UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                                  ANNUAL REPORT

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003      COMMISSION FILE NUMBER 0-12050

                       SAFEGUARD HEALTH ENTERPRISES, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                52-1528581
     (State or other jurisdiction of     (I.R.S. Employer Identification Number)
     incorporation or organization)

                            95 ENTERPRISE, SUITE 100
                       ALISO VIEJO, CALIFORNIA 92656-2605
              (Address of principal executive offices)  (Zip Code)

                                  949.425.4300
              (Registrant's telephone number, including area code)
                                  949.425.4586
            (Registrant's fax 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, $0.01 PAR VALUE

                                      NONE
                       (Name of exchange on which listed)

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 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.  [X]

The  aggregate  market  value  of the voting stock held by non-affiliates of the
registrant  as  of  June  30,  2003, was $3,567,000. The number of shares of the
registrant's  common  stock outstanding as of March 31, 2004, was 5,770,590 (not
including  3,216,978  shares  held  in  treasury).


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                                     SAFEGUARD HEALTH ENTERPRISES, INC.
                          INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003


                                                                                                       PAGE
                                                                                                       ----
PART I.
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  Item 1.       Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    1

  Item 2.       Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18

  Item 3.       Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   19

  Item 4.       Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . .   19

PART II.

  Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . .   19

  Item 6.       Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   21

  Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations.   22

  Item 7A.      Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . .   31

  Item 8.       Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . .   31

  Item 9.       Changes in and Disagreements with Independent Accountants on Accounting and
                  Financial Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   31

  Item 9A.      Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   31

PART III.

  Item 10.      Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . .   31

  Item 11.      Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   33

  Item 12.      Security Ownership of Certain Beneficial Owners and Management and
                  Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . .   35

  Item 13.      Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . .   37

  Item 14.      Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . .   37

PART IV.

  Item 15.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . .   38

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   39
</TABLE>


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                                     PART I

ITEM 1.   BUSINESS
------------------

In  addition  to  historical  information,  the  description  of  business below
includes  certain  forward-looking  statements  regarding  SafeGuard  Health
Enterprises,  Inc.  and  its  subsidiaries (the "Company"), including statements
about  growth  plans,  business  strategies,  future  operating  results, future
financial  position,  and  general  economic  and  market events and trends. The
Company's  actual  future  operating  results  could  differ materially from the
results  indicated  in  the  forward-looking  statements  as a result of various
events that cannot be predicted by the Company. Those possible events include an
increase  in  competition,  changes  in  health care regulations, an increase in
dental  care  utilization  rates,  new  technologies, an increase in the cost of
dental  care, the inability to contract with an adequate number of participating
providers,  the  inability  to  efficiently integrate the operations of acquired
businesses,  the inability to realize the carrying value of goodwill, intangible
assets,  and  certain  long-term  promissory  notes owed to the Company, natural
disasters,  loss  of  key  management,  and  other  risks  and  uncertainties as
described  below  under  "RISK  FACTORS."  The  following  should  be  read  in
conjunction  with the Consolidated Financial Statements of the Company and Notes
thereto.

(a) GENERAL DEVELOPMENT OF BUSINESS

The  Company  provides  a  wide  range of dental benefit plans, including health
maintenance  organization  ("HMO")  plan  designs  and  preferred  provider
organization  ("PPO")/indemnity  plan  designs. The Company also provides vision
benefit  plans,  administrative services, and preferred provider network rental.
The  Company conducts its business through several subsidiaries, one of which is
an  insurance  company  that  is  licensed in a number of states, and several of
which  are  dental  HMO  plans  that  are each licensed in the state in which it
operates.  The  Company's  operations  are  primarily in California, Florida and
Texas,  but  it  also  operates  in  a  number  of  other  states.

The  Company's  predecessor,  SafeGuard  Health  Plans,  Inc.,  a  California
corporation, (the "California Plan") commenced operations in 1974 as a nonprofit
corporation. The California Plan converted to for-profit status in December 1982
and is currently a subsidiary of the Company. SafeGuard Health Enterprises, Inc.
(the  "Parent") was incorporated in California in November 1982 and acquired the
California  Plan  in  December 1982. In August 1987 the Parent reincorporated in
Delaware. Unless the context requires otherwise, all references to the "Company"
or  "SafeGuard"  mean  SafeGuard  Health Enterprises, Inc. and its subsidiaries.

The  Company  completed three (3) acquisitions during the last two (2) years. In
October  2003,  the  Company  made  an  acquisition  that  included a dental HMO
company,  a  vision  HMO  company,  and  certain dental and vision PPO/indemnity
business,  all  of  which  was  located  in  California, and which had aggregate
revenue  of approximately $74 million in 2003. The total cost of the acquisition
was approximately $15.2 million, which was paid in cash and was financed through
the  issuance  of  $19.0  million of convertible notes in October 2003. In March
2003, the Company acquired a dental HMO company located in California, which had
approximately  $3  million  of annual revenue. The total cost of the acquisition
was  approximately  $1.3  million. In August 2002, the Company acquired a dental
HMO  company  located  in  Florida, which had approximately $7 million of annual
revenue.  The  purchase price of the acquisition was approximately $6.7 million,
which  consisted  of  a cash payment of $3.0 million, a secured convertible note
for $2,625,000, and 769,231 shares of the Company's common stock. The Company is
currently licensed as a dental HMO in four states, and as an indemnity insurance
company  in 20 states. However, substantially all of its revenue is generated in
California,  Florida  and  Texas.

The  Company's  executive offices are located at 95 Enterprise, Suite 100, Aliso
Viejo,  California 92656-2605, and its website address is www.safeguard.net. Its
telephone  number  is  949.425.4300  and  its  fax  number  is  949.425.4586.

DENTAL  CARE  MARKETPLACE

The total market for dental care services and for dental benefit plans has grown
rapidly  in  recent  years.  The  United  States Centers for Medicare & Medicaid
Services  (formerly  known  as the Health Care Financing Administration) ("CMS")
reported  that total expenditures for dental care in the United States increased
from  approximately $50.2 billion in 1997 to an estimated $70.3 billion in 2002.
The  National  Association  of  Dental  Plans  (the  "NADP")


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<PAGE>
estimated  that  the number of people in the United States that were enrolled in
some  type  of  dental  benefit  plan  increased from 139 million in 1997 to 153
million in 2002, the last year for which this information is available.

The  cost of dental services has increased in recent years at a rate higher than
that for consumer goods as a whole. The United States Bureau of Labor Statistics
(the  "BLS")  reported that the consumer price index ("CPI") for dental services
for  all urban consumers increased by 24.0% from 1997 to 2002, while the CPI for
all items for all urban consumers increased by 12.1% during the same period. CMS
reported  that expenditures for dental services accounted for approximately 4.5%
of total national health care expenditures during 2002. As a result of increases
in  the  cost  of dental services, the Company believes that employers and other
purchasers  of  dental  care benefits have a significant interest in effectively
managing  the  cost  of  dental  care  benefits.

As  noted  above,  the  NADP estimated that approximately 153 million people, or
approximately 54% of the total population of the United States, were enrolled in
some  type  of  dental  benefit  plan  in  2002. The United States Census Bureau
estimated  that  approximately  242  million people, or approximately 85% of the
total  population  of  the  United States, were enrolled in some type of medical
benefit  plan  in 2002. The Company believes the number of people without dental
coverage  represents  an  opportunity  for dental benefits companies to increase
their  enrollments.

The  NADP  estimated  that  enrollment  in  dental  HMO  plans  decreased  from
approximately  27  million  people in 1997 to approximately 23 million people in
2002.  The  Company  believes the primary reason that total enrollment in dental
HMOs  has  not  increased in recent years is that most purchasers desire greater
flexibility  in  the  choice  of  providers than is generally afforded by dental
HMOs,  and  the  size of dental HMO provider networks has not kept pace with the
growth  in  the  dental  benefits  market.

In  recent  years,  there  has  been a significant increase in the enrollment in
dental  insurance  plans  that  include  PPO  networks,  which typically provide
greater flexibility in the member's choice of providers than a dental HMO. Under
these  plans, the insurance company creates a PPO network by negotiating reduced
fees  with  dentists  in  exchange  for  including  the dentists in a "preferred
provider"  list  that  is distributed to subscribers who are enrolled in the PPO
dental  plan.  The  subscribers who are enrolled in the plan generally receive a
higher  level  of  benefits, in the form of reduced out-of-pocket expense at the
time  of  service,  if they choose to receive services from a dentist in the PPO
network.  The  NADP  estimated that enrollment in fully insured PPO dental plans
has  grown  from  approximately  15  million  people in 1997 to approximately 33
million  people  in  2002.  The Company believes that PPO dental plans have been
rapidly  gaining  in popularity because they provide customers with a balance of
cost-effectiveness  and  flexibility  in  the  choice  of  providers.

The  dental  benefit  plan business is characterized by participation of several
large  national  insurance companies, and numerous regional insurance companies,
regional  medical  HMOs, and other independent organizations. The NADP estimated
there  were  approximately  77  entities  offering  dental  HMO  plans,  and
approximately  67  entities  offering  dental PPO plans, in the United States in
2002.

The average monthly cost of dental insurance coverage is much lower than medical
insurance  coverage. Dental care is provided almost exclusively on an outpatient
basis,  and  general  dentists,  as  opposed to specialists, perform most dental
procedures.  Most  dental problems are not life threatening and do not represent
serious  impairments  to  overall health. Therefore, there is a higher degree of
discretion exercised by patients in determining when or whether to obtain dental
services,  and  a  higher  degree of sensitivity to the cost of dental services.
Many dental conditions have a range of appropriate courses of treatment, each of
which  has  a  different  out-of-pocket  cost  for patients who are covered by a
dental  insurance plan. For example, a deteriorated filling may be replaced with
another  filling (a low-cost alternative), a pin-retained crown build-up (a more
costly  alternative), or a crown with associated periodontal treatment (the most
costly alternative). The design of a patient's dental insurance plan can have an
impact  on the type of dental services selected by the patient or recommended by
the  dentist.  Dental  benefit  plans  generally  do  not  include  coverage for
hospitalization,  which  is  typically  the  most expensive component of medical
services.  In  addition,  co-payments and co-insurance payments made by patients
under  dental  plans  typically  represent  a  larger share of the total cost of
dental  care,  compared  to  the share of the total cost of medical care that is
paid  by  patients  under  medical  coverage  plans.

Common  features of dental PPO and indemnity plans include annual deductibles of
varying  amounts,  maximum  annual  benefits  of  $2,000  or less per person and
significant  cost  sharing by the patient. Patient cost sharing typically varies
by  the  type  of  dental  procedure, ranging from little or no cost sharing for
preventive  procedures  to  50%  or


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more  cost-sharing for bridgework or dentures, and even greater cost-sharing for
orthodontic  care.  The  relatively high patient cost-sharing and the relatively
predictable  nature  of  the  need for dental services substantially reduces the
underwriting  risk  of  dental  PPO  and  indemnity  plans,  compared  to  the
underwriting  risk  of  a  medical  insurance  plan,  which  typically  covers
catastrophic  illnesses  and  injuries.

Under  a dental PPO or indemnity plan, dentists have little incentive to deliver
cost-effective  treatments  because  they  are  compensated on a unit-of-service
basis.  In  contrast, under a dental HMO plan, each general dentist is typically
reimbursed  primarily in the form of a fixed monthly payment for each member who
selects  that dentist as his or her primary dental care provider (a "capitation"
payment). In some cases, the general dentist also receives supplemental payments
from  the  dental  HMO  for  performing  certain  procedures, in addition to the
capitation  payments.  Under  a  dental  HMO  plan,  each dentist also typically
receives  co-payments  from the patient for certain dental services, in addition
to the capitation and supplemental payments from the dental HMO. The co-payments
and  supplemental payments mitigate the level of utilization risk assumed by the
dentist,  but  are  typically  small  enough  to  discourage  the  dentist  from
delivering treatments that are not cost-effective. Capitation payments create an
incentive  for  dentists to emphasize preventive care, to deliver cost-effective
treatments,  and  to  develop  a  long-term  relationship  with  their patients.
Capitation payments also substantially reduce the dental HMO plan's underwriting
risk  associated  with  varying  utilization  of  dental  services.

(b)  FINANCIAL  INFORMATION  ABOUT  SEGMENTS

Management  views  certain  geographic areas as separate operating segments, and
therefore, measures the Company's operating results separately for each of those
geographic  areas.  The  Company  provides  essentially  the  same  products and
services  in  all  of  the  geographic areas in which it operates. For financial
reporting purposes, all the Company's operating segments are aggregated into one
reporting  segment,  which  provides  dental  benefit  plans  and  other related
products  to  employers,  individuals  and  other  purchasers.

(c)  NARRATIVE  DESCRIPTION  OF  BUSINESS

GENERAL  DESCRIPTION  OF  THE  COMPANY

The  Company  provides  dental  benefit  plans,  vision  benefit plans and other
related  products,  to  government  and  private  sector  employers,  government
programs  for  low-income  beneficiaries,  labor  unions,  associations,  and
individuals.  The  Company  also  provides dental benefit plans to medical HMOs,
which  include  the  Company's  dental  coverage in their product offerings. The
Company  currently  has  contracts  with  approximately 8,000 employers, medical
HMOs, government programs, labor unions and associations, and delivers dental or
vision  benefits,  or  related services, to a total of approximately 1.5 million
covered  individuals. Dental care is provided to covered individuals through the
Company's  HMO  network  of  approximately  6,000  dentists, and through its PPO
network  of  approximately  16,000  dentists. Vision care is provided to covered
individuals  through  the  Company's  HMO  network  of  approximately  2,700
optometrists  and ophthalmologists, and through its PPO network of approximately
3,700  optometrists  and  ophthalmologists.

Under  the  Company's  dental  benefit  plans  that have an HMO plan design, its
customers  pay a monthly premium for each subscriber enrolled in the plan, which
is  generally  fixed for a period of one to two years. The amount of the monthly
premium  varies  depending  on  the  dental  services covered, the amount of the
member  co-payments  that are required for certain types of dental services, the
geographic  location of the group, and the number of dependents enrolled by each
subscriber.  Each  subscriber  and  dependent  is typically required to select a
general  dentist  from  the  Company's  HMO provider network, and to receive all
general  dental services from that dentist. Under some benefit plans with an HMO
plan  design,  the  subscribers  and  dependents don't have to select a specific
general  dentist, but they still have to receive services from a provider in the
Company's  HMO  network in order for the services to be covered by the Company's
benefit  plan.  A  referral  to  a  specialist  must be requested by the general
dentist  and  approved  in  advance  by the Company. The approval by the Company
confirms  that  the  referral  is  for a service covered by the member's benefit
plan. Under HMO plan designs, subscribers and dependents are not required to pay
deductibles  or  file  claim  forms,  and  are  not  subject to a maximum annual
benefit.

Under  the Company's dental benefit plans that have a PPO/indemnity plan design,
its  customers  also  pay  a monthly premium for each subscriber enrolled in the
plan,  which  is  generally  fixed  for  a period of one year. The amount of the
monthly  premium  varies depending on the dental services covered, the amount of
the  annual  deductible,  the


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portion  of  the  cost  of  dental  services  that  is paid by the subscriber or
dependent,  the  maximum  annual  benefit amount, the geographic location of the
group,  and  the  number  of  dependents  enrolled  by  each  subscriber.  Under
PPO/indemnity  plan  designs,  subscribers  are  required to pay deductibles and
co-insurance  amounts  that  are  typically higher than the co-payments required
under  a  dental  HMO plan, and the benefits covered are typically subject to an
annual  maximum  amount.  However, under PPO/indemnity plan designs, subscribers
and  dependents  can choose to receive dental services from any dentist of their
choice.  If  the  subscriber  or  dependent  chooses  to receive services from a
dentist  in  the  PPO network, the services will typically cost less than if the
services  were  delivered  by  a  dentist  not contracted with the Company's PPO
network.

The  Company's  goal  is to be a leading dental benefits provider in its primary
markets  of  California,  Florida and Texas, but it also provides dental benefit
plans  in  a number of other states. The Company offers a comprehensive range of
dental  benefit  plans  that is based on a set of standard plan designs that are
generally  available  in  each  of  the  markets  in which the Company operates.
Additionally,  for large clients, the Company has the information technology and
flexibility  to  deliver  highly  customized  benefit  plans.

Under  the  Company's  vision benefit plans, customers pay a monthly premium for
each  subscriber  enrolled in the plan, which is typically fixed for a period of
one  to  two  years. The monthly premium varies depending on the vision services
covered,  the  member  co-payments required for certain vision services, and the
number  of  dependents  enrolled  by each subscriber. Under the Company's vision
plans  with an HMO plan design, subscribers and dependents must receive services
from  a  provider  in  the Company's HMO network in order for the services to be
covered  by  the Company's benefit plan. Under the Company's vision plans with a
PPO/indemnity  plan  design,  subscribers  and  dependents can choose to receive
services  from  any licensed provider. If the subscriber or dependent chooses to
receive  services  from  a  provider  in the PPO network, the amount paid by the
subscriber  or  dependent at the time of service is typically less than it would
be  if  the  services  were  delivered by a provider outside of the PPO network.

The  Company  uses  multiple  distribution  channels  to  sell its products. The
Company  targets  the  large  employer  market  by developing relationships with
benefits  consulting  firms  that are often engaged by large employers to assist
them  in  selecting  the  best  dental  plans.  The  Company utilizes its senior
management,  outside  consultants,  and  its  internal  sales  force  to develop
relationships  with benefits consulting firms and potential large customers. The
Company  primarily  uses its internal sales force to sell the Company's products
to  mid-size  employer  groups,  by  developing  relationships  with independent
brokers, and to a lesser extent, by contacting potential customers directly. The
Company  has  a telephonic small group sales and service function in each of its
primary  geographic  markets, which focuses on developing the small group market
and  providing quality service to existing customers in a cost-effective manner.
In  addition,  the  Company has developed separate distribution channels for the
individual  dental  benefit  plan  market, which the Company believes has growth
potential.  The  Company's  dental plans are also offered to medical HMOs, which
include  the  Company's  dental  plans in comprehensive medical plans offered by
those  medical  HMOs.  In  some  cases,  the  Company  utilizes  general  agency
relationships to market its products, which generally target small employers and
individuals.

The  Company  is  committed  to  providing quality dental and vision care to its
members  through its HMO and PPO networks of qualified, accessible providers. By
providing  a wide range of benefit plan designs, including HMO and PPO/indemnity
plan designs, the Company is able to maintain a competitive network of providers
by  delivering  patients  to  providers  under  both  HMO  and PPO contracts. In
addition,  the Company offers stand-alone administrative services and PPO access
products  to  its  customers,  which  deliver  additional  patient volume to its
contracted  providers.  The  Company  has provider relations representatives who
maintain  the  provider networks in each of the Company's significant geographic
markets.  The local knowledge and expertise of these representatives enables the
Company  to  develop  and  maintain  competitive  provider networks, which is an
important  factor  to  employers  in  selecting a dental or vision benefit plan.

ACQUISITIONS

Effective October 31, 2003, the Company acquired all of the outstanding stock of
Health  Net  Dental,  Inc. ("HN Dental"), which was a California dental HMO, and
Health  Net  Vision,  Inc. ("HN Vision"), which was a California vision HMO, and
certain PPO/indemnity dental and vision business underwritten by Health Net Life
Insurance  Company ("HN Life"), which was formerly an affiliate of HN Dental and
HN  Vision.  The  total cost of the acquisition was approximately $15.2 million,
which  was  paid  in  cash  and  was  financed  through  the  issuance  of


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$19.0 million of convertible notes in October 2003. HN Dental and HN Vision were
merged  with  the  Company's  preexisting  dental  HMO  subsidiary in California
effective  April  1, 2004. The combined revenue of HN Dental, HN Vision, and the
acquired  PPO/indemnity  business  was  approximately  $74  million  in 2003. In
connection  with  the  acquisition  of  HN  Dental,  the Company entered into an
agreement  to  provide private label dental HMO and PPO/indemnity products to be
sold  in  the marketplace by subsidiaries of Health Net, Inc., the former parent
company  of  HN  Dental  and  HN  Vision,  for  a  period of at least five years
following  the  transaction, subject to certain conditions. The business purpose
of  these  acquisitions  was  to  increase  the  Company's market penetration in
California,  which  is  one  of the Company's primary geographic markets, and to
gain vision benefit products that are internally administered by the Company. As
a  result of the acquisitions, the number of individuals in California for which
the  Company  provides  dental  benefits  increased  from  approximately 350,000
members  to  approximately  800,000  members,  and  the number of individuals in
California  for  which  the  Company  provides  vision  benefits  increased from
approximately  20,000  members  to  approximately 150,000 members. A significant
portion  of  the business of HN Dental consists of approximately 125,000 members
enrolled  through  a contract with the California Managed Risk Medical Insurance
Board,  under  a program known as "Healthy Families," which provides coverage to
low-income  families  and  individuals, and approximately 60,000 members who are
enrolled under California Medi-Cal programs. These government programs represent
a  new  customer segment for the Company, as it has no similar business prior to
the  acquisition  of HN Dental. During November 2003, the Company integrated the
employees  of  HN  Dental  and  HN Vision into its California operations, and in
April  2004  the  Company  integrated  a  majority  of  the  information systems
activities  and  business  operations  of the acquired business into its primary
information systems application, moved all of the former HN Dental and HN Vision
employees  to  its Aliso Viego National Service Center, and is in the process of
integrating  the  remaining  aspects of the acquired business into the Company's
operations.

In  March  2003,  the  Company acquired all of the outstanding stock of Ameritas
Managed  Dental  Plan,  Inc.  ("Ameritas"),  which was a dental HMO company with
approximately $3 million of annual revenue located in California. The total cost
of  the acquisition was approximately $1.3 million. Ameritas was merged with the
Company's  preexisting  dental  HMO  subsidiary in California effective upon the
closing  of  the  acquisition.  The  business  purpose of the acquisition was to
increase  the  Company's  market  penetration in California, which is one of the
Company's primary geographic markets. As a result of the acquisition, the number
of  individuals  in  California  for  which the Company provides dental benefits
increased  from  approximately 300,000 members to approximately 330,000 members.
The  business  of Ameritas, including all of its information systems activities,
was  integrated  into  the  Company's  California  operations  in April 2003. In
connection with this acquisition, the Company entered into a five-year marketing
services agreement with Ameritas Life Insurance Corp., the former parent company
of Ameritas, ("ALIC"). Under this marketing services agreement, ALIC markets the
Company's  dental  HMO  benefit  plans  to  clients that purchase dental PPO and
indemnity  benefit  plans  and  other  employee  benefits  products  from  ALIC.

In  August  2002, the Company acquired all of the outstanding stock of Paramount
Dental  Plan,  Inc.  ("Paramount"),  which  was  a  dental  HMO  company  with
approximately  $7  million  of  annual  revenue  located  in Tampa, Florida. The
purchase  price  of  the  acquisition  was  approximately  $6.7  million,  which
consisted  of  a  cash  payment  of $3.0 million, a secured convertible note for
$2,625,000,  and  769,231  shares  of  the Company's common stock. Paramount was
merged with the Company's preexisting dental HMO subsidiary in Florida effective
upon the closing of the acquisition. The business purpose of the acquisition was
to  increase  the  Company's  market penetration in Florida, which is one of the
Company's  primary  geographic  markets. The acquisition increased the number of
members  in  Florida  for  which  the  Company  provides  dental  benefits  from
approximately  50,000 members to approximately 275,000 members. During September
2002,  the  Company  integrated  the  employees  of  Paramount  into its Florida
operations,  and  the  former  chief executive officer of Paramount is currently
President of the Company's Florida operations. The Company integrated a majority
of  the information systems activities of Paramount into its primary information
systems  application  in  January  2003.

GEOGRAPHIC  MARKETS

The  Company  operates  primarily  in  California,  Florida  and  Texas  and its
marketing  activities  are  currently focused on these states. It also maintains
dental  HMO or dental PPO provider networks in several other states, and obtains
new  business  in  those  other  states  from time to time. The Company uses its
provider  networks  in  other states primarily to serve customers in California,
Florida or Texas that have a portion of their employees located in other states.


                                        5
<PAGE>
The  Company  started  its  business  in  California,  and expanded to Texas and
Florida primarily through the acquisition of two dental HMO companies located in
those two states. It is possible that the Company could expand its operations to
additional states as a result of future acquisitions or new or expanded customer
contracts,  although  the  Company  has  no  current  plans  to  do  so.

PRODUCTS

The  Company operates primarily in a single business segment, which is providing
dental  benefit plans to employers, labor unions, medical HMOs, state government
agencies,  individuals  and other purchasers. The Company provides a broad range
of  dental  benefit  plan designs, depending on the demands of its customers. In
addition  to offering a range of benefit plan designs, the Company offers dental
benefit  plans  with  a  restricted  choice of providers, through its HMO plans,
plans with financial incentives to use network providers, through its PPO plans,
and  benefit  plans  with  an  unrestricted  choice  of  providers,  through its
indemnity plans. Premium rates for each benefit plan are adjusted to reflect the
benefit design, the cost of dental services in each geographic area, and whether
the  covered  individuals  can  select  any  provider at the time of service. In
addition  to  dental  benefit  plans,  the  Company  also  offers  other related
products,  as  described  below.  The revenue currently generated by these other
related  products  is  not  significant compared to the revenue generated by the
Company's  dental  benefit  plans.

Dental  HMO Plan Designs. The Company offers a comprehensive range of dental HMO
plan  designs,  which  typically  cover  basic  dental  procedures,  such  as
examinations,  x-rays,  cleanings  and fillings, for no additional charge at the
time of service, although some benefit designs require the member to pay a small
co-payment  for  each  office  visit. Dental HMO plans also typically cover more
extensive  procedures  provided  by the general dentist, such as root canals and
crowns,  as  well  as  procedures  performed  by specialists contracted with the
Company,  including  oral  surgery, endodontics, periodontics, orthodontics, and
pedodontics,  in  exchange  for  member  co-payments that vary depending on each
member's  benefit  plan  design.  In  order  for  a  member  to  be treated by a
specialist,  the  member's  general  dentist  must  initiate  a  referral  to  a
specialist,  and the Company reviews each referral request prior to the member's
visit  to  the  specialist.  The  Company's  dental  HMO plan designs also cover
emergency  out-of-area treatments that are required when a member is temporarily
outside  the  geographic  area  served  by  his  general  dentist.

Under  a  dental  HMO  plan,  each  subscriber  or dependent typically selects a
general  dentist  from  the  Company's  HMO  provider  network, and receives all
general  dental services from that dentist. The general dentist selected by each
member receives a monthly capitation payment from the Company, which is designed
to  cover  a majority of the total cost of the general dental services delivered
to  that member. The monthly capitation payment does not vary with the nature or
the extent of dental services provided to the member by the general dentist, but
is  variable  based  on the particular benefit plan purchased by each member. In
addition  to  the  capitation  payments,  the  general  dentist  also  receives
co-payments  from  the  members  for  certain types of services, and may receive
supplemental  payments  from  the  Company  for  certain  types of services. The
Company  typically  pays  for  services  delivered  by  a  specialist based on a
negotiated  fee  schedule.

In  addition  to  the  dental HMO plan designs described above, the Company also
provides  a dental HMO plan design in Florida that covers only semi-annual exams
and  cleanings,  but  also provides a schedule of negotiated discounts which the
member  can  use  when  obtaining other dental services. Under this type of plan
design, the subscribers and dependents do not have to select a specific dentist,
but  they  must  receive services from a dentist in the Company's HMO network in
order  to  receive  the  benefits  of  the  plan.

Dental  PPO/Indemnity  Plan Designs. The Company offers a comprehensive range of
dental  PPO/indemnity  plan  designs, subject to regulatory restrictions. Dental
PPO/indemnity  plan designs typically cover the same dental procedures as dental
HMO  plan  designs.  Under  the Company's dental PPO/indemnity plan designs, the
covered  individuals  are required to make a co-insurance payment at the time of
each  service,  which  is typically higher than the co-payments required under a
dental  HMO  plan  design. In addition, the benefits covered under the Company's
dental  PPO/indemnity  plan designs are subject to annual deductibles and annual
benefit  maximums,  which  is  not  the case under the Company's dental HMO plan
designs.

Under  dental  PPO/indemnity plan designs, subscribers and dependents can choose
to  receive covered services from any licensed dentist. In the case of a benefit
plan that includes a PPO component, the co-insurance amounts paid by the covered
individual  are  reduced if he or she chooses to receive services from a dentist
in  the  Company's  preferred  provider  network.  In  addition,  the  covered
individual's  annual  deductible  is  sometimes  waived  if  he  or  she chooses


                                        6
<PAGE>
to  receive  all  dental  services  from  a  dentist  in the Company's preferred
provider  network,  depending on the specific benefit plan. The Company pays for
services  delivered  by  dentists  in  its  PPO  network based on negotiated fee
schedules,  which,  together with any co-insurance payment due from the patient,
constitutes  payment  in  full  for  the  services  delivered (i.e., there is no
"balance  billing"  by the provider). The Company pays for services delivered by
non-contracted  providers  based  on  usual  and  customary  dental fees in each
geographic  area,  and  the  provider  may  bill  the patient for any difference
between  his or her standard fee and the amount paid by the Company. The Company
believes  that  offering  an  indemnity  dental  plan  with  a PPO network is an
attractive  way  to  enter  geographic  areas  where few dentists have agreed to
participate in HMO networks. In such areas, participation in the PPO network can
serve  as  a  transitional  step for dentists, between the traditional system of
reimbursement  based  on  usual  and  customary fees, to participation in an HMO
network.  Dental  PPO/indemnity  plan  designs  subject  the  Company  to  more
significant underwriting risks than dental HMO plan designs, because the Company
assumes  all  the  risk  related  to  varying  utilization  rates.

The Company believes that PPO/indemnity plan designs are attractive to employers
and  other  purchasers  because  they  are  a  cost-effective  alternative  to
traditional  indemnity  insurance,  and  they  offer  more  freedom of choice of
providers  than  dental  HMO  plan  designs.

Defined  Benefit  Dental  Plans.  The  Company offers a range of defined benefit
dental  insurance  plans.  Under  these  plans,  subscribers  and dependents are
reimbursed  a  fixed  amount  for  each procedure performed, regardless of which
provider  performs the procedure. One innovative feature of this product is that
certain  plan  designs include coverage for dental implants, which are typically
excluded  from  other  types  of dental benefit plans. This product is also sold
with  or  without  orthodontic  coverage. Defined benefit plans are designed for
customers  who  want  to  avoid  the restrictions of a network-based plan, while
paying  a  monthly  premium  that  is  significantly less than that of a typical
PPO/indemnity plan. Because this product is not dependent on a provider network,
it  can  be  marketed  to  potential  customers  who  are located outside of the
geographic  areas  covered  by  the  Company's  HMO  and  PPO provider networks.

Dual  Option Product. The Company frequently combines one of its dental HMO plan
designs  with  one  of  its PPO/indemnity plan designs to create a "dual option"
product  for  its  customers. As a result, each subscriber can choose whether to
enroll  in  the  dental  HMO  plan  design  or the PPO/indemnity plan design. By
offering  a  dual  option  product,  the  Company can offer its subscribers more
flexibility,  and  can  capture  a  larger  portion of the total dental benefits
expenditures  by each of its customers. This product allows the Company to offer
a  dental  HMO  plan  design to cost-conscious customers, while also providing a
PPO/indemnity  plan  design  for  coverage  of  employees  located  outside  the
geographic  area served by the Company's HMO provider network, and for employees
who  are willing to pay higher premiums for greater flexibility. Certain states,
including  Nevada,  require that dental HMO plan designs be offered only as part
of  a  dual  option  product  and  other  states  may  do  so  in  the  future.

Vision  Benefit  Plans.  The  Company  offers a range of vision benefit plans to
employer  groups  and other purchasers, which cover routine eye care in exchange
for  a  fixed  monthly  premium.  In addition to routine optometric care, vision
plans offered by the Company generally cover a portion of the cost of glasses or
contact lenses. The vision plans generally cover only frames, lenses and contact
lenses  if  the covered individual has separate medical coverage for the cost of
routine eye exams. The vision benefit plans offered by the Company include plans
with  an  HMO  plan design and plans with a PPO/indemnity plan design. Under the
plans  with  an  HMO  plan  design,  subscribers  must  receive services from an
optometrist  or  ophthalmologist  in  the Company's HMO network in order for the
services to be covered by the benefit plan. Under the plans with a PPO/indemnity
plan  design,  subscribers  can  choose  to  receive  services from any licensed
optometrist  or  ophthalmologist, but if they choose to receive services from an
optometrist  or  ophthalmologist  in  the  preferred  provider  network,  their
co-insurance  payments  at  the  time of service would generally be reduced. The
Company's  revenue  from  vision  benefit plans was not material during the year
ended  December  31, 2003. However, the acquisition of HN Vision and the related
PPO/indemnity  vision  business  added approximately $9 million of annual vision
revenue  to  the Company, and the Company intends to increase its vision revenue
in  the  future.

Other  Dental  Benefits Products. For self-insured customers, the Company offers
claims administration under an administrative services only ("ASO") arrangement,
under  which  the  Company  does  not  assume  any of the underwriting risk. The
Company  receives  an  administrative fee to process claims and the underwriting
risk  is  retained by the customer sponsoring the self-insured plan. The Company
also  provides  access  to  its PPO network for a fixed monthly fee based on the
number  of subscribers covered by the product. Under this product, the providers
in


                                        7
<PAGE>
the  PPO  network  offer  a  reduced  fee  schedule  for  services  provided  to
participating  patients.  The  Company makes no payments to the providers in the
PPO  network  under  this product. In addition, in one of its primary geographic
markets,  the  Company  sells  dental  PPO/indemnity  benefit  plans  that  are
underwritten  by  an  unrelated  insurance  company,  and  provides  certain
administrative  services  related  to  these  plans.  In  exchange for its sales
efforts  and  administrative  services, the Company receives a fixed monthly fee
for  each subscriber enrolled. Currently, the Company's revenue from these other
products  is  not  material.

MARKETING

The  Company  markets its products to employer groups, labor unions, individuals
and  other  purchasers  primarily  through  independent brokers and consultants.
Independent  brokers  are  typically  engaged  by  employer  groups  and  other
purchasers  to  select  the  dental  plan  that  best  suits  the  needs  of the
purchaser's employees, in terms of price, benefit design, geographic coverage of
the  provider network, financial stability, reputation for customer service, and
other  factors.  Brokers are typically paid by the Company, based on a specified
percentage  of the premium revenue collected from each customer generated by the
broker.  Large  employers  typically  engage consultants, instead of brokers, to
assist  them  in  selecting  the  dental  plan  that best suits their needs. The
consultants  generally  perform  the same function as brokers, but are typically
paid  by  the  employer  instead  of  the Company. Consequently, large employers
expect  to pay premium rates that have been reduced to reflect the fact that the
Company is not paying a broker commission. Brokers and consultants do not market
the  Company's  benefit  plans  on  an  exclusive  basis.

The  Company  has  an internal sales force that is paid through a combination of
salary  and  incentive  compensation  based  on  the  revenue  generated by each
salesperson.  The function of the internal sales force is primarily to cultivate
relationships  with brokers and consultants, and to help brokers and consultants
present  the Company's benefit plans to their clients in the most favorable way.
A  small  portion  of  the Company's sales is generated directly by its internal
sales  force.  The  Company  generally  uses  the  same brokers, consultants and
internal  sales  force  to  market  all  of  its  products.

After an employer group or other purchaser decides to make the Company's benefit
plan  available  to  its employees, the Company's marketing efforts shift to the
Company's employees (potential subscribers). Typically, employees participate in
an  annual open enrollment process, under which they select the employee benefit
plans  they  wish  to  use  for  the  upcoming  year. During the open enrollment
process, employees typically choose between benefit plans offered by the Company
and  benefit  plans  offered  by  competitors of the Company, and in some cases,
whether to purchase any benefit plans at all. In the case of some employers, the
Company's  benefit  plans  are  offered  to  employees  on  an  exclusive basis.
Generally,  employees  can enroll in the Company's benefit plans or cancel their
participation  in  the  Company's  benefit  plans  only  during this annual open
enrollment  process.

In  addition  to  an  internal  sales  force,  the  Company also employs account
managers  who  are  responsible  for  promoting  retention  of  the  clients and
subscribers  enrolled  in  the Company's benefit plans, and marketing additional
products  to  existing  customers.  These  account  managers are responsible for
supporting  the  customer's  open enrollment process to ensure that difficulties
experienced  by  the  customer  during  this process are minimized, and that the
number  of  subscribers  who enroll in the Company's benefit plans is maximized.
The  account  managers  perform  this  function for both new employer groups and
renewing  employer  groups.  Account  managers  are paid a salary plus incentive
compensation  for  selling  additional  products  to  existing  customers.

The  Company  markets its benefit plans to medical HMOs primarily through direct
contact  between  executives  of  the Company and the medical HMO. The Company's
existing  contracts  with medical HMOs typically cover a relatively large number
of  subscribers,  and  accordingly,  executives of the Company directly maintain
these  relationships  and  provide customer service support on an ongoing basis.

The Company markets its products to government programs primarily through direct
contact  between  executives  of  the  Company  and the government programs. The
Company's  government  contracts  each  cover  a  relatively  large  number  of
subscribers,  and accordingly, executives of the Company directly maintain these
relationships  and  provide  customer  service  support  on an ongoing basis The
Company  also has a dedicated government client service staff to provide service
to  its  government  clients.


                                        8
<PAGE>
RATING  AND  UNDERWRITING

The  Company develops the premium rates for each of its benefit plans, including
rate  adjustments  that depend on various group-specific underwriting variables,
based  on past experience with similar products, and based on actuarial analysis
using  industry  claims  cost  information.

When  the Company has the opportunity to submit a proposal for a benefit plan to
a  potential  customer,  it first obtains certain basic underwriting information
from  the  prospective  client.  This information includes whether the potential
customer  currently  has  dental  coverage,  the  benefit design of the existing
dental  coverage, the geographic location of the potential customer's employees,
the number of employees and dependents who are currently enrolled and the number
who  are  eligible for coverage, the portion of the cost of dental coverage that
is  paid  by  the employer, whether the potential customer is considering making
the  Company  the  exclusive  provider  of  dental  coverage,  and other similar
information.  The  Company  then  evaluates  this  information  to  assess  the
underwriting  risk  associated  with  providing  a  dental  benefit  plan to the
potential  customer.  Based  on  this  evaluation,  the  Company  either makes a
proposal that includes a benefit design and premium rates that take into account
the  Company's  risk  assessment,  or  declines  to  make  a  proposal due to an
excessive  amount of underwriting risk, or the lack of compatibility between the
Company's provider network and the location of the potential client's employees.

CLIENTS  AND  CUSTOMER  CONTRACTS

The  Company  currently provides dental or vision coverage, or related services,
to an aggregate of approximately 1.5 million individuals, who participate in the
Company's  benefit  plans  primarily  through group contracts with approximately
8,000 employers, medical HMOs, state government agencies, labor unions and other
purchasers  of  dental  or vision benefits. The Company's customers include many
large  employers,  including  Boeing  Corporation, City of Dallas, County of Los
Angeles,  County  of San Diego, Joint Council of Teamsters No. 42 Welfare Trust,
North Broward Hospital District, Southern California Edison, Southern California
Gas Company, and State of California, among others. A small portion of the total
covered  individuals  participates  in  the  Company's  benefit  plans  through
individual  dental  HMO plans purchased from the Company. The Company's contract
with  the California Managed Risk Medical Insurance Board ("MRMIB"), under which
approximately  130,000  members  are  currently enrolled in one of the Company's
dental  plans  under  the  "Healthy  Families"  program,  currently accounts for
approximately  10%  of the Company's total premium revenue. The Company acquired
the  contract  with  MRMIB  in  connection  with the acquisition of HN Dental on
October  31,  2003,  and  accordingly,  the  contract  did  not  account  for  a
significant portion of the Company's revenue in 2003. No other customer accounts
for  five  percent  (5%)  or  more  of  the  Company's  total  premium  revenue.

The  Company's group contracts generally provide for a specified benefit program
to be delivered to plan participants for a period of one to two years at a fixed
monthly  premium  rate for each subscriber type. The contracts typically provide
for  termination  by  the  customer  upon 60 days written notice to the Company.

PROVIDER  NETWORKS

The  Company  currently  has  approximately  6,000  providers  in its dental HMO
network,  and  has approximately 16,000 providers in its dental PPO network. The
Company  also  has  approximately 2,700 providers in its vision HMO network, and
has  approximately  3,700  providers  in  its  vision  PPO  network. The Company
believes  that  a  key  element  in  the  success of a dental or vision benefits
company  is  an  extensive  network  of  participating  providers  in convenient
locations.  The  Company  believes that providers who participate in its HMO and
PPO  networks  are willing to provide their services at reduced fees in exchange
for  a  steady stream of revenue from patients enrolled in the Company's benefit
plans. In addition, this revenue source for the provider is relatively free from
collection  problems  and  administrative  costs sometimes associated with other
types  of  patients.  Therefore, qualified providers and/or provider groups have
generally been available and willing to participate in the Company's HMO and PPO
networks  in  order to supplement the patients for which they are paid usual and
customary  fees.

The  Company  requires  that all providers in its dental and vision HMO networks
meet  certain  quality  assessment  program  standards.  Those standards include
current  professional  license  verification,  adequate  liability  insurance
coverage,  a  risk management review of the provider's office facility to ensure
that  Occupational  Safety  and  Health  Act  ("OSHA")  requirements  and  other
regulatory  requirements  are  met,  an  inspection  of  a  dental  office's


                                        9
<PAGE>
sterilization  practices, and a general review of the office location, including
parking  availability  and  handicap  access.

The  Company  compensates  the  general  dentists  in  its HMO network primarily
through  monthly  capitation  payments  and  supplemental payments. Each general
dentist  typically  receives  a  fixed  monthly  capitation  payment  for  each
subscriber or dependent that selects that dentist as his or her primary dentist.
The  amount of the capitation payment related to each member varies based on the
plan  design  in which the member is enrolled, but does not vary with the nature
or  extent  of  the  dental  services  provided  to  the  member. In addition to
capitation payments, the general dentists may receive supplemental payments from
the  Company  and  co-payments  from  the patients, depending on the plan design
purchased  by  each  patient.  The  Company typically makes a fixed supplemental
payment  to  the  general  dentist  each  time  the  dentist  delivers specified
procedures  to  members  enrolled  in  certain  benefit plans. The amount of the
supplemental  payment  varies  depending on the specific procedure performed and
the  amount  of  the co-payment collected from the member, which varies with the
benefit  plan design. Supplemental payments are designed to mitigate the risk to
the  dentist associated with procedures that require the payment of a laboratory
fee  by  the  dentist,  and  members  who  require an extensive amount of dental
services.  Supplemental  payments are low enough to avoid providing an incentive
for  the  dentist  to  deliver services that are not cost-effective. The Company
believes  the use of supplemental payments provides for a higher level of member
and  provider  satisfaction  with  the  Company's  dental  HMO plan designs. The
general  dentist  also  typically  receives co-payments from members for certain
types  of  services, which vary based on the plan design under which each member
is  covered.  Although  most  general  dentists in the Company's HMO network are
compensated through capitation and supplemental payments, in some cases, general
dentists are compensated based on a negotiated fee for each procedure performed.
No  individual  dental  office provides services to five percent (5%) or more of
the  members  enrolled  in  the  Company's  dental  HMO  plan  designs.

The  Company's  dental  HMO  network  also  includes specialists in the areas of
endodontics, oral surgery, orthodontics, pedodontics, and periodontics. In order
for  a  member  to  receive  services  from a specialist, those services must be
requested  by  the  member's  general  dentist  and  approved  in advance by the
Company. The approval by the Company confirms that the referral is for a service
covered  by the member's benefit plan. Specialists are reimbursed by the Company
based  on  a  negotiated fee schedule, and also receive co-payments from members
based on the benefit plan design under which each member is covered.

Dentists  in the Company's PPO network are compensated based on a negotiated fee
schedule  that  is  generally 20 to 40 percent less than the usual and customary
fees  in  that  provider's  geographic area. Non-contracted dentists who provide
services  to  subscribers  and  dependents  enrolled  in  PPO  plan  designs are
compensated  based  on usual and customary fees in each geographic area, and may
bill  the  subscriber or dependent for any remaining balance. Under some benefit
plan  designs  offered  by  the  Company, the Company compensates non-contracted
dentists  based  on  a  fixed  amount  for  each  procedure,  regardless  of the
geographic area, and the dentist may bill the patient for any remaining balance.

The  Company  compensates the providers in its vision HMO and PPO networks based
on  a  negotiated  fee schedule that is generally 20 to 40 percent less than the
usual  and  customary  fees  in  that  provider's  geographic  area.  The vision
providers in both the HMO and PPO networks also generally collect co-payments or
co-insurance  amounts  from the patients, depending on the plan design purchased
by  each  patient.  Non-contracted  vision  providers  who  deliver  services to
subscribers  and  dependents  enrolled  in  PPO  plan  designs  are  generally
compensated  based  on  a  fixed  amount  for  each  procedure, and may bill the
subscriber  or  dependent  for  any  remaining  balance.

The  Company  employs  provider  relations  representatives who are based in the
geographic  markets served by the Company. These representatives are responsible
for  developing  and  maintaining the Company's network of dental and vision HMO
and  PPO  providers.  They  negotiate  contracts with dentists, optometrists and
ophthalmologists  and also assist the network providers in the administration of
the Company's benefit plans. In the event that a network provider terminates his
relationship  with  the  Company,  the  provider  relations  representative  is
responsible  for  recruiting  new  providers  to  meet  the needs of the members
enrolled  in  the  Company's  benefit  plans.

The  providers  in the Company's dental and vision HMO and PPO networks are free
to  contract  with  other dental and vision benefit plans, and both the provider
and  the  Company  can typically terminate the contract at any time upon 60 days
prior  written  notice.  In  accordance  with the contract, the Company may also
terminate  the  contract  "for  cause"  upon  15  days prior written notice. The
Company  can  also  change  the  reimbursement  rates,  member  co-payments,


                                       10
<PAGE>
and  other  financial terms and conditions of the contract at any time, with ten
to  fifteen  days notice to the provider. The Company's contracts with providers
in  its  dental  HMO  and  PPO  networks  require  the  providers  to  maintain
professional  liability insurance with a minimum coverage of $200,000 per claim,
and  $600,000 in the aggregate per year, and to indemnify the Company for claims
arising  from  the  provider's  acts  or  omissions.

QUALITY  MANAGEMENT

The  Company  maintains  a quality management program with respect to its dental
HMO  business  under the direction of its Dental Director. The Company's quality
management  program includes verification of provider credentials, assessment of
each  dentist's  compliance  with  applicable  state  regulatory  standards  and
practice standards established by the Company, monitoring of patient appointment
availability  and  accessibility  of  dental  care,  monitoring  of  patient
satisfaction  through  member  surveys  and other tools, analysis of dental care
utilization data, addressing member complaints and grievances, and assessment of
other  qualifications  of  dentists to participate in the Company's HMO network.

The  Company  maintains  a  credentialing  committee for its dental HMO network,
which  uses information provided by an NCQA-certified Credentialing Verification
Organization  ("CVO")  to  verify  each  provider's  licensing status, insurance
coverage,  and  compliance with applicable federal and state regulations, and to
review  the  National  Practitioners  Data Bank for complaints filed against the
provider.  The  Company  also  uses  an  outside  contracting service to perform
on-site dental office quality assessment reviews to determine appropriateness of
care  and  review  treatment  outcomes.

The  Company  uses  an  independent  outside  service  to conduct regular member
satisfaction  surveys  with  respect  to  its dental HMO business. These surveys
monitor  the  level of member satisfaction with respect to the services provided
by  dentists  in the Company's network, the choice of providers and availability
of  appointments  within  the  Company's  network,  the  benefits covered by the
Company's  benefit  plans, and the customer service provided by the Company. The
results  are  used  by  the Company to determine how it can improve its provider
network  and  the  level  of  service  provided  to  its  members.

The  Company  also  maintains  a  quality management program with respect to its
vision  HMO  business  under the direction of its Vision Director. The Company's
quality  management  program  includes  verification  of  provider  credentials,
assessment  of  each  dentist's  compliance  with  applicable  state  regulatory
standards  and  practice  standards  established  by  the Company, monitoring of
patient appointment availability and accessibility of dental care, monitoring of
patient  satisfaction through member surveys and other tools, analysis of dental
care  utilization  data,  addressing  member  complaints  and  grievances,  and
assessment  of  other  qualifications  of  optometrists  and ophthalmologists to
participate  in  the  Company's  HMO  network.

UTILIZATION  REVIEW

The  Company  monitors  the  utilization  rates  for  various  dental procedures
provided  by  general  dentists  in its HMO network, as well as the frequency of
specialist  referrals  initiated  by  those  dentists,  based  on  paid  claim
information  and  encounter data submitted by the dentists. The analysis of this
information,  including  comparisons among providers in the network, enables the
Company to determine whether any of its providers display practice patterns that
are  not  cost-effective, or practice patterns that are otherwise inappropriate.
When  this  information  shows a potentially inappropriate practice pattern, the
Company conducts a more focused review of the dental practice in question.

The  Company  also  monitors the utilization rates for various dental procedures
provided  by  dentists  in its PPO network, based on paid claim information. The
analysis  of  this  information,  including  comparisons  among providers in the
network,  enables  the  Company  to  focus  its  provider contracting efforts to
develop  a  more cost-effective PPO network, as well as to improve the design of
its benefit plans with a PPO/indemnity plan design. This information also allows
the  Company  to demonstrate savings achieved by the Company and its subscribers
and  dependents, as a result of the contracting arrangements between the Company
and  the  providers  in  its  network.


                                       11
<PAGE>
MEMBER  SERVICES

The  Company  provides basic member services from its National Service Center in
Aliso  Viejo,  California  through  the  use of toll-free telephone numbers. The
toll-free  telephone numbers provide members and provider offices with access to
automated  services  24  hours  per  day,  and  with  access  to member services
representatives  from  6:00 a.m. to 7:00 p.m. Pacific Time. Automated service is
available  24  hours a day for inquiries such as selection of a network dentist,
requests  for  identification  cards,  and eligibility verification. The Company
uses  an  automated  call  distribution  ("ACD")  system  for  its management of
customer  service  calls.

The  Company  maintains Quality Management ("QM") Committees with respect to its
dental and vision HMO businesses, under the direction of its Dental Director and
Vision  Director,  respectively.  Each  QM  Committee  is  responsible  for  the
disposition  of  all  types  of  member grievances with respect to the Company's
dental  and  vision HMO plan designs. Member grievances are typically originated
through a member services call or a letter written to the Company by the member.
The  Company  has  a  standard  grievance  resolution process that begins with a
member  services  representative  who  attempts to resolve the grievance. In the
event  this  is  not successful, or the grievance is related to dental or vision
care  issues  that are beyond the expertise of a member services representative,
the  appropriate  Quality Management department addresses the grievance. Each QM
Committee addresses grievances that cannot be resolved by the Quality Management
department.  The  Company  responds  to  all  member  grievances  with a written
disposition  of  the grievance within 30 days of receipt of the grievance. After
the  QM  Committee  has responded to the grievance, the member has the option of
submitting the grievance to binding arbitration, which is conducted according to
the  rules  and  regulations  of  the  American  Arbitration  Association.

Each  QM  Committee monitors the frequency of member grievances by type, and the
average  time in which the Company responds to grievances, in order to determine
ways  it  can  improve  its  communications  with members and network providers,
improve  its  customer  service, and determine ways to improve the efficiency of
the  grievance  resolution  process.

MANAGEMENT  INFORMATION  SYSTEMS

The  Company  currently  uses  a  single  primary  business  application for the
majority  of  its  business.  The source code for this application was purchased
from  a software vendor in 2002, and the Company made extensive modifications to
it  before  converting  substantially all of its business to this application in
September  2003.  The  Company  anticipates that it will continue to modify this
system  in  the  future  to  meet  the  changing  needs of its business. The new
application  is  used  for eligibility files, billing and collections, specialty
referral  authorization,  claims  processing,  commission  payments, utilization
management,  provider  file  maintenance,  and  other  similar  activities.  The
application  includes  comprehensive  information  on  the Company's eligibility
records, benefit plan designs, premium rates, provider payment arrangements, and
broker  commission  rates.  This  system  provides  the  Company  the ability to
maintain  combined  records  with  respect  to  eligibility  files,  billing and
collections,  claim  payments  and other information related to all the products
purchased  from  the  Company  by a single customer. The system is also flexible
enough  to  accommodate a wide variety of benefit plan designs to meet the needs
of  the  Company's  customers.

The business acquired in the acquisition of HN Dental, HN Vision and the related
dental  and  vision PPO/indemnity business in October 2003 used a combination of
several  different  business  applications for different functions, all of which
were  acquired  by  the  Company  in  the  transaction.  The Company converted a
majority  of  the  business acquired in this transaction to the primary business
application  described above in April 2004, and intends to convert the remainder
of the acquired business to this system over the next several months.

Prior to September 2003, the Company used two primary business applications, one
of  which  was  used  for  its  dental HMO business and its vision PPO/indemnity
business,  and  one of which was used for its dental PPO/indemnity business. The
system  used  for  the  Company's  dental  HMO business and vision PPO/indemnity
business  was  a  proprietary  application that was a predecessor version of its
current  primary  application, and that was modified extensively by the Company.
The  system  used  for  the  Company's PPO/indemnity plan designs was a standard
application  purchased from a software vendor, which generally met the Company's
needs for its PPO/indemnity business. The primary reason the Company invested in
its  new application was to develop a single system that could maintain combined
records for all of the products purchased from the Company by a single customer.


                                       12
<PAGE>
A  separate  primary  business application is used for a portion of the business
acquired  in  the purchase of Paramount in August 2002, which consists of dental
HMO  benefit  plans delivered to certain medical HMOs. This system is a standard
application  purchased from a software vendor, and generally meets the Company's
needs  for  the  products  offered  to  medical  HMOs.  The Company is currently
evaluating  whether  to  convert  this  portion  of  its business to its primary
software  application  that  was  implemented  in  September  2003.

The Company is in the process of developing an enhanced web site that will allow
customers  to  update  their eligibility files online, allow providers to verify
eligibility  online,  and  provide  other  interactive  features  for customers,
providers  and  brokers.

The  Company  uses  a personal computer network-based general ledger system that
includes  reporting and analysis tools that allow the extraction and download of
data  to  spreadsheet  programs  for  further  analysis.  The Company also makes
extensive use of its email system in coordinating the activities of employees in
various  office  locations  and  communicating  with  customers,  brokers  and
providers.  During  2002,  the  Company  implemented  a  Customer  Relationship
Management  system, as part of its long-term information systems strategic plan,
which  it  uses  to manage customer and provider relationships. The Company also
uses  a  variety of other, less significant applications in various areas of its
business. All of the Company's applications are integrated into a single network
so  employees  can  easily  access  any  needed  application  from their desktop
computers.

RISK  MANAGEMENT

Providers  in  the  Company's  dental  HMO  and  dental  PPO  networks generally
indemnify  the Company against professional liability claims and are required to
maintain  professional  liability  insurance  with  specified minimum amounts of
coverage.  The  Company  also  maintains  $5 million of general and professional
liability  insurance coverage, which covers losses on a "claims made" basis. The
Company  believes  this  amount  of  coverage is adequate to manage the ordinary
exposure of operating its business. However, there can be no assurance that this
amount  of  coverage  would  be  adequate  to cover potential claims against the
Company,  or that adequate general and professional liability insurance coverage
will  be  available  to  the  Company  in  the  future  at  a  reasonable  cost.

Prior  to  October  2002,  the  Company  maintained  $5  million of officers and
directors  liability  insurance  coverage, after a $250,000 deductible. Due to a
significant  increase  in the cost of such insurance, the Company elected not to
purchase  this  insurance  coverage  effective  October  1,  2002.

COMPETITION

The  Company  operates  in  a  highly competitive environment and faces numerous
competitors  in  each  of  its  geographic  markets with respect to all products
offered by the Company. The Company's competitors include several large national
insurance  companies that offer dental HMO plan designs and dental PPO/indemnity
plan  designs, numerous regional insurance companies and medical HMOs that offer
dental  benefit  plans,  and  numerous  local  or regional dental HMOs and other
companies that offer various types of dental benefit plans. Many competitors are
significantly  larger than the Company, and have substantially greater financial
resources  than  the Company. In addition, many employers, union trust funds and
other  group  purchasers provide self-insured dental plans to their employees or
other  constituents.

The Company believes that the key factors in a purchaser's selection of a dental
benefit  plan  include  the  premium rates charged, the comprehensiveness of the
dental  benefits  offered,  the  range  of  benefit  designs  offered,  the
responsiveness  related  to  customer  service  activities,  and  the  perceived
quality,  accessibility  and  convenience  of the dental offices in the provider
network.  There are competitors that compete aggressively with respect to all of
these  factors  in each of the geographic markets in which the Company operates,
and  many  employers,  particularly  large  employers, make their selection of a
dental  benefit plan through a competitive bidding process. There is significant
price  competition  in  each  of  the  Company's geographic markets, which could
impair  the  Company's  ability  to  sell its dental benefit plans at profitable
premium rates. The Company anticipates that this price competition will continue
to  exist  during  the  foreseeable  future.

Large  national  insurance companies that offer both dental HMO plan designs and
dental  PPO/indemnity plan designs may have a competitive advantage over smaller
competitors, such as the Company, due to larger provider networks located across
the  United States, the availability of multiple product lines other than dental
benefits,


                                       13
<PAGE>
established  business  relationships  with  large  employers,  better  name
recognition, and greater financial and information system resources. The Company
believes it can effectively compete with these insurance companies by offering a
flexible  array  of  benefit  plan  designs,  and by maintaining a high level of
customer  service  with  respect to its employer groups, members, dental service
providers,  and  brokers.  Some medical HMOs have developed dental benefit plans
with  both HMO and PPO/indemnity plan designs in-house, and others contract with
dental  benefits  companies, such as the Company, to provide those products. The
Company  believes it can compete effectively with medical HMOs that offer dental
benefit  plans.  The  Company  currently  has relationships with certain medical
HMOs,  under  which the medical HMOs offer the Company's dental benefit plans to
their  customers,  and the Company intends to form relationships with additional
medical  HMOs  in  the  future.

Other  than  minimum net worth requirements imposed by state regulators, and the
need to obtain a license from the applicable state regulator, which could take a
substantial  period of time, there are no significant barriers to entry into the
dental  benefits  business  by  potential competitors. There can be no assurance
that  the Company will be able to compete successfully with any new competitors.
Additional  competition  could  adversely impact the Company's profitability and
growth  prospects  through decreases in premium rates, and the loss of customers
or  dental  service  providers.

GOVERNMENT  REGULATION

The  Company's operations are subject to an extensive amount of state regulation
in  each  of  the  states  in  which it operates. The Company's most significant
dental  and  vision HMO subsidiaries are subject to regulation by the California
Department  of  Managed Health Care, the Florida Department of Insurance and the
Texas  Department  of  Insurance.  The  Company's  dental  and  vision insurance
subsidiary is regulated primarily by the California Department of Insurance, and
is  also  subject to regulation by state insurance regulatory agencies in all of
the  states  in  which  it  is  licensed.

The Company's dental and vision HMO subsidiaries are subject to regulations that
vary  from state to state, and generally include regulations with respect to the
scope  of  benefits  provided  to  members,  the  content  of all contracts with
customers,  dental and vision providers and others, advertising, the maintenance
of  a  minimum  amount  of  net  worth,  the maintenance of restricted deposits,
procedures  related  to  quality  assurance,  enrollment procedures, the maximum
percentage  of  premium  revenue that may be spent on general and administrative
expenses, minimum loss ratios, certain "any willing provider" requirements which
may  limit  the  Company's ability to restrict the size of its provider network,
the  relationship between the Company and the providers in its dental and vision
provider networks, the Company's procedures for resolving member grievances, and
premium  rates.

The  Company's  dental  and  vision  insurance  subsidiary  is  subject to state
regulations  with  respect  to the maintenance of a minimum amount of net worth,
the  maintenance  of  restricted  deposits  for  the  benefit  of  certain state
regulators,  the  nature  of  investments  held by the Company, insurance policy
forms,  advertising,  and  claims  processing procedures. Insurance companies in
general  are  subject to extensive regulation and are typically required to have
significantly greater financial resources than dental or vision HMOs.

The  Company's  ability  to expand its operations into states in which it is not
currently  licensed  is  dependent on the regulatory review process conducted by
the applicable state regulatory agency in each state. Such reviews may take from
six  to twenty-four months, and would have to be satisfactorily completed before
the Company could commence operations in the applicable state.

Since some states will only license full service HMO entities, the Company would
not  be  able  to  offer  its dental or vision HMO plan designs in those states,
except  pursuant to an arrangement with a full service medical HMO. Other states
permit  only  nonprofit organizations to become licensed as dental or vision HMO
plans,  again  limiting  the  Company's  access to business in those states. The
heavily  regulated  nature  of  the  Company's  business  imposes  a  variety of
potential  obstacles to any geographic expansion by the Company, and could limit
the  Company's future growth potential. This regulatory environment also governs
the  conduct  and  expansion  prospects of existing and new competitors, thereby
providing  a  potential  barrier  to  entry  for  potential  competitors.

The  Company  is  subject to the Health Insurance Portability and Accountability
Act  of 1996 ("HIPAA"). HIPAA imposes responsibilities on the Company, including
but  not  limited  to,  privacy  notice requirements to members of the Company's
benefit  plans,  the  security  and  privacy of individually identifiable health
information,  the  use  of


                                       14
<PAGE>
unique identifiers for all of the contractual relationships the Company has with
members,  providers  and  group and individual contract holders, the adoption of
standardized  electronic  transaction  code sets, and prevention of unauthorized
use  or  disclosure  of personal data maintained by the Company. The Company has
developed  policies  and  procedures  to  comply with these requirements and has
provided  privacy  notices  as required by HIPAA and the Gramm-Leach-Bliley Act.

There  is currently no other regulation of the Company's business at the federal
level.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

The  Company  currently  markets  all  of  its  products  under  the brand names
"SafeGuard"  and  "Paramount  Dental  Plan."  The  Company  has  filed, received
approval,  and  obtained  renewal  protection  from the United States Patent and
Trademark  office  for certain trademarks and trade names for names and products
used  by  the  Company  in its ordinary course of business. The Company has also
received  approvals  for  the  use  of its trademarks and trade names from state
governmental  agencies,  as  applicable.  The  Company has received a trademark,
service  mark  or  trade  name for the following words and phrases used with and
without  distinctive  logos  maintained  by  the  Company:

-    SafeGuard(R)  used  with a distinctive logo depicting a modified smile used
     in  connection  with  all  the  products  offered  by  the  Company;

-    SafeGuard  Health  Plans(R)  used  in  descriptive material to describe the
     products  offered  by  the  Company;

-    SafeGuard  Dental  Plans(TM)  used  to describe the various dental HMO plan
     designs  offered  by  the  Company;

-    SafeHealth  Life(R) used with a descriptive logo depicting a modified smile
     used  by  the  Company to describe its dental and vision PPO/indemnity plan
     designs;  and

-    Paramount Dental Plan with a distinctive logo of three triangles stacked on
     top of each other used by the Company in the integration of its acquisition
     of  Paramount  into  the  Company's  Florida  operations.

Collectively, these trademarks, service marks and trade names were first used in
interstate  commerce  in  1984  and  have  been continuously used thereafter. In
addition,  the  Company  has received trademark/service mark protection from the
United  States  Assistant  Commissioner  for  Trademarks of its distinctive logo
depicting  a  smile  that  the  Company  is  currently  utilizing  in interstate
commerce.

EMPLOYEES

At  March  31,  2004,  the  Company  had  approximately  360 employees, of which
approximately  50  were  represented by a labor union. The Company considers its
relations  with  its  employees to be satisfactory. The Company provides typical
employee  benefits, including paid vacation, holiday and sick time, a portion of
the  cost  of  health  insurance,  dental and vision coverage for the employee's
family,  life  insurance,  a  401(k)  plan that includes a matching contribution
consisting  of the Company's common stock, and the opportunity to take advantage
of  a  flexible spending account under Section 125 of the Internal Revenue Code.
Employees  are  eligible  to  participate  in the 401(k) plan upon completion of
three  months of service with the Company. Under the 401(k) plan, an employee is
allowed  to  contribute up to 20% of his total compensation to the plan each pay
period, subject to the annual limit prescribed by the Internal Revenue Code, and
subject  to  certain anti-discrimination provisions. Effective July 1, 2001, the
Company adopted a matching contribution program, under which the Company makes a
contribution equal to a specified percentage of each employee's contribution, in
the  form  of common stock of the Company. The matching contribution percentage,
which  was 25% for 2003, 2002 and 2001, is set in advance of each fiscal year by
the  Company's board of directors, and has been set at 25% for 2004. The Company
contributed  73,000  shares, 66,000 shares and 33,000 shares of its common stock
to  the  401(k)  plan  for  the  years  ended  December 31, 2003, 2002 and 2001,
respectively.  Employees  become  vested  in  the Company's contributions to the
401(k)  plan  at  the rate of 20% for each of the first five years of employment
with the Company, with credit given for past service. Employees are fully vested
in  their  contributions  to  the  401(k)  plan  at  all  times.


                                       15
<PAGE>
RISK  FACTORS

The  Company's  business  and  competitive environment includes numerous factors
that  expose  the Company to risk and uncertainty. Some risks are related to the
dental  and vision benefits industries in general and other risks are related to
the Company specifically. Due to the risks and uncertainties described below, as
well  as  other  risks  described  elsewhere in this Annual Report on Form 10-K,
there  can be no assurance that the Company will be able to maintain its current
market  position  or its profitability. Some of the risk factors described below
have  adversely affected the Company's operating results in the past, and all of
these  risk  factors  could  affect  its  future  operating  results.

Integration  of Business Acquired in October 2003. The Company is in the process
of  integrating the business operations of HN Dental, HN Vision, and the related
dental  and  vision PPO/indemnity business, all of which was acquired in October
2003, into the Company's operations. The revenue of the acquired business was an
aggregate  of  approximately  $74  million  in  2003,  which is very significant
compared  to  the size of the pre-existing operations of the Company. Due to the
complexities  inherent  in  this  integration  process, there is a risk that the
Company  may not be able to complete such integration activities in a timely and
effective manner. In such case, the profitability of the acquired business could
be  lower  than  expected,  and  the  general and administrative expenses of the
Company could be higher than expected, which could have a negative impact on the
Company's  overall  profitability.

Government  Regulation. The dental and vision benefits industries are subject to
extensive  state  and  local  laws, rules and regulations. Each of the Company's
operating  subsidiaries is subject to various requirements imposed by state laws
and  regulations  related  to  the operation of a dental or vision HMO plan or a
dental  and  vision  insurance  company,  including the maintenance of a minimum
amount of net worth by certain subsidiaries. In addition, regulations applicable
to dental or vision benefits companies could be changed in the future. There can
be  no assurance that the Company will be able to meet all applicable regulatory
requirements  in  the  future.

Government Sponsored Contracts. As a result of the acquisition of HN Dental, the
Company  has  several  dental  benefits contracts that are administered by state
government  agencies. These contracts collectively account for approximately 15%
of  the  Company's total revenue. These contracts have expiration dates in 2005.
The  loss of one or more of these contracts could have a material adverse affect
on  the  Company's  operating  results.

Health  Insurance  Portability  and  Accountability Act of 1996 ("HIPAA"). HIPAA
imposes  various  responsibilities  on  the  Company,  as  described above under
"Government  Regulation."  The  Company has developed policies and procedures to
comply  with  these requirements, but the total cost of compliance with HIPAA is
not  known  at  this  time. There is a risk that the Company will not be able to
satisfactorily  comply  all of the HIPAA requirements. There is also a risk that
the  cost  of  compliance with HIPAA could have a material adverse impact on the
Company's  financial  position.

Contingent  Lease  Obligations.  The  Company  sold  all  of  its general dental
practices  and  orthodontic  practices in 1996, 1997 and 1998. All of the office
lease  agreements  related  to  those practices either have been assigned to the
respective  purchasers  of  the  practices,  or have expired. As of December 31,
2003,  the Company is contingently liable for an aggregate of approximately $2.0
million  of  office  lease  obligations related to those practices for which the
leases  have  been  assigned.  Although  the  leases  have  been assigned to the
purchasers of those practices, there can be no assurance that the persons and/or
entities  to  which  these  office  leases  were  assigned  will  make the lease
payments,  and  that  the  Company  will  not  become liable for those payments.

Payments  Due on Promissory Notes. In connection with the sale of certain dental
practices,  the  dentists  who  purchased  those  practices  issued  long-term
promissory  notes  to  the  Company,  which are secured by the assets purchased.
There  can be no assurance that each of these dentists will make timely payments
on  the  promissory  notes  in  the  future.

Possible  Volatility  of  Stock  Price. The market price of the Company's common
stock  has  fluctuated  significantly  during  the  past  few years. Stock price
volatility  can  be  caused  by  actual  or  anticipated variations in operating
results, announcements of new developments, actions of competitors, developments
in  relationships  with  clients,  and  other  events  or factors. Even a modest
shortfall  in  the  Company's operating results, compared to the expectations of
the investment community, can cause a significant decline in the market price of
the  Company's  common  stock.  In addition, the trading volume of the Company's
common  stock  is  relatively  low,  which  can  cause  fluctuations  in  the


                                       16
<PAGE>
market  price and a lack of liquidity for holders of the Company's common stock.
The  fact  that  the  Company's common stock is not listed on an exchange and is
traded  on  the Over The Counter Bulletin Board can have a negative influence on
the  trading  volume of the stock. Broad stock market fluctuations, which may be
unrelated  to  the  Company's  operating performance, could also have a negative
effect  on  the  Company's  stock  price.

Competitive  Market.  The Company operates in a highly competitive industry. Its
ability  to operate on a profitable basis is affected by significant competition
for  employer  groups  and  for  contracting dental and vision providers. Dental
providers  are becoming more sophisticated, their practices are busier, and they
are less willing to join the Company's networks under capitation arrangements or
discounted  fees.  There can be no assurance the Company will be able to compete
successfully  enough  to be profitable. Existing or new competitors could have a
negative  impact  on  the Company's revenues, earnings and growth prospects. The
Company  expects  the  level  of  competition to remain high for the foreseeable
future.

Utilization  of  Dental  Care Services. Under the Company's dental PPO/indemnity
plan designs, the Company assumes the underwriting risk related to the frequency
and  cost  of  dental  care  services. If the Company does not accurately assess
these  underwriting  risks, the premium rates charged to its customers might not
be  sufficient  to  cover  the cost of the dental services delivered. This could
have  a  material  adverse  effect  on  the  Company's  operating  results.

Under  the  Company's  dental HMO plan designs, the Company assumes underwriting
risk  related  to  the  frequency  and  cost of specialist services, the cost of
supplemental  payments  made  to general dentists, and the frequency and cost of
dental services provided by general dentists with whom the Company does not have
standard  capitation  arrangements.  If  the  Company does not accurately assess
these  underwriting  risks, the premium rates charged to its customers might not
be  sufficient to cover the cost of the dental services delivered to subscribers
and  dependents.  This  could  have  a  material adverse effect on the Company's
operating  results.

Effect  of  Adverse  Economic  Conditions.  The  Company's  business  could  be
negatively  affected  by  periods  of  general  economic  slowdown, recession or
terrorist activities which, among other things, may be accompanied by layoffs by
the  Company's  customers, which could reduce the number of subscribers enrolled
in  the Company's benefit plans, and by an increase in the pricing pressure from
customers  and  competitors.

Relationships  with Providers. The Company's success is dependent on maintaining
competitive  networks  of  dental  and vision providers in each of the Company's
geographic  markets. Generally, the Company and the network providers enter into
nonexclusive  contracts  that  may  be  terminated  by either party with limited
notice.  The  Company's  operating results could be negatively affected if it is
unable  to  establish  and  maintain  contracts  with  a  competitive  number of
providers  in  locations  that are convenient for the subscribers and dependents
enrolled  in  the  Company's  benefit  plans.

Dependence  on Key Personnel. The Company believes its success is dependent to a
significant  degree  upon  the abilities and experience of its senior management
team.  The  loss  of  the services of one or more of its senior executives could
negatively  affect  the  Company's  operating  results.

CONVERTIBLE  NOTES

The  acquisition  of  HN  Dental,  HN  Vision  and the related dental and vision
PPO/indemnity  business  was  financed  through the issuance of $19.0 million of
unsecured  convertible  promissory  notes  to certain of the Company's principal
stockholders  in October 2003. The proceeds from the convertible notes were used
to finance the acquisitions, to satisfy the increase in the Company's regulatory
net  worth  requirements related to the PPO/indemnity dental and vision business
that  was  acquired,  which  is estimated to be $3.8 million, to provide working
capital  that may be required in connection with the integration of the acquired
businesses into the Company's pre-existing operations, and for general corporate
purposes.

The  convertible  notes bear interest at 6.0% annually, and are convertible into
the  Company's common stock at the rate of $1.75 per share, at the option of the
holder. There are no principal payments due under the convertible notes prior to
January 31, 2010, then principal payments are due beginning on January 31, 2010,
and  each  three months thereafter through July 31, 2013, pursuant to a ten-year
amortization  schedule,  and the remaining balance is payable in full on October
31,  2013. The convertible notes are payable in full upon a change in control of
the  Company,  at


                                       17
<PAGE>
the  holder's  option.  The  Company has the option of redeeming the convertible
notes  for  229%  of  face  value during the first seven years after the date of
issuance, for 257% of face value during the eighth year after issuance, for 286%
of  face  value during the ninth year after issuance, and for 323% of face value
during  the  tenth  year  after  issuance,  provided  that  it  redeems  all the
convertible notes held by each holder for which it redeems any of the notes.

RECAPITALIZATION  TRANSACTION

On  March  1, 2000, the Company entered into a recapitalization transaction with
an  investor  group (the "Investors"), the revolving credit facility lender (the
"Bank"),  and the holder of the senior notes payable (the "Senior Note Holder").
In  this  transaction,  the  Investors loaned $8.0 million to the Company in the
form  of  an  investor  senior  loan,  due  April  30,  2001.  As  part  of this
transaction,  the  Investors,  the  Bank,  and  the Senior Note Holder agreed to
convert  the  $8.0 million investor senior loan, the outstanding balance of $7.0
million under the revolving credit facility plus accrued interest, and the $32.5
million  of senior notes payable plus accrued interest, to convertible preferred
stock,  subject  to regulatory approval and an increase in the authorized shares
of  the  Company's  common  stock.

Effective  as  of January 31, 2001, the Company completed the conversion of this
debt  into 30 million shares of convertible preferred stock. The estimated value
of  the convertible preferred stock was $1.375 per share as of January 31, 2001,
which is based on the closing price of the Company's common stock on January 31,
2001,  which  was  $1.375 per share, and the fact that each share of convertible
preferred  stock  is  convertible  into one share of common stock. Based on this
estimated  value,  the  conversion  resulted in a pre-tax gain of $11.3 million,
which is net of approximately $350,000 of transaction costs. There was no income
tax  effect related to this transaction, due to the Company's net operating loss
carry-forwards  for  tax  purposes,  as discussed in Note 11 to the accompanying
consolidated  financial statements. As a result of the conversion, the ownership
interest  of  the  previously  existing  common  stockholders of the Company was
reduced to approximately 14% of the common stock interests of the Company.

The  convertible  preferred  stock  does  not  accrue dividends of any kind, but
participates  in  any  dividends  paid  on  the  Company's  common  stock  on an
as-converted  basis.  Each  share  of convertible preferred stock is convertible
into  one  share  of  common  stock at the option of the holder. The convertible
preferred  stock  entitles the holder to one vote for each share of common stock
into which the preferred stock is convertible, with respect to all matters voted
on  by  the  common  stockholders  of  the  Company,  except for the election of
directors.  The  holders  of  the  convertible preferred stock have the right to
elect  a total of five members of the board of directors, and the holders of the
common  stock  have  the  right  to  elect  the  remaining  two  directors.  The
convertible  preferred  stock  has a $30 million liquidation preference over the
Company's  common  stock.

In  1999,  in  connection  with  a  previous  restructuring  of the senior notes
payable,  the  Company  issued warrants to purchase 382,000 shares of its common
stock  for $4.51 per share to the Senior Note Holder. The warrants were canceled
without  being  exercised, in connection with the conversion of the senior notes
payable into convertible preferred stock effective January 31, 2001.

ITEM  2.  PROPERTIES
--------------------

The  Company  leases a total of approximately 68,000 square feet of office space
in  a  single  location in Aliso Viejo, California, under a lease agreement that
expires in 2008. Approximately 12,000 square feet of this space is not currently
used  by the Company, but is subleased to unrelated third parties. The remaining
56,000  square  feet  of  office  space  is  used  for  the  Company's corporate
headquarters  and  its  National  Service Center, which includes member services
activities,  eligibility  file  maintenance,  billing  and  collections,  claims
processing and other similar customer support activities, and for its California
regional  office.  In  addition,  the  Company  leases  office  space in Irvine,
California;  Walnut  Creek,  California;  Coral  Springs and Tampa, Florida; and
Dallas  and  Houston,  Texas. The Company leased all of the office space used by
its  previously  owned  dental  and  orthodontic  practices. The Company remains
contingently  liable for a number of these leases, which expire on various dates
through 2007, as discussed in Note 12 to the accompanying consolidated financial
statements.  In the opinion of management, the Company's facilities are adequate
for  its  current  needs.


                                       18
<PAGE>
ITEM  3.  LEGAL  PROCEEDINGS
----------------------------

The  Company  is  subject  to  various  claims  and legal actions arising in the
ordinary  course of business. The Company believes all pending claims either are
covered  by liability insurance maintained by the Company or by providers in the
Company's  dental  or  vision  provider  networks,  or  will not have a material
adverse  effect  on  the Company's consolidated financial position or results of
operations.

In  December  1999,  a  stockholder lawsuit against the Company was filed, which
alleged  that  the Company and certain of its officers, who were then in office,
violated  certain  securities  laws  by  issuing  alleged  false  and misleading
statements  concerning  the  Company's  publicly  reported revenues and earnings
during a specified class period. During 2002 the Company settled the lawsuit for
a payment of $1.25 million to the plaintiffs, without an admission of liability.
The  settlement  was  approved  by the District Court in September 2002, and the
lawsuit  has  been  dismissed  with  prejudice.  The Company's insurer paid $1.0
million  of  the  cost  of  the  settlement, and the Company recorded a $250,000
expense  during  2002,  which is included in selling, general and administrative
expenses in the accompanying consolidated statement of operations.

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

None.

                                     PART II

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

(a)  MARKET INFORMATION

The  Company's  common  stock  is traded on the NASDAQ Over The Counter Bulletin
Board  under  the  symbol  SFGD. The following table sets forth the high and low
sale  prices  of  the  Company's  common stock each calendar quarter. The prices
shown  are  based  on transactions between market makers in the Company's stock,
and  do  not  necessarily  represent transactions between non-dealer principals.

<TABLE>
<CAPTION>
                                              HIGH    LOW
                                              -----  -----
<S>                                           <C>    <C>
Year ended December 31, 2004:
  First Quarter. . . . . . . . . . . . . . .  $2.10  $1.78

Year ended December 31, 2003:
  First Quarter. . . . . . . . . . . . . . .  $1.75  $1.16
  Second Quarter . . . . . . . . . . . . . .   1.80   1.23
  Third Quarter. . . . . . . . . . . . . . .   1.80   1.35
  Fourth Quarter . . . . . . . . . . . . . .   3.30   1.55

Year ended December 31, 2002:
  First Quarter. . . . . . . . . . . . . . .  $1.95  $1.19
  Second Quarter . . . . . . . . . . . . . .   1.45   1.25
  Third Quarter. . . . . . . . . . . . . . .   1.40   1.15
  Fourth Quarter . . . . . . . . . . . . . .   1.35   1.15
</TABLE>

(b)  HOLDERS

As  of  March  31,  2004,  there were approximately 900 holders of the Company's
common  stock,  including approximately 400 holders of record, and 34 holders of
the  Company's  convertible  preferred  stock.

(c)  DIVIDENDS

No  cash dividends have been paid on the Company's common stock, and the Company
does  not  expect  to  pay  cash  dividends  during  the foreseeable future. The
Company's convertible preferred stock does not accrue dividends of any kind.


                                       19
<PAGE>
STOCKHOLDER  RIGHTS  PLAN

In  March 1996, the board of directors of the Company declared a dividend of one
right  to  purchase  a  fraction of a share of its Series A Junior Participating
Preferred  Stock,  having  rights,  preferences,  privileges and restrictions as
designated,  and  under  certain  circumstances,  other  securities,  for  each
outstanding share of the Company's common stock. The dividend was distributed to
stockholders  of  record  at the close of business on April 12, 1996. The Rights
become  exercisable  upon  the occurrence of certain defined events related to a
possible  change  of  control  of  the Company. The description and terms of the
Rights  are  set  forth  in  a  Rights Agreement, dated as of March 22, 1996, as
amended,  between  the Company and American Stock Transfer and Trust Company, as
Rights  Agent.  The  Rights  Agreement  may be amended by the Company's board of
directors  without  the approval of the Rights holders, at any time prior to the
Rights  becoming  exercisable. The Rights Agreement was amended in March 2000 to
specify  that the recapitalization transaction initiated in March 2000 would not
cause  the  Rights  to  become  exercisable.


                                       20
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

The  selected financial data in the following table was derived from the audited
consolidated  financial  statements  of the Company. This data should be read in
conjunction  with  such consolidated financial statements and notes thereto, and
Management's  Discussion  and  Analysis  of  Financial  Condition and Results of
Operations.

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                       --------------------------------------------------------
STATEMENT OF OPERATIONS DATA                             2003        2002        2001        2000       1999
                                                       ---------  ----------  ----------  ----------  ---------
<S>                                                    <C>        <C>         <C>         <C>         <C>
  (IN THOUSANDS, EXCEPT PER SHARE DATA):
Premium revenue, net                                   $104,891   $  83,043   $  84,822   $  97,251   $ 96,225

Health care services expense                             73,194      57,937      58,692      68,568     69,528
Selling, general and administrative expense              28,684      24,540      25,391      31,203     35,072
Loss on impairment of assets (1)                             --         334          --         450     24,576
                                                       ---------  ----------  ----------  ----------  ---------
  Operating income (loss)                                 3,013         232         739      (2,970)   (32,951)
Investment and other income                                 490         607       1,060       1,431      2,067
Interest expense                                           (530)       (232)       (504)     (4,913)    (5,855)
                                                       ---------  ----------  ----------  ----------  ---------
Income (loss) before income taxes, discontinued
  operations and extraordinary item                       2,973         607       1,295      (6,452)   (36,739)
Income tax expense (benefit) (2)                         (4,840)       (820)         --          --     10,934
                                                       ---------  ----------  ----------  ----------  ---------
Income (loss) before discontinued
  operations and extraordinary item                       7,813       1,427       1,295      (6,452)   (47,673)
Discontinued operations:
  Loss from assets transferred under contractual
    arrangements (3)                                         --          --          --      (2,500)    (4,363)
Extraordinary item:
  Gain on conversion of debt to
    convertible preferred stock (4)                          --          --      11,251          --         --
                                                       ---------  ----------  ----------  ----------  ---------
  Net income (loss)                                    $  7,813   $   1,427   $  12,546   $  (8,952)  $(52,036)
                                                       =========  ==========  ==========  ==========  =========

Basic net income (loss) per share:
  Income (loss) before discontinued
    operations and extraordinary item                  $   0.22   $    0.04   $    0.04   $   (1.36)  $ (10.04)
  Loss from discontinued operations                          --          --          --       (0.53)     (0.92)
  Extraordinary item                                         --          --        0.35          --         --
                                                       ---------  ----------  ----------  ----------  ---------

    Net income (loss) per basic share                  $   0.22   $    0.04   $    0.39   $   (1.89)  $ (10.96)
                                                       =========  ==========  ==========  ==========  =========

  Weighted average basic shares outstanding (5)          35,719      35,130      32,253       4,747      4,747

Diluted net income (loss) per share:
  Income (loss) before discontinued
    operations and extraordinary item                  $   0.20   $    0.04   $    0.04   $   (1.36)  $ (10.04)
  Loss from discontinued operations                          --          --          --       (0.53)     (0.92)
  Extraordinary item                                         --          --        0.34          --         --
                                                       ---------  ----------  ----------  ----------  ---------

    Net income (loss) per diluted share                $   0.20   $    0.04   $    0.38   $   (1.89)  $ (10.96)
                                                       =========  ==========  ==========  ==========  =========

  Weighted average diluted shares outstanding            40,244      35,638      33,009       4,747      4,747

BALANCE SHEET DATA AS OF DECEMBER 31 (IN THOUSANDS):

Cash and short-term investments                        $ 28,199   $  12,704   $  15,453   $  16,702   $  6,281
Current assets                                           37,104      16,111      19,195      21,268     10,380
Total assets                                             71,238      34,114      29,325      33,095     28,577
Current liabilities                                      23,588      14,093      14,988      72,180     18,129
Long-term debt and capital lease obligations             22,537       2,997          --         265     39,545
Other long-term liabilities                               1,223       1,013         971       1,079      2,517
Stockholders' equity (deficit)                           23,890      16,011      13,366     (40,429)   (31,614)
</TABLE>


                  See note explanations on the following page.


                                       21
<PAGE>
Note explanations to Selected Financial Data:

(1)  Represents reductions in the carrying value of notes receivable in 2002 and
     2000,  and  goodwill  in  1999,  to  their  estimated  realizable  values.
(2)  The 2003 amount primarily represents a reduction in the valuation allowance
     on  the  Company's  net  deferred  tax  assets.  The  2002 amount primarily
     represents  a  decrease in the accrual for estimated income tax liabilities
     related  to  certain  transactions  that  occurred in prior years. The 1999
     amount  primarily  represents  a  charge to establish a valuation allowance
     against  net  deferred  tax  assets.  See  Note  11  to  the  accompanying
     consolidated  financial  statements  for  more information on income taxes.
(3)  Represents  reductions  in  the carrying value of the net assets related to
     certain  dental  practices  to  their  estimated  realizable  value.
(4)  Effective  January  31, 2001, the Company completed the conversion of $47.5
     million of debt and $5.3 million of accrued interest into 30 million shares
     of convertible preferred stock, resulting in an extraordinary gain of $11.3
     million,  net  of  transaction  expenses.
(5)  Includes  the  common share equivalents of the convertible preferred stock,
     because  the  holders of the convertible preferred stock participate in any
     dividends  paid on the Company's common stock on an as-converted basis, and
     because  the  Company  believes  the  convertible  preferred  stock  is  a
     participating  security  that  is  essentially  equivalent to common stock,
     based  on  all  the  rights  and  preferences  of  both  types  of  stock.

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The  Private  Securities  Litigation Reform Act of 1995 provides a "safe harbor"
for  forward-looking  statements,  as long as those statements are identified as
forward-looking  and  are  accompanied  by  meaningful  cautionary  statements
identifying  important  factors  that  could  cause  actual  results  to  differ
materially  from  those discussed in the statements. The Company desires to take
advantage of these safe harbor provisions. The information in the "Risk Factors"
section  of  Item  1  of  this Form 10-K should be read in conjunction with this
Management's  Discussion  and  Analysis  of  Financial  Condition and Results of
Operations  ("MD&A").

The statements contained in this MD&A concerning expected growth, the outcome of
business  strategies,  future operating results and financial position, economic
and  market  events  and  trends,  future  premium  revenue,  future health care
expenses,  the  Company's  ability  to control health care, selling, general and
administrative expenses, and all other statements that are not historical facts,
are  forward-looking  statements.  Words such as expects, projects, anticipates,
intends,  plans,  believes,  seeks or estimates, or variations of such words and
similar  expressions,  are also intended to identify forward-looking statements.
These forward-looking statements are subject to significant risks, uncertainties
and  contingencies,  many of which are beyond the control of the Company. Actual
results  may  differ  materially  from  those  projected  in the forward-looking
statements,  which  statements  involve  risks  and  uncertainties.

All of the risks set forth in the "Risk Factors" section of this Form 10-K could
negatively  impact  the  earnings  of  the  Company in the future. The Company's
expectations  for the future are based on current information and its evaluation
of  external  influences.  Changes in any one factor could materially impact the
Company's expectations related to revenue, premium rates, benefit plans offered,
membership  enrollment,  the  amount  of  health  care  expenses  incurred,  and
profitability, and therefore, affect the forward-looking statements which may be
included  in  this  report.  In  addition,  past  financial  performance  is not
necessarily  a  reliable indicator of future performance. An investor should not
use  historical  performance alone to anticipate future results or future period
trends  for  the  Company.

CRITICAL  ACCOUNTING  POLICIES

The  Company's consolidated financial statements are prepared in accordance with
accounting  principles  generally  accepted  in  the  United  States of America.
Application  of  those  accounting  principles includes the use of estimates and
assumptions  that  are  made  by  management, and which the Company believes are
reasonable  based  on the information available. These estimates and assumptions
affect the reported amounts of assets, liabilities, revenues and expenses in the
accompanying  consolidated  financial  statements. The Company believes the most
critical  accounting  policies  used  to  prepare  the accompanying consolidated
financial  statements  are  the  following:

INVESTMENTS

The  Company  has  classified  all  of  its investments as "available-for-sale."
Accordingly,  investments  are  carried  at  fair  value, based on quoted market
prices,  and  unrealized  gains  and losses, net of applicable income taxes, are
reported  in  a separate caption of stockholders' equity. In the event there was
an  unrealized  loss on an investment that the Company believed to be other than
temporary, the loss would be reported in the statement of operations, instead of
in  a  separate  caption of stockholders' equity. As of December 31, 2003, there
were  no unrealized losses that the Company believed to be other than temporary.


                                       22
<PAGE>
ACCOUNTS  RECEIVABLE

Accounts  receivable  represent uncollected premiums related to coverage periods
prior  to  the  balance  sheet date, and are stated at the estimated collectible
amounts,  net  of  an allowance for bad debts. The Company continuously monitors
the  timing  and  amount of its premium collections, and maintains a reserve for
estimated  bad  debt losses. The amount of the reserve is based primarily on the
Company's historical experience and any customer-specific collection issues that
are identified. The Company believes its reserve for bad debt losses is adequate
as  of  December  31, 2003. However, there can be no assurance that the bad debt
losses ultimately incurred will not exceed the reserve for bad debts established
by  the  Company.

GOODWILL

Goodwill as of December 31, 2003 consists of $3.2 million of goodwill related to
the  acquisition of Health Net Dental, Inc. ("HN Dental") and Health Net Vision,
Inc.  ("HN  Vision")  in  October  2003, $5.3 million of goodwill related to the
acquisition  of  Paramount  Dental  Plan, Inc. ("Paramount") in August 2002, and
$3.9  million  of  goodwill  related to the acquisition of First American Dental
Benefits,  Inc.  ("First  American")  in  1996.  See  Note 2 to the accompanying
consolidated financial statements for more information on the acquisitions of HN
Dental,  HN  Vision  and  Paramount.  In  the case of each acquisition, goodwill
represents  the  excess  of  the purchase price of the acquired company over the
fair  value  of  the  net assets acquired, and in the case of the First American
acquisition, the balance is net of accumulated amortization and an adjustment in
1999  to  reduce  the carrying value of the goodwill to its estimated realizable
value.  The  Company  estimated  that the goodwill related to the First American
acquisition  had  a  useful  life  of 40 years from the date of acquisition, and
amortized the goodwill over that period through December 31, 2001. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other  Intangible  Assets," the Company ceased amortizing its goodwill effective
January  1,  2002.

SFAS  No. 142 requires that all goodwill be evaluated for possible impairment as
of  January  1,  2002, on an annual basis thereafter, and any time an event that
may  have  affected  the  value  of  the  goodwill  occurs.  SFAS  No.  142 also
establishes  a  new  method  of testing for possible impairment. The Company has
established  October 1 as the date on which it conducts its annual evaluation of
goodwill  for  possible impairment. In accordance with SFAS No. 142, the Company
tested its goodwill for possible impairment by estimating the fair value of each
of  its  reporting  units that include goodwill, and comparing the fair value of
each  reporting unit to the book value of the net assets of each reporting unit.
The fair value of each reporting unit was determined primarily by estimating the
discounted future cash flows of the reporting unit, and by estimating the amount
for  which  the reporting unit could be sold to a third party, based on a market
multiple  of  earnings.  The  Company  had  no  impairment of its goodwill as of
January  1,  2002,  or as of October 1, 2003, based on the method of testing for
possible  impairment  established  by  SFAS  No. 142. The estimates to which the
results  of  the  Company's test are the most sensitive are the amount of shared
administrative  expenses that are charged to each reporting unit, and the market
multiple  of  earnings that is used to estimate the fair value of each reporting
unit.  The  Company  believes  the estimates used in its test are reasonable and
appropriate,  but a significant change in either of these estimates could result
in  the indication of an impairment of goodwill. The Company is not aware of any
events that have occurred since October 1, 2003 that may have affected the value
of  its  goodwill.  However,  there can be no assurance that impairment will not
occur  in  the  future.

INTANGIBLE  ASSETS

Intangible  assets  as  of  December 31, 2003 consist of customer relationships,
provider  networks, and other intangible assets with an aggregate net book value
of  $9.9  million, which were acquired in connection with the acquisitions of HN
Dental  and  HN  Vision  in  October 2003, Ameritas Managed Dental Plan, Inc. in
March  2003,  and  Paramount  in  August  2002.  See  Note 2 to the accompanying
consolidated  financial  statements  for more information on these acquisitions.
The  amount  of  the purchase price that was allocated to each of the intangible
assets was equal to the Company's estimate of the fair value of each asset. Each
intangible  asset  is  being  amortized  over  its  estimated  useful  life on a
straight-line  basis.

CLAIMS PAYABLE AND CLAIMS INCURRED BUT NOT REPORTED

The  estimated liability for claims payable and claims incurred but not reported
("IBNR")  is based primarily on the average historical lag time between the date
of  service  and  the  date  the  related  claim  is  paid  by  the Company, and


                                       23
<PAGE>
the  recent trend in payment rates and the average number of incurred claims per
covered  individual.  Since the liability for claims payable and claims incurred
but  not reported is an actuarial estimate, the amount of claims eventually paid
for  services  provided  prior  to  the balance sheet date could differ from the
estimated  liability.  Any  such  differences  are  included in the consolidated
statement  of operations for the period in which the differences are identified.

RECOGNITION OF PREMIUM REVENUE

Premium  revenue  is  recognized  in  the  period  during which dental or vision
coverage  is  provided  to  the  covered  individuals.  Payments  received  from
customers  in  advance  of  the  related period of coverage are reflected on the
accompanying  consolidated  balance  sheet  as  deferred  premium  revenue.

INCOME  TAXES

The  Company's  accounting  for income taxes is in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax  liabilities  and  assets for the expected future tax consequences of events
that  are  recognized in the Company's financial statements in different periods
than  those in which the events are recognized in the Company's tax returns. The
measurement  of deferred tax liabilities and assets is based on current tax laws
as  of the balance sheet date. The Company records a valuation allowance related
to  deferred  tax assets in the event that available evidence indicates that the
future  tax  benefits  related  to  deferred  tax  assets may not be realized. A
valuation  allowance  is  required  when  it  is  more  likely than not that the
deferred tax assets will not be realized. The Company's determination of whether
a valuation allowance is required is subject to change based on future estimates
of  the  recoverability  of  its  net  deferred  tax  assets.

In  2003,  the  Company  reduced the valuation allowance on its net deferred tax
assets  by  $5.7  million,  primarily  due  to  a significant improvement in its
reported  operating  results and its expected future operating results, compared
to  previous  years.  The  Company's net deferred tax assets were fully reserved
during  the  years  ended  December  31, 2002 and 2001, due to uncertainty about
whether  those  net  assets  would  be  realized  in  the  future.

NET  INCOME  PER  SHARE

Net income per share is presented in accordance with SFAS No. 128, "Earnings Per
Share."  Basic earnings per share is based on the weighted average common shares
outstanding,  including  the  common shares into which the convertible preferred
stock  is  convertible,  but  excluding the effect of other potentially dilutive
securities.  The  number  of basic common shares outstanding includes the common
share equivalents of the convertible preferred stock, because the holders of the
convertible  preferred  stock participate in any dividends paid on the Company's
common  stock  on  an  as-converted  basis, and because the Company believes the
convertible  preferred  stock  is  a  participating security that is essentially
equivalent  to  common  stock,  based  on all the rights and preferences of both
types  of  stock.  Diluted net income per share is based on the weighted-average
common  shares  outstanding,  including  the  effect of all potentially dilutive
securities.  During  the  three  years  ended December 31, 2003, the potentially
dilutive  securities  of  the  Company  that were outstanding consisted of stock
options,  convertible  notes,  and  warrants.  See  Note  8  to the accompanying
consolidated financial statements for information on convertible notes that were
outstanding  during  2003  and  2002.  The calculation of diluted net income per
share  for  2003  includes  the effect of all the outstanding convertible notes.
Each of these convertible notes would have an anti-dilutive effect on net income
per  share  in  2002, and accordingly, they are excluded from the calculation of
diluted  net  income  per  share for this period. The calculation of diluted net
income  per share for 2003, 2002 and 2001 includes the effect of all outstanding
stock  options  with  an  exercise  price  below the average market price of the
Company's  common  stock  during  each  period.  The only warrants issued by the
Company  were  canceled  without  being exercised effective January 31, 2001, as
discussed  in  Note  9  to  the  accompanying consolidated financial statements.


                                       24
<PAGE>
SUMMARY  OF  RESULTS  OF  OPERATIONS

The following table shows the Company's results of operations as a percentage of
premium  revenue,  and  is used in the year-to-year comparisons discussed below.

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                      -------------------------------
                                                        2003       2002       2001
                                                      --------  ----------  ---------
<S>                                                   <C>       <C>         <C>
Premium revenue, net                                    100.0%      100.0%     100.0%

Health care services expense                             69.8        69.8       69.2
Selling, general and administrative expense              27.3        29.9       29.9
                                                      --------  ----------  ---------
  Operating income                                        2.9         0.3        0.9

Investment and other income                               0.4         0.7        1.2
Interest expense                                         (0.5)       (0.3)      (0.6)
                                                      --------  ----------  ---------
  Income before income taxes and extraordinary item       2.8         0.7        1.5
Income tax expense (benefit)                             (4.6)       (1.0)        --
                                                      --------  ----------  ---------
  Income before extraordinary item                        7.4         1.7        1.5
Extraordinary item                                         --          --       13.3
                                                      --------  ----------  ---------

  Net income                                              7.4%        1.7%      14.8%
                                                      ========  ==========  =========
</TABLE>

2003  COMPARED  TO  2002

Premium revenue increased by $21.9 million, or 26.3%, from $83.0 million in 2002
to $104.9 million in 2003. The average membership for which the Company provided
dental  coverage  increased  by  214,000  members,  or 34.7%, from approximately
616,000  members  during  2002  to  approximately  830,000  members during 2003.
Average membership increased in 2003 by 78,000 members due to the acquisition of
HN  Dental  in  October 2003. The HN Dental acquisition added 468,000 members to
the  Company  during  the  last two months of 2003, which resulted in an average
increase of 78,000 members for the full year. The operations of HN Dental and HN
Vision  are  included  in  the  accompanying  consolidated  financial statements
beginning  on  November  1,  2003.  Average membership also increased in 2003 by
133,000  members  due to the Paramount acquisition in August 2002. The Paramount
acquisition  added  200,000 members to the Company, which resulted in an average
increase  of  133,000  members  in  2003,  compared  to  2002. The operations of
Paramount  are  included  in  the accompanying consolidated financial statements
beginning  on September 1, 2002. Premium revenue increased by only 26.3% in 2003
even though average membership increased by 34.7%. This was primarily due to the
Paramount  acquisition, as the business acquired from Paramount consists largely
of  products  that  have  significantly  lower  premium rates than the Company's
pre-existing  business.  Substantially  all of the Company's premium revenue was
derived  from dental benefit plans in 2003 and 2002. Premium revenue from vision
benefit  plans  and  other  products  was  not  material  in  2003  or  2002.

Health  care  services  expense increased by $15.3 million, or 26.3%, from $57.9
million  in  2002  to  $73.2  million in 2003. Health care services expense as a
percentage  of  premium  revenue  (the  "loss ratio") was 69.8% in both 2003 and
2002. In 2003, the Company's mix of business shifted towards a higher proportion
of HMO benefit plan designs, which was primarily due to the HN Dental, HN Vision
and  Paramount  acquisitions. HMO benefit plan designs generally have lower loss
ratios  than  PPO/indemnity benefit plan designs, and accordingly, this shift in
the  mix  of  business  resulted in a slight decrease in the overall loss ratio.
However,  the  effect  of this shift was offset by a slight increase in the loss
ratio  on  products  with  a  PPO/indemnity  plan  design.

Selling,  general and administrative ("SG&A") expense increased by $3.8 million,
or 15.3%, from $24.9 million in 2002 to $28.7 million in 2003. SG&A expense as a
percentage of premium revenue decreased from 29.9% in 2002 to 27.3% in 2003. The
increase in SG&A expense is primarily due to increases in salaries and benefits,
broker commissions, premium taxes, and amortization of intangible assets, all of
which  are  directly  related  to  the  acquisitions of HN Dental, HN Vision and
Paramount.  The  decrease  in SG&A expense as a percentage of premium revenue is
primarily  due  economies  of  scale  that  resulted from the acquisitions of HN
Dental,  HN  Vision  and  Paramount.


                                       25
<PAGE>
Investment and other income decreased by $0.1 million, from $0.6 million in 2002
to  $0.5  million  in  2003.  This  decrease  is  primarily due to a decrease in
interest  rates  on  short-term  fixed-income  investments during the past year.

Interest  expense  increased  by $0.3 million, from $0.2 million in 2002 to $0.5
million  in 2003, primarily due to the borrowings made by the Company to finance
the  acquisition  of HN Dental and HN Vision in October 2003 and the acquisition
of  Paramount in August 2002. See Notes 2 and 8 to the accompanying consolidated
financial  statements  for  information  on  outstanding  debt.

Income  before income taxes increased by $2.4 million, from $0.6 million in 2002
to  $3.0  million in 2003. Income before income taxes as a percentage of premium
revenue increased from 0.7% in 2002 to 2.8% in 2003. This increase was primarily
due  to a decrease in SG&A expense as a percentage of premium revenue, which was
primarily  due  to  the  acquisitions  of HN Dental, HN Vision and Paramount, as
discussed  above.

There  was  an  income  tax  benefit  of  $4.8  million in 2003, which primarily
represents  a  decrease in the valuation allowance on the Company's net deferred
tax  assets.  The  Company  reduced  the  valuation allowance primarily due to a
significant  improvement  in  its  reported  operating  results and its expected
future  operating  results. There was an income tax benefit of $820,000 in 2002,
which  primarily  represents  a  decrease in the Company's accrual for estimated
income  tax  liabilities  related to certain transactions that occurred in prior
years.  There  was no other current income tax expense in 2002, due to temporary
differences  between  income  before  income  taxes  for accounting purposes and
taxable  income  for  tax purposes, which resulted in a loss for tax purposes in
2002. See Note 11 to the accompanying consolidated financial statements for more
information  on  income  taxes.

2002  COMPARED  TO  2001

Premium  revenue  decreased by $1.8 million, or 2.1%, from $84.8 million in 2001
to  $83.0 million in 2002. The average membership for which the Company provided
dental  coverage  was  approximately  616,000  members  during 2002, compared to
615,000  members  during  2001.  Average  membership  increased  in  2002  by
approximately 80,000 members due to the Paramount acquisition, but this increase
was  offset  by  the  loss  of  a  number  of the Company's customers, and a net
decrease  in its enrollment within retained customers. The Paramount acquisition
added  approximately  240,000 members to the Company during the last four months
of  2002,  which  resulted in an average increase of 80,000 members for the full
year.  The operations of Paramount are included in the accompanying consolidated
financial  statements  beginning  on September 1, 2002. The Company believes the
net  decrease  in  its  enrollment within retained customers is primarily due to
reduced  employment  levels  within  its  customers  due  to  general  economic
conditions,  and to reduced enrollment in the Company's dental benefit plans due
to  significant  increases  in  the  cost  of  medical coverage, which may cause
employers  and  employees  to  allocate less spending for the purchase of dental
coverage,  which  is  usually  viewed  as  being more discretionary than medical
coverage.  Premium  revenue  decreased  by  2.1%  in  2002  even  though average
membership  was  approximately the same in both years. This was primarily due to
the  Paramount  acquisition,  as  the  business acquired from Paramount consists
largely  of  products  that  have  significantly  lower  premium  rates than the
Company's  pre-existing  business.  Substantially  all  of the Company's premium
revenue  was derived from dental benefit plans in 2002 and 2001. Premium revenue
from  vision  benefit plans and other products was not material in 2002 or 2001.

Health  care  services  expense  decreased  by $0.8 million, or 1.3%, from $58.7
million in 2001 to $57.9 million in 2002. The loss ratio increased slightly from
69.2%  in  2001  to  69.8%  in  2002. The business acquired from Paramount has a
significantly  lower  loss ratio than the Company's pre-existing business, which
is  primarily  due  to  the  type of benefit plan designs sold by Paramount. The
effect of the Paramount acquisition on the loss ratio was offset by increases in
specialty  referral  services,  supplemental  payments,  and  discounted
fee-for-service  payments  to  dental HMO providers. The increase in the cost of
specialty  referral  services was due to an increase in the utilization rate for
those  services  in  2002. Supplemental payments are additional payments made to
dentists  who  are  compensated  primarily  through  capitation  payments,  in
connection with the delivery of certain dental procedures by those dentists. The
increases in supplemental and discounted fee-for-service payments were partially
due  to  high-cost arrangements with certain providers, which were started early
in  2002, and which were terminated prior to the end of 2002. These arrangements
resulted  in  an  unusually large amount of supplemental payments and discounted
fee-for-service  payments  in  2002.  There  was  also  a  general  increase  in
supplemental  payments  in  2002,  which  the  Company  believes  is due to more
comprehensive  submission  of  claims  information  by  the  dentists in its HMO
network.


                                       26
<PAGE>
SG&A  expense  decreased by $0.5 million, or 2.0%, from $25.4 million in 2001 to
$24.9 million in 2002. SG&A expense as a percentage of premium revenue was 29.9%
in  both  2002  and  2001.  The  decrease  in  SG&A  expense is primarily due to
decreases  in  depreciation expense and furniture rent, and a $350,000 refund of
maintenance  fees from one of the Company's vendors, which were partially offset
by  a  $250,000  expense  in  2002  related  to  the  settlement  of stockholder
litigation,  as  described in Note 12 to the accompanying consolidated financial
statements,  and  a $334,000 loss on impairment of notes receivable in 2002. The
decrease in depreciation expense is primarily due to the fact that a significant
component  of  the  Company's  computer software became fully depreciated during
2002.  The  decrease  in  furniture  rent  was due to the purchase of the office
furniture  used  in  the  Company's  primary administrative office through a new
capital  lease  during  the  second  quarter  of 2002. The related furniture was
formerly  leased  under  an  operating  lease  with  relatively expensive terms,
compared  to  the new capital lease. The new capital lease caused an increase in
depreciation  expense,  but  this  was  more  than  offset by other decreases in
depreciation,  as  noted above. The refund of maintenance fees was primarily due
to  the  settlement  of  a dispute over the amount of equipment maintenance fees
paid  by  the Company in several prior years. The impairment loss in 2002 is due
to  an  increase  in  the  reserve  related  to  notes  receivable, based on the
Company's  estimate  of  the  net  realizable  value  of  the  promissory notes.

Investment and other income decreased by $0.5 million, from $1.1 million in 2001
to $0.6 million in 2002. This decrease is primarily due to realized gains on the
sale  of  investments  in  2001,  a  decrease  in  interest  rates on short-term
fixed-income  investments,  a decrease in interest income from notes receivable,
due  to  the  liquidation  of a portion of the Company's notes receivable during
2001,  and a decrease in the amount of investments held by the Company, compared
to  the  prior year. The decrease in the Company's investments was primarily due
to significant reductions in accrued expenses and claims payable and IBNR during
both  2002  and  2001.  By intentionally accelerating its payment of claims, the
Company  intends  to  enhance  its  image  among  dental  providers.

Interest  expense  decreased  by $0.3 million, from $0.5 million in 2001 to $0.2
million  in  2002,  primarily  due to the conversion of substantially all of the
Company's  debt  into  convertible  preferred  stock effective January 31, 2001,
which  eliminated  nearly  all  of  the  Company's  interest  expense.

Income  before income taxes decreased by $0.7 million, from $1.3 million in 2001
to  $0.6  million in 2002. Income before income taxes as a percentage of premium
revenue decreased from 1.5% in 2001 to 0.7% in 2002. This decrease was primarily
due  to  an increase in the loss ratio, which was partially offset by a decrease
in  SG&A  expense  as  a percentage of premium revenue, both as discussed above.

There  was an income tax benefit of $820,000 in 2002, which primarily represents
a decrease in the Company's accrual for estimated income tax liabilities related
to certain transactions that occurred in prior years, as discussed in Note 11 to
the  accompanying consolidated financial statements. There was no current income
tax  expense  in 2002, due to temporary differences between income before income
taxes  for  accounting  purposes  and  taxable  income  for  tax purposes. Those
temporary  differences  resulted  in  a loss for tax purposes in 2002. There was
also  no  deferred  income  tax  expense in 2002, due to the valuation allowance
against  the  Company's  net deferred tax assets, as discussed in Note 11 to the
accompanying  consolidated  financial  statements.

LIQUIDITY  AND  CAPITAL  RESOURCES

The Company's net working capital increased from $2.0 million as of December 31,
2002  to  $13.5  million as of December 31, 2003, primarily due to the Company's
earnings  during  2003,  the  acquisition  of HN Dental and HN Vision in October
2003,  and  the  issuance of $19.0 million of convertible notes in October 2003.
Net  income  less  net  deferred  income  tax  benefits,  plus  depreciation and
amortization expense, added approximately $5.0 million of working capital during
2003.  HN  Dental  and  HN  Vision  had  an aggregate of $3.0 million of working
capital  as  of  the acquisition date, which added $3.0 million to the Company's
working  capital.  In addition, the Company borrowed $19.0 million in connection
with  the  acquisition  of  HN  Dental  and HN Vision, and the total cost of the
acquisition  was  $15.2 million, resulting in a $3.8 million addition to working
capital.  See  Note  2 to the accompanying consolidated financial statements for
more  information  on  the acquisition of HN Dental and HN Vision, and the $19.0
million  of  convertible  notes.

The  Company's total debt increased from $5.4 million as of December 31, 2002 to
$22.9  million  as  of  December  31,  2003,  primarily  due to $19.0 million of
convertible  notes  issued  in  October 2003, in connection with the acquisition


                                       27
<PAGE>
of  HN  Dental  and  HN  Vision,  which  was partially offset by $2.1 million of
principal  payments  on  debt  and  capital  lease  obligations  during  2003.

In October 2003, the Company acquired all of the outstanding capital stock of HN
Dental,  which  is  a  California  dental  HMO, and certain PPO/indemnity dental
business  underwritten  by  Health Net Life Insurance Company ("HN Life"), which
was  formerly  an  affiliate  of  HN  Dental,  for $10.7 million in cash, and an
agreement  to  provide private label dental HMO and PPO/indemnity products to be
sold  in  the marketplace by subsidiaries of Health Net, Inc., the former parent
company  of  HN  Dental,  for  a  period  of  at  least five years following the
transaction,  subject  to certain conditions.  In October 2003, the Company also
acquired  all  of  the  outstanding  capital  stock  of  HN  Vision,  which is a
California  vision  HMO and an affiliate of HN Dental, and certain PPO/indemnity
vision  business underwritten by HN Life, for $4.5 million in cash. The combined
revenue  of the acquired businesses was approximately $61 million during the ten
months  ended  October 31, 2003. The operations of HN Dental, HN Vision, and the
related  dental  and vision PPO/indemnity business are included in the Company's
consolidated  financial  statements  beginning  on  November  1,  2003.

The  acquisition of HN Dental and HN Vision was financed through the issuance of
$19.0  million  of  unsecured  convertible  promissory  notes  to certain of the
Company's  principal  stockholders  in  October  2003.  The  proceeds  from  the
convertible notes were used to finance the acquisitions, to satisfy the increase
in  the Company's regulatory net worth requirements related to the PPO/indemnity
dental  and  vision  business that was acquired, to provide working capital that
may  be  required  in connection with the integration of the acquired businesses
into  the Company's pre-existing operations, and for general corporate purposes.

The  convertible  notes bear interest at 6.0% annually, and are convertible into
the  Company's common stock at the rate of $1.75 per share, at the option of the
holder. There are no principal payments due under the convertible notes prior to
January 31, 2010, then principal payments are due beginning on January 31, 2010,
and  each  three months thereafter through July 31, 2013, pursuant to a ten-year
amortization  schedule,  and the remaining balance is payable in full on October
31,  2013. The convertible notes are payable in full upon a change in control of
the Company, at the holder's option. The Company has the option of redeeming the
convertible  notes for 229% of face value during the first seven years after the
date  of issuance, for 257% of face value during the eighth year after issuance,
for  286%  of  face  value during the ninth year after issuance, and for 323% of
face  value  during  the tenth year after issuance, provided that it redeems all
the convertible notes held by each holder for which it redeems any of the notes.

In  March  2003,  the  Company  acquired all of the outstanding capital stock of
Ameritas  Managed  Dental Plan, Inc. ("Ameritas") for $1.0 million in cash, plus
contingent  monthly  payments  during  the  five years following the acquisition
date.  Based  on  the  amount of premium revenue during the period from April 1,
2003  to  December 31, 2003, from customers of Ameritas that existed as of March
31,  2003, the maximum aggregate amount of the contingent monthly payments would
be  approximately  $1.5  million,  if  the  Company retained all of the existing
customers  of  Ameritas for five years after the acquisition date at the premium
rates  in  effect  during  2003.  The operations of Ameritas are included in the
Company's  consolidated  financial  statements  beginning  on  April  1,  2003.

In  August  2002,  the  Company acquired all of the outstanding capital stock of
Paramount  for approximately $6.7 million, consisting of $3.0 million in cash, a
secured  convertible  note  for  $2,625,000, and 769,231 shares of the Company's
common  stock. The secured convertible note bears interest at 7.0% annually, and
was  originally  payable  in  36  equal  monthly  installments  of principal and
interest,  beginning  in October 2002. The terms of the note were amended in the
fourth  quarter  of  2003, and the outstanding balance is now payable in monthly
installments  of interest only until a date to be specified by the holder of the
convertible  note  at  least  90  days in advance of such date, which must be no
earlier  than  January  1, 2005, and no later than January 1, 2007. Effective on
the  date  specified  by  the holder, the convertible note will be payable in 21
equal  monthly  installments  of principal and interest. The outstanding balance
under  the  secured  convertible  note  is  convertible into common stock of the
Company  at  a  conversion  price  of  $1.625 per share. The convertible note is
secured  by  the  stock  of  the Company's dental HMO subsidiary in Florida. The
operations  of Paramount are included in the accompanying consolidated financial
statements  beginning  on  September  1,  2002.

In  August  2002,  the  Company  borrowed $2.0 million from one of its principal
stockholders,  which  was  used  to  increase  the Company's working capital, to
provide  for  the payments due under certain capital leases entered into in June
2002,  and  to  provide  for  the  payments  due  under  the  settlement  of the
stockholder  litigation  discussed  in  Note


                                       28
<PAGE>
12 to the accompanying consolidated financial statements. The borrowing was made
under  an  unsecured  convertible note that bears interest at 7.0% annually, and
was  originally  payable in equal monthly installments of principal and interest
through  August  2005.  The  terms  of  the  note were amended during the second
quarter  of  2003,  and  the  outstanding  balance  is  now  payable  in monthly
installments  of interest only through May 2006, then in monthly installments of
principal  and  interest  from  June  2006  through August 2008. The outstanding
balance  under  the  convertible  note  is  convertible into common stock of the
Company  at  a  conversion  price  of  $1.625  per  share.

Net  cash  provided  by  operating activities increased from $1.2 million during
2002  to  $6.4  million in 2003, which was primarily due to increases in accrued
expenses  and  claims  payable  and claims incurred but not reported ("IBNR") in
2003,  compared  to  significant  decreases in these liabilities in 2002, and an
increase  in  net  income, excluding the non-cash deferred income tax benefit in
2003.  The increase in accrued expenses in 2003 was primarily due to an increase
in  accrued  incentive compensation, which was related to the improvement in the
Company's  operating  results  in 2003. The decrease in accrued expenses in 2002
was  primarily  due to payments made to reduce accrued lease obligations related
to  equipment  that  was  no  longer  used by the Company, and to reduce certain
obligations  related  to  discontinued operations that were disposed of prior to
2001.  The  increase in claims payable and claims IBNR in 2003 was primarily due
to an increase in the number of members covered under PPO/indemnity benefit plan
designs,  which  account  for  a majority of the total claims payable and claims
IBNR  liability.  The  decrease  in  claims  payable and claims IBNR in 2002 was
primarily  due  to  intentional  decreases in the processing time for payment of
provider  claims.  Due  in  part  to  the  recent  decline  in interest rates on
investments,  the  Company adopted the practice of paying all provider claims as
rapidly  as  possible,  in  order  to  enhance its image among dental providers.

Net  cash  used  by  investing activities was $22.9 million in 2003, compared to
$0.8  million of net cash provided in 2002.  In 2003, there was $10.1 million of
net  cash  used  for  acquisitions,  and  an  $11.4  million  net  increase  in
investments.  The  increase in investments was due to the fact that the acquired
entities  had  an aggregate of $5.9 million of cash as of the respective closing
dates,  and  the  fact that there was $6.4 million of cash provided by operating
activities  in  2003,  as  discussed  above,  all  of which was used to purchase
investments.

Net cash provided by financing activities was $16.7 million in 2003, compared to
$0.5  million  of  net cash used in 2002. The change was due to $19.0 million of
borrowings  in  2003,  compared  to  $2.0  million  of  borrowings  in  2002.

CONTRACTUAL  OBLIGATIONS  AND  OTHER  COMMITMENTS

A summary of the Company's future commitments is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     PAYMENTS DUE IN
                                        ----------------------------------------
                                        LESS THAN  1 TO 3    3 TO 5   MORE THAN
                                        ONE YEAR    YEARS    YEARS    FIVE YEARS   TOTAL
                                        ---------  -------  --------  ----------  -------
<S>                                     <C>        <C>      <C>       <C>         <C>
CONTRACTUAL OBLIGATIONS:
Long-term debt                          $      --  $ 2,659  $    481  $   19,000  $22,140
Capital lease obligations                     313      364        33          --      710
Other long-term liabilities                    --      903       308          12    1,223
Operating lease commitments, net            2,098    5,778     1,226          --    9,102
                                        ---------  -------  --------  ----------  -------

  Total contractual obligations         $   2,411  $ 9,704     2,048  $   19,012  $33,175
                                        =========  =======  ========  ==========  =======

OTHER COMMITMENTS:
Contingent liability for dental office
  leases assigned to other entities     $   1,053  $   891        14          --  $ 1,958
Contingent liability for subleased
  office space                                183        9        --          --      192
                                        ---------  -------  --------  ----------  -------

  Total other commitments               $   1,236  $   900  $     14  $       --  $ 2,150
                                        =========  =======  ========  ==========  =======
</TABLE>


                                       29
<PAGE>
If  the  entities  to  which the dental office leases have been assigned fail to
make  a  significant  amount  of  the lease payments, this could have a material
adverse  affect  on  the  Company.  See Note 10 to the accompanying consolidated
financial  statements  for  more information on other long-term liabilities, and
see  Note  12 for more information on operating lease commitments and contingent
lease  obligations.

Several  of  the  Company's  subsidiaries  are subject to state regulations that
require them to maintain restricted deposits in the form of cash or investments.
The Company had total restricted deposits of $2.9 million and $3.3 million as of
December  31,  2003  and  2002,  respectively.

In  addition,  several  of  the  Company's  subsidiaries  are  subject  to state
regulations  that  require them to maintain minimum amounts of statutory capital
and  surplus,  and that otherwise restrict the Company's access to the assets of
its  regulated  subsidiaries.  As  a  result  of  these regulatory restrictions,
substantially  all  of  the  Company's  consolidated  stockholders' equity as of
December  31,  2003,  was  not  available  for  distribution  to  the  Company's
stockholders.

The  Company's  primary  source  of  funds  is  cash  flows  from operations and
investment  income.  The  Company  believes  that cash flows from operations and
investment  income  will be adequate to meet the Company's cash requirements for
at  least  the  next twelve months, except for financing that may be required to
complete  potential  acquisitions.  The  Company does not expect any significant
changes  in  its  cash  requirements  in  the foreseeable future, except for any
financing  that  may  be  required  in  connection  with potential acquisitions.

The Company believes it has adequate financial resources to continue its current
operations  for  the  foreseeable  future,  and that it will be able to meet its
financial  obligations  from  its  existing  financial resources and future cash
flows  from  its  operations. However, there can be no assurance that there will
not  be  unforeseen  events  that  could  prevent  the  Company  from  doing so.

RECENT  ACCOUNTING  PRONOUNCEMENTS

See Note 1 to the accompanying consolidated financial statements for information
on  recent  accounting  pronouncements.

IMPACT  OF  INFLATION

The Company's operations are potentially impacted by inflation, which can affect
premium  rates,  health  care  services  expense,  and  selling,  general  and
administrative expense. The Company expects that its earnings will be positively
impacted by inflation in premium rates, because premium rates for dental benefit
plans  in  general  have  been  increasing due to inflation in recent years. The
Company  expects  that  its earnings will be negatively impacted by inflation in
health  care  costs, because fees charged by dentists and other dental providers
have  been  increasing due to inflation in recent years. The impact of inflation
on  the Company's health care services expense is mitigated in the short-term by
the  fact  that approximately 32% of total health care services expense consists
of  capitation (fixed) payments to providers. In addition, most of the Company's
selling,  general  and administrative expenses are impacted by general inflation
in  the  economy.

OFF-BALANCE  SHEET  ARRANGEMENTS

The  Company  is not a party to off-balance sheet arrangements as defined by the
Securities  and  Exchange  Commission.  However,  from  time to time the Company
enters  into certain types of contracts that contingently require the Company to
indemnify parties against third party claims. The contracts primarily relate to:
(i)  certain  asset  purchase  agreements,  under  which the Company may provide
customary  indemnification  to  the  seller of the business being acquired; (ii)
certain real estate leases, under which the Company may be required to indemnify
property  owners  for  environmental  and  other  liabilities,  and other claims
arising  from  the  Company's  use of the applicable premises; and (iii) certain
agreements  with  the  Company's officers, directors, and employees, under which
the  Company  may  be required to indemnify such persons for liabilities arising
out  of  their  employment  relationship.

The  terms of such obligations vary by contract and in most instances a specific
or  maximum  dollar  amount is not explicitly stated therein. Generally, amounts
under  these  contracts cannot be reasonably estimated until a specific claim is
asserted.  Consequently, no liabilities have been recorded for these obligations
on  the  Company's consolidated balance sheets for any of the periods presented.


                                       30
<PAGE>
ITEM  7A.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK
---------------------------------------------------------------------------

The  Company is subject to risk related to changes in short-term interest rates,
due  to its investments in interest-bearing securities. As of December 31, 2003,
the  Company's  total investments were approximately $27.9 million. Therefore, a
one  percentage-point  change in short-term interest rates would have a $279,000
impact  on the Company's annual investment income. The Company is not subject to
a material amount of risk related to changes in foreign currency exchange rates.

ITEM  8.  FINANCIAL  STATEMENTS  AND  SUPPLEMENTARY  DATA
---------------------------------------------------------

The Consolidated Financial Statements and the related Notes and Schedule thereto
filed  as  part  of  this  2003  Annual  Report  on  Form 10-K are listed on the
accompanying  Index  to  Financial  Statements  on  page  F-1.

ITEM  9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
--------------------------------------------------------------------------------
         AND  FINANCIAL  DISCLOSURES
         ---------------------------

None.

ITEM  9A.  CONTROLS  AND  PROCEDURES
------------------------------------

EVALUATION  OF  DISCLOSURE  CONTROLS  AND  PROCEDURES

As  of  the  end  of  period  covered  by  this report, the Company completed an
evaluation,  under  the  supervision and with the participation of the Company's
management,  including  the  Chief  Executive  Officer  and  the Chief Financial
Officer,  of  the  effectiveness  of  the  design and operation of the Company's
disclosure  controls  and  procedures.  Based  on  that  evaluation,  the  Chief
Executive  Officer  and  Chief  Financial  Officer  concluded that the Company's
disclosure  controls  and procedures are effective in alerting them, on a timely
basis, to material information related to the Company required to be included in
the  Company's  periodic  filings  with  the Securities and Exchange Commission.

During  the  period  covered  by  this report, there have been no changes to the
Company's  internal  control  over  financial  reporting  that  have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control  over  financial  reporting.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

The current directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                      AGE                             POSITION
------------------------  ---  ---------------------------------------------------------------
<S>                       <C>  <C>
James E. Buncher           67  President, Chief Executive Officer and Director
Stephen J. Baker           46  Executive Vice President and Chief Operating Officer
Ronald I. Brendzel, JD     54  Senior Vice President, General Counsel, Secretary and Director
Dennis L. Gates, CPA       48  Senior Vice President, Chief Financial Officer and Director
Kenneth E. Keating         40  Vice President, Marketing and Chief Marketing Officer
Michael J. Lauffenburger   43  Vice President, Chief Information Officer
Steven J. Baileys, DDS     50  Chairman of the Board of Directors
Neil R. Anderson           48  Director (1)
Stephen J. Blewitt         44  Director (2)
Leslie B. Daniels          56  Director (2)
</TABLE>

(1)  Member, Audit Committee.
(2)  Member, Compensation and Stock Option Committee, and Audit Committee.


                                       31
<PAGE>
All directors of the Company are elected annually. Officers of the Company serve
at the pleasure of the board of directors. See Item 11. - Executive Compensation
below for a description of severance agreements with certain executive officers.

Mr.  Buncher  has  been President and Chief Executive Officer, and a director of
the Company, since March 2000. From July 1998 to February 2000, he was a private
investor.  Mr.  Buncher  was  President and Chief Executive Officer of Community
Dental  Services,  Inc., a corporation operating dental practices in California,
from  October  1997  until  July  1998.  Mr. Buncher was President of the Health
Plans  Group  of  Value Health, Inc., a national specialty managed care company,
from  September  1995  to  September  1997. He served as Chairman, President and
Chief  Executive  Officer  of  Community  Care  Network,  Inc.,  a  Value Health
subsidiary,  from  August 1992 to September 1997, when Value Health was acquired
by  a third party and Mr. Buncher resigned his positions with that company.  Mr.
Buncher currently serves on the board of directors of Horizon Health Corporation
and  one  other  non-public  health  care  company.

Mr.  Baker  has  been Executive Vice President and Chief Operating Officer since
April  2001,  when he joined the Company. Prior to joining the Company, he was a
consultant  to the senior management of the Company from September 2000 to March
2001.  Mr.  Baker  was  Vice  President,  Chief  Operating  Officer  and  Chief
Information  Officer  for  Novaeon,  Inc.,  a  national  health  and  disability
management  company,  from September 1999 to August 2000.  He was an independent
management  consultant  from  September 1997 to August 1999.  Mr. Baker was Vice
President,  Developing  Businesses  for  Community  Care  Network, Inc., a group
health  and  workers'  compensation  managed  care  company from January 1997 to
August  1997.

Mr.  Brendzel  has  been Senior Vice President, General Counsel, Secretary since
1985 and a director of the Company since 1989. He joined the Company in 1978 and
was  Chief  Financial  Officer  from  April  1988  to  May 1996. Mr. Brendzel is
licensed  to  practice  law  in  the  state  of  California. Mr. Brendzel is the
brother-in-law  of  Dr.  Baileys.

Mr.  Gates  has  been  Senior  Vice  President and Chief Financial Officer since
November  1999,  when  he  joined  the  Company,  and has been a director of the
Company  since  March  2000.  From  June  1995  to  February  1999, he was Chief
Financial  Officer,  then  Treasurer,  of Sheridan Healthcare, Inc., a physician
practice  management  company.

Mr. Keating has been Vice President, Marketing and Chief Marketing Officer since
May  2001, and was Vice President, Sales and Marketing from February 2000 to May
2001.  He  was  Western Regional Vice President of the Company from October 1997
to  February 2000. He joined the Company in 1995 and was Vice President-Imprimis
and  Guards  Office  Operations  for the Company from October 1995 until October
1997.

Mr.  Lauffenburger  has  been Chief Information Officer since November 2002.  He
served  as  Director, Information Services from January 2001, when he joined the
Company,  to  November  2002.  From  November  1998  to  January 2001, he was IS
Manager,  Year  2000,  then  Senior  Project  Manager,  at  Scripps Health.  Mr.
Lauffenburger  was  Senior  Programmer,  then  Project  Manager,  then Director,
Electronic  Data Interchange of Community Care Network, Inc., from April 1991 to
November  1998.

Dr. Baileys has been Chairman of the Board of Directors since September 1995. He
joined  the  Company in 1975 and served as President of the Company from 1981 to
March  1997,  and  Chief  Executive  Officer from May 1995 to February 2000. Dr.
Baileys  is  licensed to practice dentistry in the state of California currently
practices  dentistry  full-time.  Dr. Baileys is currently a director of SunLink
Health  Systems,  Inc.

Mr.  Anderson  has  been  President  of Calver Fund, a healthcare investment and
consulting  firm, since 1988. He currently serves on the board of directors of a
non-public health care company, and has been a director of several other private
health  care  companies.

Mr.  Blewitt is a Senior Managing Director in the Bond & Corporate Finance Group
of  John  Hancock  Life  Insurance Company and has been employed by John Hancock
since  1982.  Mr. Blewitt is also President of Hancock Mezzanine Advisors LLC, a
subsidiary  of  John Hancock, and the managing member of the general partners of
three  related  investment  funds  that  invest  primarily  in  mezzanine  debt
securities.  Mr.  Blewitt  is  currently  a director of NSP Holdings, L.L.C. and
Medical  Resources,  Inc.


                                       32
<PAGE>
Mr.  Daniels was a founder of CAI Advisors & Co., an investment management firm,
in  1989 and has been a principal of that entity and its related investment fund
vehicles  since  then.  Mr.  Daniels  is  currently  a director of Bioanalytical
Systems, Inc. He was a past Chairman of Zenith Laboratories, Inc. and has been a
director  of  several  other  public  and  private  companies.

ITEM  11.  EXECUTIVE  COMPENSATION
----------------------------------

The following table shows the compensation paid to the Company's Chief Executive
Officer  as  of  December  31,  2003, and the other four most highly compensated
executive  officers  as  of December 31, 2003 who received total compensation in
excess of $100,000 during the year ended December 31, 2003 (the "Named Executive
Officers"). The compensation disclosed is for the three years ended December 31,
2003.

<TABLE>
<CAPTION>
                                                                                         LONG-TERM
                                                                                       COMPENSATION
                                                                                          AWARDS
                                                  ANNUAL COMPENSATION                  -------------
                                               ------------------------   OTHER COM-   STOCK OPTIONS
NAME                   PRINCIPAL POSITION       YEAR   SALARY    BONUS   PENSATION(1)     GRANTED
------------------  -------------------------  ------  -------  -------  ------------  -------------
<S>                 <C>                        <C>     <C>      <C>      <C>           <C>
James E. Buncher    President and Chief          2003  259,000  382,000         3,500             --
                     Executive Officer           2002  250,000   25,000         2,750             --
                                                 2001  246,000       --           928        100,000

Stephen J. Baker    Executive Vice President     2003  250,000  176,000            --         50,000
                     and Chief Operating         2002  220,000   20,000            --             --
                     Officer (2)                 2001  152,000       --            --        300,000

Dennis L. Gates     Senior Vice President        2003  204,000  122,000         3,000             --
                     and Chief Financial         2002  204,000   15,000         2,750         20,000
                     Officer                     2001  197,000       --            --             --

Ronald I. Brendzel  Senior Vice President,       2003  191,000  106,000         3,500             --
                     General Counsel and         2002  191,000   15,000         2,738        207,500
                     Secretary                   2001  193,000       --            --             --

Kenneth E. Keating  Vice President,              2003  171,000   79,000         2,337             --
                     Marketing and Chief         2002  186,000       --         2,319          2,500
                     Marketing Officer (3)       2001  180,000       --           938             --
</TABLE>
_________________________________
(1)  Other  compensation  consists  of  matching  contributions to the Company's
     401(k)  plan.
(2)  Mr.  Baker  joined  the  Company  as  Executive  Vice  President  and Chief
     Operating  Officer  in  April  2001.
(3)  Mr. Keating became Vice President, Marketing and Chief Marketing Officer in
     May  2001. He was Vice President, Sales and Marketing from February 2000 to
     May  2001.

During  2002,  the  Company  entered into a Severance Agreement with each of the
Named  Executive Officers, which continues until the officer's employment by the
Company  terminates for any reason. Pursuant to each of these agreements, either
the  Company  or  the  officer  can  terminate the officer's employment with the
Company  at  any  time.  In  the  event  the  Company  terminates  the officer's
employment,  or  implements  a  substantial  diminution  of  the  officer's
responsibilities, and as a result, the officer resigns, within one year and as a
result  of  a  "change in control" as defined below, the Company is obligated to
pay  the  officer an amount equal to the officer's annual salary then in effect,
plus an amount equal to the bonus earned by the officer during the last calendar
year.  A  "change  in  control"  is defined as the acquisition of the Company by
another  entity,  a  sale  of  substantially all of the assets of the Company, a
merger  of  the  Company  with  another entity, the acquisition by any person or
group  of  persons  of 50% or more of the combined voting power of the Company's
then  outstanding securities, or a change of 50% or more of the directors of the
Company  within  a  one-year  period.

During 2003, the Company implemented a Retention Bonus Plan with respect to each
of  the Named Executive Officers, which continues until the officer's employment
by  the  Company  terminates  for any reason. The purpose of the Retention Bonus
Plan  is  to  provide  an  incentive for the senior management of the Company to
remain  employed


                                       33
<PAGE>
during a reasonable transition period in the event of the sale of the Company to
a  third  party.  In  the  event that more than 50% of the Company is sold to an
entity  that  is  not  a  current  stockholder of the Company, each of the Named
Executive Officers would receive a variable retention bonus that is based on the
amount  of proceeds from the sale transaction. The retention bonus amounts to be
paid by the Company are the following amounts for each $1.00 per share of common
stock  that is realized in a sale transaction: $325,000 to Mr. Buncher, $250,000
to  Mr.  Baker,  $150,000 to Mr. Gates, $150,000 to Mr. Brendzel, and $75,000 to
Mr. Keating. Of the total amount of each officer's retention bonus, 25% would be
paid  at  the closing of the transaction, provided the officer is still employed
at that time, and 75% would be paid in monthly installments over the nine months
following the closing of the transaction, provided the officer is still employed
by  the  purchaser at the time each payment is due. Notwithstanding the previous
sentence,  the  entire  retention bonus would be paid in the event the purchaser
reduces  the officer's compensation rate or terminates the officer's employment.

STOCK OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 2003

Stock  options  granted  to  the  Named Executive Officers during the year ended
December  31,  2003  were  as  follows.

<TABLE>
<CAPTION>
                     INDIVIDUAL STOCK OPTION GRANTS
------------------------------------------------------------------------------       POTENTIAL REALIZABLE VALUE
                       NUMBER OF        % OF TOTAL                                    AT ASSUMED ANNUAL RATES
                         SHARES          OPTIONS                                    OF STOCK PRICE APPRECIATION
                       UNDERLYING       GRANTED TO     EXERCISE                          FOR OPTION TERM(3)
                        OPTIONS         EMPLOYEES      PRICE PER   EXPIRATION   ----------------------------------
NAME                    GRANTED          IN 2003       SHARE(1)      DATE(2)           5%               10%
------------------  ----------------  --------------  -----------  -----------  ----------------  ----------------
<S>                 <C>               <C>             <C>          <C>          <C>               <C>
James E. Buncher                  --             --   $        --           --  $            --   $            --
Stephen J. Baker              50,000           22.7%         1.60     Jul 2013           50,312           127,499
Dennis L. Gates                   --             --            --           --               --                --
Ronald I. Brendzel                --             --            --           --               --                --
Kenneth E. Keating                --             --            --           --               --                --
</TABLE>
_________________________
(1)  The  exercise price per share of each of the options is equal to or greater
     than  the  market  price  of  the Company's common stock on the date of the
     grant.  Subject  to  the terms of each option agreement, the exercise price
     may  be  paid  in  cash  or  in  shares of common stock owned by the option
     holder,  or  by  a  combination  of  the  foregoing.
(2)  Each of the options becomes exercisable in three equal annual installments.
     The  dates  on which the options can be exercised may be accelerated in the
     event  of  a  commencement of a tender offer for shares of the Company, the
     signing of an agreement for certain mergers or consolidations involving the
     Company, the sale of all or substantially all of the assets of the Company,
     a change of control, or certain other extraordinary corporate transactions.
     The  options  are  subject  to  early  termination  in the event the option
     holder's  employment  is  terminated.
(3)  There  is  no assurance that the actual stock appreciation over the term of
     the  options  will be at the assumed five percent (5%) or ten percent (10%)
     levels or at any other assumed level. Unless the market price of the common
     stock  does  in  fact  appreciate over the option term, the Named Executive
     Officers  will  realize  no  value  from  the  option  grants.

STOCK OPTION EXERCISES AND YEAR-END STOCK OPTION VALUES

There  were  no  stock  options exercised by any of the Named Executive Officers
during  the  year  ended  December  31,  2003.  Stock  options held by the Named
Executive  Officers at December 31, 2003 are shown in the following table. There
were  no  stock  appreciation  rights  outstanding  as  of  December  31,  2003.

<TABLE>
<CAPTION>
                      STOCK OPTIONS EXERCISED        NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                    --------------------------      UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                       SHARES                     OPTIONS AT FISCAL YEAR-END        AT FISCAL YEAR-END
                      ACQUIRED       VALUE      ------------------------------  ----------------------------
NAME                ON EXERCISE     REALIZED      EXERCISABLE    UNEXERCISABLE  EXERCISABLE   UNEXERCISABLE
------------------  ------------  ------------  ---------------  -------------  ------------  --------------
<S>                 <C>           <C>           <C>              <C>            <C>           <C>
James E. Buncher              --  $         --          666,667         33,333  $    553,334  $       21,666
Stephen J. Baker              --            --          200,000        150,000       121,667          73,333
Dennis L. Gates               --            --          381,667         13,333       322,750           8,000
Ronald I. Brendzel            --            --          189,167        138,333       144,834          85,666
Kenneth E. Keating            --            --          120,833          1,667       102,500           1,000
</TABLE>


                                       34
<PAGE>
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
          AND RELATED STOCKHOLDER MATTERS
          -------------------------------

The  following  table  shows  the  number of shares of common stock beneficially
owned as of March 31, 2004, by each director, each Named Executive Officer, each
entity  that,  to  the Company's knowledge, beneficially owned 5% or more of the
total  outstanding  convertible  preferred  stock  and/or  common  stock  of the
Company,  and  all directors and Named Executive Officers as a group. The number
of  shares beneficially owned includes the number of shares of common stock into
which the convertible preferred stock held by each person is convertible. To the
Company's  knowledge, the named person has sole voting and investment power with
respect  to all shares of common stock listed, except where indicated otherwise.
The  total number of shares of common stock outstanding as of March 31, 2004 was
5,770,590  and  the  total number of shares of preferred stock outstanding as of
that  date was 30,000,000, which is convertible into 30,000,000 shares of common
stock.  The  following  table  includes  the  common  share  equivalents  of the
convertible  preferred  stock,  because  the  Company  believes  the convertible
preferred  stock  is  essentially  equivalent  to common stock, based on all the
rights  and  preferences  of  both  types  of  stock.  Each  of the officers and
directors  may  be contacted in care of the Company at 95 Enterprise, Suite 100,
Aliso  Viejo,  California  92656-2605

<TABLE>
<CAPTION>
                                                             NUMBER OF SHARES     % OF TOTAL
                                                               BENEFICIALLY         SHARES
                OFFICER OR DIRECTOR                              OWNED(1)       OUTSTANDING(2)
-----------------------------------------------------------  -----------------  --------------
<S>                                                          <C>                <C>
John Hancock Life Insurance Company (3)                             17,857,143            46.2
CAI Capital Partners & Company II, Limited Partnership (4)          14,867,671            35.3
Leslie B. Daniels (5)                                                   84,500               *
Jack R. Anderson (6)                                                 3,887,414            10.6
The Burton Partnerships (7)                                          3,471,542             9.4
Steven J. Baileys (8)                                                2,911,267             8.1
James E. Buncher (9)                                                   914,667             2.5
Dennis L. Gates (10)                                                   488,333             1.4
Ronald I. Brendzel (11)                                                422,340             1.2
Stephen J. Baker (12)                                                  304,533               *
Kenneth E. Keating (13)                                                127,667               *
Neil R. Anderson                                                        18,000               *
Stephen J. Blewitt (3)                                                      --               *
Other officers (6 persons) (14)                                      1,993,842             5.4
All directors, Named Executive Officers and other officers
  as a group (15 persons)                                           39,905,463            83.0

All principal stockholders in total                                 47,264,419            94.2
</TABLE>

*    Indicates less than one percent (1%)

(1)  Includes  the  number  of shares of common stock into which the convertible
     preferred  stock  held  by each person is convertible. Also includes shares
     issuable  pursuant  to  stock  options  and  convertible  notes  that  are
     exercisable  within  60  days  of  March 31, 2004. Some of the stockholders
     included  in  this  table  reside  in states having community property laws
     under  which  the  spouse  of  a  stockholder  in whose name securities are
     registered  may  be  entitled to share in the management of their community
     property,  which  may  include the right to vote or dispose of such shares.

(2)  For  purposes  of  computing  all  the  percentages shown, the total shares
     outstanding  includes the shares of common stock into which all outstanding
     shares  of  convertible  preferred  stock  are convertible. For purposes of
     computing  the percentage for each individual, the total shares outstanding
     includes  the  shares issuable to that person pursuant to stock options and
     convertible  notes  that  are exercisable within 60 days of March 31, 2004.
     For  purposes  of  computing  the  percentages  for all other officers as a
     group,  and  all  directors  and  officers  as  a  group,  the total shares
     outstanding  includes the shares issuable to the persons in each respective
     group  pursuant to stock options and convertible notes that are exercisable
     within 60 days of March 31, 2004. For purposes of computing the percentages
     for  all  principal  stockholders  as a group, the total shares outstanding
     includes  all the shares issuable pursuant to stock options and convertible
     notes  that  are  included  in  the  above  table.

(3)  Mr.  Blewitt  is employed by John Hancock Life Insurance Company, which has
     beneficial  ownership  of  15,000,000  shares  issuable  upon conversion of
     shares  of  convertible  preferred stock and 2,857,143 shares issuable upon
     conversion  of  convertible  notes,  all  as to which Mr. Blewitt disclaims
     beneficial  ownership.  The  address  of  Mr. Blewitt and John Hancock Life
     Insurance  Company  is  John  Hancock  Place,  P.O.  Box  111,  Boston,
     Massachusetts  02117.


                                       35
<PAGE>
(4)  Includes  84,500  shares  of  common  stock  owned directly by Mr. Daniels,
     2,780,786  shares  issuable  upon  conversion  of  shares  of  convertible
     preferred  stock  and  2,260,198  shares  issuable  upon  conversion  of
     convertible  notes owned by CAI Partners & Company II, Limited Partnership,
     and  5,649,293  shares  issuable  upon  conversion of shares of convertible
     preferred  stock  and  4,092,894  shares  issuable  upon  conversion  of
     convertible  notes  owned  by  CAI  Capital  Partners & Company II, Limited
     Partnership  (collectively  "CAI").  Mr.  Daniels  is  a  principal of both
     entities.  The  address  of CAI and Mr. Daniels is 540 Madison Avenue, 22nd
     Floor,  New  York,  New  York  10022.

(5)  Represents  84,500  shares  of  common stock owned directly by Mr. Daniels.
     Does  not  include  2,780,786  shares issuable upon conversion of shares of
     convertible  preferred  stock and 2,260,198 shares issuable upon conversion
     of  convertible  notes  owned  by  CAI  Partners  &  Company  II,  Limited
     Partnership,  and  5,649,293  shares  issuable upon conversion of shares of
     convertible  preferred  stock and 4,092,894 shares issuable upon conversion
     of  convertible  notes  owned by CAI Capital Partners & Company II, Limited
     Partnership  (collectively  "CAI").  Mr.  Daniels  is  a  principal of both
     entities. The address of Mr. Daniels is 540 Madison Avenue, 22nd Floor, New
     York,  New  York  10022.

(6)  Includes 1,532,885 shares issuable upon conversion of shares of convertible
     preferred  stock,  226,000  shares  of  common  stock,  and  946,799 shares
     issuable  upon  conversion of convertible notes, all owned by Mr. Anderson.
     Also  includes  1,081,730  shares  issuable  upon  conversion  of shares of
     convertible preferred stock and 100,000 shares of common stock owned by Mr.
     Anderson's  spouse as separate property, as to which Mr. Anderson disclaims
     beneficial  ownership. The address of Mr. Anderson is 16475 Dallas Parkway,
     Suite  735,  Addison,  Texas  77001.

(7)  Includes  162,700  shares  of  common  stock,  419,470 shares issuable upon
     conversion  of  shares  of  convertible preferred stock, and 285,714 shares
     issuable  upon  conversion  of  convertible  notes, all owned by the Burton
     Partnership,  Limited  Partnership  ("BPLP"),  and 488,100 shares of common
     stock,  1,258,415  shares issuable upon conversion of shares of convertible
     preferred stock, and 857,143 shares issuable upon conversion of convertible
     notes,  all  owned  by  the  Burton  Partnership  (QP), Limited Partnership
     ("QP").  Mr.  Donald W. Burton is a principal of both entities. The address
     of  BPLP,  QP  and  Mr.  Burton  is  P.O. Box 4643, Jackson, Wyoming 83001.

(8)  Includes  645,000  shares  of  common  stock  held by Dr. Baileys directly,
     912,500  shares issuable upon conversion of shares of convertible preferred
     stock  held  by  the  Baileys  Family  Trust  and affiliated trusts for the
     benefit of various relatives of Dr. Baileys, 700,767 shares of common stock
     owned  by  the Baileys Family Trust, 303,000 shares of common stock held in
     various trusts for relatives of Dr. Baileys, as to all of which Dr. Baileys
     is trustee and for which Dr. Baileys has sole power to vote the securities,
     150,000  shares  of  common  stock  held by the Alvin and Geraldine Baileys
     Foundation,  for which Dr. Baileys is an officer and director and for which
     Dr.  Baileys  has  shared  power  to  vote  the  securities, and options to
     purchase  200,000  shares of common stock. Dr. Baileys disclaims beneficial
     ownership  of  any of the shares in the trusts or the foundation referenced
     above.

(9)  Includes  48,000  shares  of  common  stock,  200,000  shares issuable upon
     conversion  of  shares  of  convertible  preferred  stock,  and  options to
     purchase  666,667  shares  of  common  stock.

(10) Includes  100,000  shares issuable upon conversion of shares of convertible
     preferred  stock,  and  options to purchase 388,333 shares of common stock.

(11) Includes  130,673  shares  of  common  stock,  100,000 shares issuable upon
     conversion  of  shares  of  convertible  preferred  stock,  and  options to
     purchase  191,667  shares  of  common  stock.

(12) Includes  21,200  shares  of  common  stock and options to purchase 283,333
     shares  of  common  stock.

(13) Includes  6,000  shares  of  common  stock  and options to purchase 121,667
     shares  of  common  stock.

(14) Includes  724,557  shares  of  common  stock,  985,618 shares issuable upon
     conversion of a convertible note, and options to purchase 283,667 shares of
     common  stock.


                                       36
<PAGE>
The  following  is  a  summary  of the Company's equity compensation plans as of
December  31,  2003:

<TABLE>
<CAPTION>
                                                      SHARES OF       WEIGHTED        NUMBER
                                                     STOCK TO BE      AVERAGE       OF SHARES
                                                     ISSUED UPON      EXERCISE      AVAILABLE
                                                     EXERCISE OF      PRICE OF     FOR ISSUANCE
                                                     OUTSTANDING    OUTSTANDING    UNDER STOCK
                                                    STOCK OPTIONS  STOCK OPTIONS   OPTION PLAN
                                                    -------------  --------------  ------------
<S>                                                 <C>            <C>             <C>
Equity compensation plans approved by stockholders      2,940,334  $         1.17     1,059,666
Equity compensation plans not approved by
  stockholders                                                 --              --            --
                                                    -------------  --------------  ------------

Total                                                   2,940,334  $         1.17     1,059,666
                                                    =============  ==============  ============
</TABLE>

ITEM  13.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS
-------------------------------------------------------------

CERTAIN AGREEMENTS

As  of January 31, 2001, in connection with the completion of a recapitalization
transaction,  the  Company  and certain stockholders, including CAI Partners and
Company  II,  L.P., CAI Capital Partners and Company II, L.P., Jack R. Anderson,
John  Hancock Life Insurance Company and the Baileys Family Trust (collectively,
the  "Investors"),  entered  into  an  Agreement Among Stockholders which, among
other  things,  provides  that  the  Investors will vote their shares of capital
stock  of  the  Company  to  maintain  the size of the board of directors of the
Company  at  seven  (7)  members  and  also  contains  provisions  requiring the
Investors  to  sell  their  shares of capital stock in the Company under certain
conditions  applicable  to  an  acquisition of all outstanding shares of capital
stock of the Company by a third party.  In addition, as of January 31, 2001, the
Company  entered  into a Registration Rights Agreement with the Investors, under
which  it  granted  certain registration rights to the Investors with respect to
all shares of common stock owned by the Investors and into which the convertible
preferred  stock  owned  by  the  Investors  is  convertible.  See Note 9 to the
accompanying  consolidated  financial  statements  for  more  information on the
recapitalization  transaction.

CONSULTING SERVICES

The  Company  paid  $10,000,  $153,000  and  $200,000  of consulting fees to the
chairman  of  its  board  of directors during the years ended December 31, 2003,
2002  and  2001, respectively.  This consulting arrangement terminated effective
January  31,  2003.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------

The  Company's  principal  accountant is Deloitte & Touche LLP ("Deloitte"). The
aggregate fees billed by Deloitte, the member firms of Deloitte Touche Tohmatsu,
and  their  respective  affiliates,  for  professional services rendered for the
years  ended  December  31,  2003  and  2002  are  as  shown  below.

<TABLE>
<CAPTION>
                                                           2003      2002
                                                         --------  --------
<S>                                                      <C>       <C>
Audit fees                                               $309,500  $232,000
Audit related fees, which consist of fees for the audit
  of the Company's 401(k) plan                             15,000    14,600
Tax services                                               22,500    20,000
                                                         --------  --------
  Total fees                                             $347,000  $266,600
                                                         ========  ========
</TABLE>

The  Audit  Committee must approve in advance any significant audit or non-audit
engagement  or  relationship  between  the  Company  and  its independent public
accountants.  As  a  result,  the  Audit Committee pre-approved the provision of
audit related services and tax services provided by Deloitte as described above.
The


                                       37
<PAGE>
Audit  Committee has determined that the provision of certain non-audit services
by  Deloitte  is  compatible  with  maintaining  Deloitte's  independence.

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

(a)  FINANCIAL  STATEMENTS,  FINANCIAL  STATEMENT  SCHEDULES,  AND  EXHIBITS

The  consolidated  financial  statements  and  financial  statement  schedule of
SafeGuard  Health  Enterprises, Inc. filed as part of this 2003 Annual Report on
Form  10-K  are listed in the accompanying Index to Financial Statements on Page
F-1.  An  "Exhibit  Index"  is  included in this 2003 Annual Report on Form 10-K
beginning  on  Page  E-1. All Exhibits are either attached hereto or are on file
with  the  Securities  and  Exchange  Commission.

(b)  REPORTS  ON  FORM  8-K

The  Company  filed  a  Current  Report on Form 8-K/A on January 13, 2004, which
amended the Current Report on Form 8-K filed on November 7, 2003, which reported
the completion of the acquisition of HN Dental, HN Vision and the related dental
and vision PPO/indemnity business effective October 31, 2003. The report on Form
8-K/A  included  the  financial  information  required under Item 7 of Form 8-K.


                                       38
<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.

                       SAFEGUARD HEALTH ENTERPRISES, INC.

     By:  /s/ James E. Buncher                Date:   April 12, 2004
          -----------------------                  --------------------
     James E. Buncher
     President, Chief Executive Officer and Director
     (Principal Executive Officer)

     By:  /s/ Dennis L. Gates                 Date:   April 12, 2004
          -----------------------                  --------------------
     Dennis L. Gates
     Senior Vice President, Chief Financial Officer and Director
     (Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons have signed this report below on behalf of the registrant and
in the capacities and on the dates indicated.

     By:  /s/ James E. Buncher                Date:   April 12, 2004
          -----------------------                  --------------------
     James E. Buncher
     President, Chief Executive Officer
     and Director

     By:  /s/ Steven J. Baileys               Date:   April 12, 2004
          ------------------------                 --------------------
     Steven J. Baileys
     Chairman of the Board of Directors

     By:  /s/ Ronald I. Brendzel              Date:   April 12, 2004
          -------------------------                --------------------
     Ronald I. Brendzel
     Senior Vice President, General Counsel,
     Secretary and Director

     By:  /s/ Dennis L. Gates                 Date:   April 12, 2004
          ----------------------                   --------------------
     Dennis L. Gates
     Senior Vice President, Chief Financial
     Officer and Director

     By:  /s/ Neil R. Anderson                Date:   April 12, 2004
          -----------------------                  --------------------
     Neil R. Anderson
     Director

     By:  /s/ Stephen J. Blewitt              Date:   April 12, 2004
          -------------------------                --------------------
     Stephen J. Blewitt
     Director

     By:  /s/ Leslie B. Daniels               Date:   April 12, 2004
          ------------------------                 --------------------
     Leslie B. Daniels
     Director


                                       39
<PAGE>
<TABLE>
<CAPTION>
                                                EXHIBIT INDEX

EXHIBIT
NUMBER                                               DESCRIPTION
-------  ----------------------------------------------------------------------------------------------------
<S>      <C>
2.1      Plans of Acquisition (5)
3.1      Articles of Incorporation (3)
3.1.1    Amended and Restated Certificate of Incorporation (11)
3.1.2    Amended and Restated Certificate of Incorporation (15)
3.1.3    Amended and Restated Certificate of Incorporation (17)
3.1.4    Certificate of Designation of Preferred Stock (11)
3.1.5    2002 Certificate of Designation of Preferred Stock
3.1.6    Amendment to Restated Certificate of Incorporation (22)
3.2      Amended and Restated Bylaws (19)
10.1     1984 Stock Option Plan (2)
10.2     Stock Option Plan Amendment (1)
10.3     Stock Option Plan Amendment (3)
10.4     Stock Option Plan Amendment (4)
10.5     2000 Stock Option Plan Amendment (12)
10.5.1   Amended and Restated Stock Option Plan (17)
10.5.2   2003 Stock Option Plan Amendment (22)
10.6     Form of Employment Agreement between the Company and the Named Executive Officers (12)
10.7     Form of Rights Agreement, dated as of March 22, 1996, between the Company and American
         StockTransfer and Trust Company, as Rights Agent (5)
10.8     Default Forbearance Agreement and Irrevocable Power of Attorney (6)
10.9     First Waiver and Amendment to Note Purchase Agreement (7)
10.10    Amended and Restated Loan and Security Agreement (7)
10.11    Debenture and Note Purchase Agreement (8)
10.12    Stockholder Agreement (8)
10.13    First Amendment to Debenture and Note Purchase Agreement (9)
10.14    Second Amendment to Debenture and Note Purchase Agreement (9)
10.15    Term Sheet Agreement dated as of March 1, 2000 (10)
10.16    Loan Document and Purchase Agreement (11)
10.17    Agreement among Stockholders and the Company (11)
10.18    Registration Rights Agreement between certain Stockholders and the Company (11)
10.19    Consulting Agreement between the Company and Steven J. Baileys (12)
10.20    Asset Purchase Agreement between the Company and Total Dental Administrators Health Plan, Inc.
         (13)
10.21    Administrative Services Agreement between the Company and Total Dental Administrators Health
         Plan, Inc. (13)
10.22    Stock Purchase Agreement between the Company and Total Dental Administrators, Inc. (13)
10.23    Promissory Note and Security Interest given by Total Dental Administrators, Inc. to the Company (13)
10.24    Administrative Services Agreement between the Company and Total Dental Administrators, Inc. (13)
10.25    Stock Purchase Agreement between the Company and Dental Source of Missouri and Kansas, Inc. (13)
10.26    First Amendment to Stock Purchase Agreement between the Company and Dental Source of Missouri
         and Kansas, Inc. (13)
10.27    Administrative Services Agreement between the Company and Dental Source of Missouri and Kansas,
         Inc. (13)
10.28    Amended and Restated 401(k) Plan (13)
10.29    First Amendment to Amended and Restated 401(k) Plan (13)
10.30    Stock Purchase Agreement dated as of April 24, 2002 by and between the Company and Nicholas M.
         Kavouklis (14)
10.31    First Amendment to Stock Purchase Agreement dated as of June 17, 2002 between the Company and
         Nicholas M. Kavouklis (16)
10.32    Secured Convertible Promissory Note dated as of August 30, 2002 issued by the Company to Nicholas
         M. Kavouklis in connection with Exhibit 10.31 above (16)


                                      E-1
<PAGE>
10.33    Registration Rights Agreement dated as of August 30, 2002 between the Company and Nicholas M.
         Kavouklis in connection with Exhibit 10.31 above (16)
10.34    Employment Agreement dated as of August 30, 2002 between the Company and Nicholas M.
         Kavouklis (16)
10.35    Lease Agreement dated as of August 30, 2002 between the Company and an affiliate of Nicholas M.
         Kavouklis (16)
10.36    Pledge Agreement dated as of August 30, 2002 between the Company and Nicholas M. Kavouklis in
         connection with Exhibit 10.31 above (16)
10.37    Guarantee Agreement dated as of August 30, 2002 between the Company and an affiliate of Nicholas
         M. Kavouklis in connection with Exhibit 10.35 above (16)
10.38    Stipulation and Settlement dated as of September 17, 2002 of stockholder class action lawsuit filed
         against the Company in 1999 (17)
10.39    Order Preliminarily Approving Settlement, providing for notice to the class, and scheduling final
         approval of settlement dated as of September 19, 2002 (17)
10.40    Convertible Promissory Note dated as of August 8, 2002 issued by the Company to Jack R. Anderson
         (18)
10.41    Registration Rights Agreement dated as of August 8, 2002 between the Company and Jack R.
         Anderson (18)
10.42    Stock Purchase Agreement dated as of January 15, 2003 between a subsidiary of the Company and
         Ameritas Life Insurance Company for the purchase of Ameritas Managed Dental Plan, Inc. (20)
10.43    Purchase and Sale Agreement dated as of April 7, 2003 between the Company and Health Net, Inc.
         relating to the sale of Health Net Dental, Inc. (21)
10.44    Network Access Agreement dated as of April 7, 2003 between the Company and Health Net, Inc. (21)
10.45    Assumption and Indemnity Reinsurance Agreement dated as of April 7, 2003 between the Company
         and a subsidiary of Health Net, Inc. (21)
10.46    Strategic Relationship Agreement dated as of April 7, 2003 between the Company and Health Net, Inc.
         (21)
10.47    Amendment to Promissory Note dated as of May 6, 2003 between the Company and Jack R. Anderson
         (22)
10.48    Purchase and Sale Agreement dated as of June 30, 2003, between the Company and Health Net, Inc.
         relating to the sale of Health Net Vision, Inc. (23)
10.49    Assumption and Indemnity Reinsurance Agreement dated as of June 30, 2003 between the Company
         and a subsidiary of Health Net, Inc. (23)
10.50    Network Access Agreement dated as of June 30, 2003 between the Company and Health Net, Inc. (23)
10.51    Administrative Services Agreement dated as of June 30, 2003 between the Company and Health Net,
         Inc. (23)
10.54    Amendment to Purchase and Sale Agreement dated as of October 31, 2003 between the Company and
         Health Net, Inc. relating to the sale of Health Net Dental, Inc. (24)
10.55    Amendment to Assumption and Indemnity Reinsurance Agreement dated as of October 31, 2003
         between the Company and Health Net, Inc. relating to the sale of Health Net Dental, Inc. (24)
10.56    Amendment to Purchase and Sale Agreement dated as of October 31, 2003 between the Company and
         Health Net, Inc. relating to the sale of Health Net Vision, Inc. (24)
10.57    Amendment to Assumption and Indemnity Reinsurance Agreement dated as of October 31, 2003
         between the Company and Health Net, Inc. relating to the sale of Health Net Vision, Inc. (24)
10.58    Form of 6% Promissory Note used by the Company in connection with the financing of the acquisition
         of Health Net Dental, Inc., and Health Net Vision, Inc. (24)
10.59    Amended Credit Agreement and Termination of Registration Rights Agreement dated as of December
         3, 2003 between the Company and Nicholas M. Kavouklis
10.60    Amended and Restated Promissory Note dated as of December 3, 2003 between the Company and
         Nicholas M. Kavouklis
21.1     Subsidiaries of the Company
23.1     Independent Auditors' Consent
31.1     Certification of Chief Executive Officer
31.2     Certification of Chief Financial Officer
32       Certification Pursuant to 18 U.S.C. Section 1350
</TABLE>

_________________________________________

(1)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the Company's Registration Statement on Form S- 1 filed as of September 12,
     1983  (File  No.  2-86472).
(2)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Registration Statement on Form S-1 filed as of July 3, 1984
     (File  No.  2-92013).


                                      E-2
<PAGE>
(3)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report of Form 10-K for the year ended December 31,
     1989.
(4)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report of Form 10-K for the year ended December 31,
     1992.
(5)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report on Form 8-K dated as of September 27, 1996.
(6)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     1998.
(7)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated  as  of June 4, 1999.
(8)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated  as of June 30, 1999.
(9)  Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K dated as of October 5, 1999.
(10) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated as of March 16, 2000.
(11) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated  as of March 6, 2001.
(12) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2000.
(13) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2001.
(14) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated as of April 24, 2002.
(15) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Registration  Statement  on Form S-8 filed as of August 30,
     2002  (File  No.  33-2226).
(16) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K dated as of August 30, 2002.
(17) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report on Form 8-K dated as of September 19, 2002.
(18) Incorporated by reference herein and disclosed and filed as an exhibit to
     the Company's Quarterly Report on Form 10-Q for the quarter ended September
     30,  2002.
(19) Incorporated  by  reference herein and disclosed and filed as an exhibit to
     the  Company's  Annual  Report on Form 10-K for the year ended December 31,
     2002.
(20) Incorporated by reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on Form 8-K dated as of February 14, 2003.
(21) Incorporated by reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated as of April 25, 2003.
(22) Incorporated by reference herein and disclosed and filed as an exhibit to
     the  Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     2003.
(23) Incorporated by reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form  8-K  dated  as of June 30, 2003.
(24) Incorporated by reference herein and disclosed and filed as an exhibit to
     the  Company's  Current  Report  on  Form 8-K dated as of November 1, 2003.


                                      E-3
<PAGE>
<TABLE>
<CAPTION>
                          SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                  FOR THE YEAR ENDED DECEMBER 31, 2003

                                                                                               PAGE
                                                                                            -----------
<S>                                                                                         <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-2

Financial Statements:

  Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-3

  Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . .      F-4

  Consolidated Statements of Stockholders' Equity (Deficit) and Other Comprehensive Income      F-5

  Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . .      F-6

  Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . .  F-8 to F-33

Financial Statement Schedule:

  Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . .      F-34
</TABLE>


                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


To  the  Board  of  Directors  and Stockholders of SafeGuard Health Enterprises,
Inc.:

We have audited the accompanying consolidated balance sheets of SafeGuard Health
Enterprises,  Inc.  and subsidiaries (the "Company") as of December 31, 2003 and
2002,  and  the  related consolidated statements of income, stockholders' equity
(deficit)  and  other comprehensive income, and cash flows for each of the three
years  in  the  period  ended  December  31,  2003. Our audits also included the
consolidated financial statement schedule for the years ended December 31, 2003,
2002  and  2001,  included  in  the  Index  at Item 15(a)(2). These consolidated
financial  statements  and  consolidated  financial  statement  schedule are the
responsibility  of the Company's management. Our responsibility is to express an
opinion  on  the  consolidated  financial  statements and consolidated financial
statement  schedule  based  on  our  audits.

We conducted our audits in accordance with auditing standards generally accepted
in  the  United  States  of  America.  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,  such consolidated financial statements present fairly, in all
material  respects, the financial position of SafeGuard Health Enterprises, Inc.
and  subsidiaries  as  of  December  31, 2003 and 2002, and the results of their
operations  and their cash flows for each of the three years in the period ended
December  31,  2003, in conformity with accounting principles generally accepted
in  the  United  States  of  America.  Also,  in  our opinion, such consolidated
financial  statement  schedule,  when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken  as  a whole, presents fairly, in all
material  respects,  the  information  set  forth  therein.

As  discussed  in  Note  1 to the consolidated financial statements, the Company
changed  its  method of accounting for goodwill and other intangible assets as a
result of adopting Statement of Financial Accounting Standards No. 142, Goodwill
and  Other  Intangible  Assets,  effective  January  1,  2002.

DELOITTE  &  TOUCHE  LLP

Costa  Mesa,  California
March  26,  2004


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                          SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS
                                    AS OF DECEMBER 31, 2003 AND 2002
                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


                                                                                     2003       2002
                                                                                   ---------  ---------
<S>                                                                                <C>        <C>
                                        ASSETS

Current assets:
  Cash and cash equivalents                                                        $  3,201   $  3,036
  Investments available-for-sale, at fair value                                      24,998      9,668
  Accounts receivable, net of allowances of $544 in 2003 and $325 in 2002             5,486      2,554
  Deferred tax assets, net of valuation allowance of $212 in 2003                     1,871         --
  Other current assets                                                                1,548        853
                                                                                   ---------  ---------
    Total current assets                                                             37,104     16,111

Property and equipment, net of accumulated depreciation and amortization              4,823      3,532
Restricted investments available-for-sale, at fair value                              2,932      3,254
Goodwill                                                                             12,365      8,590
Intangible assets, net of accumulated amortization                                    9,862      2,013
Deferred tax assets, net of valuation allowance of $388 in 2003                       3,432         --
Other assets                                                                            720        614
                                                                                   ---------  ---------
    Total assets                                                                   $ 71,238   $ 34,114
                                                                                   =========  =========

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                                 $  1,716   $  1,661
  Accrued expenses                                                                    7,919      3,526
  Current portion of long-term debt and capital lease obligations                       313      2,430
  Claims payable and claims incurred but not reported                                10,109      4,690
  Deferred premium revenue                                                            3,531      1,786
                                                                                   ---------  ---------
    Total current liabilities                                                        23,588     14,093

Long-term debt and capital lease obligations                                         22,537      2,997
Other long-term liabilities                                                           1,223      1,013
Commitments and contingencies (Note 12)

Stockholders' equity:
  Convertible preferred stock and additional paid-in capital - $0.01 par value;
    31,000,000 shares authorized; 30,000,000 shares issued and outstanding
    in 2003 and 2002; liquidation preference of $30 million                          41,250     41,250
  Common stock and additional paid-in capital - $0.01 par value;
    54,000,000 shares authorized; 8,970,000 shares and 8,900,000 shares
    issued in 2003 and 2002, respectively; 5,753,000 shares and 5,683,000 shares
    outstanding in 2003 and 2002, respectively                                       22,766     22,662
  Retained earnings (accumulated deficit)                                           (22,357)   (30,170)
  Accumulated other comprehensive income                                                 57         95
  Treasury stock - at cost; 3,217,000 shares in 2003 and 2002                       (17,826)   (17,826)
                                                                                   ---------  ---------
    Total stockholders' equity                                                       23,890     16,011
                                                                                   ---------  ---------
    Total liabilities and stockholders' equity                                     $ 71,238   $ 34,114
                                                                                   =========  =========
<FN>
                      See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                     SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF INCOME
                        YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
                            (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                 2003       2002      2001
                                                               ---------  --------  --------
<S>                                                            <C>        <C>       <C>
Premium revenue, net                                           $104,891   $83,043   $84,822

Health care services expense                                     73,194    57,937    58,692
Selling, general and administrative expense                      28,684    24,874    25,391
                                                               ---------  --------  --------
Operating income                                                  3,013       232       739

Investment and other income                                         490       607     1,060
Interest expense on debt that was converted to equity in 2001        --        --      (402)
Other interest expense                                             (530)     (232)     (102)
                                                               ---------  --------  --------
Income before income taxes and extraordinary item                 2,973       607     1,295
Income tax benefit                                               (4,840)     (820)       --
                                                               ---------  --------  --------
Income before extraordinary item                                  7,813     1,427     1,295
Extraordinary item:
  Gain on conversion of debt to convertible preferred stock          --        --    11,251
                                                               ---------  --------  --------

    Net income                                                 $  7,813   $ 1,427   $12,546
                                                               =========  ========  ========

Basic net income per share:
  Income before extraordinary item                             $   0.22   $  0.04   $  0.04
  Extraordinary item                                                 --        --      0.35
                                                               ---------  --------  --------
    Net income                                                 $   0.22   $  0.04   $  0.39
                                                               =========  ========  ========

Weighted average basic shares outstanding                        35,719    35,130    32,253

Diluted net income per share:
  Income before extraordinary item                             $   0.20   $  0.04   $  0.04
  Extraordinary item                                                 --        --      0.34
                                                               ---------  --------  --------
    Net income                                                 $   0.20   $  0.04   $  0.38
                                                               =========  ========  ========

Weighted average diluted shares outstanding                      40,244    35,638    33,009
<FN>
                See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                   SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND
                                               OTHER COMPREHENSIVE INCOME
                                      YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
                                                     (IN THOUSANDS)

                                                                                                    ACCUMU-
                                    NUMBER OF SHARES         PREFERRED      COMMON      RETAINED     LATED
                             -----------------------------   STOCK AND    STOCK AND     EARNINGS     OTHER
                                             COMMON          ADDITIONAL   ADDITIONAL    (ACCUMU-    COMPRE-
                                        ------------------    PAID-IN      PAID-IN       LATED      HENSIVE    TREASURY
                             PREFERRED  ISSUED   TREASURY     CAPITAL      CAPITAL      DEFICIT)    INCOME      STOCK       TOTAL
                             ---------  -------  ---------  -----------  ------------  ----------  ---------  ----------  ---------
<S>                          <C>        <C>      <C>        <C>          <C>           <C>         <C>        <C>         <C>
Balance, January 1, 2001            --    8,022    (3,275)                    21,829     (44,254)       119     (18,123)   (40,429)

Net income                          --       --        --            --           --      12,546         --          --     12,546
Other comprehensive
  income:
  Net unrealized losses on
    investments available-                                                                              (56)                   (56)
    for-sale
                                                                                                                          ---------
Total comprehensive income                                                                                                  12,490
Issuance of preferred           30,000       --        --        41,250           --          --         --          --     41,250
  stock
Cancellation of stock               --       --        --            --         (320)        320         --          --         --
  warrants (1)
Repurchase of common stock          --       --       (10)           --           --          --         --         (10)       (10)
Reissuance of treasury
  stock in
  contribution to                   --       --        18            --           --         (59)        --          81         22
  retirement plan
Exercise of stock options           --       43        --            --           43          --         --          --         43
                             ---------  -------  ---------  -----------  ------------  ----------  ---------  ----------  ---------

Balance, December 31, 2001      30,000    8,065    (3,267)       41,250       21,552     (31,447)        63     (18,052)    13,366

Net income                          --       --        --            --           --       1,427         --          --      1,427
Other comprehensive
  income:
  Net unrealized gains on
    investments available-                                                                               32                     32
    for-sale
                                                                                                                          ---------
Total comprehensive income                                                                                                   1,459
Issuance of common stock            --      786        --            --        1,061          --         --          --      1,061
Reissuance of treasury
  stock in
  contribution to                   --       --        50            --           --        (150)        --         226         76
  retirement plan
Exercise of stock options           --       49        --            --           49          --         --          --         49
                             ---------  -------  ---------  -----------  ------------  ----------  ---------  ----------  ---------

Balance, December 31, 2002      30,000    8,900    (3,217)       41,250       22,662     (30,170)        95     (17,826)    16,011

Net income                          --       --        --            --           --       7,813         --          --      7,813
Other comprehensive
  income:
  Net unrealized losses on
    investments available-                                                                              (38)                   (38)
    for-sale
                                                                                                                          ---------
Total comprehensive income                                                                                                   7,775
Issuance of common stock            --       70        --            --          104          --         --          --        104
                             ---------  -------  ---------  -----------  ------------  ----------  ---------  ----------  ---------

Balance, December 31, 2003      30,000    8,970    (3,217)  $    41,250  $    22,766   $ (22,357)  $     57   $ (17,826)  $ 23,890
                             =========  =======  =========  ===========  ============  ==========  =========  ==========  =========
<FN>
(1)  These warrants were canceled without being exercised as of January 31, 2001, in connection with the conversion
     of the Senior Notes Payable to convertible preferred stock, as discussed in Note 9.

                              See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                      F-5
<PAGE>
<TABLE>
<CAPTION>
                        SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                           YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
                                           (IN THOUSANDS)

                                                                       2003       2002      2001
                                                                     ---------  --------  ---------
<S>                                                                  <C>        <C>       <C>
Cash flows from operating activities:
  Net income                                                         $  7,813   $ 1,427   $ 12,546
  Adjustments to reconcile net income to net
    cash provided by (used in) operating activities:
    Gain on conversion of debt to convertible preferred stock              --        --    (11,251)
    Deferred income tax benefit                                        (4,887)       --         --
    Loss on impairment of assets                                           --       334         --
    Bad debt expense                                                      476       220        245
    Depreciation and amortization                                       2,110     1,474      1,862
    Gain or loss on sale or disposal of assets                            (19)      (16)      (276)
    Contribution to retirement plan in the form
      of common stock, at fair value                                      118        87         51
  Changes in operating assets and liabilities, net of
    effects of acquisitions:
    Accounts receivable                                                  (479)      103       (306)
    Other current assets                                                  203       241        685
    Other assets                                                         (196)       69         58
    Accounts payable                                                      (61)     (653)      (144)
    Accrued expenses                                                    1,126    (1,271)    (2,063)
    Claims payable and claims incurred but not reported                   632    (1,440)    (1,649)
    Deferred premium revenue                                             (421)      607       (469)
                                                                     ---------  --------  ---------
  Net cash provided by (used in) operating activities                   6,415     1,182       (711)

Cash flows from investing activities:
  Purchases of investments available-for-sale                         (24,610)   (3,448)   (15,599)
  Proceeds from sale/maturity of investments available-for-sale        13,177     7,334     16,878
  Cash paid for acquisitions of businesses, net of cash acquired      (10,028)   (2,708)        --
  Purchases of property and equipment                                  (1,436)     (444)    (1,109)
  Additions to intangible assets                                         (125)       --         --
  Payments received on notes receivable                                   114        14      1,320
  Proceeds from sale of subsidiary                                         --        77         --
                                                                     ---------  --------  ---------
    Net cash (used in) provided by investing activities               (22,908)      825      1,490

Cash flows from financing activities:
  Borrowings on long-term debt                                         19,000     2,000         --
  Increase in accrued interest that was converted to equity in 2001        --        --        321
  Payments on debt and capital lease obligations                       (2,089)   (1,663)      (235)
  Decrease in bank overdrafts                                            (463)     (896)      (674)
  Repurchase of common stock                                               --        --        (10)
  Exercise of stock options                                                --        49         43
  Increase (decrease) in other long-term liabilities                      210        42       (108)
                                                                     ---------  --------  ---------
    Net cash provided by (used in) financing activities                16,658      (468)      (663)
                                                                     ---------  --------  ---------
Net increase in cash and cash equivalents                                 165     1,539        116
Cash and cash equivalents at beginning of year                          3,036     1,497      1,381
                                                                     ---------  --------  ---------

Cash and cash equivalents at end of year                             $  3,201   $ 3,036   $  1,497
                                                                     =========  ========  =========
<FN>
                                      (Continued on next page)
</TABLE>


                                      F-6
<PAGE>
<TABLE>
<CAPTION>
                    SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                       YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
                                      (IN THOUSANDS)


                                                                2003       2002     2001
                                                              ---------  --------  -------
<S>                                                           <C>        <C>       <C>
Supplementary information:
  Cash paid during the year for interest                      $    342   $   207   $   315
  Cash paid during the year for income taxes                       125        18        --

Supplementary disclosure of non-cash activities:
  Debt converted into convertible preferred stock             $     --   $    --   $41,250
  Purchases of property and equipment through capital leases       447     1,836        --

  Liabilities assumed in acquisitions of businesses:
    Fair value of assets acquired, excluding cash             $ 16,700   $ 2,670   $    --
    Goodwill related to transactions                             4,191     4,670        --
    Less - Secured convertible note issued to seller                --    (2,625)       --
    Less - Common stock issued in transaction                       --    (1,040)       --
    Less - Cash paid in transactions, net of cash acquired     (10,028)   (2,708)       --
                                                              ---------  --------  -------
      Liabilities assumed in acquisitions of businesses       $ 10,863   $   967   $    --
                                                              =========  ========  =======
<FN>
               See accompanying Notes to Consolidated Financial Statements.
</TABLE>


                                      F-7
<PAGE>
               SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE  1.ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES
------------------------------------------------------------

SafeGuard  Health  Enterprises,  Inc.,  a  Delaware corporation (the "Company"),
provides  a  wide range of dental benefit plans, vision benefit plans, and other
related  products. The Company's operations are primarily in California, Florida
and  Texas,  but  it also operates in several other states. The Company conducts
its  operations  through  several  subsidiaries,  one  of  which is an insurance
company that is licensed in several states, and several of which are licensed as
dental  or vision health maintenance organization ("HMO") plans in the states in
which  they  operate.  The  Company provides dental benefits, vision benefits or
other related products to approximately 1.5 million individuals. The Company has
been  providing  dental  benefit  plans  in  California  since  the  Company was
organized  in  1974.

Over 90% of the Company's total premium revenue is derived from providing dental
benefit  plans.  Under  the  dental  HMO plan designs provided by the Company, a
majority  of  the  total  health  care  services  expense consists of capitation
payments  to dental service providers, which are fixed monthly payments for each
covered  individual.  These  capitation  arrangements  limit  the amount of risk
assumed  by  the  Company.  Under  the  dental  preferred  provider organization
("PPO")/indemnity plan designs provided by the Company, all health care services
expense consists of claims that are paid each time a covered individual receives
dental services.  Under this type of plan design, the Company assumes all of the
utilization  risk.  Capitation  payments  comprised  32%,  33%  and  37%  of the
Company's total health care services expense during the years ended December 31,
2003,  2002  and  2001,  respectively.

BASIS  OF  PRESENTATION

The  consolidated  financial  statements include all the accounts of the Company
and  its  subsidiaries.  Intercompany  accounts  and  transactions  have  been
eliminated  in  consolidation.  The  Company's consolidated financial statements
were prepared in accordance with accounting principles generally accepted in the
United  States  of  America.

BUSINESS  SEGMENT  INFORMATION

Management  views  certain  geographic areas as separate operating segments, and
therefore, measures the Company's operating results separately for each of those
geographic  areas.  The Company provides essentially the same services in all of
the geographic areas in which it operates. For financial reporting purposes, all
the  Company's  operating  segments  are  aggregated into one reporting segment,
which  provides  dental  benefit  plans and other related products to employers,
individuals  and  other  purchasers.

CASH  AND  CASH  EQUIVALENTS

Investments  with  an  original maturity of three months or less are included in
cash  equivalents.

RESTRICTED DEPOSITS AND MINIMUM NET WORTH REQUIREMENTS

Several  of  the  Company's  subsidiaries  are subject to state regulations that
require them to maintain restricted deposits in the form of cash or investments.
The Company had total restricted deposits of $2.9 million and $3.3 million as of
December  31,  2003  and  2002,  respectively.

In  addition,  several  of  the  Company's  subsidiaries  are  subject  to state
regulations  that  require them to maintain minimum amounts of statutory capital
and  surplus,  and that otherwise restrict the Company's access to the assets of
its  regulated  subsidiaries.  As  a  result  of  these regulatory restrictions,
substantially  all  of  the  Company's  consolidated  stockholders' equity as of
December  31,  2003,  was  not  available  for  distribution  to  the  Company's
stockholders.

INVESTMENTS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting  for Certain Investments in Debt and Equity Securities," the Company
has  classified  its  investments  as  "available-for-sale."


                                      F-8
<PAGE>
Investments classified as available-for-sale are carried at fair value, based on
quoted  market prices, and unrealized gains and losses, net of applicable income
taxes, are reported in stockholders' equity under the caption "Accumulated other
comprehensive  income."  In  the  event  there  was  an  unrealized  loss  on an
investment  that the Company believed to be other than temporary, the loss would
be  reported  in  the  statement  of income, instead of in a separate caption of
stockholders'  equity.  As of December 31, 2003, there were no unrealized losses
that  the  Company  believed  to  be  other  than  temporary.

FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS

The  accompanying  consolidated  balance  sheets include the following financial
instruments  as  of  December  31, 2003: cash and cash equivalents, investments,
accounts  receivable,  accounts  payable,  accrued  expenses,  short-term  and
long-term  debt,  and  other  long-term  liabilities.  All  of  these  financial
instruments,  except  for  long-term  debt  and other long-term liabilities, are
current  assets  or  current  liabilities.  The  Company  expects to realize the
current  assets,  and  to  pay the current liabilities, within a short period of
time. Therefore, the carrying amount of these financial instruments approximates
fair  value.  Long-term  debt  and other long-term liabilities are stated at the
estimated amount of the future payments, which approximates fair value.

PROPERTY  AND  EQUIPMENT

Property  and  equipment  is recorded at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the
assets.  Depreciation  of  leasehold  improvements  is  calculated  based on the
shorter  of  the  estimated  useful  lives  of  the assets, or the length of the
related  lease.  The  Company  uses  the  following  useful  lives  to  record
depreciation  expense: leasehold improvements - 4 to 10 years; computer hardware
and  software - 3 to 4 years; and furniture, fixtures and other office equipment
-  4  to  7  years. The cost of maintenance and repairs is expensed as incurred,
while  significant improvements that add functionality to an asset or extend the
estimated  useful  life  of  an  asset  are  capitalized. Upon the sale or other
retirement  of  assets,  the cost of any such assets and the related accumulated
depreciation  are  removed  from  the  books  and  any resulting gain or loss is
recognized.

GOODWILL

Goodwill as of December 31, 2003 is related to the following acquisitions:

<TABLE>
<CAPTION>
<S>                                                                           <C>
      Health Net Dental, Inc. ("HN Dental") and
        Health Net Vision, Inc. ("HN Vision") - October 2003                  $ 3,181
      Paramount Dental Plan, Inc. ("Paramount") - August 2002                   5,264
      First American Dental Benefits, Inc. ("First American") - October 1996    3,920
                                                                              -------
        Total                                                                 $12,365
                                                                              =======
</TABLE>

See  Note  2  for  more  information  on the HN Dental, HN Vision, and Paramount
acquisitions. In the case of each acquisition, goodwill represents the excess of
the purchase price of the acquired company over the fair value of the net assets
acquired,  and in the case of the First American acquisition, the balance is net
of  accumulated  amortization  and  an adjustment in 1999 to reduce the carrying
value  of  the goodwill to its estimated realizable value. The Company estimated
that the goodwill related to the First American acquisition had a useful life of
40  years  from  the  date  of acquisition, and amortized the goodwill over that
period  through  December  31,  2001. See Recently Adopted Accounting Principles
below  in  Note  1  for  information  on the Company's adoption of SFAS No. 142,
"Goodwill  and  Other  Intangible  Assets,"  which  changed  the  accounting for
goodwill  effective  January  1,  2002.

INTANGIBLE  ASSETS

Intangible  assets  as  of  December 31, 2003 consist of customer relationships,
provider  networks  and other intangible assets with an aggregate net book value
of  $9.9  million, all of which are related to the acquisitions of HN Dental, HN
Vision, Ameritas Managed Dental Plan, Inc. ("Ameritas") and Paramount, which are
discussed  in  Note 2. The amount of the purchase price in each acquisition that
was  allocated  to  the intangible assets was equal to the Company's estimate of
the  fair  value  of  each  intangible  asset.  Each  intangible  asset is being
amortized over its estimated useful life on a straight-line basis.


                                      F-9
<PAGE>
LONG-LIVED ASSETS

In  accordance  with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived  Assets,"  long-lived  assets  are  reviewed for events or changes in
circumstances  that  indicate that their carrying values may not be recoverable.
The  Company's  principal long-lived assets as of December 31, 2003 are property
and  equipment  and intangible assets. The Company is not aware of any events or
circumstances  that may have impaired the fair value of these long-lived assets.

RECOGNITION OF PREMIUM REVENUE AND COMMISSION EXPENSE

Premium  revenue  is  recognized  in  the  period  during which dental or vision
coverage  is  provided  to  the  covered  individuals.  Payments  received  from
customers  in  advance  of  the  related period of coverage are reflected on the
accompanying  consolidated  balance  sheets  as  deferred  premium  revenue.

In connection with its acquisition of new customers, the Company pays broker and
consultant  commissions,  which  are  generally based on a percentage of premium
revenue  collected.  The  Company  also pays internal sales commissions, some of
which  are based on a percentage of premium revenue collected, and some of which
consist  of  a  one-time  payment  at  the  beginning  of  a  customer contract.
Commissions  that  are  based  on  a percentage of premium revenue collected are
recognized  as  expenses  in  the period in which the related premium revenue is
recognized.  Commissions  that consist of a one-time payment at the beginning of
a  customer  contract are recognized as expenses at the beginning of the related
customer  contract.  As  stated  in  SFAS  No.  60, "Accounting and Reporting by
Insurance  Companies,"  commissions  related  to  insurance  contracts should be
capitalized  and  charged  to expense over the term of the customer contract, in
proportion  to  premium  revenue  recognized.  In  the case of the PPO/indemnity
insurance  policies  issued  by  the  Company, the customers have the ability to
cancel  the  policy  at any time with 30 days advance written notice. Because of
this  ability, one-time commissions paid at the beginning of a customer contract
are  charged  to  expense  at  the  beginning  of the related customer contract.

RECOGNITION  OF  HEALTH  CARE  SERVICES  EXPENSE

Capitation  payments  to  providers  are  recognized as expense in the period in
which  the  providers are obligated to deliver the related health care services.
Other  payments for health care services are recognized as expense in the period
in  which  the  services  are  delivered.

The  estimated liability for claims payable and claims incurred but not reported
is  based  primarily  on  the  average  historical  lag time between the date of
service  and  the  date the related claim is paid by the Company, and the recent
trend  in  payment  rates  and the average number of incurred claims per covered
individual.  Since  the liability for claims payable and claims incurred but not
reported  is  an  actuarial  estimate,  the amount of claims eventually paid for
services  provided  prior  to  the  balance  sheet  date  could  differ from the
estimated  liability.  Any  such  differences  are  included in the consolidated
statements  of  income  for  the period in which the differences are identified.

ADMINISTRATIVE  SERVICES  ARRANGEMENTS

The Company processed approximately $5.2 million, $2.6 million, and $3.2 million
of  dental  and  vision  claims  under  administrative  services  only  ("ASO")
agreements  during  the  years  ended  December  31,  2003,  2002  and  2001,
respectively.  The  revenue  recognized  by  the  Company  from  ASO  agreements
consists  only  of  the  ASO  fees  received  from  its  clients, and the claims
processed  by  the  Company  under  ASO  agreements  are  not  included  in  the
accompanying  consolidated  statements  of  income.

STOCK-BASED  COMPENSATION

SFAS  No.  123,  "Accounting for Stock-Based Compensation," provides a choice of
two different methods of accounting for stock options granted to employees. SFAS
No.  123  encourages,  but  does not require, entities to recognize compensation
expense  equal  to  the fair value of employee stock options granted. Under this
method  of accounting, the fair value of a stock option is measured at the grant
date,  and  compensation  expense is recognized over the period during which the
stock option becomes exercisable. Alternatively, an entity may choose to use the
accounting  method  described in Accounting Principles Board Opinion ("APB") No.
25,  "Accounting  for  Stock  Issued  to  Employees."  Under  APB  No.  25,  no
compensation  expense  is  generally  recognized  as  long  as  the  exercise


                                      F-10
<PAGE>
price  of  each  stock  option  is  at  least  equal  to the market price of the
underlying  stock  at  the  time  of  the grant. If an entity chooses to use the
accounting  method  described  in APB No. 25, SFAS No. 123 requires that the pro
forma  effect  of using the fair value method of accounting on its net income be
disclosed  in  a  note  to  the  financial  statements.

The Company has chosen to use the accounting method described in APB No. 25. All
stock  options granted by the Company have an exercise price equal to the market
value of the Company's common stock on the date of grant, and accordingly, there
is  no  employee  compensation expense related to stock options reflected in the
accompanying  consolidated statements of income. The weighted average fair value
of  stock  options  granted by the Company was $0.90, $0.75, and $1.13 per share
during  the  years  ended  December 31, 2003, 2002 and 2001, respectively. Stock
options granted generally become exercisable in equal annual installments over a
three-year  period  after  the  date  of  grant.

The following table shows the pro forma effect of using the fair value method of
accounting for stock options, as described by SFAS No. 123, on the Company's net
income  and  net  income  per  share  (in  thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                             ----------------------------------
                                                                2003        2002        2001
                                                             ----------  -----------  ---------
<S>                                                          <C>         <C>          <C>
    Net income, as reported                                  $   7,813   $    1,427   $ 12,546
    Less - Employee compensation expense based on
      the fair value method of accounting for stock options       (416)        (856)      (833)
                                                             ----------  -----------  ---------
    Pro forma net income                                     $   7,397   $      571   $ 11,713
                                                             ==========  ===========  =========

    Basic net income per share, as reported                  $    0.22   $     0.04   $   0.39
    Pro forma basic net income per share                          0.21         0.02       0.36

    Diluted net income per share, as reported                $    0.20   $     0.04   $   0.38
    Pro forma diluted net income per share                        0.19         0.02       0.35
</TABLE>

SFAS  No.  123  requires  a publicly traded entity to estimate the fair value of
stock-based  compensation  by  using  an  option-pricing  model  that takes into
account  certain  facts  and assumptions. The facts and assumptions that must be
taken  into account are the exercise price, the expected life of the option, the
current  stock  price,  the expected volatility of the stock price, the expected
dividends  on  the  stock,  and  the risk-free interest rate. The option-pricing
models  commonly  used  were  developed  to  estimate  the  fair value of freely
tradable,  fully  transferable  options  without  vesting  restrictions,  which
significantly  differ from the stock options granted by the Company. The Company
estimated  the  fair value of each stock option as of the date of grant by using
the  Black-Scholes  option-pricing  model.  The  facts  and  assumptions used to
determine the fair value of stock options granted were: an average expected life
of  four  years;  expected  volatility  of 75% in 2003, 82% in 2002, and 160% in
2001; no expected dividends; and a risk-free interest rate of approximately 2.2%
in  2003, 2.0% in 2002, and 3.8% in 2001. The assumptions regarding the expected
life  of  the  options  and  the  expected  volatility  of  the  stock price are
subjective,  and  these  assumptions  have a significant effect on the estimated
fair  value  amounts.

INCOME  TAXES

The  Company's  accounting  for income taxes is in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax  liabilities  and  assets for the expected future tax consequences of events
that  are  recognized  in  the  Company's  consolidated  financial statements in
different periods than those in which the events are recognized in the Company's
tax  returns. The measurement of deferred tax liabilities and assets is based on
current  tax  laws as of the balance sheet date. The Company records a valuation
allowance  related  to  deferred tax assets in the event that available evidence
indicates  that  the  future tax benefits related to the deferred tax assets may
not  be  realized. A valuation allowance is required when it is more likely than
not  that  the  deferred  tax  assets  will  not  be  realized.


                                      F-11
<PAGE>
RELATED  PARTY  TRANSACTIONS

See  Notes  2  and  8  for information on $19.0 million of unsecured convertible
promissory  notes  that  were  issued  to  certain  of  the  Company's principal
stockholders  in October 2003 in connection with the Company's acquisition of HN
Dental  and  HN  Vision  effective  October  31,  2003.

See  Notes  2  and  8  for  information on a secured convertible promissory note
payable  to a member of the Company's senior management, the outstanding balance
of  which  was  $1.6  million  as of December 31, 2003. The convertible note was
issued  in  September  2002 in connection with the acquisition of Paramount, and
the  former  owner  of  Paramount  is currently a member of the Company's senior
management.

See  Note  8 for information on an unsecured convertible promissory note payable
to one of the Company's principal stockholders, the outstanding balance of which
was  $1.5 million as of December 31, 2003. The note was issued in August 2002 to
obtain  working  capital  for  various  purposes.

The  Company  paid  $10,000,  $153,000  and  $200,000  of consulting fees to the
chairman  of  its  board  of directors during the years ended December 31, 2003,
2002  and  2001,  respectively.

ADVERTISING

Advertising  expense  was  $148,000,  $185,000, and $110,000 for the years ended
December  31,  2003,  2002  and  2001,  respectively.

USE OF ESTIMATES IN FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles
generally  accepted  in the United States of America requires management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities,  the  disclosure  of  contingent  assets  and  liabilities, and the
reported  amounts  of  revenues  and  expenses. Actual results could differ from
those  estimates.

NET  INCOME  PER  SHARE

Net income per share is presented in accordance with SFAS No. 128, "Earnings Per
Share."  Basic  net  income  per  share  is based on the weighted average common
shares  outstanding,  including  the  common  shares  into which the convertible
preferred  stock  is  convertible, but excluding the effect of other potentially
dilutive  securities. The number of basic common shares outstanding includes the
common share equivalents of the convertible preferred stock, because the holders
of  the  convertible  preferred  stock  participate in any dividends paid on the
Company's  common  stock  on  an  as-converted  basis,  and  because the Company
believes  the  convertible  preferred  stock is a participating security that is
essentially  equivalent to common stock, based on all the rights and preferences
of  both  types  of stock. Diluted net income per share is based on the weighted
average  common  shares  outstanding,  including  the  effect of all potentially
dilutive  securities.  During  the  three  years  ended  December  31, 2003, the
potentially  dilutive  securities of the Company that were outstanding consisted
of convertible notes, stock options, and warrants. See Note 8 for information on
convertible notes that were outstanding during 2003 and 2002. The calculation of
diluted net income per share for 2003 includes the effect of all the outstanding
convertible  notes.  Each of these convertible notes would have an anti-dilutive
effect  on net income per share in 2002, and accordingly, they are excluded from
the calculation of diluted net income per share for this period. The calculation
of  diluted  net income per share for 2003, 2002 and 2001 includes the effect of
all  outstanding  stock  options with an exercise price below the average market
price of the Company's common stock during each period. The only warrants issued
by the Company were canceled without being exercised effective January 31, 2001,
as  discussed  in  Note  9.


                                      F-12
<PAGE>
The  differences  between weighted average basic shares outstanding and weighted
average diluted shares outstanding in each of the three years ended December 31,
2003,  are  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                    2003    2002    2001
                                                   ------  ------  ------
<S>                                                <C>     <C>     <C>
    Weighted average basic shares outstanding      35,719  35,130  32,253
    Effect of convertible notes                     3,806      --      --
    Effect of dilutive stock options                  719     508     756
                                                   ------  ------  ------
      Weighted average diluted shares outstanding  40,244  35,638  33,009
                                                   ======  ======  ======
</TABLE>

For  purposes of computing the net income per diluted share of common stock, the
Company's  net  income  was  adjusted  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                               2003    2002    2001
                                                              ------  ------  -------
<S>                                                           <C>     <C>     <C>
    Net income, as reported                                   $7,813  $1,427  $12,546
    Interest expense on convertible notes, net of tax effect     272      --       --
                                                              ------  ------  -------
      Adjusted Net Income                                     $8,085  $1,427  $12,546
                                                              ======  ======  =======
</TABLE>

RECENTLY ADOPTED ACCOUNTING PRINCIPLES

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible  Assets."  SFAS  No.  142 requires that goodwill and other intangible
assets with indefinite useful lives not be amortized. SFAS No. 142 also requires
that all goodwill be evaluated for possible impairment as of January 1, 2002, on
an  annual  basis  thereafter,  and any time an event that may have affected the
value  of  the  goodwill  occurs.  SFAS No. 142 also establishes a new method of
testing  goodwill  for  possible impairment. The adoption of SFAS No. 142 had no
significant effect on the Company's consolidated financial statements. See Notes
5  and  6  for  more  information.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets."  SFAS  No.  144  supersedes  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  Of,"  and  APB  No.  30,  "Reporting  the  Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual,  and  Infrequently  Occurring  Events  and  Transactions." SFAS No. 144
establishes accounting and reporting standards for the impairment or disposal of
long-lived assets, and for reporting the results of discontinued operations. The
Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No.
144  had  no  significant  effect  on  the  Company's  consolidated  financial
statements.

In  April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4,  44,  and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS  No.  145  updates,  clarifies,  and  simplifies  existing  accounting
pronouncements.  SFAS  No.  145  is generally effective for financial statements
issued  after  May  15,  2002.  The  adoption of SFAS No. 145 had no significant
effect  on  the  Company's  consolidated  financial  statements.

In  July  2002,  the  FASB issued SFAS No. 146, "Accounting for Costs Associated
with  Exit  or  Disposal Activities." SFAS No. 146 requires that a liability for
the  cost  of  an  exit or disposal activity be recognized when the liability is
incurred.  SFAS  No.  146 also requires that the liability be initially measured
and  recorded  at  fair  value.  SFAS  No. 146 is effective for exit or disposal
activities  that are initiated after December 31, 2002. The adoption of SFAS No.
146  had  no  significant  effect  on  the  Company's  consolidated  financial
statements.

In October 2002, the Emerging Issues Task Force ("EITF") of the FASB issued EITF
02-17,  which  addresses  issues  raised  in the interpretation of SFAS No. 141,
"Business  Combinations"  and  SFAS  No.  142,  "Goodwill  and  Other Intangible
Assets,"  and  the identification and valuation of intangible assets. EITF 02-17
provides  guidance on determining when, as a result of a business combination, a
customer-related  intangible  asset exists that should be separately valued from
goodwill.  EITF No. 02-17 is effective for business combinations consummated and
goodwill impairment tests performed after October 25, 2002. The adoption of EITF
02-17  had  no  significant  effect  on  the  Company's  consolidated  financial
statements.


                                      F-13
<PAGE>
In  November  2002,  the  FASB  issued  FASB  Interpretation  ("FIN")  No.  45,
"Guarantor's  Accounting  and  Disclosure Requirements for Guarantees, Including
Indirect  Guarantees of Indebtedness of Others." FIN No. 45 is an interpretation
of  FASB  Statements  No.  5,  57,  and  107,  and  a  rescission of FIN No. 34,
"Disclosure  of  Indirect  Guarantees  of  Indebtedness  of Others."  FIN No. 45
requires  that  a  guarantor recognize a liability for the fair value of certain
types  of  guarantees,  at  the  time  the guarantee is initially made.  It also
elaborates  on  the  financial  statement  disclosures to be made by a guarantor
about  its  obligations  under  certain  types  of  guarantees.  The  initial
recognition  and measurement provisions of this interpretation are applicable on
a  prospective  basis  to guarantees issued or modified after December 31, 2002.
The  disclosure  requirements are effective for financial statements for periods
ending  after  December  15, 2002. The adoption of FIN No. 45 had no significant
effect  on  the  Company's  consolidated  financial  statements.

In  December  2002,  the  FASB  issued SFAS No. 148, "Accounting for Stock-Based
Compensation  -  Transition  and  Disclosure," which is an amendment of SFAS No.
123,  "Accounting  for  Stock-Based  Compensation."  SFAS  No.  148  provides
alternative methods of transition for a voluntary change to the fair value based
method  of  accounting  for stock-based employee compensation.  It also requires
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method  used  on  reported  results.  SFAS No. 148 is effective for fiscal years
ending  after December 15, 2002. The adoption of SFAS No. 148 had no significant
effect  on  the  Company's  consolidated  financial  statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51.  FIN No. 46
requires  that  variable  interest  entities  be  consolidated  by the investing
company if the investing company is obligated to absorb a majority of the losses
incurred  by  the variable interest entity, or is entitled to receive a majority
of  the profits earned by the entity, or both. The consolidation requirements of
FIN No. 46 are effective for all periods with respect variable interest entities
that  are  created  after January 31, 2003.  The consolidation requirements with
respect  to  variable  interest  entities  created prior to February 1, 2003 are
effective  for periods beginning after June 15, 2003. The adoption of FIN No. 46
had no significant effect on the Company's consolidated financial statements. In
December  2003,  the  FASB  issued FIN No. 46R, which revised the implementation
date  for FIN No. 46 with respect to variable interest entities created prior to
January  31,  2003,  among  other  things.  The  adoption  of FIN No. 46R had no
significant  effect  on  the  Company's  consolidated  financial  statements.

In  April  2003,  the  FASB  issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging Activities." SFAS No. 149 is effective for
contracts  and  hedging  relationships  entered  into or modified after June 30,
2003.  The  adoption  of SFAS No. 149 had no significant effect on the Company's
consolidated  financial  statements.

In  May  2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with  Characteristics  of Both Liabilities and Equity." SFAS No. 150 establishes
standards  for  how  an  issuer  classifies  and  measures  certain  financial
instruments  that  have characteristics of both debt and equity, and requires an
issuer to classify certain instruments as liabilities in its balance sheet. SFAS
No. 150 is effective for financial instruments created or modified after May 31,
2003,  and  otherwise  is effective at the beginning of the first interim period
beginning  after  June 15, 2003. The adoption of SFAS No. 150 had no significant
effect on the Company's consolidated financial statements. In November 2003, the
FASB  issued  FASB  Staff  Position  No. 150-3 ("FSP 150-3"), which deferred the
effective  dates  for  applying  certain  provisions  of SFAS No. 150 related to
mandatorily  redeemable  financial instruments. The adoption of FSP 150-3 had no
significant  effect  on  the  Company's  consolidated  financial  statements.

RECLASSIFICATION

Certain  amounts  in  the  financial  statements  for  prior  years  have  been
reclassified  to  conform  to  the  current  year  presentation.

NOTE  2.  ACQUISITIONS
----------------------

HEALTH NET DENTAL, INC. AND HEALTH NET VISION, INC.

Effective  October 31, 2003, the Company acquired all of the outstanding capital
stock  of HN Dental, which is a California dental HMO, and certain PPO/indemnity
dental  business  underwritten  by  Health  Net  Life  Insurance


                                      F-14
<PAGE>
Company  ("HN  Life"),  which  was formerly an affiliate of HN Dental, for $10.7
million  in  cash,  and  an  agreement  to  provide private label dental HMO and
PPO/indemnity  products  to be sold in the marketplace by subsidiaries of Health
Net, Inc., the former parent company of HN Dental, for a period of at least five
years  following  the  transaction,  subject  to  certain conditions.  Effective
October 31, 2003, the Company also acquired all of the outstanding capital stock
of  HN  Vision,  which  is  a California vision HMO and a former affiliate of HN
Dental,  and  certain PPO/indemnity vision business underwritten by HN Life, for
$4.5  million  in  cash.  The  combined  revenue  of the acquired businesses was
approximately  $61  million  during  the  ten months ended October 31, 2003. The
operations  of  HN  Dental,  HN  Vision,  and  the  related  dental  and  vision
PPO/indemnity  business  are  included  in  the Company's consolidated financial
statements  beginning  on  November  1,  2003.

The  dental  and vision PPO/indemnity business referred to above was transferred
to  the Company through two Assumption and Indemnity Reinsurance Agreements with
HN  Life  (the  "Agreements").  In  connection  with the Agreements, the Company
assumed  an  estimated  amount  of  claims  payable  and claims incurred but not
reported,  and  certain  other  assets  and  liabilities, in exchange for a cash
payment from HN Life. Also in connection with the Agreements, the Company and HN
Life  agreed  to  adjust  the  cash  payment  approximately six months after the
effective  date  of  the  Agreements,  based  on  subsequent  payment of claims,
subsequent  collection  of  receivables,  and  other  information  that  becomes
available to the parties during the six months after the effective date.

The  business purpose of these acquisitions was to increase the Company's market
penetration  in  California,  which  is  one of the Company's primary geographic
markets, and to gain vision benefit products that are internally administered by
the  Company.  As  a  result  of  the acquisitions, the number of individuals in
California  for  which  the  Company  provides  dental  benefits  increased from
approximately  350,000  members to approximately 800,000 members, and the number
of  individuals  in  California  for  which the Company provides vision benefits
increased  from  approximately  20,000 members to approximately 150,000 members.

The  acquisitions  were  financed  through  the  issuance  of  $19.0  million of
unsecured  convertible  promissory  notes  to certain of the Company's principal
stockholders  in October 2003. The proceeds from the convertible notes were used
to finance the acquisitions, to satisfy the increase in the Company's regulatory
net  worth  requirements related to the PPO/indemnity dental and vision business
that  was  acquired,  which  is estimated to be $3.8 million, to provide working
capital  that may be required in connection with the integration of the acquired
businesses into the Company's pre-existing operations, and other purposes.

The  convertible  notes bear interest at 6.0% annually, and are convertible into
the  Company's common stock at the rate of $1.75 per share, at the option of the
holder. There are no principal payments due under the convertible notes prior to
January 31, 2010, then principal payments are due beginning on January 31, 2010,
and  each  three months thereafter through July 31, 2013, pursuant to a ten-year
amortization  schedule,  and the remaining balance is payable in full on October
31,  2013. The convertible notes are payable in full upon a change in control of
the Company, at the holder's option. The Company has the option of redeeming the
convertible  notes for 229% of face value during the first seven years after the
date  of issuance, for 257% of face value during the eighth year after issuance,
for  286%  of  face  value during the ninth year after issuance, and for 323% of
face  value  during  the tenth year after issuance, provided that it redeems all
the convertible notes held by each holder for which it redeems any of the notes.


                                      F-15
<PAGE>
The  aggregate  cost of the acquisitions was allocated among the assets acquired
as  follows  (in  thousands):

<TABLE>
<CAPTION>
<S>                                                                      <C>
    Cost of acquisitions:
      Cash purchase price, including estimated post-closing adjustments  $15,158
      Transaction expenses incurred by the Company                            68
                                                                         --------
        Total cost                                                       $15,226
                                                                         ========

    Fair value of net assets acquired (liabilities assumed):
      Cash and cash equivalents                                          $ 5,672
      Investments, including restricted investments                        3,147
      Accounts receivable                                                  2,864
      Property and equipment                                                 795
      Goodwill                                                             4,191
      Intangible assets                                                    7,768
      Other assets                                                         1,110
      Accounts payable                                                      (537)
      Accrued expenses                                                    (3,121)
      Claims payable and claims incurred but not reported                 (4,755)
      Deferred premium revenue                                            (1,908)
                                                                         --------
        Net assets acquired                                              $15,226
                                                                         ========
</TABLE>

The intangible assets acquired consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           WEIGHTED
                                           AVERAGE
                               AMOUNT    AMORTIZATION
                             ALLOCATED      PERIOD
                             ----------  ------------
<S>                          <C>         <C>
    Customer relationships   $    5,237     6.2 years
    Provider networks             2,230    20.0 years
    Other intangible assets         301    11.7 years
                             ----------
      Total                  $    7,768    10.4 years
                             ==========
</TABLE>

The  Company plans to make an election under Section 338 of the Internal Revenue
Code  to  treat  the  acquisition  of  HN  Dental  as  an asset purchase for tax
purposes.  Assuming  this  election  is  made,  the  Company  estimates  that
approximately  $8.9  million of goodwill and intangible assets related to the HN
Dental  and  HN  Vision  acquisitions  will  be  amortized  over  15  years on a
straight-line  basis  for  income  tax  purposes.

AMERITAS  MANAGED  DENTAL  PLAN,  INC.

Effective  March  31,  2003, the Company acquired all of the outstanding capital
stock of Ameritas for $1.0 million in cash, including a post-closing adjustment,
plus contingent monthly payments during the five years following the acquisition
date.  Each  contingent  monthly  payment  is equal to 10% of the actual premium
revenue during the month from customers of Ameritas that existed as of March 31,
2003.  As  of  December 31, 2003, the Company has accrued a total of $301,000 of
contingent  purchase  price, which has been added to the cost of the acquisition
for  accounting  purposes.  This  amount  represents contingent monthly payments
related  to the period from the acquisition date through December 31, 2003, plus
the  estimated  contingent  monthly payments related to the remaining portion of
annual  customer contracts that are in force as of January 1, 2004.  The Company
intends  to  accrue  additional portions of the contingent purchase price in the
future,  if  and when the payment of such amounts becomes probable, based on the
renewal  of  existing customer contracts. Based on the amount of premium revenue
during  the  period  from  April 1, 2003 to December 31, 2003, from customers of
Ameritas  that existed as of March 31, 2003, the maximum aggregate amount of the
contingent  monthly payments would be approximately $1.5 million, if the Company
retained  all  of  the  existing  customers of Ameritas for five years after the
acquisition  date  at the premium rates in effect during 2003. The operations of
Ameritas  are  included  in  the  Company's  consolidated  financial  statements
beginning  on  April  1,  2003.

Ameritas was a dental benefits company located in California and was merged into
the  Company's  California  dental  HMO subsidiary effective March 31, 2003. The
business  purpose  of  the  acquisition  was  to  increase  the  Company's


                                      F-16
<PAGE>
market  penetration  in  California,  which  is  one  of  the  Company's primary
geographic markets. As a result of the acquisition, the number of individuals in
California  for  which  the  Company  provides  dental  benefits  increased from
approximately  300,000  members  to  approximately  330,000  members.

The  cost  of the acquisition was allocated among the assets acquired as follows
(in  thousands):

<TABLE>
<CAPTION>
<S>                                                              <C>
    Cost of acquisition:
      Cash purchase price, net of post-closing adjustments       $1,034
      Contingent purchase price accrued as of December 31, 2003     301
                                                                 -------
        Total cost                                               $1,335
                                                                 =======

    Fair value of net assets acquired (liabilities assumed):
      Cash and cash equivalents                                  $  276
      Investments                                                   465
      Intangible assets                                             810
      Other assets                                                  150
      Deferred premium revenue                                     (258)
      Other current liabilities                                    (108)
                                                                 -------
        Total cost of acquisition                                $1,335
                                                                 =======
</TABLE>

The intangible assets acquired consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           WEIGHTED
                                           AVERAGE
                               AMOUNT    AMORTIZATION
                             ALLOCATED      PERIOD
                             ----------  ------------
<S>                          <C>         <C>
    Customer relationships   $      635     9.5 years
    Other intangible assets         175    10.8 years
                             ----------
      Total                  $      810     9.8 years
                             ==========
</TABLE>

The  Company  estimates that approximately $0.1 million of the intangible assets
related  to  the  acquisition  of  Ameritas will be amortized over 15 years on a
straight-line  basis  for  income  tax  purposes.

PARAMOUNT  DENTAL  PLAN,  INC.

Effective  August  30, 2002, the Company acquired all of the outstanding capital
stock of Paramount for approximately $6.7 million, consisting of $3.0 million in
cash,  a  secured  convertible  note  for  $2,625,000, and 769,231 shares of the
Company's  common  stock.  Paramount  was  a  dental benefits company located in
Florida,  and  was  merged  into  the  Company's  Florida  dental HMO subsidiary
effective  August  30, 2002. The secured convertible note bears interest at 7.0%
annually,  and  was  originally  payable  in  36  equal  monthly installments of
principal  and  interest,  beginning in October 2002. The terms of the note were
amended  in  the  fourth  quarter  of  2003,  and the outstanding balance is now
payable in monthly installments of interest only until a date to be specified by
the  holder  of  the  convertible note at least 90 days in advance of such date,
which  must  be  no  earlier  than January 1, 2005, and no later than January 1,
2007.  Effective  on the date specified by the holder, the convertible note will
be  payable  in  21  equal  monthly  installments of principal and interest. The
outstanding  balance  under  the  secured  convertible  note is convertible into
common  stock  of  the  Company  at  a conversion price of $1.625 per share. The
convertible  note is secured by the stock of the Company's dental HMO subsidiary
in  Florida.  The  operations  of  Paramount  are  included  in the accompanying
consolidated  financial  statements  beginning  on  September  1,  2002.

The  business  purpose  of  the acquisition was to increase the Company's market
penetration  in  Florida,  which  is  one  of  the  Company's primary geographic
markets.  The  acquisition  increased the number of members in Florida for which
the  Company  provides  dental  benefits  from  approximately  50,000 members to
approximately  275,000  members.

In  connection  with  this  transaction,  the  Company entered into a three-year
employment  agreement with the seller of Paramount, who is currently employed as
president  of  the Company's operations in Florida. Also in connection with this
transaction,  the  Company entered into a three-year office lease agreement with
the  seller  of  Paramount,  the  term


                                      F-17
<PAGE>
of which started in November 2002, related to the office space that is currently
used as the Company's primary sales and administrative office in Florida.

The  cost  of the acquisition was allocated among the assets acquired as follows
(in  thousands):

<TABLE>
<CAPTION>
<S>                                                           <C>
    Cost of acquisition:
      Cash portion of purchase price                          $3,000
      Secured convertible note issued to seller                2,625
      Common stock issued to seller                            1,040
                                                              -------
        Purchase price paid to seller                          6,665
      Transaction expenses incurred by the Company               164
                                                              -------
        Total cost                                            $6,829
                                                              =======

    Fair value of net assets acquired (liabilities assumed):
      Cash and cash equivalents                               $  456
      Restricted investment                                       50
      Property and equipment                                     121
      Goodwill                                                 4,670
      Intangible assets                                        2,270
      Other assets                                               229
      Accounts payable and accrued expenses                     (386)
      Claims payable and claims incurred but not reported       (225)
      Deferred premium revenue                                  (356)
                                                              -------
        Net assets acquired                                   $6,829
                                                              =======
</TABLE>

The  value  indicated  above  for  the  Company's  common  stock  issued  in the
acquisition  is  based  on  769,231  shares of common stock issued, and a market
value  of  $1.35  per  share. The market value of $1.35 per share is the average
closing price of the Company's common stock during the period from five business
days  prior  to  execution of the Stock Purchase Agreement to five business days
after  execution  of the agreement. The Stock Purchase Agreement was executed on
April  24,  2002.

The intangible assets acquired consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           WEIGHTED
                                           AVERAGE
                               AMOUNT    AMORTIZATION
                             ALLOCATED      PERIOD
                             ----------  ------------
<S>                          <C>         <C>
    Customer relationships   $    1,926     4.5 years
    Other intangible assets         344    10.1 years
                             ----------
      Total                  $    2,270     5.3 years
                             ==========
</TABLE>

None  of  the  goodwill  or  intangible  assets  related  to  the acquisition of
Paramount  will  be  amortized  for  income  tax  purposes.


                                      F-18
<PAGE>
PRO  FORMA  RESULTS  OF  OPERATIONS

Following  is certain unaudited pro forma statement of income information, which
reflects  adjustments to the Company's historical financial statements as if the
acquisitions of HN Dental, HN Vision, and Paramount had been completed as of the
beginning  of  each  period  presented  (in  thousands):

<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                          ----------------------------
                                              2003           2002
                                          ------------  --------------
                                                 (unaudited)
<S>                                       <C>           <C>
    Premium revenue, net                  $    150,629  $     139,521
    Operating income (loss)                      3,222         (3,461)
    Net income (loss)                            7,281         (3,171)

    Basic net income (loss) per share     $       0.20  $       (0.09)
    Diluted net income (loss) per share           0.17          (0.09)
</TABLE>

The above unaudited pro forma statement of income information is not intended to
indicate  the  results that would have occurred if the acquisitions had actually
been  completed  on  the  dates  indicated, or the results that may occur in any
future  period.  The  above pro forma information does not reflect the pro forma
effect  of  the  acquisition  of  Ameritas, because such pro forma effect is not
significant.

NOTE  3.  INVESTMENTS
---------------------

Gross  realized  gains on sales of investments were $1,000, $2,000, and $101,000
for the years ended December 31, 2003, 2002, and 2001, respectively.  There were
no  gross  realized  losses on sales of investments during the three years ended
December  31,  2003.  The historical cost of specific securities sold is used to
compute  the  gain or loss on the sale of investments. At December 31, 2003, the
Company  had net unrealized gains of $57,000, which is included in stockholders'
equity  under  the  caption  "Accumulated  other  comprehensive  income."

The  Company's  investments  as  of  December  31, 2003 are summarized below (in
thousands):

<TABLE>
<CAPTION>
                                              COST/                                ESTIMATED
                                            AMORTIZED   UNREALIZED    UNREALIZED      FAIR
                                               COST        GAINS        LOSSES       VALUE
                                            ----------  -----------  ------------  ----------
<S>                                         <C>         <C>          <C>           <C>
    Classified as available-for-sale:
      U.S. government securities            $    5,842  $        55  $        --   $    5,897
      U.S. government agency securities          6,238            2           (1)       6,239
      Corporate bonds and commercial paper       3,109            3           --        3,112
      Other marketable debt securities          12,684           --           (2)      12,682
                                            ----------  -----------  ------------  ----------

        Total available-for-sale            $   27,873  $        60  $        (3)  $   27,930
                                            ==========  ===========  ============  ==========
</TABLE>

The  maturity  dates  of  the  Company's investments as of December 31, 2003 are
summarized  below  (in  thousands):

<TABLE>
<CAPTION>
                                     COST/     ESTIMATED
                                   AMORTIZED      FAIR
                                      COST       VALUE
                                   ----------  ----------
<S>                                <C>         <C>
    Classified as available-for-sale:
      Due in 2004                  $   23,121  $   23,126
      Due in 2005                       1,544       1,581
      Due in 2006 and thereafter        3,208       3,223
                                   ----------  ----------

        Total available-for-sale   $   27,873  $   27,930
                                   ==========  ==========
</TABLE>


                                      F-19
<PAGE>
The  Company's  investments  as  of  December  31, 2002 are summarized below (in
thousands):

<TABLE>
<CAPTION>
                                          COST/                               ESTIMATED
                                        AMORTIZED   UNREALIZED   UNREALIZED      FAIR
                                           COST        GAINS       LOSSES       VALUE
                                        ----------  -----------  -----------  ----------
<S>                                     <C>         <C>          <C>          <C>
    Classified as available-for-sale:
      U.S. government and its agencies  $    2,303  $        87  $        --  $    2,390
      State and municipal obligations          255            8           --         263
      Other marketable debt securities      10,269           --           --      10,269
                                        ----------  -----------  -----------  ----------

        Total available-for-sale        $   12,827  $        95  $        --  $   12,922
                                        ==========  ===========  ===========  ==========
</TABLE>

NOTE  4.  PROPERTY  AND  EQUIPMENT
----------------------------------

The  Company's  property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               -------------------
                                                                 2003      2002
                                                               --------  ---------
<S>                                                            <C>       <C>
    Leasehold improvements                                     $   950   $    842
    Furniture and office equipment                               1,871      1,504
    Computer hardware and software                               9,957      7,767
                                                               --------  ---------
      Total, at cost                                            12,778     10,113
    Less - accumulated depreciation and amortization            (7,955)    (6,581)
                                                               --------  ---------

      Total, net of accumulated depreciation and amortization  $ 4,823   $  3,532
                                                               ========  =========
</TABLE>

Property  and  equipment  that  was  acquired  through  capital  leases  with an
outstanding  balance  as  of  the  balance sheet date consists of the following,
which  is  included  above  (in  thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                               ------------------
                                                                2003      2002
                                                               -------  ---------
<S>                                                            <C>      <C>
    Furniture and office equipment                             $1,135   $    950
    Computer hardware and software                                250      1,250
                                                               -------  ---------
      Total cost of property acquired through capital leases    1,385      2,200
    Less - accumulated depreciation and amortization             (297)      (344)
                                                               -------  ---------

      Total, net of accumulated depreciation and amortization  $1,088   $  1,856
                                                               =======  =========
</TABLE>

NOTE 5.  GOODWILL
-----------------

Changes in the carrying amount of goodwill were as follows (in thousands):

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                           ----------------------------
                                               2003           2002
                                           -------------  -------------
<S>                                        <C>            <C>
    Balance at beginning of year           $      8,590   $       3,920
    Goodwill acquired (see Note 2)                4,191           4,670
    Adjustments to goodwill (see Note 11)          (416)             --
                                           -------------  -------------

      Balance at end of year               $     12,365   $       8,590
                                           =============  =============
</TABLE>


                                      F-20
<PAGE>
In  accordance  with  SFAS  No.  142, the Company ceased amortizing its goodwill
effective January 1, 2002. The Company recorded $113,000 of amortization expense
related  to  goodwill  during  the  year  ended December 31, 2001. The Company's
adjusted  results  of operations for the year ended December 31, 2001, which are
adjusted to assume the non-amortization provision of SFAS No. 142 was applied as
of  January  1,  2001,  are  as  follows  (in  thousands):

<TABLE>
<CAPTION>
<S>                                                <C>
    Income before extraordinary item, as reported  $ 1,295
    Add back - Goodwill amortization                   113
                                                   -------
    Income before extraordinary item, as adjusted  $ 1,408
                                                   =======

    Net income, as reported                        $12,546
    Add back - Goodwill amortization                   113
                                                   -------
    Net income, as adjusted                        $12,659
                                                   =======
</TABLE>

None  of  the Company's reported net income per share amounts for the year ended
December  31, 2001 would change as a result of the above adjustment for goodwill
amortization  expense,  due  to  the relatively small amount of this adjustment.

SFAS  No. 142 requires that all goodwill be evaluated for possible impairment as
of  January  1,  2002, on an annual basis thereafter, and any time an event that
may  have  affected  the  value  of  the  goodwill  occurs.  SFAS  No.  142 also
establishes  a  new  method  of testing for possible impairment. The Company has
established  October 1 as the date on which it conducts its annual evaluation of
goodwill  for  possible impairment. In accordance with SFAS No. 142, the Company
tested its goodwill for possible impairment by estimating the fair value of each
of  its  reporting  units that include goodwill, and comparing the fair value of
each  reporting unit to the book value of the net assets of each reporting unit.
For  purposes of this test, the Company has three reporting units, which are its
operations  in  California,  Florida  and  Texas.  As  of December 31, 2003, the
Company  has  goodwill  in  each of the three reporting units. The fair value of
each reporting unit was determined primarily by estimating the discounted future
cash  flows  of  the  reporting  unit,  and  estimating the amount for which the
reporting  unit  could  be  sold to a third party, based on a market multiple of
earnings.  The  Company had no impairment of its goodwill as of January 1, 2002,
or as of October 1, 2003, based on the method of testing for possible impairment
established  by  SFAS  No. 142. The Company is not aware of any events that have
occurred  since  October  1,  2003,  that may have resulted in impairment of the
value  of  its  goodwill.

NOTE  6.  INTANGIBLE  ASSETS
----------------------------

The Company's intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                              -------------------
                                                2003      2002
                                              --------  ---------
<S>                                           <C>       <C>
    Customer relationships                    $ 7,798   $  1,926
    Provider networks                           2,461         --
    Other intangible assets                       589        344
                                              --------  ---------
      Total, at cost                           10,848      2,270
    Less - accumulated amortization              (986)      (257)
                                              --------  ---------

      Total, net of accumulated amortization  $ 9,862   $  2,013
                                              ========  =========
</TABLE>


                                      F-21
<PAGE>
Amortization  expense  related  to  intangible  assets was $729,000 and $257,000
during  the years ended December 31, 2003 and 2002, respectively. As of December
31,  2003, the Company expects future amortization expense related to intangible
assets  to  be  as  follows  (in  thousands):

                    2004                 $1,909
                    2005                  1,580
                    2006                  1,188
                    2007                    904
                    2008                    755
                    Thereafter            3,526

NOTE 7.   CLAIMS PAYABLE AND CLAIMS INCURRED BUT NOT REPORTED ("IBNR")
----------------------------------------------------------------------

The  Company  is  responsible  for  paying claims submitted by dental and vision
providers  for services provided to patients who have purchased dental or vision
coverage  from  the Company. The liability for claims payable and claims IBNR is
an  estimate  of  the  claims related to services delivered prior to the balance
sheet  date, which have not yet been paid by the Company as of the balance sheet
date.  The  estimate of claims payable and claims IBNR is based primarily on the
average historical lag time between the date of service and the date the related
claim  is paid by the Company, the recent trend in payment rates, and the recent
trend in the average number of incurred claims per covered individual. Since the
liability  for  claims  payable  and  claims  IBNR is an actuarial estimate, the
amount  of  claims  eventually  paid  for services provided prior to the balance
sheet  date  could differ from the estimated liability. Any such differences are
included  in  the  consolidated  statement of income for the period in which the
differences  are  identified.

A  summary  of  the activity in the liability for claims payable and claims IBNR
during  the  two  years  ended  December 31, 2003 is shown below (in thousands):

<TABLE>
<CAPTION>
                                           CLAIMS LIABILITY BY TYPEOF COVERAGE
                                      ---------------------------------------------
                                                                       VISION HMO
                                        DENTAL PPO/       DENTAL        AND PPO/
                                         INDEMNITY          HMO         INDEMNITY      TOTAL
                                      ---------------  -------------  -------------  ---------
<S>                                   <C>              <C>            <C>            <C>
    Balance at January 1, 2002        $        4,252   $      1,653   $         --   $  5,905

    Incurred claims related to:
      Current year - 2002                     23,133         10,566             --     33,669
      Prior years                               (594)          (206)            --       (800)
    Balance assumed in acquisition                --            225             --        225
    Paid claims related to:
      Current year - 2002                    (20,092)        (8,928)            --    (29,020)
      Prior years                             (3,658)        (1,447)            --     (5,105)
      Balance assumed in acquisition              --           (214)            --       (214)
                                      ---------------  -------------  -------------  ---------

    Balance at December 31, 2002               3,041          1,649             --      4,690

    Incurred claims related to:
      Current year - 2003                     28,134         14,492            716     43,342
      Prior years                               (378)          (371)            --       (749)
    Balance assumed in acquisitions            2,344          1,945            466      4,755
    Paid claims related to:
      Current year - 2003                    (22,608)       (11,798)          (297)   (34,703)
      Prior years                             (2,663)        (1,278)            --     (3,941)
      Balance assumed in acquisition          (1,621)        (1,360)          (304)    (3,285)
                                      ---------------  -------------  -------------  ---------

    Balance at December 31, 2003      $        6,249   $      3,279   $        581   $ 10,109
                                      ===============  =============  =============  =========
</TABLE>


                                      F-22
<PAGE>
The  liability  for  claims  payable  and  claims  IBNR is adjusted each year to
reflect  any  differences between claims actually paid and previous estimates of
the  liability.  During  each of the years ended December 31, 2003 and 2002, the
aggregate  adjustments  to the liability to reflect these differences, which are
reflected  in  the  above  table,  were  not  material.

NOTE  8.  LONG-TERM  DEBT  AND  CAPITAL  LEASE  OBLIGATIONS
-----------------------------------------------------------

Long-term  debt  and  capital  lease  obligations consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           -------------------
                                                             2003      2002
                                                           --------  ---------
<S>                                                        <C>       <C>
    Unsecured convertible promissory notes - October 2003  $19,000   $     --
    Secured convertible promissory note - September 2002     1,602      2,427
    Unsecured convertible promissory note - August 2002      1,538      1,798
    Capital lease obligations                                  710      1,202
                                                           --------  ---------
      Total debt                                            22,850      5,427
    Less - short-term portion                                 (313)    (2,430)
                                                           --------  ---------

      Long-term debt and capital lease obligations         $22,537   $  2,997
                                                           ========  =========
</TABLE>

See Note 2 for descriptions of the unsecured convertible promissory notes issued
in  October  2003 in connection with the acquisition of HN Dental and HN Vision,
and  the  secured  convertible  promissory  note  issued  in  September  2002 in
connection  with  the  acquisition  of  Paramount.  None  of  the  outstanding
convertible notes include any financial covenants or similar restrictions.

In  August  2002,  the  Company  borrowed $2.0 million from one of its principal
stockholders  under  an  unsecured  convertible  promissory note. The note bears
interest  at  7.0%  annually,  and  was  originally  payable  in  equal  monthly
installments  of  principal  and  interest through August 2005. The terms of the
note were amended during the second quarter of 2003, and the outstanding balance
is  now  payable in monthly installments of interest only through May 2006, then
in  monthly installments of principal and interest from June 2006 through August
2008.  The  outstanding  balance  under  the  unsecured  convertible  note  is
convertible into common stock of the Company at a conversion price of $1.625 per
share.

The  Company  has  several  capital leases outstanding, which are related to the
purchase  of  certain  office  and  computer  equipment.

Annual  maturities  of  long-term  debt  and future minimum lease payments under
capital  lease  obligations  were  as  follows,  as  of  December  31,  2003 (in
thousands):

<TABLE>
<CAPTION>
                                                        CAPITAL      LESS - AMOUNT
                                          LONG-TERM      LEASE       REPRESENTING
                                             DEBT     OBLIGATIONS      INTEREST       TOTAL
                                          ----------  ------------  ---------------  -------
<S>                                       <C>         <C>           <C>              <C>
    Payable in 2004                       $       --  $        372  $          (59)  $   313
    Payable in 2005                              886           169             (35)    1,020
    Payable in 2006                            1,092           166             (22)    1,236
    Payable in 2007                              681            98             (12)      767
    Payable in 2008                              481            35              (2)      514
    Payable thereafter                        19,000            --              --    19,000
                                          ----------  ------------  ---------------  -------

      Total balance at December 31, 2003  $   22,140  $        840  $         (130)  $22,850
                                          ==========  ============  ===============  =======
</TABLE>

NOTE 9.  CONVERSION OF DEBT TO CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------

On  March 1, 2000, the Company entered into a recapitalization agreement with an
investor group (the "Investors"), the Company's revolving credit facility lender
(the  "Bank"),  and  the  holder  of  certain  senior  notes  payable  issued by


                                      F-23
<PAGE>
the  Company  (the  "Senior  Note  Holder").  Pursuant  to  this  agreement, the
Investors  loaned  $8.0 million to the Company in the form of an investor senior
loan,  due  April 30, 2001. In addition, the Investors, the Bank, and the Senior
Note  Holder  agreed  to  convert  the  $8.0  million  investor senior loan, the
outstanding  balance  of  $7.0  million under the revolving credit facility plus
accrued  interest,  and  the  $32.5 million of senior notes payable plus accrued
interest,  to convertible preferred stock, subject to regulatory and stockholder
approval.

Effective  as  of  January 31, 2001, the Company completed the conversion of the
investor senior loan ($8.0 million), the outstanding balance under the revolving
credit  facility  ($7.0  million), the senior notes payable ($32.5 million), and
the  accrued  interest  on  the  revolving  credit facility and the senior notes
payable  ($5.3  million)  into 30 million shares of convertible preferred stock.
The  estimated  value of the convertible preferred stock was $1.375 per share as
of January 31, 2001, which is based on the closing price of the Company's common
stock  on  January  31, 2001, which was $1.375 per share, and the fact that each
share  of  convertible  preferred  stock is convertible into one share of common
stock.  The number of shares of convertible preferred stock, the estimated value
per  share,  and  the conversion ratio indicated above have all been adjusted to
reflect an exchange of the Company's outstanding shares of convertible preferred
stock  that  was completed in May 2002. See Note 13 for more information on this
exchange.

Based  on  the  estimated value of the convertible preferred stock as of January
31,  2001,  the  debt  conversion  resulted  in  an  extraordinary gain of $11.3
million,  which is net of approximately $350,000 of transaction costs. There was
no  income  tax  effect  related  to  the  conversion,  due to the Company's net
operating loss carryforwards for tax purposes, as discussed in Note 11.

See Note 13 for a description of the convertible preferred stock. As a result of
the  debt  conversion,  the ownership interest of the previously existing common
stockholders of the Company was reduced to approximately 14% of the common stock
interests  of the Company. The holders of the convertible preferred stock issued
to  the  Investors in the debt conversion (Series A convertible preferred stock)
have the right to elect four members of the Company's board of directors, voting
as  a  separate  class,  which constitutes a majority of the board of directors,
which  has a total of seven members. In addition, the holders of the convertible
preferred  stock  issued  to  the  Bank  and  the Senior Note Holder in the debt
conversion  (Series  B,  C  and D convertible preferred stock) have the right to
elect  one  member  of  the  Company's  board of directors, voting as a separate
class.  The  holders  of  the Company's common stock have the right to elect the
remaining  two members of the Company's board of directors, voting as a separate
class.

In  1999,  in  connection  with  a  previous  restructuring  of the senior notes
payable,  the  Company  issued warrants to purchase 382,000 shares of its common
stock  for $4.51 per share to the Senior Note Holder. The Company estimated that
the fair value of these warrants was $320,000, based on an option-pricing model.
Accordingly,  this  amount  was  charged  to  interest  expense  and credited to
additional  paid-in  capital  during  1999.  The  warrants were canceled without
being  exercised,  in connection with the conversion of the senior notes payable
into  convertible  preferred  stock effective January 31, 2001. Accordingly, the
estimated  fair  value  of  the  warrants,  which  was  $320,000, was debited to
additional  paid-in  capital  and  credited  to  retained  earnings during 2001.

NOTE  10.  OTHER  LONG-TERM  LIABILITIES
----------------------------------------

Other  long-term  liabilities  consist  primarily of deferred rent related to an
office  lease with monthly payments that increase over the term of the lease, an
accrued  lease obligation related to a dental office sold by the Company in 1998
(see  Note  12), deferred compensation payments to a former employee of a dental
HMO  company  acquired  by  the  Company in 1996, and certain other liabilities.

Annual  maturities of other long-term liabilities as of December 31, 2003 are as
follows  (in  thousands):

                    2005                                         $280
                    2006                                          312
                    2007                                          311
                    2008                                          208
                    Thereafter                                    112
                                                               ------

                      Total  other  long-term  liabilities     $1,223
                                                               ======


                                      F-24
<PAGE>
NOTE  11.  INCOME  TAXES
------------------------

The  Company's  federal and state income tax expense (benefit) is as follows (in
thousands):

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                        ---------------------------------
                                           2003        2002       2001
                                        ----------  ----------  ---------
<S>                                     <C>         <C>         <C>
    Currently payable:   Federal        $      64   $    (120)  $      --
                         State                (17)       (700)         --
    Deferred:            Federal              860          --          --
                         State                (22)         --          --
    Decrease in valuation allowance        (5,725)         --          --
                                        ----------  ----------  ---------

    Total income tax expense (benefit)  $  (4,840)  $    (820)  $      --
                                        ==========  ==========  =========
</TABLE>

The  Company's  taxable  income  for  federal  income  tax  purposes in 2003 was
completely  offset  by net operating loss carryforwards from previous years, but
the  Company  recognized a current federal income tax expense in 2003 due to the
alternative  minimum  tax.  The  State  of  California  suspended the use of net
operating  loss  carryforwards  to offset current taxable income in 2003 for all
corporations, and accordingly, the Company recognized a current state income tax
expense  for  2003,  which  was  more than offset by a decrease in the Company's
accrual  for  estimated  income  tax liabilities related to certain transactions
that  occurred  in  prior years. The Company incurred net losses for federal and
state  income  tax  purposes  during the years ended December 31, 2002 and 2001,
primarily due to temporary differences that reduced the Company's income for tax
purposes,  and  the  fact  that  the Company's gain on the conversion of debt to
equity  in  2001  (see  Note  9) was not taxable. The income tax benefit in 2002
primarily  represents  a  decrease in the Company's accrual for estimated income
tax  liabilities  related  to certain transactions that occurred in prior years.

In  the  fourth  quarter of 2003, the Company reduced the valuation allowance on
its  net  deferred  tax  assets by $5.7 million, based on its determination that
this  amount  of  the  net  deferred  tax  assets  is more likely than not to be
realized,  primarily  due to a significant improvement in the Company's reported
operating  results  and  its expected future operating results. Accordingly, the
Company  recognized  deferred  federal  income  tax expense and a deferred state
income  tax  benefit  in  2003. The Company's net deferred tax assets were fully
reserved  during  the  years  ended  December  31, 2002 and 2001, as the Company
believed at that time that it was more likely than not that the net deferred tax
assets  would  not  be  realized. Accordingly, the Company's deferred income tax
expense  in both of these years was completely offset by adjustments to decrease
the  valuation  allowance  against  its  net  deferred  tax  assets.

A  reconciliation  of the expected federal income tax expense (benefit) based on
the  statutory rate to the actual income tax expense (benefit) is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                   ------------------------------------------------------------
                                          2003                  2002                 2001
                                   ------------------  --------------------  ------------------
                                    AMOUNT      %        AMOUNT       %       AMOUNT       %
                                   --------  --------  ----------  --------  ---------  -------
<S>                                <C>       <C>       <C>         <C>       <C>        <C>
Expected federal income tax
  expense                          $ 1,011      34.0%  $     206      34.0%  $  4,266     34.0%
State income tax expense, net of
  effect on federal income tax         123       4.1          23       3.7         --       --
Amortization of goodwill                --        --          --        --         35      0.3
Other items                            (49)     (1.6)        132      21.8        855      6.8
Decrease in income tax accrual        (200)     (6.7)       (820)   (135.1)        --       --
Expiration of net operating loss
  carryforwards due to change
  of control                            --        --          --        --      6,774     54.0
Change in valuation allowance       (5,725)   (192.6)       (361)    (59.5)   (11,930)   (95.1)
                                   --------  --------  ----------  --------  ---------  -------
Actual income tax
  expense (benefit)                $(4,840)  (162.8)%  $    (820)  (135.1)%  $     --       --%
                                   ========  ========  ==========  ========  =========  =======
</TABLE>


                                      F-25
<PAGE>
Deferred  tax  assets  and  liabilities  are  related to the following items (in
thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           ------------------
                                                             2003      2002
                                                           -------  ---------
<S>                                                        <C>      <C>
    Deferred tax assets:
      Net operating loss carryforward                      $2,612   $  3,690
      Depreciation and amortization                           960      1,498
      Accrued expenses                                      1,720        948
      Capital loss carryforward                               600        610
      Other items                                             547        166
                                                           -------  ---------
        Total deferred tax assets                           6,439      6,912

    Deferred tax liabilities:
      State income taxes                                      253        321
      Prepaid expenses                                        184         --
      Other items                                              99        266
                                                           -------  ---------
        Total deferred tax liabilities                        536        587
                                                           -------  ---------

    Net deferred tax assets                                 5,903      6,325
      Valuation allowance                                    (600)    (6,325)
                                                           -------  ---------

        Net deferred tax assets after valuation allowance  $5,303   $     --
                                                           =======  =========
</TABLE>

As  noted above, the Company reduced the valuation allowance on its net deferred
tax  assets  by  $5.7  million  in 2003. The Company evaluated all the available
positive  and  negative  evidence  regarding whether it was more likely than not
that  the  Company would realize the value of its net deferred tax assets in the
future.  As  a  result of this evaluation, the Company concluded that it is more
likely  than  not  that the Company will realize its net deferred tax assets. In
reaching  this  conclusion,  significant  weight  was  given  to the significant
improvement  in the Company's operating results, including its operating results
for  the  two  months  ended  December 31, 2003, during which time the Company's
results  included  the  operations  of  HN  Dental  and HN Vision. The remaining
valuation  allowance  of  $0.6  million as of December 31, 2003, is related to a
deferred  tax  asset  that  represents  an unused capital loss carryforward. The
Company  retained the valuation allowance on this deferred tax asset because the
Company  can  only  use  the  capital loss carryforward by offsetting it against
capital  gains,  and  there  are  no  capital  gains expected in the foreseeable
future.

Due  to  the conversion of outstanding debt into convertible preferred stock, as
described in Note 9, there was a "change of control" of the Company for purposes
of  Internal  Revenue Code Section 382, effective January 31, 2001. As a result,
effective  January  31,  2001,  the  amount  of  pre-existing net operating loss
carryforwards that can be used to offset current taxable income on the Company's
federal  income  tax return is limited to approximately $350,000 per year. As of
December  31, 2003, the Company had net operating loss carryforwards for federal
and  state  tax  purposes  of  approximately  $6.7  million  and  $5.2  million,
respectively,  which  are  net of the amounts that will expire unused due to the
change  of  control  limitation.  The  federal  and  state  net  operating  loss
carryforwards  will  begin  to  expire  in  2020  and  2012,  respectively.

In 2003, as a result of the decrease in the valuation allowance on the Company's
net  deferred  tax  assets,  the  Company  reduced  the  goodwill related to the
acquisition  of  HN  Dental  and  HN  Vision  in October 2003 by $1,010,000, and
increased the goodwill related to the acquisition of Paramount in August 2002 by
$594,000,  to  recognize  the  deferred  tax  assets  and  liabilities that were
acquired  in  these  transactions.  See Note 5 for more information on goodwill.

NOTE  12.  COMMITMENTS  AND  CONTINGENCIES
------------------------------------------

LEASE  COMMITMENTS

The  Company  leases  administrative  office  space and office equipment under a
number  of  operating  leases.  Rent  expense  was  $2,632,000,  $2,960,000, and
$3,465,000  in  2003,  2002,  and  2001, respectively. The Company has subleased
certain  of  its  office space to unrelated third parties, which office space is
subject  to  lease  agreements  for


                                      F-26
<PAGE>
which  the  Company remains contingently liable in the event the sublessees fail
to  make  the  lease  payments.  Future  minimum  rental payments required under
non-cancelable  operating  leases  are  as  follows, net of payments the Company
expects  to  receive  pursuant  to  subleases  (in  thousands):

<TABLE>
<CAPTION>
                                 TOTAL      EXPECTED       NET
                                 LEASE      SUBLEASE      LEASE
                              OBLIGATION    PAYMENTS   OBLIGATION
                              -----------  ----------  -----------
<S>                           <C>          <C>         <C>
    2004                      $     2,281  $    (183)  $     2,098
    2005                            2,093         (9)        2,084
    2006                            1,853         --         1,853
    2007                            1,841         --         1,841
    2008                            1,226         --         1,226
    Thereafter                         --         --            --
                              -----------  ----------  -----------

      Total minimum payments  $     9,294  $    (192)  $     9,102
                              ===========  ==========  ===========
</TABLE>

LITIGATION

The  Company  is  subject  to  various  claims  and legal actions arising in the
ordinary  course of business. The Company believes all pending claims either are
covered  by liability insurance maintained by the Company or by providers in the
Company's  network,  or will not have a material adverse effect on the Company's
consolidated  financial  position  or  results  of  operations.

In  December  1999,  a  stockholder lawsuit against the Company was filed, which
alleged  that  the Company and certain of its officers, who were then in office,
violated  certain  securities  laws  by  issuing  alleged  false  and misleading
statements  concerning  the  Company's  publicly  reported revenues and earnings
during a specified class period. During 2002 the Company settled the lawsuit for
a payment of $1.25 million to the plaintiffs, without an admission of liability.
The  settlement  was  approved  by the District Court in September 2002, and the
lawsuit  has  been  dismissed  with  prejudice.  The Company's insurer paid $1.0
million  of  the  cost  of  the  settlement, and the Company recorded a $250,000
expense  during  2002,  which is included in selling, general and administrative
expenses  in  the  accompanying  consolidated  statement  of  income.

CONTINGENT  LEASE  OBLIGATIONS

The  Company  sold all of its general dental practices and orthodontic practices
in  1996,  1997  and  1998.  The  office  lease agreements related to all of the
practices  sold  by  the  Company  either  have  been assigned to the respective
purchasers  of  the  practices,  or  have  expired.

In  the  case  of the assigned leases, the Company is secondarily liable for the
lease  payments  in the event the purchasers of those practices fail to make the
payments.  As  of  December  31,  2003, the total of the minimum annual payments
under  these leases was approximately $1.1 million, and the aggregate contingent
liability  of the Company related to these leases was approximately $2.0 million
over  the  terms  of the lease agreements, which expire at various dates through
2009.  In  the  event  the  parties  to  which  these lease agreements have been
assigned  defaulted  on  the  leases,  the  aggregate  contingent  liability  of
approximately  $2.0  million could be mitigated by the Company by subleasing the
related  office  space  to  other parties, although there can be no assurance it
would  be  able  to  do  so.  The  aggregate contingent lease obligation of $2.0
million  excludes $350,000 of estimated lease obligations that have been accrued
as  of  December 31, 2003, due to the failure by one of the entities to make the
lease  payments  under  a lease that was assigned to that entity by the Company.
This  estimated  lease  obligation  is included in the accompanying consolidated
balance  sheet  under  the  caption "Accrued expenses." The Company has not been
notified  of  any  other  defaults under these leases that would have a material
effect  on  the  Company's  consolidated  financial  position.

GUARANTEES  AND  INDEMNITIES

As  discussed above, the Company has contingent lease obligations under which it
is  secondarily  liable  for  the lease payments under dental office leases that
have  been  assigned  to third parties. In the event those third parties fail to


                                      F-27
<PAGE>
make  the  lease  payments,  the  Company  could  be obligated to make the lease
payments  itself.  The  Company has purchased a letter of credit for $250,000 in
connection  with a certain customer agreement. In the event the Company fails to
meet  its  financial  obligations to the customer, the customer would be able to
use the letter of credit to satisfy the Company's obligations, in which case the
Company  would  be  obligated  to  repay the issuer of the letter of credit. The
Company  also  indemnifies  its  directors  and  officers  to the maximum extent
permitted  by  Delaware  law.  In addition, the Company makes indemnities to its
customers  in connection with the sale of dental and vision benefit plans in the
ordinary  course  of  business.  The maximum amount of potential future payments
under  all of the preceding guarantees and indemnities cannot be determined. The
Company  has recorded no liabilities related to these guarantees and indemnities
in the accompanying consolidated balance sheets, except as described above under
"Contingent  Lease  Obligations."

EMPLOYMENT  AGREEMENT  COMMITMENTS

The  Company  has an employment agreement with one of its senior officers, which
expires  on  August  30,  2005,  and has severance agreements with certain other
officers  of  the  Company,  which  continue for as long as each officer remains
employed  by  the  Company.  In  the  event  there is a change in control of the
Company,  each  officer  with  a  severance  agreement would receive a severance
payment  under  certain  circumstances,  which is equal to that officer's annual
salary  then  in  effect,  plus  the  amount of the bonus, if any, earned by the
officer  for  the previous calendar year. The maximum aggregate commitment under
the  employment  agreement  and  the  severance agreements is approximately $3.2
million  as  of  December  31,  2003.  None  of the future commitments under the
employment  agreement or the severance agreements are accrued as of December 31,
2003,  as  these  commitments are all related to services to be performed by the
officers  subsequent  to  2003.

RETENTION  BONUS  PLAN

In  January  2003,  the  Company implemented a Retention Bonus Plan (the "Plan")
with  respect  to  certain  senior executives of the Company. The purpose of the
Plan  is  to  provide  an  incentive for the senior management of the Company to
remain  employed  during a reasonable transition period in the event of the sale
of  the Company to a third party. In the event that more than 50% of the Company
is sold to an entity that is not otherwise a current stockholder of the Company,
each  eligible officer would receive a variable retention bonus that is based on
the  amount  of  proceeds  from  the  sale  transaction,  subject to the officer
remaining  an  employee  of  the  Company  for  a  specified period of time. The
aggregate  amount  of retention bonuses paid by the Company under the Plan would
be  approximately  $1.3  million  for each $1.00 of proceeds per share of common
stock  realized  by  the  Company's  stockholders  in  a  sale  of  the Company.

EMPLOYEE  RETIREMENT  PLAN

The  Company  maintains  a  retirement plan under Section 401(k) of the Internal
Revenue  Code  (the  "Plan").  Under  the  Plan, employees are permitted to make
contributions  to  a  retirement account through payroll deductions from pre-tax
earnings.  Employees  are  fully  vested  in  contributions  made  from  payroll
deductions.  In  addition,  the  Company may, at its discretion, make additional
contributions  to  the  Plan.  The Company made $118,000, $87,000 and $51,000 of
matching  contributions  to the Plan for the years ended December 31, 2003, 2002
and  2001,  respectively, in the form of 73,000 shares, 66,000 shares and 33,000
shares  of  its  common  stock,  respectively.  Of the total of 73,000 shares of
common  stock  related  to  2003, 55,000 shares were contributed in 2003, and an
additional  18,000  shares  were  contributed  in  2004,  the  value of which is
included in accrued expenses as of December 31, 2003. Employees become vested in
the  matching  contributions  at  the rate of 20% per year during the first five
years  of  employment with the Company, with employees receiving credit for past
years  of  service.  There  are  no  restrictions on the ability of employees to
liquidate  the  Company's common stock that is credited to their account, except
for  vesting  requirements.

PROFESSIONAL  LIABILITY  INSURANCE

The  Company  maintains professional liability insurance that covers losses on a
claims-made  basis.  The  Company's  professional  liability  insurance  policy
provides  $5  million  of  coverage and has an aggregate deductible of $250,000.


                                      F-28
<PAGE>
GOVERNMENT  REGULATION

The dental benefits industry is subject to extensive state and local laws, rules
and  regulations. Several of the Company's operating subsidiaries are subject to
various  requirements  imposed  by  state  laws  and  regulations related to the
operation  of a dental or vision HMO plan or an insurance company, including the
maintenance  of a minimum amount of net worth and compliance with numerous other
financial  requirements. In addition, regulations applicable to dental or vision
benefit plans could be changed in the future. There can be no assurance that the
Company  will  be  able  to  meet  all applicable regulatory requirements in the
future.

During  the  years  ended  December  31,  2003,  2002  and  2001, certain of the
Company's  subsidiaries were not in compliance with regulatory requirements that
limit  the amount of the subsidiary's administrative expenses as a percentage of
its  premium  revenue.  The  Company  has  discussed this noncompliance with the
applicable  regulatory  agencies,  and  those agencies have taken no action with
respect  to  this  noncompliance.  The  Company  believes  these  instances  of
noncompliance  with  regulatory  requirements will have no significant effect on
its  consolidated  financial  statements.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 ("HIPAA")

HIPAA imposes various responsibilities on the Company, including but not limited
to,  the  issuance of privacy notices to members of the Company's benefit plans,
the  security  and  privacy of individually identifiable health information, the
use  of  unique identifiers for all of the contractual relationships the Company
has  with  members,  providers  and  group  and individual contract holders, the
adoption  of  standardized  electronic  transaction code sets, and prevention of
unauthorized  use  or disclosure of personal data maintained by the Company. The
Company  has developed policies and procedures to comply with these requirements
and has provided privacy notices as required by HIPAA and the Gramm-Leach-Bliley
Act.

CONCENTRATIONS  OF  CREDIT  RISK

Financial  instruments that potentially subject the Company to concentrations of
credit  risk  consist  primarily  of  bank  deposits,  investments  and accounts
receivable.  As  of  December  31, 2003, the Company had bank deposits that were
approximately  $7.0  million  in  excess  of  the amounts insured by the Federal
Deposit  Insurance  Corporation.  The  Company's investments consist entirely of
high-quality  marketable  securities.

NOTE  13.  CAPITAL  STOCK
-------------------------

CONVERTIBLE  PREFERRED  STOCK

The  convertible  preferred  stock  does  not  accrue dividends of any kind, but
participates  in  any  dividends  paid  on  the  Company's  common  stock  on an
as-converted  basis.  Each  share  of convertible preferred stock is convertible
into  one  share  of  common  stock at the option of the holder. The convertible
preferred  stock  entitles the holder to one vote for each share of common stock
into which the preferred stock is convertible, with respect to all matters voted
on  by  the  common  stockholders  of  the  Company,  except for the election of
directors.  The  holders  of  the  convertible preferred stock have the right to
elect  a total of five members of the board of directors, and the holders of the
common  stock  have  the  right  to  elect  the  remaining two directors. In the
aggregate,  the  convertible  preferred  stock  has  a  $30  million liquidation
preference  over  the  Company's  common  stock.

Prior  to  May  2002,  there  were 300,000 shares of convertible preferred stock
issued  and  outstanding.  Each  share had a par value of $100 and a liquidation
preference  of $100, and was convertible into 100 shares of the Company's common
stock.  In  May  2002, each outstanding share of convertible preferred stock was
exchanged  for  100 new shares of convertible preferred stock. Each new share of
convertible  preferred  stock  has  a  par  value  of  $1.00  and  a liquidation
preference  of  $1.00, and is convertible into one share of the Company's common
stock.  All  other  rights  and  preferences  of the convertible preferred stock
remained  the  same.  All  references  to the convertible preferred stock in the
accompanying  consolidated  financial  statements  reflect  the  effects of this
exchange  on  a  retroactive  basis.


                                      F-29
<PAGE>
TREASURY  STOCK  AND  STOCK  REPURCHASES

As  of  December 31, 2003 and 2002, the Company had 3,216,978 shares of treasury
stock,  which were acquired by the Company for an aggregate of $17.8 million. In
December  2000,  the  board of directors of the Company authorized management to
repurchase  up  to  500,000 shares of the Company's outstanding common stock, of
which  10,000  shares  had  been  repurchased  as  of  December  31,  2003.

PENDING  REVERSE  STOCK  SPLIT

In November 2003 the Company's board of directors approved a reverse stock split
and  certain  related  transactions, pursuant to which: (i) each 1,500 shares of
the  Company's outstanding common stock would be converted into one share of new
common  stock; (ii) the Company would pay cash for fractional shares that result
from  the  reverse stock split at the rate of $2.25 per share of existing common
stock;  (iii)  the Company would acquire all the shares of its common stock that
are  held by the Company's 401(k) retirement plan (approximately 172,000 shares)
for  a  price of $2.25 per share of existing common stock; (iv) each outstanding
option  to  purchase  1,500  shares  of  common stock would be converted into an
option to purchase one share of new common stock, at an exercise price per share
that  is equal to 1,500 times the existing exercise price per share; and (v) the
Company  would pay cash equal to the excess, if any, of $2.25 per existing share
over  the  existing  exercise  price  per share, for the fractional options that
result  from  the  reverse  split.

The  purpose of the reverse stock split is to reduce the number of the Company's
stockholders  below  300,  after  which  the  Company intends to de-register its
common stock with the United States Securities and Exchange Commission and cease
being a publicly traded company. The Company estimates the aggregate cost of the
reverse  stock  split and related transactions to be approximately $1.2 million,
including the cost of acquiring shares of stock and fractional stock options and
transaction  expenses.  The  reverse  stock  split  and related transactions are
currently  pending  stockholder  approval.

STOCKHOLDER  RIGHTS  PLAN

In  March 1996, the board of directors of the Company declared a dividend of one
right  to  purchase  a  fraction of a share of its Series A Junior Participating
Preferred  Stock,  having  rights,  preferences,  privileges and restrictions as
designated,  and  under  certain  circumstances,  other  securities,  for  each
outstanding share of the Company's common stock (the "Rights"). The dividend was
distributed  to  stockholders  of  record  at the close of business on April 12,
1996.  The  Rights  become  exercisable  upon  the occurrence of certain defined
events  related  to a possible change of control of the Company. The description
and  terms  of the Rights are set forth in a Rights Agreement, dated as of March
22,  1996, as amended, between the Company and American Stock Transfer and Trust
Company,  as  Rights Agent. The Rights Agreement may be amended by the Company's
board of directors without the approval of the Rights holders, at any time prior
to  the  Rights  becoming exercisable. The Rights Agreement was amended in March
2000  to  specify  that the recapitalization transaction initiated in March 2000
would  not  cause  the  Rights  to  become  exercisable.

STOCK  OPTION  PLAN

The Company has a stock option plan (the "Plan") that authorizes the granting of
both  incentive  and  non-qualified  stock  options  to purchase an aggregate of
4,000,000  shares  of  common  stock.  Either  incentive  or non-qualified stock
options may be granted to executive officers and other employees of the Company.
Only non-qualified stock options may be granted to non-employee directors of the
Company.  Under the Plan, the exercise price of any stock option granted must be
at least equal to the market value of the Company's common stock on the date the
option  is  granted. The Compensation and Stock Option Committee of the board of
directors  of  the  Company  administers  the  Plan.


                                      F-30
<PAGE>
The following is a summary of stock options outstanding as of December 31, 2003:

<TABLE>
<CAPTION>
                         TOTAL STOCK OPTIONS OUTSTANDING          STOCK OPTIONS EXERCISABLE
                  --------------------------------------------  -----------------------------
   RANGE OF                        WEIGHTED        WEIGHTED                       WEIGHTED
   EXERCISE          NUMBER        AVERAGE          AVERAGE         NUMBER         AVERAGE
    PRICES         OF SHARES   REMAINING LIFE  EXERCISE PRICE    OF SHARES    EXERCISE PRICE
----------------  -----------  --------------  ---------------  ------------  ---------------
<S>               <C>          <C>             <C>              <C>           <C>
  $ 1.00 - 1.46     2,642,334       6.9 years  $          1.09     2,130,228  $          1.06
    1.50 - 2.00       290,000       8.7 years             1.58        80,004             1.50
    9.00 - 15.75        8,000       3.5 years            10.64         8,000            10.64
                  -----------                                   ------------

    Total           2,940,334       7.1 years  $          1.17     2,218,232  $          1.11
                  ===========                                   ============
</TABLE>

The following is a summary of activity in stock options:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                            -------------------------------------
                                                               2003         2002         2001
                                                            -----------  -----------  -----------
<S>                                                         <C>          <C>          <C>
    Outstanding at beginning of year                         2,725,834    2,614,500    2,216,300
    Stock options granted                                      220,000      404,500      805,000
    Stock options exercised                                         --      (48,332)     (43,332)
    Stock options canceled                                      (5,500)    (244,834)    (363,468)
                                                            -----------  -----------  -----------

    Outstanding at end of year                               2,940,334    2,725,834    2,614,500
                                                            ===========  ===========  ===========

    Exercisable at end of year                               2,218,232    1,319,142      616,107

    Available to issue                                       1,059,666      874,166      385,500

    Weighted average exercise price of options granted      $     1.59   $     1.24   $     1.26
    Weighted average exercise price of options exercised            --         1.00         1.00
    Weighted average exercise price of options canceled          10.91         1.16         3.81
    Weighted average exercise price of options outstanding        1.17         1.15         1.14
    Weighted average exercise price of options exercisable        1.11         1.15         1.23
</TABLE>

NOTE  14.  INVESTMENT  AND  OTHER  INCOME
-----------------------------------------

Investment and other income consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                                 -------------------------------
                                                   2003       2002       2001
                                                 ---------  ---------  ---------
<S>                                              <C>        <C>        <C>
    Investment income, including realized gains  $     226  $     318  $   1,046
    Other income, net                                  264        289         14
                                                 ---------  ---------  ---------

      Total investment and other income          $     490  $     607  $   1,060
                                                 =========  =========  =========
</TABLE>


                                      F-31
<PAGE>
NOTE 15.  UNAUDITED SELECTED  QUARTERLY  INFORMATION
----------------------------------------------------

QUARTERLY  RESULTS  OF  OPERATIONS

Unaudited  quarterly results of operations for the years ended December 31, 2003
and 2002 are shown below (in thousands, except per share data). This information
was  derived  from  the  Company's unaudited interim financial statements, which
were  prepared  on  the  same  basis  as the accompanying consolidated financial
statements  for  the  years  ended  December  31, 2003 and 2002, and include all
necessary  adjustments,  which consist only of normal recurring adjustments. The
unaudited  quarterly results should be read in conjunction with the accompanying
audited  consolidated  financial  statements.

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 2003
                                                 -------------------------------------------
                                                   FIRST     SECOND      THIRD      FOURTH
                                                  QUARTER    QUARTER    QUARTER    QUARTER
                                                 ---------  ---------  ---------  ----------
<S>                                              <C>        <C>        <C>        <C>
    Premium revenue, net                         $ 21,912   $ 23,129   $ 23,009   $  36,841
    Health care services expense                   15,093     15,947     16,118      26,036
    Selling, general and administrative expense     6,354      6,565      6,243       9,522
                                                 ---------  ---------  ---------  ----------

    Operating income                                  465        617        648       1,283

    Investment and other income                        79         79         73         259
    Interest expense                                 (100)       (86)       (76)       (268)
                                                 ---------  ---------  ---------  ----------

    Income before income taxes                        444        610        645       1,274
    Income tax expense                                 --         60         81      (4,981)
                                                 ---------  ---------  ---------  ----------

      Net income                                 $    444   $    550   $    564   $   6,255
                                                 =========  =========  =========  ==========

    Basic net income per share                   $   0.01   $   0.02   $   0.02   $    0.18
    Weighted average basic shares outstanding      35,693     35,711     35,729      35,741

    Diluted net income per share                 $   0.01   $   0.02   $   0.02   $    0.14
    Weighted average diluted shares outstanding    35,989     36,366     36,421      46,228
</TABLE>

FOURTH  QUARTER  ADJUSTMENTS  IN  2003

During  the  fourth  quarter of 2003, the Company recorded a $5.0 million income
tax  benefit,  which  primarily represents a decrease in the valuation allowance
for  the  Company's  net  deferred  tax  assets  and a decrease in the Company's
accrual  for  estimated  income  tax liabilities related to certain transactions
that  occurred  in  prior  years,  as  discussed  in  Note  11.


                                      F-32
<PAGE>
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31, 2002
                                                  --------------------------------------------
                                                    FIRST     SECOND      THIRD       FOURTH
                                                   QUARTER    QUARTER    QUARTER     QUARTER
                                                  ---------  ---------  ----------  ----------
<S>                                               <C>        <C>        <C>         <C>
    Premium revenue, net                          $ 20,688   $ 20,174   $  20,682   $  21,499
    Health care services expense                    14,550     14,676      14,546      14,165
    Selling, general and administrative expense      5,839      5,777       6,040       6,884
    Loss on impairment of assets                        --         --          --         334
                                                  ---------  ---------  ----------  ----------

    Operating income (loss)                            299       (279)         96         116

    Investment and other income                        116        103          92         296
    Interest expense                                    (7)       (24)        (84)       (117)
                                                  ---------  ---------  ----------  ----------

    Income (loss) before income taxes                  408       (200)        104         295
    Income tax expense                                  --         --          --        (820)
                                                  ---------  ---------  ----------  ----------

      Net income (loss)                           $    408   $   (200)  $     104   $   1,115
                                                  =========  =========  ==========  ==========

    Basic net income (loss) per share             $   0.01   $  (0.01)  $    0.00   $    0.03
    Weighted average basic shares outstanding       34,812     34,857      35,161      35,677

    Diluted net income (loss) per share           $   0.01   $  (0.01)  $    0.00   $    0.03
    Weighted average diluted shares outstanding     35,568     34,857      35,526      36,010
</TABLE>

FOURTH  QUARTER  ADJUSTMENTS  IN  2002

During  the  fourth quarter of 2002, the Company recorded an $820,000 income tax
benefit,  which  primarily  represents  a  decrease in the Company's accrual for
estimated  income  tax liabilities related to certain transactions that occurred
in  prior years, as discussed in Note 11. During the fourth quarter of 2002, the
Company  also increased the bad debt reserve on its notes receivable by $334,000
to  reduce  the  carrying  value  of  those  notes to their estimated realizable
values.


                                      F-33
<PAGE>
<TABLE>
<CAPTION>
                        SAFEGUARD HEALTH ENTERPRISES, INC. AND SUBSIDIARIES
                                            SCHEDULE II
                                 VALUATION AND QUALIFYING ACCOUNTS
                           YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
                                          (IN THOUSANDS)


                                  BALANCE AT   CHARGED TO   CHARGED TO                 BALANCE AT
                                   BEGINNING    COSTS AND      OTHER                       END
                                    OF YEAR     EXPENSES     ACCOUNTS     WRITE-OFFS     OF YEAR
                                  -----------  -----------  -----------  ------------  -----------
<S>                               <C>          <C>          <C>          <C>           <C>
YEAR ENDED DECEMBER 31, 2001:

Allowance for doubtful accounts:
  Accounts receivable             $       868  $       245  $        --  $      (605)  $       508
  Long-term notes receivable      $     2,806  $        --  $        --  $    (2,339)  $       467

YEAR ENDED DECEMBER 31, 2002:

Allowance for doubtful accounts:
  Accounts receivable             $       508  $       220  $        --  $      (403)  $       325
  Long-term notes receivable      $       467  $       334  $        --  $        --   $       801

YEAR ENDED DECEMBER 31, 2003:

Allowance for doubtful accounts:
  Accounts receivable             $       325  $       476  $        --  $      (257)  $       544
  Long-term notes receivable      $       801  $        --  $        --  $       (21)  $       780
</TABLE>


                                      F-34
<PAGE>