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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS

13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

For the transition period from                      to                     

Commission File Number: 1-13263

CASTLE DENTAL CENTERS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of incorporation or organization)

76-0486898

(I.R.S. Employer Identification No.)

3701 Kirby Drive, Suite 550

Houston, Texas

(Address of principal executive offices)

77098

(Zip Code)

(713) 490-8400

(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, $.000001 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 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. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes. ¨ No. x

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, was $2.7 million. As of March 29, 2004, issued and outstanding voting stock of Castle Dental Centers, Inc. consisted of 8,265,323 shares of Common Stock, $.000001 par value; 195,838 shares of Series A-1 Preferred Stock, par value $.000001, convertible into 35,776,356 shares of Common Stock, and; 79,190 shares of Series B Preferred Stock, par value $.000001, convertible into 165,022,853 shares of Common Stock. The total equivalent shares of Common Stock, issued and outstanding at March 29, 2004, was 209,064,532 shares.

Documents Incorporated by Reference: None

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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.

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The Company

The Company 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, Tennessee and 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 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 March 15, 2004, the Company provided management services to 74 dental centers with approximately 158 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 enables affiliated dentists, orthodontists and other dental specialists to focus on delivering quality patient care and 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 payers and intends to continue to pursue managed care contracts. The Company negotiates capitated managed care contracts on behalf of its affiliated dental practices, which maintained capitated managed care contracts covering approximately 136,000 members at December 31, 2003. 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 establish a consistent national identity for its business by implementing common practice management policies and procedures in all of its dental centers and affiliated dental practices nationwide. 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 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 utilized as a basis for its expansion. In the period from 1996 through the first half of 2000, the Company expanded through the acquisition of dental practices and the development of new (“de novo”) dental centers in its markets. Practices were acquired in Tennessee, Florida, Austin, Fort Worth and San Antonio in Texas, and in Los Angeles, California. A total of 33 de novo dental centers were opened during this period while 8 dental centers were closed or consolidated in 1999 and 2000. From 2001 through 2003, as part of its restructuring and cost reduction program, the Company closed, consolidated or sold 26 dental centers, 11 of which were de novo centers that had been built in 1998 and 1999. At March 15, 2004, the Company operated 47, 10, 12 and 5 dental centers in Texas, Tennessee, Florida and California, respectively.

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Recent Developments

On May 15, 2003, the Company entered into a series of agreements to restructure certain of its outstanding debt and equity (the “2003 Restructuring”). As of May 14, 2003, the Company had $46.7 million outstanding under a bank agreement (the “Old Credit Agreement”) with its senior secured lenders, a bank group that included, among other banks Bank of America Strategic Solutions, Inc. (“BofA”) and GE Capital Corporation (“GECC”), (collectively, the “Senior Secured Lenders”), of which $38.3 million was due the Senior Secured Lenders excluding GECC. In addition, at May 14, 2003, the Company had outstanding $1.9 million in principal and accrued interest under 15% convertible notes (“Senior Notes”) due Heller Financial, Inc. (“Heller”), Midwest Mezzanine Fund II, L.P. (“Midwest”) and the Company’s Chief Executive Officer at the time, James Usdan (collectively “Senior Subordinated Lenders”). The Restructuring transaction consisted of the following:

As a result of these transactions, the total equivalent shares of Common Stock, issued and outstanding at December 31, 2003, was 209.1 million. Sentinel owns more than 50% of the voting stock of the Company and therefore is the controlling stockholder of the Company.

In connection with the 2003 Restructuring, the Company entered into a management agreement with Sentinel (“Sentinel Management Agreement”), whereby Sentinel is to provide various strategic financial planning, advisory and consulting services to the Company. In consideration of the services provided by Sentinel, an annual consulting fee of $275,000 is payable quarterly in advance on the last business day of each February, May, August and November. The consulting fee increases to $300,000 annually after the date that the Company’s EBITDA (as defined in the Credit Agreement) exceeds $10.0 million for the preceding twelve months. Unless earlier terminated by the parties, the Sentinel Management Agreement will remain in effect as long as Sentinel owns stock of the Company. If, during the term of the Sentinel Management Agreement, Sentinel holds less than 50% of the shares of Company Common Stock held by Sentinel on a fully diluted basis as of May 15, 2003, the fees payable to Sentinel will be prorated based on the number of

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fully diluted shares of Company Common Stock held by Sentinel on such date. Pursuant to the terms of the Sentinel Management Agreement, the Company paid Sentinel approximately $0.5 million at closing for consulting services related to the 2003 Restructuring.

The Dental Industry

Dental care services in the United States are 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 2002 Survey of Dental Practice (“ADA Survey”), in 2002, there were approximately 153,000 actively practicing dentists in the U.S., of which approximately 8,900 were orthodontists. Nearly 80% of the nation’s private practitioners work either as sole practitioners or in a practice with one other dentist. Since 1991, the number of dentists practicing in groups has grown from 4% to 20% of all dentists, as the practice of dentistry becomes more complex and the investment required to open a practice increased. Dental, orthodontic and other specialty practices have followed the trend of the health care industry generally and are increasingly forming larger group practices.

As the trend towards consolidation is expected to continue, the number of dentists graduating from dental schools has been falling, from a peak of 6,300 annually in the 1970’s to 4,200 in recent years. This is leading to an increase in the average age of dental practitioners. In addition, the character of the graduating dentist is changing, with women comprising about 40% of graduating classes compared to less than 5% thirty years ago. The combination of increasing demand for dental services and the slow growth in the number of practicing dentists should result in a positive pricing environment for dental services over the next decade. The tightening supply of dentists will create more competitive recruiting and higher compensation for qualified dentists.

The annual aggregate domestic market for dental services was estimated by the Health Care Financing Administration, Health Care Financing Review (1999) to be approximately $65.4 billion for 2001, and is projected to reach $109 billion by 2010. 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% from 1980 to 2000, and is projected to grow at a compound annual growth rate of approximately 6.1% through the year 2010. 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 1998, consumer out-of-pocket expenditures accounted for 48% of the payment for dental services, compared to 16% for other medical services.

Management 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 as employers have added dental benefits to employee healthcare programs; (ii) an increasing demand for dental services from an aging population as people live longer and retain their teeth throughout their lives; (iii) the evolution of new technology which has made 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 various forms of insurance coverage in the dental industry. The National Association of Dental Plans (“NADP”) estimates that some form of dental care plan covered 162 million people, or about 57% of the U.S. population in 2000, compared to 47% of the population that had such coverage in 1995. These plans include traditional indemnity insurance, preferred provider (“PPO”) plans, capitated managed care (“DHMO”) plans, and referral plans. Patients covered by indemnity insurance plans typically are charged the same fees for dental services that are charged to uninsured patients, with insurance generally paying for 50% to 80% of covered procedures. Under a PPO plan, the dentist charges a discounted fee for each service based on a fee schedule negotiated with the insurance provider. Capitated managed care (“DHMO”) plans provide a fixed monthly fee for each enrolled member that selects the dentist as his or her dental care provider, plus supplemental or patient co-payments based on the type of service provided. Referral plans are not insurance

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products but are a network-based product that provides dental care at a discounted guaranteed rates and usually charge the subscriber a monthly fee. According to the NADP, of the estimated 162 million people covered by dental benefits in 2000, approximately 37% were covered by indemnity plans, 34% were covered by PPO plans, 17% were enrolled in capitated managed care programs, including government (Medicaid) programs and 12% were enrolled in referral plans. The highest growth in dental insurance benefits has come in PPO and referral plans that have increased enrollment from 23 million members in 1995 to 76 million members in 2000. Growth in managed care plans, on the other hand, slowed in 1997 and enrollment of approximately 27 million members has grown by only 5.3% per year since 1995. Growth in PPO plans should continue as employers switch from traditional indemnity insurance benefits to lower cost PPO programs. As a result, enrollment in traditional indemnity plans actually decreased by 4.8% per year from 1995.

Business Strategy

The Company’s strategy is to develop integrated networks for the provision of a broad range of dental services 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 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 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 seeks to establish or, where appropriate, relocate each Castle Dental Center in a convenient location in or near a high-profile neighborhood retail area and utilizes innovative sales and marketing programs designed to create 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.

Dental Network Development

Prior to 1999, the Company expanded into new markets through the acquisition of multi-location group dental practices. Once the market entry acquisition was made, the Company expanded within its target markets primarily through the de novo development of new dental centers. During 1999 and 2000, the Company expanded solely through the development of de novo centers and did not complete any acquisitions of dental practices. In 2000, four de novo dental centers were opened, four dental centers were closed and two dental centers in Houston were consolidated into a new dental center. The Company developed no new

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dental centers in 2001, 2002 and 2003. Between January 1, 2001 and December 31, 2003, as part of its restructuring and cost reduction program, the Company closed, sold or consolidated 26 unprofitable or under performing dental centers, 11 of which were de novo centers that had been built in 1998 and 1999.

De novo Development

The Company has opened 33 newly developed dental centers since 1997; seven in Houston, four in Austin, five in Dallas/Fort Worth, five in San Antonio, two in Corpus Christi, Texas, seven in Nashville, Tennessee and three in the Tampa/Clearwater area in Florida. All of the new centers were located in leased facilities in neighborhood retail shopping centers areas. Development of each de novo dental center cost approximately $330,000 in leasehold improvements, signage, and dental and office equipment, depending primarily on the size of the dental facility. All new dental centers in the Company’s existing markets utilize the Castle Dental Centers name and logo. Six of the de novo dental centers were closed in 2001, two were closed and three were sold in 2002 and two were closed and one was sold in 2003 as part of the restructuring and cost reduction programs that were implemented in 2001 and 2002. The Company is continually monitoring the performance of all its dental centers to determine if additional closings will be necessary.

The Company expanded through development of de novo dental centers in existing markets because management believes that opening new dental centers that conform to the Company’s operating model is more effective in creating brand awareness and increasing market share in existing markets than acquiring dental practices that have different operating characteristics. In addition, the cost of building and equipping a new dental center has generally been less than the cost of acquiring dental centers. Due to the lack of capital necessary for continued expansion, the Company ceased development of new dental centers in early 2000, and did not have any centers under construction at December 31, 2003. The Company anticipates that it will open 2 additional dental centers in 2004, relocate three dental centers into newly built facilities and will refurbish other dental centers.

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 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 management fee earned by the Company, except for the professional corporation located in California, is generally comprised of three components: (i) the costs incurred by it on behalf of the affiliated dental practice; (ii) a base management fee ranging from 12.5% to 20.0% of net patient revenues; and, (iii) a performance fee equal to the net 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. In California, the Company is paid a monthly management fee comprised of two components: (i) the costs incurred by it on behalf of the affiliated practice and (ii) a management fee in an amount of 30.0% of net patient revenues; plus a bonus equal to 30.0% of net patient revenues in excess of average monthly patient revenues over the prior two-year period. The amount of the management fee is reviewed by the Company and the affiliated dental practice at least annually in order to determine whether such fee should be adjusted to continue to reflect the fair value of the management services rendered by the Company.

The obligations of the Company under its management services agreements include assuming financial and other responsibility, 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,

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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 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. As part of the management services agreement, the Company requires that the majority shareholder of the affiliated dental practice execute an option agreement that grants the Company’s designee the right to acquire all the shareholder’s interest in the practice at a nominal cost. Upon the occurrence of certain events, the Company can exercise the option at any time with 10 days written notice. The Company may nominate without restriction any licensed dentist as its designee and may transfer the option at any time to any qualified person, subject to applicable state regulations governing the practice of dentistry. The management services agreement does not limit the number of times that the option may be exercised. At December 31, 2003, each of the Company’s affiliated dental practices was wholly owned by an individual dentist. Additionally, the management services agreement may be terminated by the Company or the affiliated dental practice only in the event of default in the performance of the material duties of the non-terminating party.

Dentist Employment Agreements

Each affiliated dental practice has entered into employment agreements with substantially all of its full-time dentists, orthodontists and other dental specialists. Although the form of contract varies somewhat among 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 some of 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 those locations.

The majority of services provided by the Company’s affiliated dental practices are classified as general dentistry. 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 networks, the Company provides a wide range of specialty dental 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

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(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 Company’s dental centers are generally located in retail environments. Many of the dental centers include semi-private general dentistry treatment rooms, private treatment rooms and orthodontic bays. Currently, the Company’s dental centers include from four to 22 treatment rooms and range in size from approximately 1,000 square feet to approximately 6,000 square feet. New dental centers, developed by the Company, range in size from 2,400 square feet to 4,000 square feet, and have from six to fourteen operatories.

Since its formation, the Company has adapted its locations to accommodate the full range of dental specialties, where feasible. The Company believes the application of its method of designing and locating dental centers will facilitate the expansion of services offered by the acquired practices. Where a dental center 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 dental center to a more desirable retail location as soon as practicable.

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 some dental centers opening as early as 8:00 a.m. and closing as late as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The dental centers 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 dental center is also regularly staffed with an office manager, front office staff and other support staff.

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 of $98 to $109 per month, with an average contract period of approximately 26 – 30 months. After consultation with the orthodontic staff 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. The Company maintains a payment policy requiring that new orthodontic patients arrange for an automatic monthly bank draft.

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 assist its affiliated dental practices 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

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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.

Sales and Marketing

Since its founding, the Company has applied retail-marketing concepts to the practice of dentistry. This strategy has been based on the relatively high level of patient payments (as opposed to insurance and other third-party payers), the discretionary nature of many procedures such as cosmetic dentistry and orthodontics and the large number of uninsured patients that require dental treatment. These principles include network development and densification within markets, common branding of all dental centers utilizing the Castle Dental logo and trademark, extended hours of operation, location optimization, consistent signage, affordable fees and payment plans. The Company uses both print advertising and professionally produced broadcast advertising to market its dental services to potential patients in its markets. As part of its retail-oriented strategy, the Company seeks to establish or, where appropriate, relocate each of its dental centers in a convenient location in or near a high-profile neighborhood retail area and utilize marketing programs designed to create 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.

The Company has also established a national telemarketing system in Houston, Texas to field calls generated by advertising, to confirm upcoming scheduled patient visits and to encourage patients to return for follow-up visits. The national telemarketing system is based on a national 800 number (1-800-TO SMILE) and utilizes state-of-the-art software to identify patients and direct them to the nearest Company operated dental center. The telemarketers can enter all relevant information into the practice management information system for patients making appointments for an initial visit, including pre-screening patients for insurance and other credit information.

Managed Care Contracts

The Company negotiates contracts with dental healthcare maintenance organizations, insurance companies, self insurance plans and other third-party payers pursuant to which services are provided on some type of discounted fee-for-service or capitated basis. Under capitated contracts the affiliated dental practice receives a predetermined amount per patient per month in exchange for providing certain necessary covered services to members of the plan. Usually, the capitated plans also provide for supplemental payments and/or co-payments by members for certain higher cost procedures such as crowns, root canal therapy and dentures. These contracts typically result in lower average fees for services than the usual and customary fees charged by the Company and may, in certain instances, expose the Company to losses on contracts where the total revenues received are less than the costs of providing such dental care. However, most of these contracts are cancelable by either party on 60 to 90 days written notice, thereby reducing the risk of long-term adverse impact on the Company.

Because of the rapid growth of capitated managed care plans in the 1990’s, the Company increased its participation in such plans by negotiating national agreements with major managed care plans. As a result, the number of members enrolled at Castle Dental offices increased from 55,000 in 1997 to approximately 172,000 in 2001. As a result of the reduction in dental offices since 2001, and the limits placed on additional managed care enrollment by the Company, the number of managed care members had fallen to approximately 136,000 by the end of 2003.

At December 31, 2003, the Company and its affiliated dental practices maintained capitated managed care contracts covering approximately 136,000 members. Capitation fees, including supplemental fees and excluding co-payments by members, totaled $8.2 million, or approximately 8.7% of net patient revenues in 2003. One managed care contract with a national insurance company accounted for $6.5 million in revenues ($2.8 million in capitation payments and $3.7 million in patient co-payments) in 2003, equal to 6.9% of total net patient revenues. The Company periodically evaluates its capitated managed care contracts by comparing

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the average reimbursement per procedure plus the total capitation fees per contract to the usual and customary fees charged by the affiliated dental practice. If the aggregate reimbursement percentage for the capitated contract exceeds 50% of the usual and customary fees, the Company believes that the incremental costs of providing covered services are being recovered. Management believes that capitated managed care contracts, in the aggregate, are profitable, however, the Company periodically reviews its contracts with managed care companies in order to improve the financial performance of these plans and to limit the growth of enrolled members in such plans.

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 it competes with in its markets. Publicly traded dental practice management companies that compete with the Company include American Dental Partners, Inc., Interdent, Inc., Coast Dental Services, Inc., and Orthodontic Centers of America, as well as others. Certain of these 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.

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 uses an integrated dental practice management system in all its dental centers, provided by a third party, that is located in Houston. This system monitors and controls patient treatment, scheduling, invoicing of patients and insurance companies, productivity of clinical staffs and other practice related activities. The Company also has implemented a web-based purchase order system to enable management to monitor and control dental and office supplies purchasing.

The Company also utilizes centralized financial information and accounting systems. These systems are linked to the practice management system allowing for automatic transfer of certain data between the practice management and financial information systems.

In 2004, the Company plans to upgrade and improve its financial information and accounting systems, convert its purchase order system to a sequel based platform and to determine the feasibility of upgrading its practice management system.

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. Consequently the Company may become subject to compliance with additional laws, regulations and interpretations or enforcement 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.

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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 “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 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, payer contracts and, in certain states, dental equipment), 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

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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.

On March 27, 2003, a Federal District Judge in Dallas, Texas issued a Memorandum Opinion and Order (“Opinion”) in the case of Robert C. Penny et al vs. Orthalliance, Inc., granting Plaintiffs’ amended Motion for Partial Summary Judgment. Orthalliance, Inc. (“Orthalliance”) is a dental practice management company with similarities in its purpose, organizational structure and management relationships to the Company’s. The issuance of this Opinion has potential implications for the Company since the Opinion held that the management relationship between Orthalliance and certain dentists is in violation of the prohibition against the corporate practice of dentistry as defined in the Texas Dental Practices Act (“TDPA”) and is therefore void. Management believes that the Opinion, at this stage, does not significantly increase the risk that the Company’s management relationships will be considered illegal. There are material distinctions between the Company’s management arrangements and the Orthalliance arrangements, which would suggest that this or another judge would not reach the same conclusion in applying the law to the Company’s arrangements. In addition, the Company is not currently party to any lawsuits alleging that its business arrangements violate the TDPA. However, the Company can give no assurance that another judge would not apply a similar analysis to its arrangements and hold that such arrangements also violate the TDPA. Such a ruling against the Company would have material adverse consequences on its financial position and results of operations.

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 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

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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, 2003, the Company and its affiliated dental practices employed approximately 860 administrative and dental office personnel on a full-time or part-time basis, and the affiliated dental practices employed approximately 165 general dentists and specialists on a full-time or part-time basis. The affiliated dental practices generally enter into employment or independent contractor agreements with their affiliated dentists. The Company believes that its relations with its employees are good.

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. Significant increases in 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 provides each affiliated dental practice with comprehensive general liability, workers compensation and professional liability coverage covering the practice. Each dentist retained or employed by the affiliated dental practice, is required to provide professional liability coverage of not less than $1.0 million for each occurrence and $3.0 million annual aggregate.

The Company maintains other insurance coverage 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.

The Company leases approximately 9,000 square feet of space for executive, administrative, sales and marketing and operations offices in Houston, Texas. The lease expires in July 2006 and is subject to renewal options.

All of the Company’s existing dental centers are leased. Two of the dental centers are owned by an affiliate of the Company.

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 2003 and 2011 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.

On May 30, 2002, litigation was filed in the Circuit Court for Putnam County, Tennessee against the Company and one of its subsidiaries by the spouse and children of a patient of an affiliated dental practice alleging that the defendants were negligent and vicariously liable in the care and treatment of the patient, resulting in his death. The Company filed a response to the litigation denying liability in this matter. The matter was settled in October 2003, within the Company’s insurance policy limits. On February 9, 2004,

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Mr. Herren’s daughter filed suit in the Circuit Court for Putnam County, Tennessee, seeking an injunction or restraining order preventing the disbursement of funds from the settlement, and seeking to amend the settlement to reflect that the plaintiff receive her proper share of the settlement, or alternatively, to set the settlement aside and reinstate the original lawsuit. The Company has filed a response to the lawsuit denying any liability in this matter and intends to vigorously defend itself.

In June 2000, the Company recorded litigation expenses of $1.5 million resulting from an arbitration award against two subsidiaries of the Company in an arbitration proceeding in Los Angeles, California. The arbitrator found that the subsidiaries had breached a contractual agreement to acquire a dental practice and awarded the plaintiffs actual damages and costs of $1.1 million, plus interest at 10 percent from the date that the judgment was filed. In connection with the restructuring of certain indebtedness in July 2002, the Company entered into a forbearance agreement with the plaintiffs regarding this judgment. The Company agreed to make the following payments in exchange for forbearance in enforcing the judgment (1) $100,000 interest payment paid in July 2002, (2) twenty-three monthly installments of $30,000 each beginning August 2002 and (3) then $25,000 monthly installments until paid in full. Pursuant to an Amendment to the forbearance agreement, dated as of May 15, 2003, the plaintiffs consented to GECC filing liens against the Company’s assets to secure its obligations under the Credit Agreement and the Company agreed to increase by $5,000 per month the amounts being paid on the forbearance agreement. The Company entered into a Pay-Off Agreement on November 4, 2003, and made one final payment of approximately $0.5 million in full satisfaction of the outstanding judgment. Pursuant to the Pay-Off Agreement the Company has been released from all claims under the judgment.

In May 2003, the Company was notified that its former malpractice insurance provider had filed for liquidation and that payment of claims and legal defense in various malpractice lawsuits filed against the Company and its affiliated dental practices had been terminated. The insolvent insurance company provided malpractice coverage for the Company and its affiliated dental practices in 2000 and 2001. Therefore the Company is potentially liable for payment of any claims, judgments or other costs associated with these lawsuits. Management has reviewed all open claims and lawsuits still pending that this insurance company was covering and does not believe that the potential liability, if any, will have a material impact on the Company’s financial results.

The Company has been informed of an investigation by Texas Medicaid concerning alleged overpayments for services for certain procedures performed by the Company’s affiliated dental practice in Texas. Texas Medicaid has alleged that certain advertised specials were not offered to Medicaid patients from 1997 through 2001. Texas Medicaid has preliminarily claimed overpayments of approximately $280,000. The Company disputes Texas Medicaid’s claims and intends to vigorously contest the findings of the Texas Medicaid investigative offices.

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.

None

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PART II

The Company’s common stock is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “CASL.OB.” The following table presents the quarterly high and low sale prices as reported by the OTC Bulletin Board. These quotations reflect the inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

As of March 15, 2004, there were 8,265,323 shares of the Company’s Common Stock outstanding held by approximately 40 stockholders of record. The Company believes there are approximately 800 beneficial owners of the Common Stock. As of March 15, 2004, there were 195,838 shares of Series A-1 Convertible Preferred Stock, par value $0.000001 (“Series A-1 Stock”) outstanding held by 6 stockholders of record. The Series A-1 Stock is convertible into 35,776,356 shares of Common Stock. As of March 15, 2004, there were 79,190 shares of Series B Stock outstanding held by 22 stockholders of record. The Series B Stock is convertible into 165,022,853 shares of Common Stock. The Series A-1 Stock and the Series B Stock vote together with the holders of the common stock on an “as-converted” basis. The total number of shares of Common Stock outstanding, including the “as-converted” Series A-1 Stock and Series B Stock, is 209,064,532.

The Company has never paid a cash dividend on its Common Stock. The Company currently intends to retain earnings to finance the 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 Agreement prohibits the payment of dividends.

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The selected financial data of the Company should be read in conjunction with the related consolidated financial statements, notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere herein.