. and G.
                        Powell Bilyeu, D.D.S.
         *10.30      -- 10% Note due May 30, 2001 by and
                        between Castle Dental Centers, Inc.
                        and Mid-South Dental Centers, P.C. in
                        the principal amount of $750,000.
         *10.31      -- Accounts Receivable Purchase
                        Agreement dated May 31, 1996, between
                        Castle Mid-South Dental Centers, P.C.
                        and Castle Dental Centers of
                        Tennessee, Inc.
         *10.32      -- Management Services Agreement
                        effective May 31, 1996 by and between
                        Castle Dental Centers of Tennessee,
                        Inc. and Castle Mid-South Dental
                        Center, P.C.
         *10.33      -- Amendment to Management Services
                        Agreement between Castle Dental
                        Centers of Tennessee, Inc. and Castle
                        Mid-South Dental Center, P.C., dated
                        as of August 16, 1996.
         *10.34      -- Trade Name License Agreement
                        effective May 31, 1996 by and between
                        Castle Dental Centers of Tennessee,
                        Inc. and Castle Mid-South Dental
                        Centers, P.C.
         *10.35      -- Trademark License Agreement effective
                        May 31, 1996 by and between Castle
                        Dental Centers of Tennessee, Inc. and
                        Castle Mid-South Dental Centers, P.C.
         *10.36      -- Employment Agreement dated May 31,
                        1996 by and between Castle Dental
                        Centers of Tennessee, Inc., and G.
                        Powell Bilyeu, D.D.S.
         *10.37      -- Asset Purchase Agreement dated August
                        9, 1996 by and among Castle Dental
                        Centers, Inc.; Castle Dental Centers
                        of Texas, Inc.; Consolidated
                        Industries, Inc.; S.A. Dental
                        Services, P.C.; C.A. Dental Services,
                        P.C.; S.C.A. Dental Services, P.C.;
                        Austin Periodontist Associates, Inc.;
                        Joseph A. Bonola, D.D.S.; and Kristen
                        Bonola.
         *10.38      -- Plan and Agreement of Reorganization
                        dated August 9, 1996 by and among
                        Castle Dental Centers, Inc.; Castle
                        Dental Centers of Texas, Inc.; N.A.
                        Dental Services, P.C.; EFW Dental
                        Services, P.C.; HDC Dental Services,
                        P.C.; Midcities Dental Services,
                        P.C.; NEFW Dental Services, P.C.;
                        West Ft. Worth Dental Services, P.C.;
                        Joseph A. Bonola, D.D.S.; Kristen
                        Bonola; and Larry Charles Jackson.
         *10.39      -- 10% Note due July 9, 2001 between
                        Castle Dental Centers, Inc. and
                        Joseph Bonola, D.D.S. in the
                        principal amount of $1,000,000.
         *10.40      -- License Agreement effective August 9,
                        1996 by and between Joseph A. Bonola,
                        D.D.S. and Castle Dental Centers of
                        Texas, Inc.
         *10.41      -- Employment Agreement dated August 9,
                        1996 by and between Jack H. Castle,
                        D.D.S., P.C., and Joseph A. Bonola,
                        D.D.S.

                                      II-6
<PAGE>
       EXHIBIT
       NUMBER                           DESCRIPTION OF EXHIBIT
--------------------    --------------------------------------------------------
         *10.42      -- Escrow Agreement dated August 9, 1996
                        by and among N.A. Dental Services,
                        P.C.; EFW Dental Services P.C.; NEFW
                        Dental Services, P.C.; HDC Dental
                        Services, P.C.; Midcities Dental
                        Services, P.C.; West Ft. Worth Dental
                        Services, P.C.; Joseph A. Bonola and
                        Kristen Bonola; Castle Dental Centers
                        of Texas, Inc,.; and the escrow agent
                        named therein.
         *10.43      -- 1996 Castle Dental Centers, Inc.
                        Omnibus Stock and Incentive Plan, as
                        amended.
         *10.44      -- 1996 Castle Dental Centers, Inc.
                        Non-Employee Directors' Plan, as
                        amended.
          10.45      -- Agreement and Plan of Merger dated as
                        of December 8, 1997 by and among Castle
                        Dental Centers of Texas, Inc and Steve W.
                        Lebo, D.D.S., Inc. and Steve W. Lebo, D.D.S.
          10.46      -- Reserved
          10.47      -- Reserved
          10.48      -- Reserved
         *10.49      -- Amended and Restated Credit Agreement
                        dated May 31, 1996 between Castle
                        Dental Centers, Inc. and NationsBank
                        of Texas, N.A.
         *10.50      -- $3,000,000 Revolving Credit Note
                        dated May 31, 1996 between Castle
                        Dental Centers, Inc. and NationsBank
                        of Texas, N.A.
         *10.51      -- $6,000,000 Term Note dated May 31,
                        1996 between Castle Dental Centers,
                        Inc. and NationsBank of Texas, N.A.
         *10.52      -- $10,000,000 Advancing Term Note dated
                        May 31, 1996 between Castle Dental
                        Centers, Inc. and NationsBank of
                        Texas, N.A.
         *10.53      -- Amended and Restated Security
                        Agreement (Stocks, Bonds and Other
                        Securities) dated May 31, 1996
                        between Castle Dental Centers, Inc.
                        and NationsBank of
                        Texas, N.A.
         *10.54      -- Amended and Restated Security
                        Agreement (Accounts, Inventory,
                        Equipment, Chattel Paper, Documents,
                        Instruments, General Intangibles and
                        Other Property) dated May 31, 1996
                        between Castle Dental Centers, Inc.
                        and NationsBank of Texas, N.A.
         *10.55      -- Amended and Restated Guaranty
                        Agreement dated May 31, 1996 by Jack
                        H. Castle, Jr. in favor of
                        NationsBank of Texas, N.A.
         *10.56      -- Guaranty Agreement dated May 31, 1996
                        by JHCDDS, Inc. in favor of
                        NationsBank of Texas, N.A.
         *10.57      -- Amended and Restated Security
                        Agreement (Accounts, Inventory,
                        Equipment, Chattel Paper, Documents,
                        Instruments, General Intangibles and
                        Other Property) dated May 31, 1996
                        between JHCDDS, Inc. and NationsBank
                        of Texas, N.A.
         *10.58      -- Security Agreement (Accounts,
                        Inventory, Equipment, Chattel Paper,
                        Documents, Instruments, General
                        Intangibles and Other Property) dated
                        May 31, 1996 between Castle Dental
                        Centers of Florida, Inc. and
                        NationsBank of Texas, N.A.
         *10.59      -- Guaranty Agreement dated May 31, 1996
                        by Castle Dental Centers of Florida,
                        Inc. in favor of NationsBank of
                        Texas, N.A.
         *10.60      -- Security Agreement (Accounts,
                        Inventory, Equipment, Chattel Paper,
                        Documents, Instruments, General
                        Intangibles and Other Property) dated
                        May 31, 1996 between Castle Dental
                        Centers of Tennessee, Inc. and
                        NationsBank of Texas, N.A.
         *10.61      -- Guaranty Agreement dated May 31, 1996
                        by Castle Dental Centers of
                        Tennessee, Inc. in favor of
                        NationsBank of Texas, N.A.
         *10.62      -- Lease dated January 1, 1996 by and
                        between Goforth, Inc. and Family
                        Dental Services of Texas, Inc.
         *10.63      -- Lease Agreement effective February
                        20, 1995 by and between Lehndorff
                        Four Oaks Place Joint Venture and
                        Family Dental Services of Texas, Inc.
          10.64      -- Credit Agreement dated as of November 7, 1997
                        between Castle Dental Centers, Inc.
                        and NationsBank of Texas, N.A., as agent
          10.65      -- First Amendment to Credit Agreement effective
                        as of February 11, 1998 between Castle Dental
                        Centers, Inc. and NationsBank of Texas, N.A.,
                        as agent.
          10.66      -- Reserved

                                      II-7
<PAGE>
       EXHIBIT
       NUMBER                           DESCRIPTION OF EXHIBIT
--------------------    --------------------------------------------------------
         *10.67      -- Option Agreement effective as of
                        December 18, 1995 by and between Jack
                        H. Castle, D.D.S. and Castle Dental
                        Centers, Inc.
         *10.68      -- Option Agreement effective as of May
                        19, 1996 by and between Lester B.
                        Greenberg, D.D.S. and Castle Dental
                        Centers of Florida, Inc.
         *10.69      -- Incentive Stock Option Agreement
                        dated May 31, 1996 between Castle
                        Dental Centers, Inc. and G. Powell
                        Bilyeu, D.D.S.
         *10.70      -- Incentive Stock Option Agreement
                        dated May 31, 1996 between Castle
                        Dental Centers, Inc. and Phillip T.
                        Hamner.
         *10.71      -- Incentive Stock Option Agreement
                        dated May 31, 1996 between Castle
                        Dental Centers, Inc. and David North.
         *10.72      -- Option Agreement effective as of May
                        31, 1996 by and between G. Powell
                        Bilyeu and Castle Dental Centers of
                        Tennessee, Inc.
         *10.73      -- Second Amendment and Supplement to
                        Amended and Restated Credit Agreement
                        dated as of June 16, 1997 between
                        Castle Dental Centers, Inc. and
                        NationsBank of Texas, N.A.
         *10.74      -- 12% Senior Subordinated Note due
                        January 31, 1998 between Castle
                        Dental Centers, Inc. and NAP &
                        Company in the principal amount of
                        $1,347,000.
         *10.75      -- 12% Senior Subordinated Note due
                        January 31, 1998 between Castle
                        Dental Centers, Inc. and Fuelship &
                        Company in the principal amount of
                        $267,000.
         *10.76      -- 12% Senior Subordinated Note due
                        January 31, 1998 between Castle
                        Dental Centers, Inc. and Northman &
                        Co. in the principal amount of
                        $386,000.
         *10.77     --  Amendment No. 1 to Deferred
                        Compensation Agreement dated June 16,
                        1997 by and between Castle Dental
                        Centers, Inc. and Jack H. Castle,
                        D.D.S.
         *10.78      -- Option Agreement for the Purchase and
                        Sale of Businesses dated as of June
                        1, 1997 by and among Castle Dental
                        Centers of Texas, Inc., Castle Dental
                        Centers, Inc., Jack H. Castle,
                        D.D.S., P.C., SW Dental Associates,
                        LC, John Goodman, D.D.S. and Harold
                        Simpson, Jr.
         *10.80      -- Member Interests Purchase Agreement
                        dated as of June 1, 1997 by and among
                        Castle Dental Centers of Texas, Inc.,
                        Castle Dental Centers, Inc., Jack H.
                        Castle, D.D.S., P.C., SW Dental
                        Associates, LC, John Goodman, D.D.S.
                        and Harold Simpson, Jr.
         *10.81     --  Management Services Agreement
                        effective June 1, 1997 by and between
                        Castle Dental Centers of Texas, Inc.,
                        and SW Dental Associates, LC.
         *10.82     --  Employment Agreement dated as of June
                        1, 1997 by and between Castle Dental
                        Centers of Texas, Inc. and John
                        Goodman, D.D.S.
         *10.83      -- Consulting Agreement dated as of June
                        1, 1997 by and between Castle Dental
                        Centers of Texas, Inc. and Sheryl K.
                        Goodman.
         *10.84     --  Option Agreement dated as of June 18,
                        1997 by and among Castle Dental
                        Centers, Inc., Castle Dental Centers
                        of Florida, Inc., Lester Greenberg
                        D.D.S. and NationsBank of Texas, N.A.
          21         -- Subsidiaries of the Registrant.
          27.1       -- Financial Data Schedule as of December 31, 1997.
          27.2       -- Restated Financial Data Schedule as of December 31,
                        1996.
          27.3       -- Restated Financial Data Schedule as of September 30,
                        1997


------------
 * Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (registration number 333-1335)
                                      II-8