UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
D.C. 20549




FORM
10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009OR ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934





For the
transition period from ____________ to ____________





Commission
file number:  0-28456





METROPOLITAN
HEALTH NETWORKS, INC.


(Exact
name of registrant as specified in its charter)





Florida
                65-0635748(State
      or other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      No.)250
      South Australian Avenue, Suite 400
                  West
      Palm Beach, Fl.
                33401(Address
      of principal executive offices)
                (Zip
      Code)





(561)
805-8500


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, $.001 par value per share
            
            NYSE
      Amex




Securities
registered pursuant to Section 12(g) of the
Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈            No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.


Yes  ̈            No
x





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.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated
filer”  “accelerated filer” and “smaller reporting company”, in Rule
12b-2 of the Exchange Act.





Large
      accelerated filer  ̈
              Accelerated
      filer  x
              Non-accelerated
      filer   ̈Smaller
      reporting company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈            No  x





As of
June 30, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $91,964,322based
on the closing sale price as reported on the NYSE Amex.   This
calculation has been performed under the assumption that all directors, officers
and stockholders who own more than 10% of our outstanding voting securities are
affiliates of the Company.





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at February 25, 2010Common
      Stock, $.001 par value per share
            
            39,846,684  shares





DOCUMENTS
INCORPORATED BY REFERENCE





The
information required by Part III of this report, to the extent not set forth
herein, is incorporated by reference from the registrant's definitive proxy
statement relating to the 2010 annual meeting of shareholders, which definitive
proxy statement will be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year to which this report
relates.







METROPOLITAN
HEALTH NETWORKS, INC.




FORM
10-K


For
the Year Ended


December
31, 2009




TABLE
OF CONTENTS





ITEM
                  
                  
                  
                  Page
                    No.PART
      I1
                  
                  Business
                  
                  51A
                  
                  Risk
      Factors
                  
                  181B
                  
                  Unresolved
      Staff Comments
                  
                  262
                  
                  Properties
                  
                  263
                  
                  Legal
      Proceedings
                  
                  274
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  27PART
      II5
                  
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  276
                  
                  Selected
      Financial Data
                  
                  307
                  
                  Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations
                  
                  317A
                  
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  
                  448
                  
                  Financial
      Statements and Supplementary Data
                  
                  459
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  459A
                  
                  Controls
      and Procedures
                  
                  45PART
      III10
                  
                  Directors,
      Executive Officers and Corporate Governance
                  
                  4811
                  
                  Executive
      Compensation
                  
                  4812
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  4813
                  
                  Certain
      Relationships and Related Transactions and Director
      Independence
                  
                  4814
                  
                  Principal
      Accounting Fees and Services
                  
                  49PART
      IV15
                  
                  Exhibits,
      Financial Statement Schedules
                  
                  49Exhibits
      Index
                  
                  50Signatures
                  
                  53




-2-




GENERAL




Unless
otherwise indicated or the context otherwise requires, all references in this
Form 10-K to “we,” “us,” “our,” “Metropolitan” or the “Company” refer to
Metropolitan Health Networks, Inc. and its consolidated subsidiaries unless the
context suggests otherwise.




CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




Some of
the discussion under the captions “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” “Business” and
elsewhere in this Form 10-K may include certain “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, without limitation,
statements with respect to anticipated future operations and financial
performance, growth and acquisition opportunities and other similar forecasts
and statements of expectation. We intend such statements to be covered by the
safe harbor provisions for forward looking statements created
thereby.  These statements involve known and unknown risks and
uncertainties, such as our plans, objectives, expectations and intentions, and
other factors that may cause us, or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
the forward-looking statements. Many of these factors are listed in Item 1A“Risk
Factors” and elsewhere in this Form 10-K.




In some
cases, you can identify forward-looking statements by statements that include
the words “estimate,” “project,”  “anticipate,” “expect,” “intend,”
“may,” “should,” “believe,” “seek” or other similar expressions.




Specifically,
this report contains forward-looking statements, including statements regarding
the following topics:




·
            the
      ability of our provider services network (the “PSN”) to renew those Humana
      Agreements (as defined below) with one-year renewable terms and maintain
      all of the Humana Agreements on favorable
terms;





·
            our
      ability to make reasonable estimates of Medicare retroactive premium
      adjustments; and





·
            our
      ability to adequately predict and control medical expenses and to make
      reasonable estimates and maintain adequate accruals for incurred but not
      reported (“IBNR”) claims.





The
forward-looking statements reflect our current view about future events and are
subject to risks, uncertainties and assumptions.  We wish to caution
readers that certain important factors may have affected and could in the future
affect our actual results and could cause actual results to differ significantly
from those expressed in any forward-looking statement.  The following
important factors could prevent us from achieving our goals and cause the
assumptions underlying the forward-looking statements and the actual results to
differ materially from those expressed in or implied by those forward-looking
statements:





·
            reductions
      in government funding of the Medicare program and changes in the political
      environment that may affect public policy and have an adverse impact on
      the demand for our services;





·
            the
      loss of or material, negative price amendment to significant
      contracts;





·
            disruptions
      in the PSN’s or Humana's healthcare provider
  networks;





·
            failure
      to receive accurate and timely claims processing, billing services, data
      collection and other information from
Humana;





·
            future
      legislation and changes in governmental
  regulations;





·
            increased
      operating costs;





·
            reductions
      in premium payments to Medicare Advantage
plans;


-3-





·
            the
      impact of Medicare Risk Adjustments on payments we receive from
      Humana;





·
            the
      impact of the Medicare prescription drug plan on our
      operations;





·
            general
      economic and business conditions;





·
            increased
      competition;





·
            the
      relative health of our customers;





·
            changes
      in estimates and judgments associated with our critical accounting
      policies;





·
            federal
      and state investigations;





·
            our
      ability to successfully recruit and retain key management personnel and
      qualified medical professionals;
and





·
            impairment
      charges that could be required in future
  periods.





We
undertake no obligation to revise or publicly release the results of any
revision to any forward-looking statements.


-4-





PART
I





ITEM 1
            DESCRIPTION
      OF BUSINESS




We
operate a provider services network (the “PSN”), through which we provide and
arrange for medical care primarily to Medicare Advantage beneficiaries in the
State of Florida who have enrolled in health plans primarily operated by Humana,
Inc. (“Humana”), or subsidiaries of Humana, one of the largest participants in
the Medicare Advantage program in the United States.  As of December
31, 2009, our PSN operated in 16 counties in the state of Florida.





Medicare
is the national, federally-administered health insurance program that covers the
cost of hospitalization, medical care, and some related health services for U.S.
citizens aged 65 and older, qualifying disabled persons and persons suffering
from end-staged renal disease.  Substantially all of our revenue in
2009 and 2008 was generated by providing services to Medicare beneficiaries
through arrangements that require us to assume responsibility to provide and/or
manage the care for our customers’ medical needs in exchange for a monthly fee,
also known as a capitation fee or capitation arrangement.  To mitigate
our exposure to high cost medical claims, we have reinsurance arrangements that
provide for the reimbursement ofcertain customermedical expenses. See
“Insurance.”





Our
concentration on Medicare customers provides us the opportunity to focus our
efforts on understanding the specific needs of Medicare beneficiaries in our
local service areas.  Our management team has extensive experience
developing and managing providers and provider networks.





As of
December 31, 2009, the PSN provided healthcare benefits to approximately 35,500
Medicare Advantage beneficiaries, an increase of approximately 2,500 from the
number of customers served by the PSN as of December 31, 2008.





Until the
end of August 2008, we also operated a health maintenance organization (the
“HMO”) which provided healthcare benefits to Medicare Advantage beneficiaries in
13 Florida counties.   As discussed in greater detail below, the
HMO was sold to Humana Medical Plan, Inc. (the “Humana Plan”) on August 29,
2008.





See also
Note 19 to the “Notes to the Consolidated Financial Statements” contained in
this Form 10-K.





Our
corporate headquarters are located at 250 South Australian Avenue, Suite 400,
West Palm Beach, Florida 33401 and our telephone number is (561) 805-8500. Our
corporate website is www.metcare.com. Information contained on our website is
not incorporated by reference into this report and we do not intend the
information on or linked to our website to constitute part of this report. We
make available our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports on our website,
free of charge, to individuals interested in acquiring such reports. The reports
can be accessed at our website as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange
Commission (the “SEC”). The public may read and copy these materials at the
SEC’s public reference room at 100 F Street, N.E., Washington D.C. 20549 or on
their website at http://www.sec.gov.
Questions regarding the operation of the public reference room may be directed
to the SEC at 1-800-732-0330.





Provider Services
Network





We
operate the PSN through our wholly owned subsidiary, Metcare of Florida,
Inc.  The PSN currently operates under three network agreements with
Humana (collectively, the “Humana Agreements”) pursuant to which the PSN
provides, on a non-exclusive basis, healthcare services to Medicare
beneficiaries in certain Florida counties who have elected to receive benefits
under a Humana Medicare Advantage HMO Plan (“Humana Plan
Customers”).  We entered into the most recent of the Humana
Agreements, a five year independent practice association participation agreement
(the “IPA Agreement”), in connection with the sale of the HMO.  The
IPA Agreement covers the 13 Florida counties where the HMO operated at the time
of the sale.





Collectively,
the Humana Agreements cover 30 counties within the State of
Florida.  At December 31, 2009, we have customers in 16 counties
throughout Florida.





We are
closely monitoring the healthcare reform debate.  Until we have more
clarity on the changes, if any, that are going to be legislated, we have
suspended plans to expand our operations in any additional counties covered
under the Humana Agreements.  In the meantime, we will continue to
seek opportunities to expand our operations where we already
operate.


-5-





Humana
directly contracts with the Centers for Medicare & Medicaid Services
(“CMS”), an agency of the United States Department of Health and Human Services,
which administers the Medicare program.  Humana is paid a monthly
premium payment for each Humana Plan Customer who selects one of the PSN
physicians as his or her primary care physician (a “Humana Participating
Customer”).  Among other factors, the monthly premium varies by
customer, county, age and severity of health status.  Pursuant to the
Humana Agreements, the PSN provides or arranges for the provision of covered
medical services to each Humana Participating Customer.  In return for
the provision of these medical services, the PSN receives from Humana a fee for
each Humana Participating Customer established pursuant to the Humana
Agreements.  The amount we receive from Humana represents a
substantial percentage of the monthly premiums received by Humana from CMS with
respect to Humana Participating Customers.





Our PSN
assumes full responsibility for the provision or management of all necessary
medical care for each of the approximately 35,300 Humana Participating Customers
covered by the Humana Agreements, even for services we do not provide
directly.  For the approximately 6,000 Humana Participating Customers
covered under our network agreement covering Miami-Dade, Broward and Palm Beach
counties, our PSN and Humana share in the cost of inpatient hospital services
and the PSN is responsible for the full cost of all other medical care provided
to the Humana Participating Customers.For the remaining
29,300 Humana Participating Customers covered under our other two network
agreements, our PSN is responsible for the cost of all medical care provided. To
the extent the costs of providing such medical care are less than the related
fees received from Humana; our PSN generates a gross
profit.  Conversely, if medical expenses exceed the fees received from
Humana, our PSN experiences a deficit in gross profit.





In 2008
and 2009, substantially all of our revenue was directly or indirectly derived
from premiums generated by Medicare Advantage health plans.  In 2009,
substantially all of our revenue was earned through our contracts with
Humana.





We have
built our PSN by contracting with independent primary care physician practices
(each, an “IPA”) for their services and acquiring and operating our own
physician practices.  Through the Humana Agreements, we have
established referral relationships with a large number of specialist physicians,
ancillary service providers, pharmacies and hospitals throughout the counties
covered by the Humana Agreements.





Effective
as of August 1, 2008, our PSN entered into a network agreement (the “CarePlus
Agreement”) with CarePlus Health Plans, Inc. (“CarePlus”), a Medicare Advantage
HMO in Florida.  CarePlus is a wholly-owned subsidiary of
Humana.  Pursuant to the CarePlus Agreement, the PSN manages, on a
non-exclusive basis, healthcare services for Medicare beneficiaries in certain
Florida counties who have elected to receive benefits through CarePlus’ Medicare
Advantage plans (each, a “CarePlus Plan Customer”) and who have selected
one of the PSN physicians as their primary care physician (each a “CarePlus
Participating Customer”).   At December 31, 2009, we operated in
six of the 22 Florida counties covered by the CarePlus
Agreement.  Effective January 1, 2010 we began to operate in six
additional counties and we terminated services in one county.





Like
Humana, CarePlus directly contracts with CMS and is paid a monthly premium
payment for each CarePlus Plan Customer, which premium varies by, among other
things, customer, county, age and severity of health status.  Pursuant
to the CarePlus Agreement, the PSN provides or arranges for the provision of
covered medical services to CarePlus Participating Customers.  Since
the establishment of the CarePlus Agreement, the PSN has received a monthly
network administration fee for each CarePlus Participating
Customer.  Effective February 1, 2010, the PSN began to receive a
capitation fee from CarePlus and assumed full responsibility for the cost of all
medical services provided to each CarePlus Participating
Customer.  The capitation fee represents a substantial portion of the
monthly premium CarePlus is to receive from CMS.





In nine
of the counties covered by the CarePlus Agreement the PSN physicians who provide
services to the Humana Participating Customers are not allowed to provide
services to CarePlus Participating Customers.  In these counties, the
PSN must (i) locate and contract with new independent primary care physician
practices and/or (ii) acquire or establish and operate its own physician
practices to service the CarePlus Participating Customers.  In the
remaining counties covered by the CarePlus Agreement, the PSN is allowed to use
the PSN physicians who provide services to the Humana Participating
Customers.





The
CarePlus Agreement covered approximately 200 CarePlus Participating Customers at
December 31, 2009.


-6-





The
Medicare Program and Medicare Managed Care




Medicare





Medicare
is a federal program that provides persons age 65 and over, qualifying disabled
persons and persons suffering from end-stage renal disease with certain hospital
and medical insurance benefits. The Medicare program, created in 1965, offers
both hospital insurance, known as Medicare Part A, and medical insurance, known
as Medicare Part B. In general, Medicare Part A covers hospital care
and some nursing home, hospice, and home care. Although there is no monthly
premium for Medicare Part A, beneficiaries are responsible for paying
deductibles and co-payments. All United States citizens eligible for Medicare
are automatically enrolled in Medicare Part A when they turn 65. Enrollment
in Medicare Part B is voluntary. In general, Medicare Part B covers
outpatient hospital care, physician services, laboratory services, durable
medical equipment, and some other preventive tests and services. Beneficiaries
that enroll in Medicare Part B pay a monthly premium, which was $96.40 in
2009, which is usually withheld from their Social Security checks. Medicare Part
B generally pays 80% of the cost of services and beneficiaries pay the remaining
20% after the beneficiary has satisfied a deductible, which was $135 in 2009. To
fill the gaps in traditional fee-for-service Medicare coverage, individuals may
purchase Medicare supplement products, commonly known as “Medigap,” to cover
deductibles, copayments, and coinsurance.





Initially,
Medicare was offered only on a fee-for-service basis. Under the Medicare
fee-for-service payment system, an individual can choose any licensed physician
accepting Medicare payments and use the services of any hospital, healthcare
provider, or facility certified by Medicare. CMS reimburses providers if
Medicare covers the service and CMS considers it “medically
necessary.” Subject to limited exceptions, Medicare fee-for-service does
not cover transportation, eyeglasses, hearing aids, and certain preventive
services, such as annual physicals and wellness visits. However, the Medicare
Improvements for Patients and Providers Act (“MIPPA”), enacted in
July 2008, permits the Secretary of the Department of Health and Human
Services to extend fee-for-service coverage to certain additional preventive
services that are reasonable and necessary for the prevention or early detection
of an illness or disability.





Medicare Advantage





As an
alternative to the traditional fee-for-service Medicare program, in geographic
areas where a managed care plan has contracted with CMS pursuant to the Medicare
Advantage program, Medicare beneficiaries may choose to receive benefits from a
managed care plan. Pursuant to Medicare Part C and Medicare Part D,
Medicare Advantage plans contract with CMS to provide benefits at least
comparable to those offered under the traditional fee-for-service Medicare
program in exchange for a monthly per customer premium payment from
CMS.




Participation
of private health plans, such as Humana, in the Medicare Advantage Program under
full risk contracts began in the 1980’s and grew to 6.9 million customers in
1999.  According to information provided by the Henry J. Kaiser Family
Foundation, after a drop to 5.3 million customers in 2003, the number of
enrollees in Medicare Advantage plans in the United States has increased to 10.2
million in 2009.




The
Medicare Advantage program provides a comprehensive array of health insurance
benefits, including wellness programs, to Medicare eligible persons under HMO,
Preferred Provider Organizations (“PPO”), and Private Fee-For-Service (“PFFS”)
plans in exchange for contractual payments received from CMS, usually a per
customer per month payment.  Substantially all of our customers are
enrolled in a Medicare Advantage HMO plan.  Under a Medicare Advantage
HMO plan, the beneficiary receives benefits in excess of traditional Medicare,
typically including reduced cost sharing, enhanced prescription drug benefits,
eye exams, hearing aids and routine physical exams, care coordination, data
analysis techniques to help identify customer needs, complex case management,
tools to guide customers in their health care decisions, disease management
programs, wellness and prevention programs, and in some instances a reduced
monthly Part B premium.  Most Medicare Advantage plans offer the
prescription drug benefit under Part D as part of the basic plan, subject to
cost sharing and other limitations.  Medicare Advantage plans may
charge beneficiaries monthly premiums and other co-payments for Medicare-covered
services or for certain extra benefits.





Medicare
Advantage HMO plans may eliminate or reduce coinsurance or the level of
deductibles on many other medical services while seeking care from participating
in-network providers or in emergency situations. Except in emergency situations,
HMO plans provide no out-of-network benefits.  While out-of-pocket
costs for the Medicare beneficiary enrolled in a Medicare Advantage plan may be
lower than under the traditional fee-for-service Medicare program, customers are
generally required to use only the services and provider networks offered by the
customer’s Medicare Advantage plan.


-7-





CMS uses
monthly rates per person for each county to determine the monthly per
customer payments made to health benefit plans. These rates are adjusted
under CMS’s risk-adjustment model which uses health status indicators, or
risk scores, to improve the adequacy of payment. The risk-adjustment model,
which CMS implemented pursuant to the Balanced Budget Act of 1997 (“BBA”) and
the Benefits and Improvement Protection Act of 2000 (“BIPA”), generally pays
more for customers with predictably higher costs and uses principal hospital
inpatient diagnoses as well as diagnosis data from ambulatory treatment settings
(hospital outpatient department and physician visits). Under the risk-adjustment
methodology, all health benefit organizations must capture, collect, and submit
the necessary diagnosis code information to CMS within prescribed
deadlines.




HMO plans
covered under Medicare Advantage contracts with CMS are renewed generally for a
one-year term each December 31 unless CMS notifies the plan of its decision
not to renew by August 1 of the year in which the contract would end, or
the plan notifies CMS of its decision not to renew by the first Monday in June
of the year in which the contract would end.  All material contracts
between Humana and CMS relating to our Medicare Advantage business have been
renewed for 2010.





Medicare Part
D


Effective
January 1, 2006, all Medicare beneficiaries became eligible to receive
assistance paying for prescription drugs through Medicare Part D.  The drug
benefit is not part of the traditional fee-for-service Medicare program, but
rather is offered through private insurance plans. Medicare beneficiaries are
able to choose and enroll in a prescription drug plan through Medicare Part
D.  Prescription drug coverage under Part D is
voluntary.  Fee-for-service beneficiaries may purchase Part D coverage
from a stand-alone prescription drug plan (a “stand-alone PDP”) that is included
on a list approved by CMS.


Individuals
who are enrolled in a Medicare Advantage plan that offers drug coverage must
receive their drug coverage through the prescription drug plan offered by their
Medicare Advantage plan (“MA-PD”) and may not enroll in a stand-alone
PDP.  Any customer of a Medicare Advantage plan that enrolls in a
stand-alone PDP is automatically disenrolled from the Medicare Advantage plan
altogether, thereby resuming traditional fee-for-service Medicare coverage.
Beneficiaries who are eligible for both Medicare and Medicaid, known as dual
eligible beneficiaries (discussed in greater detail below), who have not
enrolled in a MA-PD or a stand-alone PDP have been automatically enrolled by CMS
with approved stand-alone PDP’s in their region.  Medicare Advantage
customers have the right to change drug plans, either MA-PD or stand-alone PDP,
one time per year, during the open enrollment period.  Dual eligible
beneficiaries and other customers qualified for the low-income subsidy may
change plans throughout the
year.


The
Medicare Part D prescription drug benefit is largely subsidized by the
federal government and is additionally supported by risk-sharing with the
federal government through risk corridors designed to limit the profits or
losses of the drug plans and reinsurance for catastrophic drug costs. The
government subsidy is based on the national weighted average monthly bid for
this coverage, adjusted for customer demographics and risk factor payments. If
the plan bid exceeds the government subsidy the beneficiary is responsible for
the difference.  The beneficiary is also responsible for co-pays,
deductibles and late enrollment penalties, if applicable.


All of
our Humana Plan Customers receive prescription drug coverage through Medicare
Part D.  We are responsible for the costs of pharmaceuticals and our
capitation fee from Humana is intended to cover these costs.





Dual-Eligible
Beneficiaries





A
“dual-eligible” beneficiary is a person who is eligible for both Medicare,
because of age or other qualifying status, and Medicaid, because of economic
status. Health plans that serve dual-eligible beneficiaries receive a higher
premium from CMS for dual-eligible customers. The additional premium for a
dually-eligible beneficiary is based upon the estimated incremental cost CMS
incurs, on average, to care for dual-eligible beneficiaries. By managing
utilization and implementing disease management programs, many Medicare
Advantage plans can profitably care for dually-eligible customers. The Medicare
Modernization Act of 2003 (the “MMA”) provides subsidies and reduced or
eliminated deductibles for certain low-income beneficiaries, including
dual-eligible individuals. Pursuant to the MMA, since January 1, 2006,
dual-eligible individuals receive their drug coverage from the Medicare program
rather than the Medicaid program. Companies offering stand-alone PDP with bids
at or below the regional weighted average bid resulting from the annual bidding
process received a pro-rata allocation and automatic enrollment of the
dual-eligible beneficiaries within their applicable region.


-8-


Enrollment
Period





Medicare
beneficiaries have defined enrollment periods, similar to commercial plans, in
which they can select or change a Medicare Advantage plan.  The annual
enrollment for a Medicare Advantage plan is from November 15 through
March 31 of the subsequent year.  Enrollment prior to December 31
will generally be effective as of January 1 of the following year and enrollment
on or after January 1 and within the enrollment period is effective the first
day of the month following enrollment. After the defined enrollment period ends,
generally only seniors turning 65 during the year, Medicare beneficiaries who
permanently relocate to another service area, dual-eligible beneficiaries,
others who qualify for special needs plans, and employer group retirees will be
permitted to enroll in or change health plans during the year. In addition, in
certain circumstances, such as the bankruptcy of a health plan, CMS may offer a
special election period during which the customers affected are allowed to
change plans.





Bidding
Process.





Since
January 1, 2006, CMS has used a rate calculation system for Medicare
Advantage plans based on a competitive bidding process that allows the federal
government to share in any cost savings achieved by Medicare Advantage plans. In
general, the statutory payment rate for each county, which is primarily based on
CMS’s estimated per beneficiary fee-for-service expenses, is known as the
“benchmark” amount, and local Medicare Advantage plans annually submit bids that
reflect the costs they expect to incur in providing the base Medicare Part A and
Part B benefits in their applicable service areas. If the bid is less than the
benchmark for that year, Medicare will pay the plan its bid amount, adjusted
based on county of residence and customers’ risk scores, plus a rebate equal to
75% of the amount by which the benchmark exceeds the bid, resulting in an annual
adjustment. in reimbursement rates. Plans are required to use the rebate to
provide beneficiaries with extra benefits, reduced cost sharing, or reduced
premiums, including premiums for MA-PD and other supplemental benefits and CMS
has the right to audit the use of these proceeds. The remaining 25% of the
excess amount is retained in the statutory Medicare trust fund. If a Medicare
Advantage plan’s bid is greater than the benchmark, the plan is required to
charge a premium to enrollees equal to the difference between the bid amount and
the benchmark, which has made such plans charging premiums less attractive to
potential customers.





The Medicare Improvements
for Patients and Providers Act of 2008





MIPPA
addressed several aspects of the Medicare program. With respect to Medicare
Advantage and Medicare Part D plans, MIPPA increased restrictions on
marketing and sales activities, including limitations on compensation systems
for agents and brokers, limitations on solicitation of beneficiaries, and
prohibitions regarding many sales activities. MIPPA also imposed restrictions on
special needs plans, increased penalties for reimbursement delays by Medicare
Part D plans, required weekly reporting of pricing standards by Medicare
Part D plans, and implemented focused cuts to certain Medicare Advantage
programs. The Congressional Budget Office has estimated that the Medicare
Advantage provisions of MIPPA will reduce federal spending on Medicare Advantage
by $48.7 billion over the 2008-2018 period.





The Florida Medicare
Advantage Market





Over the
last several decades, Florida has generally been a highly attractive, rapidly
growing market.  In April 2009, the Office of Economic &
Demographic Research of the Florida Legislature projected a total population in
Florida of over 18.8 million people.  Those 65 and older in Florida
are projected to be 3.3 million in 2010 and are forecast to increase
to 4.6 million by 2020.





Behind only California, which has
approximately 4.5 millionMedicare eligible beneficiaries, Florida has the second largest Medicare
population in the U.S. with an estimated 3.2 million Medicare eligible
beneficiaries.As ofMay 2009, California’s Medicare Advantage penetration was
approximately 34% while Florida’s was 28%.  Our Humana Agreements
cover 30 counties throughout Florida and we have established provider networks
in 16of these counties.  We
believe that of the approximate1.4million Medicare eligible individuals
in the counties in which we have established networks, approximately28% are customers of Medicare Advantage
plans.





In thefourteencounties where we do not yet have
provider networks, we believe that of the approximate1.3 millionMedicare eligible individuals in these
counties, approximately30% are customers of Medicare Advantage plans.


-9-


Business
Model




Provider Services
Network




Our PSN
provides and arranges healthcare services to Medicare Advantage beneficiaries
who participate in a Medicare Advantage plan through Humana or
CarePlus.





Humana
Agreements





Two of
the Humana Agreements, one covering approximately 20,400 customers and the other
covering 6,000 customers at December 31, 2009,  have one-year terms
and renew automatically each December 31 for additional one-year terms unless
terminated for cause or upon 180 days’ prior notice.  In addition,
Humana may immediately terminate either of these agreements and/or any
individual physician credentialed under these agreements upon written notice,
(i) if the PSN and/or any of the PSN physician’s continued participation
may adversely affect the health, safety or welfare of any Humana customer or
bring Humana into disrepute; (ii) in the event of one of the PSN
physician’s death or incompetence; (iii) if any of  the PSN
physicians fail to meet Humana’s credentialing criteria; (iv) in accordance
with Humana’s policies and procedures as specified in Humana’s manual,
(v) if the PSN engages in or acquiesces to any act of bankruptcy,
receivership or reorganization; or (vi) if Humana loses its
authority to do business in total or as to any limited segment or business
(but only to that segment). The PSN and Humana may also each terminate each of
these Agreements upon 90 days’ prior written notice (with a 60 day
opportunity to cure, if possible) in the event of the other’s material
breach.




The IPA
Agreement, which covers approximately 8,900 customers at December 31, 2009, has
a five-year term that began on August 30, 2008 and will renew automatically for
additional one-year periods upon the expiration of the initial term and each
renewal term unless terminated upon 90 days notice prior to the end of the
applicable term.  After the initial five year term, either party may
terminate the agreement without cause by providing to the other party 120 days
prior notice.  Humana may immediately terminate the IPA Agreement
and/or any individual physician credentialed under the IPA Agreement, upon
written notice, (i) if the PSN and/or any of the PSN physician’s continued
participation may adversely affect the health, safety or welfare of any Humana
customer or bring Humana into disrepute; (ii) if the PSN or any of its
physicians fail to meet Humana’s credentialing or re-credentialing criteria;
(iii) if the PSN or any of its physicians is excluded from participation in
any federal healthcare program; (iv) if the PSN or any of its physicians
engages in or acquiesces to any act of bankruptcy, receivership or
reorganization; or (v) if Humana loses its authority to do business in
total or as to any limited segment or business (but only to that segment). The
PSN and Humana may also each terminate the IPA Agreement upon 60 days’
prior written notice (with a 30 day opportunity to cure, if possible) in the
event of the other’s material breach of the IPA Agreement.





Humana
may provide 30 days notice as to certain amendments or modifications to the
Humana Agreements, including but not limited to, compensation rates, covered
benefits and other terms and conditions. If Humana exercises its right to amend
the Humana Agreements, the PSN may object to such amendment within the 30 day
notice period. If the PSN objects to such amendment within the requisite time
frame, Humana may terminate the applicable Humana Agreement upon 90 days
written notice.





The
Humana Agreements are also subject to changes to the covered benefits that
Humana elects to provide to Humana Plan Customers and other terms and
conditions.




In four
of the counties covered by the IPA Agreement (Martin, St. Lucie, Okeechobee and
Glades), unless otherwise agreed to in writing by Humana, the PSN is restricted
from entering into any risk contract with any other Medicare Advantage plan
through December 31, 2013.




For the
term of the Humana Agreement covering 20,400 customers:





·
            Humana
      has agreed that it will not, with the exception of one existing service
      provider, enter into any new global risk agreements for Humana’s Medicare
      Advantage HMO products in Volusia and Flagler counties;
  and





·
            The
      PSN has agreed that it will not enter into any global, full or limited
      risk contracts with respect to Medicare Advantage customers with any
      non-Humana Medicare Advantage HMO or provider sponsored organization in
      Volusia and Flagler counties in which Humana has a Medicare Advantage
      contract.


-10-





In
addition, for the term plus one year for each of the Humana Agreements, the PSN
and its affiliated providers will not, directly or indirectly, engage in any
activities which are in competition with Humana’s health insurance, HMO or
benefit plans business, including obtaining a license to become a managed
healthcare plan offering HMO or point of service (“POS”) products, or (ii)
acquire, manage, establish or have any direct or indirect interest in any
provider sponsored organization or network for the purpose of administering,
developing, implementing or selling government sponsored health insurance or
benefit plans, including Medicare and Medicaid, or (iii) contract or affiliate
with another licensed managed care organization, where the purpose of such
affiliation is to offer and sponsor a HMO or POS products and where the PSN
and/or its affiliated providers obtain an ownership interest in the HMO or POS
products to be marketed, and (iv) enter into agreements with other managed care
entities, insurance companies or provider sponsored networks for the provision
of healthcare services to Medicare HMO, Medicare POS and/or other Medicare
replacement patients at the same office sites or within five miles of the office
sites where services are provided to the Humana Plan Customers.





CarePlus
Agreement





Pursuant
to the CarePlus Agreement, the PSN provides or arranges for the provision of
covered medical services to each CarePlus Participating
Customer.  Since the establishment of the CarePlus Agreement, the PSN
has received a monthly network administration fee for each CarePlus
Participating Customer in return for managing these healthcare
services.   Effective February 1, 2010, the PSN began receiving a
capitation fee for each CarePlus Participating Customer and, in connection
therewith, the PSN assumed full responsibility for the cost of all necessary
medical care for each CarePlus Participating Customer, even for services the PSN
does not provide directly.





Physician
Network





At
December 31, 2009, the PSN owned and operated ten primary care centers and an
oncology practice.  These centers provide and arrange for medical care
to approximately 26% of the PSN’s customers.





The PSN
also has contracts with IPA’s to provide and manage care for our remaining
customers.  Some of these contracts provide for payment to the
provider on a fixed per customer per month amount and require the providers to
provide all the necessary primary care medical services to Humana Participating
Customers.  The monthly amount is negotiated and is subject to change
based on certain quality metrics under the PSN’s Partners In Quality (“PIQ”)
program, our proprietary care management model.  Other contracts
provide for payments on a fee for service basis, pursuant to which the provider
is paid only for the services provided.





PIQ is
our “pay for performance” program that measures performance based on quality
metrics including patient satisfaction, disease state management of high-risk,
chronically ill patients, frequency of physician-patient encounters, and
enhanced medical record documentation.  Management believes that the
PIQ program differentiates our PSN from other PSN’s or Management Service
Organizations (“MSO’s”).





The
contracts with our IPA’s generally have one-year terms and renew automatically
for one-year periods unless either party provides written notice at least 60
days prior to the end of the term.  The IPA providers, during the term
of their contract with the PSN, and for a period of six months after the
expiration or termination of such contract, are generally prohibited from
participating in any other PSN, HMO or other agreement which contracts directly
or indirectly with the Medicare or Medicaid Program on a capitated or risk
basis.  The IPA providers are further prohibited during the term and
for a period of six months after the expiration of the terms from encouraging or
soliciting the Humana Participating Customers to change their primary care
provider, disenroll from their health plan, or leave the PSN’s
network.





The PSN
has established referral relationships with a large number of specialist
physicians, ancillary service providers and hospitals throughout the PSN’s
service area that are under contract with Humana.  These providers
have contracted with Humana to deliver services to our PSN patients based on
certain fee schedules and care requirements.  Specialist physicians,
ancillary service providers and hospitals are generally paid on a contractual
fee-for-service basis. Certain specialist physicians dealing with a high volume
of cases are paid on a capitated basis.





The Patient Centered Medical
Home





The
Patient Centered Medical Home (“PCMH”) is medical care delivered to a group of
customers through a physician-led healthcare team which utilizes information
technology and evidence-based medicine to enhance communication and customer
access, improve clinical outcomes, and ensure continuity and coordination of
care, thereby adding value to the healthcare consumer.  We believe
that our approach to care is philosophically and operationally aligned with
these principles.  However, to function as a true PCMH, medical
practices must first develop and implement processes and systems to deliver this
product consistently, efficiently, and effectively.


-11-





We have
been moving our business toward the PCMH model for the past few
years.  In October 2009, we applied to the National Committee for
Quality Assurance (“NCQA”) for certification as a PCPM.  The NCQA has
developed a formal set of standards to certify practices as a
PCMH.  In February 2010, we were notified by NCQA that all eight
of our owned primary care centers that applied have received level 3
certification, the highest available, as Patient Centered Medical Homes. We
believe that this makes us the first PCMH in Florida. We believe the PCMH will
improve our competitive position.





In
coordination with our PCMH strategy, we are currently designing and testing an
electronic medical records system (“EMR”) to be implemented in the primary care
centers which we own.  We began moving toward more electronic health
data in 2007 with the implementation of a basic practice management software
program. In 2008 and 2009, we added telephonic messaging, the ability to
prescribe pharmaceuticals electronically, a disease registry and speech
recognition software.  We plan to begin to install EMR at our owned centers
in April 2010 and expect to have the installation completed in all of our
centers in 2011.   Initially, we will see some increase in cost
as the installation occurs.  However, we expect that as we gain more
experience and efficiency with EMR, we will see costs begin to drop in the early
part of 2011.





We
believe it is important, in what is a highly competitive healthcare marketplace,
to retain and recruit top talent.  Beginning in 2009, we have entered
into a formal program to better train and develop our leaders and
staff.   We believe this investment will have a positive
return in terms of improved customer service, enhanced employee engagement
and retention and, as a result, better outcomes and financial performance in
future years.





Claims
Processing




Pursuant
to the Humana Agreements, Humana, among other things, processes claims received
from providers, including from our PSN, makes a determination as to whether and
to what extent to allow such claims and makes payments for covered services
rendered to Humana Participating Customers using Humana's claims processing
systems, policies, procedures and guidelines.  Humana provides notice
to the PSN upon qualification of a claim and we have the opportunity within
seven days of receipt of a claim to review such claim and approve, deny or
modify the claim, as appropriate.  Humana provides the PSN with
electronic data and reports on a monthly basis which are maintained on a server
system at our executive offices.  We statistically evaluate the data
provided by Humana for a variety of factors including the number of customers
assigned to the PSN, the reasonableness of revenue paid to us and the claims
paid on our behalf.  We also regularly monitor and measure Humana’s
estimates of claims incurred but not yet reported.




The PSN’s
claims suspense staff seeks to identify and correct non-qualifying claims prior
to payment.  After payments are made by Humana, the PSN’s contestation
staff is responsible for reviewing paid claims, identifying errors and seeking
recoveries.




Utilization
Management




Utilization
review is a process whereby multiple data is analyzed to ensure that appropriate
health services are provided in a cost-effective manner.  Factors
considered include the risks and benefits of a medical procedure, the cost of
providing those services, specific payer coverage guidelines, and historical
outcomes of healthcare providers such as physicians and hospitals.




PSN Growth
Strategy




We are
closely monitoring the healthcare reform debate.  Until we have more
clarity on the changes, if any, that are going to be legislated, we have
suspended plans to expand our operations in any additional counties covered
under the Humana Agreements.  In the meantime, we continue to seek
opportunities to expand in markets where we already operate.





Our
growth strategy for the PSN includes, among other things:




·
            increasing
      the volume of  patients treated by the PSN physicians through
      enhanced marketing efforts;




·
            selectively
      expanding the PSN’s network of providers to include additional physician
      practices within the geographic markets in which we operate that are
      covered by the Humana and CarePlus
Agreements;




-12-


·
            acquiring
      existing physician practices; and




·
            acquiring
      other medical service
organizations.




Increasing Patient
Volume




We
believe the PSN’s existing network of providers has the capacity to care for
additional Humana Plan Customers and could realize certain additional
economies of scale if the number of Humana Plan Customers utilizing the network
increased.  We seek to increase the number of customers using the PSN
network through the general marketing efforts of Humana and through our own
targeted marketing efforts towards Medicare eligible patients.




Selectively
Expanding Our  NetworkofPhysician
Practices Including Acquisition of Existing Physician Practices or Other Medical
Services Organizations




Within
our existing geographic markets, we are seeking to add additional physician
practices to the PSN’s existing network either through acquisition, start up or
affiliation with a current PSN physician or medical service organization. We
identify and select opportunities based in large part on the following broad
criteria:




·
            a
      history of profitable operations or a perceived synergy such as
      opportunities for economies of scale through a consolidation of management
      or service provision functions;





·
            a
      high concentration of Medicare
patients;





·
            a
      geographic proximity to underserved areas within our service regions;
      and





·
            a
      geographic proximity to our current
operations.





PSN
Competition





Some of
our direct competitors in the PSN industry, all of which are operating in
Florida are Continucare Corporation, MCCI, Primary Care Associates, Inc., Island
Doctors and WellMed. See Item 1A “Risk Factors – Our Industry is Already Very
Competitive...”





Health Maintenance
Organization





Between
July 2005 and August 2008, we operated the HMO through our wholly owned
subsidiary, Metcare Health Plans, Inc.





On August
29, 2008 (the “Closing Date”), we completed the sale of all of the outstanding
capital stock of the HMO to the Humana Plan pursuant to the terms of the Stock
Purchase Agreement, dated as of June 27, 2008, by and between the Company and
the Humana Plan for a cash purchase price of approximately $14.6 million (the
“Purchase Price”).  Upon closing, approximately ten percent of the
Purchase Price was deposited in escrow to be held for 24 months to secure our
payment of any post-closing adjustments, described below, and indemnification
obligations.  Concurrently with the sale, the PSN and Humana entered
into the IPA Agreement to provide or coordinate the provision of healthcare
services to the HMO’s customers pursuant to a capitation
arrangement.





The
Purchase Price is subject to positive or negative post-closing adjustment based
upon the difference between the HMO’s estimated closing net equity, which was
approximately $5.1 million, and the HMO’s actual net equity as of the Closing
Date as determined nine months following the Closing Date (the “Closing Net
Equity”).  In addition to the Purchase Price adjustment, the Stock
Purchase Agreement requires that the Humana Plan reconcile any changes in CMS
Part D payments and Medicare payments received by the HMO after the Closing Date
for services provided prior to the Closing Date to the amounts recorded for such
items as part of the Closing Net Equity determination.  Substantially
all of the reconciliations are expected to be completed in the first half of
2010 and will be paid to us or the Humana Plan, as applicable.  The
ultimate settlements, if any, will increase or decrease the gain on the sale of
the HMO.





In
connection with the sale, we paid certain of the employees of the HMO stay
bonuses or termination payments.  We recognized and paid all of these
costs, totaling $1.6 million, in the third quarter of 2008.


-13-





The
following discussion generally summarizes the HMO’s business as operated by us
prior to its sale.





At the
time of its sale, the HMO was offering its Medicare Advantage health plan in 13
Florida counties and providing services to 7,400 customers.





The HMO’s
Medicare Advantage customers did not pay a monthly premium in
2008.  In most cases, the HMO customers were subject to co-payments
and deductibles, depending upon the market and benefit. Except in limited cases,
including emergencies, our HMO customers were required to use primary care
physicians within the HMO’s network of providers and generally
received referrals from their primary care physician in order to see a
specialist or ancillary provider.





Pursuant
to the HMO’s contract with CMS, the HMO had agreed to provide services to
Medicare beneficiaries pursuant to the Medicare Advantage
program.  Under this contract, CMS paid the HMO a capitation payment
based on the number of customers enrolled, which payment was adjusted for
demographic and health risk factors. Inflation, changes in utilization patterns
and average per capita fee-for-service Medicare costs were also considered in
the calculation of the capitation payment by CMS.





Insurance





We rely
upon insurance to protect us from many business risks, including medical
malpractice, errors and omissions and certain significantly higher than average
customer medical expenses.  For example, to mitigate our exposure to
high cost medical claims, we have reinsurance arrangements that provide for the
reimbursement ofcertain customermedical expenses.  For 2009,
our deductible per customer per year for the PSN was $40,000 in Miami-Dade,
Broward and Palm Beach counties and $200,000 in the other counties in which we
operate, with a maximum annual benefit per customer of $1.0
million.  Although we maintain insurance of the types and in the
amounts that we believe are reasonable, there can be no assurances that the
insurance policies maintained by us will insulate us from material expenses
and/or losses in the future.  See Item 1A “Risk Factors - Claims
Relating to Medical Malpractice and Other Litigation...."





Employees





As of
December 31, 2009, we had 209 full-time employees, 28 of which are on our
corporate staff and 181 of which are employed by the PSN. None of our employees
are covered by a collective bargaining agreement or are represented by a labor
union. We consider our employee relations to be good.




Government
Regulation




Our
business is regulated by the federal government and the State of Florida. The
laws and regulations governing our operations are generally intended for the
benefit of health plan customers and providers and are intended to limit
healthcare program expenditures.  These laws and regulations, along
with the terms of our contracts, regulate how we do business, what services we
offer, and how we interact with Humana Participating Customers, CarePlus
Participating Customers, affiliated providers and the public.  The
government agencies administering these laws and regulations have broad latitude
to interpret and enforce them.  We are subject to various governmental
reviews, audits and investigations to verify our compliance with our contracts
and applicable laws and regulations.




We
believe that we are in material compliance with all government regulations
applicable to our business.  We further believe that we have
implemented reasonable systems and procedures to assist us in maintaining
compliance with such regulations.  Nonetheless, we face a variety of
regulatory related risks.  See “Risk Factors - Reductions in
Government Funding...”, “-The MMA Materially Impacted Our Operations...”, “CMS Risk
Adjustment Payment System...”, “Our Business Activities Are Highly Regulated...”,
“The Healthcare Industry is Highly Regulated...”, “” and “We Are Required to
Comply with Laws...”




A summary
of material aspects of the government regulations to which we are subject is set
forth below.




Federal
and State Reimbursement Regulation




Our
operations are affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements, which
are administered by a variety of federal and state governmental agencies as well
as by self-regulating associations and commercial medical insurance
reimbursement programs.


-14-


Federal
“Fraud and Abuse” Laws and Regulations




Health
care fraud and abuse laws at the federal and state levels regulate both the
provision of services to government program beneficiaries and the submission of
claims for services rendered to such beneficiaries.  Individuals and
organizations can be punished for submitting claims for services that were not
provided, not medically necessary, provided by an improper person, accompanied
by an illegal inducement to utilize or refrain from utilizing a service or
product, or billed in a manner that does not comply with applicable governmental
requirements.  Federal and state governments have a range of criminal,
civil and administrative sanctions available to penalize and remediate health
care fraud and abuse, including recovery of amounts improperly paid,
imprisonment, exclusion from participation in the Medicare/Medicaid programs,
civil monetary penalties and suspension of payments.  Fraud and abuse
claims may be initiated and prosecuted by one or more government entities and/or
private individuals, and more than one of the available penalties may be imposed
for each violation.




Laws
governing fraud and abuse apply to virtually all health care providers
(including the PSN Physicians and other physicians employed or otherwise engaged
by the PSN) and the entities with which a health care provider does
business.




Federal
Anti-Kickback Law




The
federal Anti-Kickback Law prohibits the knowing and willful, offer, payment,
solicitation, or receipt of any remuneration, overtly or covertly, in cash or in
kind, to reduce or reward (i) referrals of goods, facilities, items or services
reimbursable (in whole or in part) by a federal health care program (including,
without limitation, Medicare and/or Medicaid), or (ii) the purchasing, leasing,
ordering, or arranging for or recommending the purchasing, leasing or ordering
of such goods, facilities, items or services..  Violations of the
Anti-Kickback Law are punishable by imprisonment, criminal fines, civil monetary
penalties, exclusion from care programs and forfeiture of amounts collected in
violation of such laws. “Remuneration” is defined broadly and includes virtually
all economic arrangements involving hospitals, physicians and other health care
providers, and any third party including joint ventures, space and equipment
rentals, purchases of physician practices and management and personal services
contracts.




However,
in response to the breadth of the Anti-Kickback Law and a concern that it
prohibited some common and appropriate arrangements, regulatory “safe harbors”
were established such that if a particular transaction or relationship satisfied
all of the requirements of a particular safe harbor, the transaction or
relationship will be protected from prosecution under the Anti-Kickback
Law.  Further, the Anti-Kickback Law is an intent-based statute,
meaning that the failure of an arrangement to meet all of the requirements of a
safe harbor does not render such arrangement illegal per se.  Rather,
those arrangements that do not satisfy the requirements of a safe harbor
will be subject to review on a case-by-case basis to determine whether the
parties involved possessed the requisite improper intent.




Physician
Incentive Plan Regulations




CMS has
promulgated regulations that prohibit health plans with Medicare contracts from
making any direct or indirect payment to physicians or other providers as an
inducement to reduce or limit medically necessary services to a Medicare
beneficiary.  These regulations also impose disclosure, patient
satisfaction monitoring and other requirements relating to physician incentive
plans including requirements that govern incentive plans involving bonuses or
withholdings that could result in a physician being at “substantial financial
risk” as defined in Medicare regulations.




Federal
False Claims Act




We are
subject to a number of laws that regulate the presentation of false claims or
the submission of false information to the federal government.  For
example, the federal False Claims Act prohibits any party from knowingly
presenting, or causing to be presented, a false or fraudulent request for
payment from the federal government, or making a false statement or using a
false record to get a claim approved.  The federal government has
taken the position that claims presented in violation of the federal
Anti-Kickback Law or the Stark Law may be considered a violation of the federal
False Claims Act as well as by imprisonment for up to five
years.  Violations of the False Claims Act are punishable by treble
damages and penalties of up to $11,000 per false claim.  In addition
to suits filed by the government, a special provision under the False Claims Act
allows a private individual (e.g., a “whistleblower” such as a disgruntled
former employee, competitor or patient) to bring an action under the False
Claims Act on behalf of the government alleging that an entity has defrauded the
federal government and permits the whistleblower to share in any settlement or
judgment that may result from that lawsuit.


-15-




Florida
Fraud and Abuse Regulations




Florida
enacted “The Patient Brokering Act” which imposes criminal penalties, including
jail terms and fines, for offering, soliciting, receiving or paying any
commission, bonus, rebate, kickback, or bribe, directly or indirectly in cash or
in kind, or engaging in any split-fee arrangement, in any form whatsoever, to
induce the referral of patients or patronage from a healthcare provider or
healthcare facility. The Florida statutory provisions regulating the practice of
medicine include similar language as grounds for disciplinary action against a
physician.




Restrictions
on Physician Referrals





The
federal Ethics on Patient Referrals Law (the “Stark Law”), enacted as part of
the Social Security Act, prohibits a physician from referring Medicare or
Medicaid beneficiaries to an entity for the furnishing of “designated health
services,” which includes a broad range of inpatient and outpatient health care
services, if the physician (or the physician’s immediate family member) has a
direct or indirect “financial relationship” with the entity.  The
Stark Law also prohibits an entity from billing Medicare or Medicaid for
services furnished pursuant to a prohibited referral.  A financial
relationship is defined broadly to include a direct or indirect ownership
or investment in, or compensation relationship with, a health care entity. The
Stark Law, and the regulations promulgated thereunder, contains certain
exceptions that permit referrals that would otherwise be prohibited if the
parties comply with all of the requirements of the applicable exception. The
sanctions under the Stark Law include denial of claims and repayment of claims
previously paid, civil monetary penalties and exclusions from participation in
the Medicare programs.





Privacy
Laws





The
privacy, security, and use and disclosure of patient health information is
subject to federal and state laws and regulations, including the Healthcare
Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its
implementing regulations. Final regulations with respect to the privacy of
certain individually identifiable health information (the “Protected Health
Information”) became effective in April 2003 (the “Privacy Rule”). The Privacy
Rule specifies authorized or required uses and disclosures of the Protected
Health Information, as well as the rights patients have with respect to their
health information. The Privacy Rule also provides that to the extent that state
laws impose stricter privacy standards than the HIPAA privacy rule, such
standards are not preempted, requiring compliance with any stricter state
privacy law.  In addition, in October 2002, the electronic data
standards regulations under HIPAA became effective.  The final HIPAA
security rule became effective in February 2003, and established security
standards with respect to Protected Health Information transmitted or maintained
electronically.  These regulations establish uniform standards
relating to data reporting, formatting, and coding that many health care
providers and health plans must use when conducting certain transactions
involving health information.





HIPAA
added a new provision to an existing criminal statute that prohibits the knowing
and willful falsification or concealment of a material fact or the making of a
materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for health care benefits, items or
services.  HIPAA established criminal sanctions for health care fraud
and applies to all health care benefit programs, whether public or
private.  HIPAA also imposes sanctions and fines for unintentional
disclosure of Protected Health Information.





Clinic
Licensure





AHCA
requires us to license each of our physician practices individually as health
care clinics. Each physician practice must renew its health care clinic
licensure biennially.





Occupational Safety and
Health Administration (“OSHA”)





In
addition to OSHA regulations applicable to businesses generally, we must comply
with, among other things, the OSHA directives on occupational exposure to blood
borne pathogens, the federal Needlestick Safety and Prevention Act, OSHA injury
and illness recording and reporting requirements, federal regulations relating
to proper handling of laboratory specimens, spill procedures and hazardous waste
disposal, and patient transport safety requirements.


-16-


Medicare Marketing
Restrictions





We are
subject to federal marketing rules and regulations that limit, among other
things, offering any gift or other inducement to Medicare beneficiaries to
encourage them to come to us for their healthcare.


Our Executive
Officers




Set forth
below are: (1) the names and ages of our executive officers at February 1,
2010, (2) all positions with the Company presently held by each such person
and (3) the positions held by, and principal areas of responsibility of,
each such person during the last five years.





Name
              
              Age
              
              PositionMichael
      M. Earley*
              
              54
              
              Chief
      Executive OfficerJose
      A. Guethon, M.D.
              
              47
              
              Chief
      Operating Office and PresidentRobert
      J. Sabo, CPA.
              
              59
              
              Chief
      Financial OfficerRoberto
      L. Palenzuela, Esq.
              
              46
              
              General
      Counsel and Secretary




*On December 7, 2009, we
announced that Mr. Earley plans to step down as Chief Executive Officer upon the
earlier of March 31, 2010 or the employment of his successor.  On
March 1, 2010, Mr. Earley agreed to continue to serve as our CEO until the
earlier of June 30, 2010 or the employment of his successor.  We are
currently in the process of searching for a successor.




MICHAEL M. EARLEY has served
as our Chief Executive Officer since March 2003. He also served as Chairman
of the Board from September 2004 through December 2009.  He previously
served as a member on our Board of Directors from June 2000 to December
2002.  From January 2002 until February 2003, Mr. Earley was
self-employed as a corporate consultant.  Previously, from January
2000 through December 2002, he served as Chief Executive Officer of Collins
Associates, an institutional money management firm.  From 1997 through
December 1999, Mr. Earley served as Chief Executive Officer of Triton Group
Management, a corporate consulting firm.  From 1986 to 1997, he served
in a number of senior management roles, including CEO and CFO of Intermark, Inc.
and Triton Group Ltd., both publicly traded diversified holding companies and
from 1978 to 1983, he was an audit and tax staff member of Ernst &
Whinney.  From 2002 until its sale in 2008, Mr. Earley served as a
director and member of the audit committee of MPower Communications, a publicly
traded telecommunications company.  Mr. Earley received his
undergraduate degrees in Accounting and Business Administration from the
University of San Diego.





JOSE A. GUETHON, M.D.has served
as our Chief Operating Officer and President since September
2008.  Prior to his appointment, he served as President of the PSN
since January 2007.  Dr. Guethon initially joined us in October 2001
and has served in a variety of positions, including as Medical Director and
Staff Physician from October 2001 through June 2004, as Senior Vice President of
Utilization and Quality Improvement from June 2004 through January 2006 and as
Chief Medical Officer of our HMO from January 2006 through December
2006.  Dr. Guethon has approximately 15 years of healthcare experience
both in clinical and administrative medicine, and is board-certified in family
practice. Prior to joining us, Dr. Guethon served as the Regional Medical
Director for JSA Healthcare Corporation, a provider services network
located in Tampa, Florida from April 2001 through October 2001 and as the
Medical Director of Humana’s Orlando market operations from April 1998 through
April 2001.  Dr. Guethon earned his undergraduate degree from the
University of Miami, his doctorate in medicine degree from the University of
South Florida College of Medicine, and completed an MBA program at Tampa
College.




ROBERT J. SABO, C.P.A. has served as our Chief
Financial Officer since November 15, 2006. Mr. Sabo has over 35 years of
financial expertise focused substantially in the Florida healthcare
industry.  From November 2003 to October 2006, he was the Chief
Financial Officer of Hospital Partners of America, LLC, a privately held North
Carolina healthcare services and hospital partnership company, where his duties
included the day to day financial operations of the organization as well as the
company’s significant business development and merger and acquisition work. He
began his career as a CPA in South Florida with Ernst & Young in 1972, and
was admitted to the partnership in 1984, with his most recent responsibility
from January 1999 until June 2003 as Market Leader of the Health Science
Practice of the Carolinas.  Mr. Sabo graduated with a B.B.A. in
Accounting from the University of Miami.  He is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants.


-17-





ROBERTO L. PALENZUELA,
ESQ. has served
as General Counsel and Secretary since March 2004.  Prior to joining
us, Mr. Palenzuela served as General Counsel and Secretary of Continucare
Corporation, a publicly traded primary care physician services company, from May
2002 through March 2004.  From 1994 to 2002, Mr. Palenzuela served as
an officer and director of Community Health Plan of the Rockies, Inc., a
privately owned health maintenance organization based in Denver,
Colorado.  Community Health Plan of the Rockies, Inc. filed for
protection under Chapter 11 of the federal bankruptcy laws on November 15, 2002,
and was released from Chapter 11 on December 16, 2002.  From March
1999 through June 2001, Mr. Palenzuela served as General Counsel of Universal
Rehabilitation Centers of America, Inc. (n/k/a Universal Medical Concepts,
Inc.), a privately owned physician practice management company.  Mr.
Palenzuela received his Bachelors Degree in Business Administration from the
University of Miami in 1985 and his law degree from the University of Miami
School of Law in 1988.





ITEM
1A.  RISK FACTORS





Our
Operations are Dependent on Humana and, At Times, Their and Our Economic
Interests May Diverge.




For the
twelve months ended December 31, 2009, approximately 99.6% of our revenue was
earned through the Humana Agreements.  We expect that, going forward,
substantially all of our revenue will continue to be derived under the Humana
Agreements.  Humana may immediately terminate any of the Humana
Agreements and/or any individual physician credentialed under the Humana
Agreements upon the occurrence of certain events.  Humana may also
amend the material terms of the Humana Agreements under certain
circumstances.  See “Item 1.  Business- Humana Agreements”
for a detailed discussion of the Humana Agreements.  Failure to
maintain the Humana Agreements on favorable terms, for any reason, would
materially adversely affect our results of operations and financial condition. A
material decline in enrollees in Humana’s Medicare Advantage program could also
have a material adverse effect on our results of operations.




Notwithstanding
Humana and our current shared interest in providing service to Humana
Participating Customers enrolled in Humana’s Medicare Advantage Plans, Humana
and we have different and, at times, opposing economic
interests.  Humana provides a wide range of health insurance services
across a wide range of geographic regions, utilizing a vast network of
providers.  As a result, Humana and we may have different views
regarding the proper pricing of our services and/or the proper pricing of the
various service providers in Humana’s provider networks, the cost of which we
bear to the extent we utilize such service providers.  Similarly, as a
result of changes in laws, regulations, consumer preferences or other factors,
Humana may find it in its best interest to provide health insurance services in
Florida pursuant to another payment or reimbursement structure.  In
the event our interests diverge, we may have limited recourse or alternative
options in light of our dependence on Humana.  There can be no
assurances that Humana and we will continue to find it mutually beneficial to
work together.





Because
we operate exclusively as a PSN in Florida, primarily pursuant to the Humana
Agreements, our exposure to many of the risks described herein are not mitigated
by a diversification of our lines of business, geographic focus or sources of
revenue.   While there are no restrictions to pursuing such
diversification we would have to establish new relationships with physicians and
other health care providers.  In addition, if we were to seek expansion
into new geographic markets we would  be required to comply with laws and
regulations of states that differ from the ones in which we currently operate,
and may face competitors with greater knowledge of such local
markets.





Reductions
in Funding for Medicare Programs and other Healthcare Reform Initiatives Could
Adversely Affect Our Profitability





Substantially
all of our revenue is directly or indirectly derived from reimbursements
generated by Medicare Advantage health plans.  As a result, our
revenue and profitability are dependent on government funding levels for
Medicare Advantage programs.





The
Medicare programs are subject to statutory and regulatory changes, prospective
and retroactive rate adjustments, administrative rulings, and funding
restrictions, any of which could have the effect of limiting or reducing
reimbursement levels.  These government programs, as well as private
insurers have taken and continue to take steps to control the cost, use and
delivery of healthcare services.





For
instance, CMS has announced that in 2010, the premiums paid to Medicare
Advantage Plans will decrease as a result of a 0.5% decrease in the base rate
and a recalibration of risk scores that will decrease the base rate by an
additional 4.5%. Although we believe that the impact on us of the premium
reduction will be mitigated by, among other things, reduced benefit
offerings, increased customer co-pays and deductibles and improved risk score
compliance, we have limited ability to influence the benefits offered or co-pays
and deductibles set by Humana.


-18-





CMS
announced that it would audit Medicare Advantage plans, primarily targeted based
on risk score growth, for compliance by the plans and their providers with
proper coding practices. CMS began targeted medical record reviews and
adjustment payment validations in late 2008, focusing on risk adjustment data
from 2006 dates of service, which were the basis for premium payments for the
2007 plan year.  CMS has indicated that payment adjustments will not
be limited to risk scores for the specific beneficiaries for which errors are
found but may be extrapolated to the entire plan. There can be no assurance that
Humana’s Medicare Advantage plans will not be randomly selected or targeted for
review by CMS or, in the event that a Humana Medicare Advantage plan is selected
for a review, that the outcome of such a review will not result in a material
adjustment in our revenue and profitability.





The
President has expressed support for healthcare reform and each house of the U.S.
Congress has passed a bill pertaining to the structure and funding for the U.S.
healthcare system, including the Medicare program.  Various items of
the two bills would, if adopted, have a material adverse impact on Medicare
Advantage customers and Medicare Advantage plans, including without limitation,
provisions reducing Medicare Advantage payment rates. More specifically,
the House of Representative’s bill would phase down the current payment system
to benchmark rates that are 100% of average Medicare fee-for-service costs.
Plans with high “quality rankings” would be eligible for a benchmark increase.
The Senate bill, in contrast, would set benchmark rates at the area-wide average
of plan bids. Plans meeting certain performance benchmarks would be eligible for
bonus payments. In addition, the House of Representatives bill would also
authorize the termination of Medicare Advantage plans which, for five
consecutive years, use less than 85% of health insurance premiums to provide
health care to their customers




Although
the Senate’s bill and the House of Representative’s bill contain some comparable
provisions regarding restrictions on plan cost-sharing and changes to the annual
enrollment period, it is impossible to predict with any reasonable certainty
what items of the two bills or of any future legislative proposals, if any, will
become law or the impact of any new law on our profitability.




Any of
the following changes, among others, could have a material adverse effect on our
business:





·
            reductions
      in or limitations of reimbursement amounts or rates under
      programs;


·
            reductions
      in funding of programs;


·
            expansion
      of benefits without adequate funding;
or


·
            elimination
      of coverage for certain individuals, benefits or treatments under
      programs.





Any of
the foregoing changes could compel Medicare Advantage plan providers to increase
member premiums, compel them to reduce the benefits they offer, or some
combination thereof, thereby making Medicare Advantage plans potentially less
attractive to Medicare customers relative to other insurance or care
options.





Because
Substantially All of Our Revenue Is Established by Contract and Cannot Be
Modified During the Contract Terms, Our Operating Margins Could be Negatively
Impacted if We Are Unable to Manage Our Medical Expenses
Effectively.




The
Humana Agreements are riskagreements
under which we receive monthly payments for each Humana Participating
Customer at a rate established by the agreements, also called a capitation
fee.  In accordance with the agreements, the total monthly payment is
a function of the number of Humana Participating Customers, regardless of the
actual utilization rate of covered services. In return, the PSN assumes
financial responsibility for the provision of all necessary medical care to the
Humana Participating Customers, regardless of whether or not its affiliated
providers directly provide the covered medical services.




To the
extent that the Humana Participating Customers require more care than is
anticipated, aggregate capitation rates may be insufficient to cover the costs
associated with the treatment of such Humana Participating Customers. If medical
expenses exceed our estimates, except in very limited circumstances, we will be
unable to increase the premiums received under these contracts during the
then-current terms.


-19-




Since we
do not negotiate with CMS or Humana regarding the benefits to be provided under
Humana’s Medicare Advantage plans, we often have just a few months to
familiarize ourselves with each new, annual package of benefits we are expected
to offer.  If Humana exercises its right to amend the benefits
offered, we may object to such amendment within 30 days.  If we object
to such amendment, Humana may terminate the applicable Humana Agreement upon 90
days written notice.  Aside from the foregoing, we have limited
ability to negotiate with Humana regarding the scope of benefits we will be
directly or indirectly responsible for providing.  While the Humana
Agreements covering the Central Florida and South Florida service areas have
one-year renewable terms, the term of the IPA Agreement is five
years.  Accordingly, even if the Humana Agreements covering the
Central Florida and South Florida service areas were terminated, we could still
have an obligation to provide services under the IPA Agreement for a number of
years, potentially at a loss.




Relatively
small changes in our ratio of medical expense to revenue can create significant
changes in our financial results. Accordingly, the failure to adequately predict
and control medical expenses and to make reasonable estimates and maintain
adequate accruals for incurred but not reported, claims, may have a material
adverse effect on our financial condition, results of operations, or cash
flows.




Historically,
our medical expenses as a percentage of revenue have
fluctuated.  Factors that may cause medical expenses to exceed
estimates include:




·
            the
      health status of our customers;


·
            higher
      than expected utilization of new or existing healthcare services or
      technologies;


·
            an
      increase in the cost of healthcare services and supplies, including
      pharmaceuticals, whether as a result of inflation or
      otherwise;


·
            changes
      to mandated benefits or other changes in healthcare laws, regulations, and
      practices;


·
            Humana’s
      periodic renegotiation of provider contracts with specialist
      physicians, hospitals and ancillary
  providers;


·
            periodic
      renegotiation of  contracts with our affiliated primary care
      physicians;


·
            changes
      in the demographics of our customers and medical trends affecting Medicare
      risk scores;


·
            contractual
      or claims disputes with providers, hospitals, or other service providers
      within the Humana network; and


·
            the
      occurrence of catastrophes, major epidemics, or acts of
      terrorism.




A
Failure to Estimate Incurred But Not Reported Medical Benefits Expense
Accurately Could Affect Our Profitability.





Medical
claims expense includes estimates of future medical claims that have been
incurred by the customer but for which the provider has not yet billed us (“IBNR
claims”).  IBNR claim estimates are made utilizing actuarial methods
and are continually evaluated and adjusted by management, based upon our
historical claims experience and other factors.  Adjustments, if
necessary, are made to medical claims expense when the assumptions used to
determine our IBNR claims liability changes and when actual claim costs are
ultimately determined.  Due to the inherent uncertainties associated
with the factors used in these estimates and changes in the patterns and rates
of medical utilization, materially different amounts could be reported in our
financial statements for a particular period under different conditions or using
different, but still reasonable, assumptions.  Although our past
estimates of IBNR have typically been adequate, they may be inadequate in the
future, which would adversely affect our results of
operations.  Further, the inability to estimate IBNR accurately may
also affect our ability to take timely corrective actions, further exacerbating
the extent of any adverse effect on our results.





We
Face Certain Competitive Threats Which Could Reduce Our Profitability and
Increase Competition for Customers.




We face
certain competitive threats based on certain features of the Medicare programs,
including the following:





·
            Managed
      care companies began offering various new products in 2006, including
      regional PPOs and private fee-for-service plans. Medicare PPOs and private
      fee-for-service plans allow their customers more flexibility in selecting
      physicians than Medicare Advantage HMOs, which typically require customers
      to coordinate care with a primary care physician. The Medicare
      Modernization Act has encouraged the creation of regional PPOs through
      various incentives, including certain risk corridors, or
      cost-reimbursement provisions, a stabilization fund for incentive
      payments, and special payments to hospitals not otherwise contracted with
      a Medicare Advantage plan that treat regional plan enrollees. The
      formation of regional Medicare PPOs and private fee-for-service plans has
      affected our PSN’s relative attractiveness to existing and potential
      Medicare customers in their service
areas.





·
            The
      payments for the local and regional Medicare Advantage plans are based on
      a competitive bidding process that may indirectly cause a decrease in the
      amount of premiums paid to the PSN or cause the PSN to increase the
      benefits it offers.


-20-


·
            Medicare
      beneficiaries generally have a more limited annual enrollment period
      during which they can choose between participating in a Medicare Advantage
      plan or receiving benefits under the traditional fee-for-service Medicare
      program. After the annual enrollment period, most Medicare beneficiaries
      will not be permitted to change their Medicare benefits. The annual
      enrollment process and subsequent “lock-in” provisions of the MMA may
      adversely affect our level of revenue growth as it will limit Humana’s
      ability to market to and enroll new customers in its established service
      areas outside of the annual enrollment
period.





·
            Managed
      care companies that offer Medicare Advantage plans are required to offer
      prescription drug benefits as part of their Medicare Advantage
      plans.  Individuals who are enrolled in a Medicare Advantage
      plan that offers qualified Part D coverage must receive their drug
      coverage through their Medicare Advantage prescription drug plan, with the
      exception of those Medicare Advantage enrollees who are also enrolled in a
      Medical Savings Account plan, who may choose a stand-alone
      PDP.  Enrollees may prefer a stand-alone drug plan and may cease
      to be a Medicare Advantage customer in order to participate in a
      stand-alone PDP. Accordingly, the Medicare Part D prescription drug
      benefit could reduce Humana Participating Customer enrollment and
      revenue.




CMS’s
Risk Adjustment Payment System and Budget Neutrality Payment Adjustments Could
Result In Material Retroactive Adjustments to Our Results of
Operations.




CMS has
implemented a risk adjustment payment system for Medicare health plans to
improve the accuracy of payments and establish appropriate compensation for
Medicare plans that enroll and treat less healthy Medicare
beneficiaries.  CMS establishes premium payments to Medicare plans
based on the plans’ approved bids at the beginning of the calendar year. Based
on the customers’ known demographic and risk information, CMS then adjusts
premium levels on two separate occasions during the year on a retroactive basis
to take into account additional customer risk data. The first such adjustment
updates the risk scores for the current year based on prior year’s dates of
service. The second such adjustment is a final retroactive risk premium
settlement for the prior year. As a result of the variability of factors
impacting risk scores, the actual amount of CMS’s retroactive payment could be
materially more or less than our estimates. Consequently, our estimate of our
plans’ aggregate customer risk scores for any period, and our accrual of
premiums related thereto, may result in favorable or unfavorable adjustments to
our Medicare premium revenue and, accordingly, our profitability.





Since
2003, payments to Medicare Advantage plans have also been adjusted by a “budget
neutrality” factor that was implemented by Congress and CMS to prevent health
plan payments from being reduced overall while, at the same time, directing
higher, risk adjusted payments to plans with more chronically ill enrollees. In
general, this adjustment has favorably impacted payments to all Medicare
Advantage plans. The Deficit Reduction Act of 2006, among other changes,
provides for an accelerated phase-out of budget neutrality for risk adjustment
of payments made to Medicare Advantage plans.  The phase out began in
1997 and will be complete by 2011, when Medicare Advantage plans will no longer
receive any budget neutrality payment adjustment.  As a result of
this phase-out, we expect the premiums we receive could be reduced, depending on
the risk scores of Humana Participating Customers.





A Disruption in
Our Health Care Provider Networks Could Have an Adverse Effect on Our Operations
and Profitability.





Our
operations and profitability are dependent, in part, upon our ability to
contract with healthcare providers and provider networks on favorable terms. In
any particular service area, healthcare providers or provider networks could
refuse to contract with us, demand higher payments, or take other actions that
could result in higher healthcare costs, disruption of benefits to our
customers, or difficulty in meeting our regulatory or accreditation
requirements. In some service areas, healthcare providers may have significant
market positions. If healthcare providers refuse to contract with us, use their
market position to negotiate favorable contracts, or place us at a competitive
disadvantage, then our ability to market products or to be profitable in those
service areas could be adversely affected. Our provider networks could also be
disrupted by the financial insolvency of a large provider group. Any disruption
in our provider network could result in a loss of customers or higher healthcare
costs.





A
Disruption in Humana’s Healthcare Provider Networks Could Have an Adverse Effect
on Our Operations and Profitability.




A
significant portion of the PSN’s total medical expenses are payable to entities
that are not directly contracted with the PSN.  Although virtually all
of such entities are Humana approved service providers, and although the PSN can
provide Humana input with respect to Humana’s service providers, the PSN does
not control the process by which Humana negotiates and/or contracts with service
providers in the Humana Medicare Advantage network.


-21-


We
Depend on Humana to Provide Us with Crucial Information and Data.




Humana
provides a significant amount of information and services to the PSN, including
claims processing, billing services, data collection and other information,
including reports and calculations of costs of services provided and payments to
be received by the PSN.  The PSN does not own or control such systems
and, accordingly, has limited ability to ensure that these systems are properly
maintained, serviced and updated.  In addition, information systems
such as these may be vulnerable to failure, acts of sabotage and
obsolescence.  The PSN’s business and results of operations could be
materially and adversely affected by its inability, for any reason, to receive
timely and accurate information from Humana.




Competition
For Physician Practice Group Acquisition and Other Factors May Impede Our
Ability to Acquire Other Physician Practices and May Inhibit Our
Growth.





We
anticipate that a portion of the future growth of our PSN may be accomplished
through acquisitions of physician practices or other medical service
organizations with Humana or CarePlus contracts.  The success of this
strategy depends upon our ability to identify suitable acquisition candidates,
reach agreements to acquire these companies, obtain necessary financing on
acceptable terms and successfully integrate the operations of these
businesses.  In pursuing acquisition opportunities, we may compete
with other companies that have similar growth strategies.  Some of
these competitors are larger and have greater financial and other resources then
we have.  This competition may prevent us from acquiring businesses
that could improve our growth or expand our operations.





Claims
Relating to Medical Malpractice and Other Litigation Could Cause Us to Incur
Significant Expenses.




From time
to time, we are a party to various litigation matters, some of which seek
monetary damages. Managed care organizations may be sued directly for alleged
negligence, including in connection with the credentialing of network providers
or for alleged improper denials or delay of care. In addition, providers
affiliated with the PSN involved in medical care decisions may be exposed to the
risk of medical malpractice claims. Some of these providers do not have
malpractice insurance. As a result of increased costs or inability to secure
malpractice insurance, the percentage of physicians who do not have
malpractice insurance may increase. Although most of its network providers
are independent contractors, claimants sometimes allege that a PSN should be
held responsible for alleged provider malpractice, particularly where the
provider does not have malpractice insurance, and some courts have permitted
that theory of liability.




We cannot
predict with certainty the eventual outcome of any pending litigation or
potential future litigation, and there can be no assurancesthat we will not incur
substantial expense in defending these or future lawsuits or indemnifying third
parties with respect to the results of such litigation. The loss of even one of
these claims, if it results in a significant damage award, could have a material
adverse effect on our business. In addition, exposure to potential liability
under punitive damage or other theories may significantly decrease our ability
to settle these claims on reasonable terms.




We
maintain errors and omissions insurance and other insurance coverage that we
believe are adequate based on industry standards. Nonetheless, potential
liabilities may not be covered by insurance, insurers may dispute coverage or
may be unable to meet their obligations or the amount of insurance coverage
and/or related reserves may be inadequate. There can be no assurancesthat we will be able to
obtain insurance coverage in the future, or that insurance will continue to be
available on a cost-effective basis, if at all. Moreover, even if claims brought
against us are unsuccessful or without merit, we would have to defend ourselves
against such claims. The defense of any such actions may be time-consuming and
costly and may distract management’s attention. As a result, we may incur
significant expenses and may be unable to effectively operate our
business.




Our
Industry is Already Very Competitive; Increased Competition Could Adversely
Affect Our Revenue; the PSN Competes with Other Service Providers for Humana’s
Business.




We
compete in the highly competitive and regulated healthcare industry, which is
subject to continuing changes with respect to the provisioning of services and
the selection and compensation of providers.  Substantially all of our
revenue was directly or indirectly derived from premiums generated by Medicare
Advantage health plans.  In 2009, substantially all of our revenue was
earned through the Humana Agreements. Humana competes with other health
plans in securing and serving patients in the Medicare Advantage
Program.  Companies in other healthcare industry segments, some of
which have financial and other resources comparable to or greater than Humana,
are competitors to Humana.  The market in Florida has become
increasingly attractive to health plans that may compete with
Humana.  For example, HealthSpring and Coventry Health Plans, both
based outside of Florida, have in recent years announced acquisitions of health
plans in Florida.  Humana may not be able to continue to compete
profitably in the healthcare industry if additional competitors enter the same
market.




-22-


The PSN
competes with other service providers for Humana’s business and Humana competes
with other health plans in securing and serving patients in the Medicare
Advantage Program.  Failure to maintain favorable terms in the Humana
Agreements would adversely affect our results of operations and financial
condition.





Competitors
of our PSN vary in size and scope and in terms of products and services
offered.  Our PSN competes directly with various regional and local
companies that provide similar services.  Some of the PSN’s direct
competitors are WellCare, Continucare Corporation, Primary Care Associates,
Inc., MCCI and Island Doctors, all based or operating in Florida. Additionally,
companies in other healthcare industry segments, some of which have financial
and other resources greater than ours, may become competitors in providing
similar services at any given time.  The market in Florida has become
increasingly attractive to competitors of the PSN due to the large population of
Medicare participants.  We and Humana may not be able to continue to
compete effectively in the healthcare industry if additional competitors enter
the same markets.





We
believe that many of our competitors and potential competitors are substantially
larger than our PSN and have significantly greater financial, sales and
marketing, and other resources.  Furthermore, it is our belief that
some of our competitors may make strategic acquisitions or establish cooperative
relationships among themselves.




The
Failure to Implement a CEO Succession Plan Could Be Disruptive to Our
Business.





In
December 2009, we announced that Mr. Earley plans to step down as Chief
Executive Officer upon the earlier of March 31, 2010 or the employment of his
successor.  On March 1, 2010, Mr. Earley agreed to continue to serve
as our CEO until the earlier of June 30, 2010 or the employment of his
successor.  We are in the process of searching for a new Chief Executive
Officer.  However, there can be no assurances that we will be able to
locate and retain a suitable candidate in a timely manner or that any new Chief
Executive Officer will lead us as desired. We face significant competition for
an executive with the qualifications and experience we are
seeking.  If we do not locate and engage a Chief Executive Officer
that meets our search criteria prior to Mr. Earley’s departure, we may seek to
appoint an interim Chief Executive Officer. Any failure to implement a CEO
succession as planned could have a material adverse effect on our
business.





We
are Dependent upon Certain Executive Officers and Key Management Personnel for
Our Future Success.





Our
success depends, to a significant extent, on the continued contributions of
certain of our executive officers and key management personnel.  The
loss of these individuals could have a material adverse effect on our business,
results of operations, financial condition and plans for future
development.  While we have a retention plan and employment contracts
with certain executive officers and key management personnel, there can be no
assurance that these persons will continue their employment with us. We compete
with other companies in the industry for executive talent and there can be no
assurance that highly qualified executives would be readily and easily available
without delay, given the limited number of individuals in the industry with
expertise particular to our business operations.





Our
Business Activities Are Highly Regulated and New and Proposed Government
Regulation or Legislative Reforms Could Increase Our Cost of Doing Business, and
Reduce Our Customer Base, Profitability, and Liquidity.





Our
business is subject to substantial federal and state regulation. These laws and
regulations, along with the terms of our contracts and licenses, directly or
indirectly regulate how we do business, what services we offer, and how we
interact with our customers, providers, and the public. Healthcare laws and
regulations are subject to frequent change and varying interpretations.
Changes in existing laws or regulations, or their interpretations, or the
enactment of new laws or the issuance of new regulations could adversely affect
our business by, among other things:




·
            reducing
      the capitation payments we receive;


·
            imposing
      additional license, registration, or capital reserve
      requirements;


·
            increasing
      our administrative and other costs;


·
            forcing
      us to undergo a corporate
restructuring;


-23-


·
            increasing
      mandated benefits without corresponding premium
  increases;


·
            limiting
      our ability to engage in inter-company transactions with our affiliates
      and subsidiaries;


·
            forcing
      us to restructure our relationships with
  providers; or


·
            requiring
      us to implement additional or different programs and
    systems.




It is
possible that future legislation and regulation and the interpretation of
existing and future laws and regulations could have a material adverse effect on
our ability to operate under the Medicare program and to continue to serve and
attract new customers.




The Healthcare Industry is Highly
Regulated.  Our or Humana’s Failure to Comply with Laws or
Regulations, or a Determination that in the Past We Had Failed to Comply with
Laws or Regulations, Could Have an Adverse Effect on Our Business, Financial Condition and Results of
Operations.




The
healthcare services that we and our affiliated professionals, including the PSN
physicians, provide are subject to extensive federal, state and local laws and
regulations governing various matters such as the licensing and certification of
our facilities and personnel, the conduct of our operations, billing and coding
policies and practices, policies and practices with regard to patient privacy
and confidentiality, and prohibitions on payments for the referral of business
and physician self-referrals.  These laws and regulations generally
aimed at protecting patients and federal healthcare programs, and the agencies
charged with the administration of these laws and regulations have broad
authority to enforce them.  See Item 1.  Business -
Government Regulation for a discussion of the various federal government and
state laws and regulations to which we are subject.




The
federal and state agencies administering the laws and regulations applicable to
us have broad discretion to enforce them. We are subject, on an ongoing basis,
to various governmental reviews, audits, and investigations to verify our
compliance with our contracts, licenses, and applicable laws and regulations.
These reviews, audits and investigations can be time consuming and costly. An
adverse review, audit, or investigation could result in one or more of the
following:




·
            loss
      of the PSN’s right to directly or indirectly participate in the Medicare
      program;


·
            loss
      of one or more of the PSN’s licenses to act as a service provider or third
      party administrator or to otherwise provide or bill for a
      service;


·
            forfeiture
      or recoupment of amounts the PSN has been paid pursuant to its
      contracts;


·
            imposition
      of significant civil or criminal penalties, fines, or other sanctions on
      us and/or  our affiliated professionals and employees, including
      the PSN physicians;


·
            damage
      to our reputation in existing and potential
  markets;


·
            increased
      restrictions on marketing of the PSN’s
  services; and


·
            inability
      to obtain approval for future products and services, geographic
      expansions, or acquisitions.




Humana is
also subject to substantial federal and state government regulation as well as
governmental reviews, audits and investigations.  Humana’s failure to
comply with applicable regulations and/or maintain its licensure and rights to
participate in the Medicare program would have a materially adverse effect on
our business.




We
Are Required to Comply With Laws Governing the Transmission, Security and
Privacy of Health Information That Require Significant Compliance Costs, and Any
Failure to Comply With These Laws Could Result in Material Criminal and Civil
Penalties.




Regulations
under the Health Insurance Portability and Accountability Act of 1996, or HIPAA,
require us to comply with standards regarding the exchange of health information
within our company and with third parties, including healthcare providers,
designated “business associates” and customers. These regulations include
standards for common healthcare transactions, including claims information, plan
eligibility, and payment information; unique identifiers for providers and
employers; security; privacy; and enforcement. HIPAA also provides that to the
extent that state laws impose stricter privacy standards than HIPAA privacy
regulations, the stricter state law requirements are not preempted by
HIPAA.  HIPAA does, however, preempt more lenient state law
requirements and thus, unless a state seeks and receives an exception from the
Department of Health and Human Services regarding certain state laws, or state
laws concerning certain specified areas, such state standards and laws will be
preempted by any contrary provision of HIPAA.




-24-


We
conduct our operations in an attempt to comply with all applicable HIPAA
requirements. Given the complexity of the HIPAA regulations, the possibility
that the regulations may change, and the fact that the regulations are subject
to changing and, at times, conflicting interpretation, our ongoing ability to
comply with applicable HIPAA requirements is uncertain. Furthermore, a state’s
ability to promulgate stricter laws, and uncertainty regarding many aspects of
such state requirements, make compliance more difficult. To the extent that
we  submit electronic healthcare claims and payment transactions that
do not comply with the electronic data transmission standards established under
HIPAA, payments may be delayed or denied. Additionally, the costs of complying
with any changes to the HIPAA regulations may have a negative impact on
operations. Sanctions for failing to comply with the HIPAA provisions include
criminal penalties and civil sanctions, including significant monetary
penalties. In addition, failure to comply with state health information laws
that may be more restrictive than the regulations issued under HIPAA could
result in additional penalties.




Our
Exploration of Various Forms of Business Proposals Could be Disruptive to Our
Business and We May Never Recover Our Investment in Such Efforts.
  From time
to time we do explore various business proposals that we believe have the
promise of resulting in a transaction or relationship that could be beneficial
to us.  Such proposals may relate to new service areas, new
businesses, new services and/or strategic alternatives.  Such
perceived opportunities may be presented to us by third parties without
solicitation and, in other instances, we may take certain actions to
generate and/or gauge an expression of interest or an offer.  The
exploration of such proposals is an inherently uncertain process, not
uniquely within our control and subject to unpredictable developments
and set-backs.  We may incur substantial expenses and consume
considerable management and employee time, exploring whether or not to
even conditionally advance one or more business proposals.  The
diversion of our management's and employees’ attention can be disruptive to
our on-going business.  Although our Board of Directors can commit to act
in our best interest when making and/or evaluating any communications
regarding business proposals, we can not assure you that any series of
conversations, expressions of interest or offers will ever result in an
offer that is deemed to be in our best interest by our Board of Directors
and/or shareholders, which may be asked to pass upon an offer in certain
circumstances. Accordingly, we are also subject to the risk that we may
never recoup the investment of money and/or management time that we devote to
business proposals.




We
have Anti-Takeover Provisions Which May Make it Difficult to Acquire Us or
Replace or Remove Current Management.




Provisions
in our Articles of Incorporation and Bylaws may delay or prevent our
acquisition, a change in our management or similar change in control
transaction, including transactions in which our shareholders might otherwise
receive a premium for their shares over then current prices or that shareholders
may deem to be in their best interests. In addition, these provisions may
frustrate or prevent any attempts by our shareholders to replace or remove
current management by making it more difficult for shareholders to replace
members of the Board of Directors. Because the Board of Directors is responsible
for appointing the members of the management team, these provisions could in
turn affect any attempt by our shareholders to replace the current members of
the management team. These provisions provide, among other things,
that:




·
            any
      shareholder wishing to properly bring a matter before a meeting of
      shareholders must comply with specified procedural and advance notice
      requirements;





·
            the
      authorized number of directors may be changed only by resolution of the
      Board of Directors; and





·
            the
      Board of Directors has the ability to issue up to 10,000,000 shares of
      preferred stock, with such rights and preferences as may be determined
      from time to time by the Board of Directors, without shareholder
      approval.





Our
Quarterly Results Will Likely Fluctuate, Which Could Impact the Value of
Our Common Stock.





We are
subject to quarterly variations in revenue and medical expenses due to, among
other things, our ever evolving estimates of reimbursement rates and incurred
but not reported medical expenses, as well as fluctuations in patient
utilization.  For example, our estimates of reimbursement rates are
often materially impacted when CMS announces past and future year reimbursement
rates and we generally experience a greater use of medical services in some
months than others.  Accordingly, our results of operations fluctuate
from period to period and our results of operations for any quarter are not
necessarily indicative of results of operations for any future period or full
year, which could impact the value of our Common Stock.





The
Market Price of Our Common Stock Could Fall as a Result of Sales of Shares of
Common Stock in the Market or the Price Could Remain Lower because of the
Perception that Such Sales May Occur.




We cannot
predict the effect, if any, that future sales or the possibility of future sales
may have on the market price of our Common Stock.  As of December 31,
2009, there were approximately 40.9 million shares of our Common Stock
outstanding, all of which are freely tradable without restriction or tradable in
accordance with Rule 144 of the Securities Actwith
the exception of approximately 5.2 million shares owned by certain of our
officers, directors and affiliates which may be sold publicly at any time
subject to the volume and other restrictions promulgated pursuant to Rule 144 of
the Securities Act and subject to legal restrictions such as insider trading
laws  and (ii) approximately 719,000 restricted shares of our Common
Stock owned by certain of our employees and directors at December 31, 2009,
which are subject to forfeiture until vested in accordance with their
terms.  In addition, as of December 31, 2009, approximately
4.2 million shares of our Common Stock were reserved for issuance upon the
exercise of options which were previously granted and 881,000 shares of our
Common Stock were reserved for future issuance upon conversion of the Series A
Preferred Stock.




Sales of
substantial amounts of our Common Stock or the perception that such sales could
occur could adversely affect prevailing market prices which could impair our
ability to raise funds through future sales of Common Stock.




-25-


The
market price and trading volume of our Common Stock could fluctuate
significantly and unexpectedly as a result of a number of factors, including
factors beyond our control and unrelated to our business.  Some of the
factors related to our business include termination of the Humana Agreements,
announcements relating to our business or that of our competitors, adverse
publicity concerning organizations in our industry, changes in state or federal
legislation and programs, general conditions affecting the industry, performance
of companies comparable to us, and changes in the expectations of analysts with
the respect to our future financial performance.  Additionally, our
Common Stock may be affected by general economic conditions or specific
occurrences such as epidemics (such as influenza), natural disasters (including
hurricanes), and acts of war or terrorism.  Because of the limited
trading market for our Common Stock, and because of the possible price
volatility, our shareholders may not be able to sell their shares of Common
Stock when they desire to do so. The inability to sell shares in a rapidly
declining market may substantially increase our shareholders’ risk of loss
because of such illiquidity and because the price for our Common Stock may
suffer greater declines because of our price volatility.




Delisting
of Our Common Stock from NYSE Amex Would Adversely Affect Us and Our
Shareholders.




Our
Common Stock is listed on the NYSE Amex.  To maintain listing of
securities, the NYSE Amex requires satisfaction of certain maintenance criteria
that we may not be able to continue to be able to satisfy.  If we are
unable to satisfy such maintenance criteria in the future and we fail to comply,
our Common Stock may be delisted from trading on NYSE Amex.  If our
Common Stock is delisted from trading on NYSE Amex, then trading, if any, might
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or on the "Electronic Bulletin Board" of the National Association of
Securities Dealers, Inc. and consequently an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
our Common Stock.





Our
Common Stock May Not be Excepted from “Penny Stock” Rules, Which May Adversely
Affect the Market Liquidity of Our Common Stock.





The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a “penny stock”.  The Securities and Exchange
Commission’s (the “Commission” or the “SEC”) regulations generally define a
penny stock to be an equity security that has a market price of less than $5.00
per share, subject to certain exceptions.  For example, such
exceptions include any equity security listed on a national securities exchange
such as the NYSE
Amex.  Currently, our Common Stock meets this
exception.  Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated
therewith.  In addition, if our Common Stock becomes delisted from the
NYSE
Amex and we do not meet another exception to the penny stock regulations,
trading in our Common Stock would be covered by the Commission's Rule 15g-9
under the Exchange Act for non-national securities exchange listed
securities.  Under this rule, broker/dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to
sale.  Securities also are exempt from this rule if the market price
is at least $5.00 per share.  If our Common Stock becomes subject to
the regulations applicable to penny stocks, the market liquidity for our Common
Stock could be adversely affected.  In such event, the regulations on
penny stocks could limit the ability of broker/dealers to sell our Common Stock
and thus the ability of purchasers of our Common Stock to sell their shares in
the secondary market.





ITEM
1B.  UNRESOLVED STAFF COMMENTS




None




ITEM 2
            PROPERTIES




Our
principal executive office is located at 250 South Australian Avenue, Suite 400,
West Palm Beach, Florida where we occupy 18,100 square feet at a current monthly
rent of approximately $26,500 pursuant to a lease expiring March 31,
2011.




We have a
satellite office in Daytona Beach, Florida where we occupy 5,700 square feet at
a monthly rent of $9,700 pursuant to a lease expiring in January
2012.




The PSN
leases eleven offices serving patients in Central Florida and South Florida with
aggregate monthly rental payments of $51,000 pursuant to lease agreements with
remaining noncancellable terms ranging from two to seven years after December
31, 2009.




-26-


ITEM 3
            LEGAL
      PROCEEDINGS




We are a
party to various legal proceedings which are either immaterial in amount to us
or involve ordinary routine litigation incidental to our business and the
business of our subsidiaries.  There are no material pending legal
proceedings, other than routine litigation incidental to our business to which
we are a party or of which any of our property is the subject.





ITEM 4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




No matter
was submitted to a vote of the security holders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 2009.




PART
II




ITEM 5
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Our
Common Stock is currently traded on the NYSEAmex Exchange under the symbol
“MDF”. The following table sets forth the high and low sales prices for our
Common Stock, as reported by NYSE Amex, for each full quarterly period within
the two most recent years:




High
                                    
                                    
                                    Low($)
                                    
                                    
                                    ($)Quarter
      ended March 31, 2008
                                    
                                    $
                                    2.48
                                    
                                    
                                    $
                                    2.18Quarter
      ended June 30, 2008
                                    
                                    $
                                    2.28
                                    
                                    
                                    $
                                    1.66Quarter
      ended September 30, 2008
                                    
                                    $
                                    2.28
                                    
                                    
                                    $
                                    1.69Quarter
      ended December 31, 2008
                                    
                                    $
                                    2.07
                                    
                                    
                                    $
                                    1.30Quarter
      ended March 31, 2009
                                    
                                    $
                                    1.78
                                    
                                    
                                    $
                                    1.20Quarter
      ended June 30, 2009
                                    
                                    $
                                    2.19
                                    
                                    
                                    $
                                    1.46Quarter
      ended September 30, 2009
                                    
                                    $
                                    2.49
                                    
                                    
                                    $
                                    2.01Quarter
      ended December 31, 2009
                                    
                                    $
                                    2.21
                                    
                                    
                                    $
                                    1.85






At
February 16, 2010, we believe we had approximately 3,440 beneficial
shareholders.




Issuer
Purchases of Equity Securities








-27-





Period
                  
                  TotalNumber
                    ofShares
                    Purchased
                  
                  
                  AveragePrice
                    PaidPer
                    Share,
                    Including
                    Commission
                  
                  
                  TotalNumberof
                    Shares
                    Purchasedas
                    PartofPublicly
                    AnnouncedPlans
                    (1)
                  
                  
                  MaximumNumberof
                    SharesThatMayYet
                    BePurchasedUnder
                    thePlan(2)October
      1, 2009 - October 31, 2009
                  
                  
                  637,250
                  
                  
                  $
                  2.21
                  
                  
                  
                  637,250
                  
                  
                  
                  3,871,224November
      1, 2009 - November 30, 2009
                  
                  
                  668,000
                  
                  
                  $
                  2.07
                  
                  
                  
                  668,000
                  
                  
                  
                  3,203,224December
      1, 2009 - December 31, 2009
                  
                  
                  895,867
                  
                  
                  $
                  1.98
                  
                  
                  
                  895,867
                  
                  
                  
                  2,307,357





(1)
            On
      October 3, 2008, we announced a stock repurchase plan pursuant to which
      our Board of Directors authorized us to repurchase up to 10 million shares
      of our common stock.  On August 3, 2009, the Board of Directors
      approved a 5 million share increase to the share repurchase program.
       On February 24, 2010, the Board approved an increase to the share
      repurchase program of an additional 5 million shares, bringing the total
      number of shares of common stock authorized for repurchase under the
      program to 20 million shares.  The number of shares to be
      repurchased and the timing of the purchases are influenced by a number of
      factors, including the then prevailing market price of our common stock,
      other perceived opportunities that may become available to us and
      regulatory requirements.  The plan does not have a scheduled
      expiration date.





(2)
            Maximum
      number of shares that may yet be purchased under the plan at December 31,
      2009 excludes the additional 5 million shares of common stock authorized
      by the Board on February 24, 2010.





Dividends





We have
never declared or paid any cash dividends on our Common Stock and do not intend
to pay cash dividends in the foreseeable future.  Pursuant to Florida
law, we are prohibited from paying dividends or otherwise distributing funds to
our shareholders, except out of legally available funds. The declaration and
payment of dividends on our Common Stock and the amount thereof will be
dependent upon our results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board of
Directors. No assurance can be given that we will pay any dividends on our
Common Stock in the future.




Equity
Compensation Plans




The
following table provides certain information regarding our existing equity
compensation plans as of December 31, 2009:




Number of securities
                      to be issued upon
                      exercise of
                      outstanding options,
                      warrants
                      and rights
                    
                    
                    Weighted-
                      average exercise
                      price of
                      outstanding
                      options, warrants
                      and rights
                    
                    
                    Number of
                      securities
                      remaining
                      available for
                      issuance under
                      equitycompensa-
                      tionplansEquity
      compensation plans approved by security holders
                    
                    
                    4,202,098
                    (1)
                    
                    $
                    1.85
                    
                    
                    
                    3,236,284





(1)
            The
      table above does not include awards of 719,000 shares of unvested
      restricted common stock.  For information concerning these
      awards see Note 15 to the Consolidated Financial
    Statements.




-28-




Performance
Graph





The
following graph depicts our cumulative total return for the last five fiscal
years relative to the cumulative total returns of the NASDAQ Stock Market Index
and a group of peer companies (the “Peer Group”). All indices shown in the graph
have been reset to a base of $100 as of December 31, 2004 and assume an
investment of $100 on that date and the reinvestment of dividends paid since
that date.





December
                    31, 2005
                  
                  
                  December
                    31,2006
                  
                  
                  December
                    31,2007
                  
                  
                  December
                    31,2008
                  
                  
                  December
                    31,2009Metropolitan
      Health Networks, Inc.
                  
                  $
                  85
                  
                  
                  $
                  108
                  
                  
                  $
                  84
                  
                  
                  $
                  57
                  
                  
                  $
                  70NASDAQ
      Composite
                  
                  
                  102
                  
                  
                  
                  113
                  
                  
                  
                  125
                  
                  
                  
                  75
                  
                  
                  
                  109NASDAQ
      Health Services
                  
                  
                  137
                  
                  
                  
                  137
                  
                  
                  
                  179
                  
                  
                  
                  131
                  
                  
                  
                  173SIC
      Code 8000-8099 Health Services
                  
                  
                  112
                  
                  
                  
                  120
                  
                  
                  
                  112
                  
                  
                  
                  82
                  
                  
                  
                  110







-29-


ITEM
6         SELECTED FINANCIAL
DATA




Set forth
below is our selected historical consolidated financial data for the five years
ended December 31, 2009.  The selected historical consolidated
financial data should be read in conjunction with the consolidated financial
statements and accompanying notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in Item 7 of this Annual
Report.  The consolidated statement of operations data and balance
sheet data as of and for the years ended December 31, 2006, 2007, 2008 and 2009
are derived from our audited consolidated financial statements which have been
audited by Grant Thornton LLP, our independent registered public accounting
firm.  The consolidated statement of operations data and balance sheet
data as of and for the year ended December 31, 2005 are derived from our audited
consolidated financial statements which have been audited by Kaufman, Rossin
& Co., P.A.





For the years ended December
      31,2009 (5)
                  
                  
                  2008 (4)
                  
                  
                  2007 (3)
                  
                  
                  2006 (2)
                  
                  
                  2005 (1)Statement
      of Operations DataRevenue
                  
                  $
                  354,407,100
                  
                  
                  $
                  317,211,727
                  
                  
                  $
                  277,577,289
                  
                  
                  $
                  228,216,073
                  
                  
                  $
                  183,765,191Operating  income
      (loss)
                  
                  $
                  22,981,103
                  
                  
                  $
                  16,540,974
                  
                  
                  $
                  8,071,571
                  
                  
                  $
                  (232,952
                  )
                  
                  $
                  3,232,678Income
      from continuing operations before income taxes
                  
                  $
                  23,348,679
                  (8)
                  
                  $
                  16,618,535
                  (6) (7)
                  
                  $
                  9,440,738
                  (6)
                  
                  $
                  825,561
                  (6)
                  
                  $
                  3,849,549Net
      income
                  
                  $
                  14,448,566
                  
                  
                  $
                  10,204,467
                  
                  
                  $
                  5,913,998
                  
                  
                  $
                  472,561
                  
                  
                  $
                  2,381,743Basic
      earnings per share
                  
                  $
                  0.32
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.12
                  
                  
                  $
                  0.01
                  
                  
                  $
                  0.05Diluted
      earnings per share
                  
                  $
                  0.31
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.01
                  
                  
                  $
                  0.05Weighted
      average common shares outstanding-basic
                  
                  
                  44,496,487
                  
                  
                  
                  49,093,039
                  
                  
                  
                  50,573,349
                  
                  
                  
                  50,032,555
                  
                  
                  
                  48,975,803Weighted
      average common shares outstanding-diluted
                  
                  
                  45,940,636
                  
                  
                  
                  50,353,644
                  
                  
                  
                  51,796,185
                  
                  
                  
                  51,472,616
                  
                  
                  
                  51,007,396Cash
      dividend declared
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      Sheet DataCash
      and equivalents
                  
                  $
                  6,794,809
                  
                  
                  $
                  2,701,243
                  
                  
                  $
                  38,682,186
                  
                  
                  $
                  23,110,042
                  
                  
                  $
                  15,572,862Short-term
      investments
                  
                  $
                  27,036,310
                  
                  
                  $
                  33,641,140
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      current assets
                  
                  $
                  35,715,053
                  
                  
                  $
                  40,867,225
                  
                  
                  $
                  44,763,752
                  
                  
                  $
                  30,464,838
                  
                  
                  $
                  24,479,528Total
      assets
                  
                  $
                  51,332,242
                  
                  
                  $
                  49,144,355
                  
                  
                  $
                  53,811,047
                  
                  
                  $
                  41,841,033
                  
                  
                  $
                  33,115,106Total
      current liabilities
                  
                  $
                  8,008,609
                  
                  
                  $
                  6,339,625
                  
                  
                  $
                  15,545,068
                  
                  
                  $
                  10,911,770
                  
                  
                  $
                  3,416,244Total
      liabilities
                  
                  $
                  8,406,336
                  
                  
                  $
                  6,339,625
                  
                  
                  $
                  15,545,068
                  
                  
                  $
                  10,911,770
                  
                  
                  $
                  3,416,244Total
      working capital
                  
                  $
                  27,706,444
                  
                  
                  $
                  34,527,600
                  
                  
                  $
                  29,218,684
                  
                  
                  $
                  19,553,068
                  
                  
                  $
                  21,063,284Long
      - term obligations, including current portion
                  
                  $
                  715,909
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      stockholders' equity
                  
                  $
                  42,925,906
                  
                  
                  $
                  42,804,730
                  
                  
                  $
                  38,265,979
                  
                  
                  $
                  30,929,263
                  
                  
                  $
                  29,698,862





(1)
            The
      financial data for 2005 includes a deferred tax asset of $7,993,000 and an
      income tax expense of $1,468,000.


(2)
            The
      financial data for 2006 includes a deferred tax asset of $7,367,000 and an
      income tax expense of $353,000.


(3)
            The
      financial data for 2007 includes a deferred tax asset
      of  $4,309,000 and an income tax expense of
      $3,527,000.


(4)
            The
      financial data for 2008 includes a deferred tax asset
      of  $1,244,000 and an income tax expense of
      $6,414,000.


(5)
            The
      financial data for 2009 includes a deferred tax asset
      of  $1,678,000 and an income tax expense of
      $8,900,000.


(6)
            In
      accordance with U.S. GAAP, 2009, 2008, 2007 and 2006 results of operations
      include stock based compensation expense of $1,355,000, $1,229,000,
      $616,000 and $736,000,
respectively.


(7)
            Includes
      a gain on the sale of our HMO of $5.9 million and related stay bonuses and
      termination costs of $1.6 million.


(8)
            Includes
      an incremental gain on the sale of our HMO of $1.3
  million.


-30-


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




Overview





During
2009 and the last four months of 2008, we operated only our PSN business, having
sold our HMO on August 29, 2008.  During 2007 and through August 28,
2008, we operated two financial reporting segments, the PSN business and the HMO
business.The sale
allowed us to focus solely on our core PSN business in 2009 and to significantly
reduce general and administrative costs.




Our
results are impacted by many factors, but most notably are influenced by our
ability to establish and maintain a competitive and efficient cost structure and
to accurately and consistently negotiate competitive payments from
Humana.  Benefit costs are subject to a high rate of inflation due to
many forces, including new higher priced technologies and medical procedures,
new prescription drugs and therapies, an aging population, lifestyle challenges
including obesity and smoking, the tort liability system, and government
regulation.




We rely
on a key statistical performance measure, the medical expense ratio (“MER”),
which is computed by taking total medical expenses as a percentage of
revenue.  This measure represents a statistic used to measure gross
profit.





Critical
Accounting Policies




Our
significant accounting policies are more fullydescribed in Note 2 of
the “Notes to Consolidated Financial Statements” included in this Form
10-K.  As disclosed in Note 2, 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
amounts reported in the accompanying financial statements.  Actual
results may ultimately differ materially from those estimates.  We
believe that the following discussion addresses our most critical accounting
policies, including those that are perceived to be the most important to the
portrayal of our financial condition and results of operations and that require
complex and/or subjective judgments by management.




We
believe that our most critical accounting policies include “Use of Estimates,
Revenue, Expense and Receivables.”




Use of Estimates, Revenue, Expense
and Receivables





Our
revenue is primarily derived from risk-based health insurance arrangements in
which the premium is paid to us monthly and varies depending on the county, age
and severity of illness of the Humana Participating Customer.  We
assume the economic risk of funding our customers’ healthcare services and
related administrative costs. Premium revenue is recognized in the period in
which eligible individuals are entitled to receive healthcare
services.  Because we have the obligation to fund medical expenses, we
recognize gross revenue and medical expenses associated with the Humana
Agreements in our consolidated financial statements. We record healthcare
premium payments we receive in advance of the service period as unearned
premiums.





Periodically
we receive retroactive adjustments to the premiums paid to us based on the
updated health status of our customers (known as a Medicare risk adjustment or
“MRA” score).  The factors considered in this update include changes
in demographic factors, risk adjustment scores, customer information and
adjustments required by the risk sharing requirements for prescription drug
benefits under Part D of the Medicare program.  In addition, the
number of customers for whom we receive capitation fees may be retroactively
adjusted due to enrollment changes not yet processed, or not yet reported. These
retroactive adjustments could, in the near term, materially impact the revenue
that has been recorded.  We record any adjustments to revenue at the
time that the information necessary to make the determination of the adjustment
is available and the collectibility of the amount is reasonably assured, or the
likelihood of repayment is probable.





Medical
expenses are recognized in the period in which services are provided and include
an estimate of our obligations for medical services that have been provided to
our customers but for which we have neither received nor processed claims, and
for liabilities for physician, hospital and other medical expense disputes. We
develop our estimated medical claims payable by using an actuarial process that
is consistently applied. The actuarial models consider factors such as time from
date of service to claim receipt, claim backlogs, care provider contract rate
changes, medical care consumption and other medical expense
trends.  The actuarial process and models develop a range of projected
medical claims payable and we record to the amount within the range that is our
best estimate of the ultimate liability.  The actual liability
incurred could differ materially from the amount recorded.


-31-


Each
period we re-examine previously established medical claims payable estimates
based on actual claim submissions and other changes in facts and circumstances.
As the estimate of medical claims payable recorded in prior periods become more
exact, we adjust the amount of our liability estimates, and include the changes
in such estimates in medical expense in the period in which the change is
identified.  In each reporting period, our operating results include
the effects of more completely developed medical expense payable estimates
associated with previously reported periods. While we believe our medical
expenses payable are adequate to cover future claims payments required, such
estimates are based on claims experience to date and various assumptions.
Therefore, the actual liability could differ materially from the amounts
recorded.  See Notes 2 and 8 to the Consolidated Financial Statements
and Item 1A Risk Factors - “A Failure To Estimate Incurred But Not
Reported...”





Pending Adoption of an Accounting Pronouncement





There are
no pending accounting pronouncements that are expected to have a significant
impact on our financial statements.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenue or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.





Contractual
Obligations and Other Contractual Commitments





The
following table summarizes our significant contractual obligations and
commercial commitments as of December 31, 2009.




Payment Due by PeriodContractual
                  
                  
                  
                  
                  Less
      Than
                  
                  
                  1
      - 3
                  
                  
                  3
      - 5
                  
                  
                  More
      ThanObligations
                  
                  Total
                  
                  
                  1 Year
                  
                  
                  Years
                  
                  
                  Years
                  
                  
                  5 yearsOperating
      lease obligations
                  
                  $
                  5,693,000
                  
                  
                  $
                  1,398,000
                  
                  
                  $
                  2,042,000
                  
                  
                  $
                  1,176,000
                  
                  
                  $
                  1,077,000Service
      Agreements
                  
                  
                  1,443,000
                  
                  
                  
                  987,000
                  
                  
                  
                  456,000
                  
                  
                  
                  -
                  
                  
                  
                  -Employment
      obligations
                  
                  
                  3,313,000
                  
                  
                  
                  3,313,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  10,449,000
                  
                  
                  $
                  5,698,000
                  
                  
                  $
                  2,498,000
                  
                  
                  $
                  1,176,000
                  
                  
                  $
                  1,077,000





As of
December 31, 2009, our long-term debt totaled $716,000 (including current
portion) and we had no payment obligations that would constitute capital lease
obligations.





We
utilized vendors during the year to assist us with the implementation of the EMR
system as well as other initiatives.  Payments under these
service contracts for the years subsequent to December 31, 2009 are
approximately $987,000, $305,000 and $151,000 in the years 2010, 2011 and 2012,
respectively.  Some contracts will automatically renew unless written
notice is provided to the vendor within the stated period of time prior to the
end of the contract period.





Impact
of Inflation





In
February of 2010, CMS announced that Medicare program spending is projected to
increase by 8.1% in 2009.  CMS also projects that the Medicare
spending growth rate from 2009 to 2019 will increase by an average of
7.5%. The principal projected drivers for this growth include continued
cost-increasing medical innovation, inflation, continued strong demand for
prescription drugs and the aging baby-boomer demographic.





Comparison
of 2009 and 2008


Summary





In 2009,
income before income taxes increased by 40.4% over 2008 from $16.6 million
in 2008 to $23.3 million in 2009, an increase of $6.7
million.  Excluding the gain on sale of our HMO of $5.9 million and
$1.3 million in 2008 and 2009, respectively, and the stay bonuses and
termination costs related to the sale that were expensed in 2008 of $1.6
million, our income before income taxes would have been $22.0 million in 2009
compared to $12.3 million in 2008, an increase of $9.7 million or
78.9%.


-32-


Net
income in 2009 was $14.4 million compared to $10.2 million in 2008, an increase
of $4.2 million or 41.2%.  Basic earnings per share were $0.32 in 2009
and $0.21 in 2008.  Diluted earnings per share were $0.31 in 2009
compared to $0.20 in 2008.  The increase in earnings per share was
primarily a result of our increased net income and the impact of our share
buyback program that began in October 2008.  We repurchased an
aggregate of 7,816,678 shares in 2009 and 4,191,798 shares in
2008.  The gain on the sale of the HMO, net of the related stay
bonuses and termination costs in 2008, increased net income in 2009 by $0.01 per
basic and diluted share and by $0.06 per basic and diluted share in
2008.




Revenue
increased to $354.4 million in 2009 from $317.2 million in 2008, an increase of
$37.2 million or 11.7%.   See “Item 1 – Description of
Business – Medicare,” “The Medicare Modernization Act.”




Our
customer months, which are the aggregate number of months of healthcare
services we have provided to customers during a period of time, increased to
425,100 in 2009 from 396,400 in 2008, an increase of
7.2%.  Our per customer per month (“PCPM”) revenue increased from
$800 in 2008 to $834 in 2009, an increase of 4.3%.  The increase in
PCPM revenue in 2009 was reduced by the IPA Agreement entered into as a result
of the sale of the HMO.  More specifically, while we owned the HMO in
2008, we received 100% of the premium paid by CMS for the HMO’s
customers.  Since the sale of the HMO, we receive, pursuant to the IPA
Agreement, less than 100% of the CMS premium paid to Humana with respect to
customers in the HMO’s former counties of operation.




Our PCPM
medical expense increased, from $708 in 2008 to $738 in 2009, an increase of
4.2%.  Our MER increased by one basis point to 88.5% in 2009 as
compared to 88.4% in 2008. The reduction in Medicare premiums we received
under the IPA Agreement increased our MER in 2009 compared to 2008.




The sale
of the HMO enabled us to reduce our operating expenses.  In 2009,
operating expenses decreased to $19.2 million compared to $26.1 million in
2008.  Included in 2008 operating expenses is $1.6 million of stay
bonuses and termination costs associated with the sale of the
HMO.  Excluding these bonuses and termination costs, operating costs
in 2008 (which exclude approximately four months of the HMO’s 2008 operations)
would have been $24.5 million, which is $5.3 million or 21.6% higher than
operating costs for 2009.




CMS has
announced that in 2010, the premiums paid to Medicare Advantage plans will
decrease as a result of a 0.5% decrease in the base rate and a recalibration of
risk scores that will decrease the base rate by an additional
4.5%.  We believe that the impact on us of the foregoing premium
reduction and increased costs will be mitigated by, among other things, reduced
benefit offerings, increased customer co-pays and deductibles and improved
risk score compliance by us.





See “Item
1A.  Risk Factors” for further discussion of the most significant
risks that affect our business, financial condition, results of operations
and/or cash flows.




Customer
Information





The table
set forth below provides (i) the total number of customers to whom we were
providing healthcare services through the PSN as of December 31, 2009 and
2008 and (ii) the aggregate customer months for the PSN in 2009 and 2008 and the
HMO in 2008.





Following
the sale of the HMO and contemporaneous execution of the IPA Agreement, the PSN
assumed responsibility for providing medical services to the customer base of
the HMO.




Customers at December 31
                  
                  
                  Customer Months In
                  
                  
                  Percentage Change
                    in Customer Months2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Between YearsPSN
                  
                  
                  35,500
                  
                  
                  
                  33,000
                  
                  
                  
                  425,100
                  
                  
                  
                  338,300
                  
                  
                  
                  25.7
                  %HMO
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  58,100
                  
                  
                  
                  -100.0
                  %Total
                  
                  
                  35,500
                  
                  
                  
                  33,000
                  
                  
                  
                  425,100
                  
                  
                  
                  396,400
                  
                  
                  
                  7.2
                  %




-33-


The
increase in total customer months for 2009 as compared to 2008 is primarily a
result of the net effect of new enrollments and disenrollments caused by deaths,
customers moving from the covered areas, customers transferring to another
physician practice or customers making other insurance selections.




At
February 1, 2010, the PSN was providing services to approximately 35,300
customers.  This amount will change as customers may enroll and
disenroll through March 31, 2010.




Revenue




The
following table provides a breakdown of our sources of revenue.




Year Ended December 31
                  
                  
                  $
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  ChangePSN
      revenue from Humana
                  
                  $
                  352,993,000
                  
                  
                  $
                  263,268,000
                  
                  
                  $
                  89,725,000
                  
                  
                  
                  34.1
                  %PSN
      fee-for-service revenue
                  
                  
                  1,414,000
                  
                  
                  
                  1,570,000
                  
                  
                  
                  (156,000
                  )
                  
                  
                  -9.9
                  %Total
      PSN revenue
                  
                  
                  354,407,000
                  
                  
                  
                  264,838,000
                  
                  
                  
                  89,569,000
                  
                  
                  
                  33.8
                  %Percentage
      of total revenue
                  
                  
                  100.0
                  %
                  
                  
                  83.5
                  %HMO
      revenue
                  
                  
                  -
                  
                  
                  
                  52,374,000
                  
                  
                  
                  (52,374,000
                  )
                  
                  
                  -100.0
                  %Percentage
      of total revenue
                  
                  
                  0.0
                  %
                  
                  
                  16.5
                  %Total
      revenue
                  
                  $
                  354,407,000
                  
                  
                  $
                  317,212,000
                  
                  
                  $
                  37,195,000
                  
                  
                  
                  11.7
                  %




The PSN’s
most significant source of revenue during both 2009 and 2008 was the premium
revenue generated pursuant to the Humana Agreements (the “Humana Related
Revenue”).  The Humana Related Revenue increased from $263.3 million
in 2008 to $353.0 million in 2009, an increase of approximately $89.7 million or
34.1%.




Approximately
$77.1 million of the increase in the Humana Related Revenue is attributable to
the IPA Agreement pursuant to which we began providing services to the customers
of the HMO following its sale to the Humana Plan.  The balance of the
increase is primarily attributable to a 4.3% increase in our PCPM premium in
2009 as compared to 2008 and the increase in our customer
base.





The
average premium we received per customer per month (“PCPM”) for 2009 was
approximately $834 as compared to $800 for 2008.This PCPM premium increase
is primarily a result of a 3.5% increase in the base premium in 2009 as compared
to 2008, comprised of an industry-wide increase in the base premium in
2009, as well as a company specific increase in the base premium based upon
an increase in the average Medicare risk score of our customers.





Periodically,
we receive retroactive adjustments to the premiums paid to us based on the
updated MRA scores of our customers.  The factors considered in this
update include changes in demographic factors, risk adjustment scores, customer
information and adjustments required by the risk sharing requirements for
prescription drug benefits under Part D of the Medicare program.  In
addition, the number of customers for whom we receive capitation fees may be
retroactively adjusted due to enrollment changes not yet processed or reported.
These retroactive adjustments could, in the near term, materially impact the
revenue that has been recorded.  We record any adjustments to this
revenue at the time the information necessary to make the determination of the
adjustment is available, the collectibility of the amount is reasonably assured,
or the likelihood of repayment is probable.





At
December 31, 2009, we recorded a $1.4 million receivable representing our
estimate of the retroactive MRA premium for services provided in 2009 that we
expect to receive in the summer of 2010.  In 2009, we received the
final MRA premium payment for services provided in 2008 in the amount of $3.0
million. At December 31, 2008, we had recorded a $3.8 million estimated MRA
receivable for services provided in 2008. The difference of $800,000
reduced revenue in 2009.  The final retroactive MRA premium adjustment
for services provided in 2007, which was received in 2008, was not materially
different than the estimate we recorded at December 31, 2007.




We
continue to invest resources in people and processes to assure that our
customers are assigned the proper risk scores. These processes include ongoing
training of medical staff responsible for coding and routine auditing of patient
charts to assure risk-coding compliance.   Customers with higher
risk codes generally require more healthcare resources than those with lower
risk codes.  Proper coding helps to assure that we receive premiums
consistent with the cost of treating these customers. Our efforts related to
coding compliance are ongoing and we continue to commit additional resources to
this important discipline.


-34-


The
payment we receive for providing prescription drug benefits (the “Medicare Part
D payment”) is subject to adjustment, positive or negative, based upon the
application of risk corridors that compare the estimated
prescription  drug benefit costs (the "Estimated  Costs") to
actual incurred  prescription  drug benefit  costs
(the "Actual  Costs").  To the extent the Actual Costs
exceed the Estimated Costs by more than the risk corridor, we may receive
additional payments.  Conversely, to the extent the Estimated Costs
exceed the Actual Costs by more than the risk corridor, we may be required to
refund a portion of the Medicare Part D payment.  The final settlement
for the Part D program occurs in the subsequent year.





At
December 31, 2009 we recorded a receivable of $961,000, the amount we estimate
2009 Actual Costs exceeded the revenue received.  At December 31,
2008, we estimated that we would be required to refund $100,000 related to
Medicare Part D payments received and recorded a liability for this
amount.  The 2008 amount settled at the approximate amount that was
estimated.  In 2008, we determined that the final Part D settlement
payable for prescription drug coverage in 2007 was over accrued by approximately
$1 million and we increased revenue in 2008 by this amount.





The
fee-for-service revenue represents amounts earned from medical services provided
to non-Humana customers in our owned physician practices.




Total
Medical Expense





Total
medical expense represents the estimated total cost of providing patient care
and is comprised of two components, medical claims expense and medical center
costs.  Medical claims expense is recognized in the period in which
services are provided and includes an estimate of our obligations for medical
services that have been provided to our customers but for which we have neither
received nor processed claims, and for liabilities for physician, hospital and
other medical expense disputes.  Medical claims expense includes such
costs as inpatient and outpatient services, pharmacy benefits and physician
services by providers other than the physician practices owned by the PSN
(collectively “Non-Affiliated Providers”).  Medical center costs
represent the operating costs of the physician practices owned by the
PSN.





We
develop our estimated medical expenses payable by using an actuarial process
that is consistently applied.  The actuarial process develops a range
of estimated medical expenses payable and we record to the amount in the range
that is our best estimate of the ultimate liability.  Each period, we
re-examine previously recorded medical claims payable estimates based on actual
claim submissions and other changes in facts and circumstances. As medical
expenses recorded in prior periods becomes more exact, we adjust the amount of
the estimate, and include the change in medical expense in the period in which
the change is identified.  In each reporting period, our operating
results include a change in medical expense from the effects of more completely
developed medical expense payable estimates associated with previously reported
periods. While we believe our estimated medical expenses payable is adequate to
cover future claims payments required, such estimates are based on our claims
experience to date and various management assumptions. Therefore, the actual
liability could differ materially from the amount recorded.





Medical
expense and MER for 2008 and 2009 are as follows:




-35-




2009
                  
                  
                  2008Consolidated
                  
                  
                  HMO
                  
                  
                  PSN
                  
                  
                  ConsolidatedEstimated
      medical expense for the year, excluding prior period claims
      development
                  
                  $
                  313,532,000
                  
                  
                  $
                  46,826,000
                  
                  
                  $
                  234,799,000
                  
                  
                  $
                  281,625,000(Favorable)
      unfavorable prior period medical claims development in current year based
      on actual claims submitted
                  
                  
                  20,000
                  
                  
                  
                  (780,000
                  )
                  
                  
                  (373,000
                  )
                  
                  
                  (1,153,000
                  )Total
      reported medical expense for the year
                  
                  $
                  313,552,000
                  
                  
                  $
                  46,046,000
                  
                  
                  $
                  234,426,000
                  
                  
                  $
                  280,472,000Medical
      Expense Ratio for year
                  
                  
                  88.5
                  %
                  
                  
                  87.9
                  %
                  
                  
                  88.5
                  %
                  
                  
                  88.4
                  %Medical
      Expense PCPM
                  
                  $
                  738
                  
                  
                  $
                  793
                  
                  
                  $
                  693
                  
                  
                  $
                  708





In the
table above, favorable adjustments to amounts we recorded in prior periods for
estimated claims payable appear in parentheses while unfavorable adjustments do
not appear in parentheses.  Favorable adjustments reduce total medical
expense for the respective applicable period and unfavorable claims development
increases total medical expense for the applicable period.




The
reported MER is impacted by both revenue and expense.  Periodically we
receive retroactive adjustments to the premiums paid to us based on the updated
MRA score.  Retroactive adjustments of prior period’s premiums that
are recorded in the current period impact the MER of that period.  If
the retroactive adjustment increases premium revenue then the impact reduces the
MER for the period.  Conversely, if the retroactive adjustment reduces
revenue, then the MER for the period is higher.  These retroactive
adjustments include, among other things, the mid-year and annual MRA premium
adjustments and settlement of Part D program premiums.  In addition,
actual medical claims expense usually develops differently than estimated during
the period.  Therefore, the reported MER shown in the above table will
likely change as additional claim development occurs.  Favorable
claims development is a result of actual medical claim cost for prior periods
developing lower than the original estimated cost which reduces the reported
medical expense and the MER for the current period.  Unfavorable
claims development is a result of actual medical claim cost for prior periods
exceeding the original estimated cost which increases total reported medical
expense and the MER for the current period.




A change
in either revenue or medical claims expense of approximately $3.8 million would
have impacted the MER by 1% in 2009 while a change in either revenue or medical
claims expense of approximately $3.4 million would have impacted our MER by 1%
in 2008.




Because
the Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers, medical claims
expense includes the cost of medical services provided to
Humana Participating Customers by Non-Affiliated Providers.




Total
medical expense was $313.6 million and $280.5 million for the years ended
December 31, 2009 and 2008, respectively.   The increase in total medical
expense in 2009 was primarily due to the increase in the number of customer
months and increasing medical costs.Approximately $299.0
million or 95.4% of our total medical expenses in 2009 are attributable to
medical claims expense.  In 2008, approximately $268.0 million or
95.5% of our total medical expenses were attributable to medical claims
expense.  The balance was the expenses associated with operating our
medical centers.





Medical
expense on a PCPM basis was $708 in 2008 as compared to $738 in
2009.  This increase of 4.2% is primarily a result of increasing
medical costs and utilization during 2009.





Our MER
increased by one basis point from 88.4% in 2008 to 88.5% in
2009.  Prior to the sale of the HMO in August 2008, we received 100%
of the premium paid by CMS for the HMO’s customers.  Following the
sale of the HMO and under the related IPA Agreement, we receive a percentage of
the CMS premium received by Humana for care for these customers through our
PSN.  Our MER in 2008 would have been 90.7% if the HMO had been sold
on January 1, 2008.


-36-


At
December 31, 2009, we estimate that claims paid subsequent to December 31, 2008
for services provided prior to that date was not substantially different than
the amount that we had estimated and accrued at December 31, 2008.  At
December 31, 2008, we estimated that claims paid subsequent to December 31, 2007
for services provided prior to that date were $1.2 million or approximately 0.4%
of total medical expense lower than the estimated medical expenses payable
recorded at December 31, 2007.




At
December 31, 2009, we determined that the range for estimated medical claims
payable was between $25.8 million and $29.4 million and we recorded a liability
of $27.4 million, the actuarial mid-point of the range.  Based on
historical results, we believe that the actuarial mid-point of the range
continues to be the best estimate within the range of the PSN’s ultimate
liability.




Medical
center costs include the salaries, taxes and benefits of the PSN’s employed
health professionals and staff providing primary care services, as well as the
costs associated with the operations of those
practices.  Approximately $14.5 million of our total medical expenses
in 2009 related to physician practices we own as compared to $12.5 million in
2008.  Approximately $1.2 million of the increase in medical center
costs is attributable to payroll costs, $500,000 is related to a medical center
that was acquired in July 2008 and $200,000 is related to increased medical
supply costs.




Other
Operating Expenses





Year Ended December 31
                
                
                
                
                
                %2009
                
                
                2008
                
                
                (Decrease)
                  Increase
                
                
                ChangeAdministrative
      payroll, payroll taxes and benefits
                
                $
                11,287,000
                
                
                $
                12,537,000
                
                
                $
                (1,250,000
                )
                
                
                -10.0
                %Percentage
      of total revenue
                
                
                3.2
                %
                
                
                4.0
                %General
      and administrative
                
                
                7,565,000
                
                
                
                10,071,000
                
                
                
                (2,506,000
                )
                
                
                -24.9
                %Percentage
      of total revenue
                
                
                2.1
                %
                
                
                3.2
                %Marketing
      and advertising
                
                
                359,000
                
                
                
                1,865,000
                
                
                
                (1,506,000
                )
                
                
                -80.8
                %Percentage
      of total revenue
                
                
                0.1
                %
                
                
                0.6
                %Stay
      bonuses and termination costs
                
                
                -
                
                
                
                1,598,000
                
                
                
                (1,598,000
                )
                
                
                -100.0
                %Percentage
      of total revenue
                
                
                0.0
                %
                
                
                0.5
                %Total
      other operating expenses
                
                $
                19,211,000
                
                
                $
                26,071,000
                
                
                $
                (6,860,000
                )
                
                
                -26.3
                %





Administrative
Payroll, Payroll Taxes and Benefits





Administrative
payroll, payroll taxes and benefits include salaries and related costs for our
executive, administrative and the sales staff of the HMO in 2008.  For
2009, administrative payroll, payroll taxes and benefits were $11.3 million,
compared to the $12.5 million for 2008, a decrease of $1.3
million.  The decrease is primarily a result of a $1.8 million
decrease in payroll cost associated with the HMO following the sale of the HMO
primarily offset by the costs related to the amount expensed under the Amended
Employment Agreement of our CEO.





General
and Administrative




General
and administrative expenses decreased to $7.6 million in 2009 as compared to
$10.1 million in 2008, a decrease of $2.5 million, or 24.9%.  General
and administrative costs associated with the HMO decreased $3.3 million as a
result of the sale of the HMO partially offset by increased costs of the PSN
associated with the number of customers cared for under the IPA
Agreement.




Marketing
and Advertising





Marketing
and advertising expense primarily consists of advertising expenses and, in 2008,
brokerage commissions paid to independent sales agents of the
HMO.  Marketing and advertising expense was $359,000 in 2009 as
compared to $1.9 million in 2008, a decrease of 80.8%. The primary reason for
this decrease is the elimination of these costs upon the sale of the HMO as a
significant portion of our marketing costs were incurred during the open
enrollment period, which occurred in the first and last quarter of the
year.


-37-


Stay
Bonuses and Termination Costs





In
connection with the sale of the HMO, we paid certain employees of the HMO stay
bonuses and termination payments.  We recognized and paid all of these
costs, totaling $1.6 million, in the third quarter of 2008.   We
incurred no such costs in 2009.




Gain
on Sale of HMO Subsidiary





On August
29, 2008, we completed the sale of all of the outstanding capital stock of our
HMO to the Humana Plan for a cash purchase price of approximately $14.6
million.  We recognized a gain on the sale of the HMO in the third
quarter of 2008 of approximately $5.9 million.





The gain
on sale in 2009 of $1.3 million includes additional gain from the closing net
equity settlement for the HMO and the settlement of certain liabilities of the
HMO that we settled in 2009 at amounts lower than the liability recorded at the
time of the sale.





Other
Income





We
realized other income of $368,000 in 2009 compared to $78,000 in
2008.  We realized investment income in 2009 of $390,000 as
compared to $108,000 in 2008.





Income
taxes




Our
effective income tax rate was 38.1% in 2009 and 38.6% in
2008.   The decrease in 2009 was a result of an increase in our
investment in tax-exempt securities.





Comparison
of 2008 and 2007


Summary





Income
before income taxes for 2008 was $16.6 million compared to $9.4 million in
2007.  Income before income taxes in 2008 includes a gain on the sale
of the HMO of $5.9 million and stay bonus and terminations costs associated with
the sale of $1.6 million.  The PSN reported a segment gain before
income taxes and allocated overhead of $24.8 million for 2008, compared to $29.2
million for 2007, a decrease of $4.4 million or 15.1%. The HMO segment incurred
a loss before income taxes and allocated overhead of $2.2 million for 2008,
compared to a loss of $10.5 million in 2007, a decrease of
79.0%.  Allocated overhead was $10.2 million and $9.3 million for 2008
and 2007, respectively.  The 2008 segment information above excludes
the gain on the sale of the HMO and the related stay bonus and termination
costs.





Net
income for 2008 was $10.2 million compared to $5.9 million for
2007.  Earnings per share, basic was $0.21 and earnings per share,
diluted was $0.20 for 2008 compared to earnings per share, basic of $0.12 and
earnings per share, diluted of $0.11 for 2007.  The gain on sale of
the HMO, net of the stay bonus and termination costs, of $4.3 million is
equivalent to approximately $0.06 per share, basic and diluted, of our
outstanding common stock.




For 2008,
we realized revenue of $317.2 million compared to $277.6 million in the prior
year, an increase of approximately $39.6 million or 14.3%.  Medical
expenses for 2008 were $280.5 million, an increase of $39.8 million or 16.5%
over 2007.





Our
customer months increased to 396,400 in 2008 from 367,200 in 2007, an increase
of 8.0%.  Our PCPM revenue increased from $759 in 2007 to $800 in
2008, an increase of 5.4%.  Our PCPM revenue included 100% of the
premium from CMS when we operated the HMO and was reduced under the IPA
Agreement upon the sale of the HMO.  Our PCPM medical costs also
increased, from $658 in 2007 to $708 in 2008, an increase of
7.6%.  Our MER increased by 1.7% to 86.7% in 2007 as compared to
88.4% in 2008.




Customer
Information





The table
set forth below provides (i) the total number of customers to whom we were
providing healthcare services through the PSN and HMO as of December 31, 2008
and 2007 and (ii) the aggregate customer months for the PSN and the HMO during
2008 and 2007.


-38-


Following
the sale of the HMO and consummation of the related IPA Agreement, the customer
base of the HMO was assumed by the PSN.




Customers at December 31
                  
                  
                  Customer Months In
                  
                  
                  Percentage Change
                    in Customer Months2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  Between YearsPSN
                  
                  
                  33,000
                  
                  
                  
                  25,400
                  
                  
                  
                  338,300
                  
                  
                  
                  302,100
                  
                  
                  
                  12.0
                  %HMO
                  
                  
                  -
                  
                  
                  
                  6,200
                  
                  
                  
                  58,100
                  
                  
                  
                  65,100
                  
                  
                  
                  -10.8
                  %Total
                  
                  
                  33,000
                  
                  
                  
                  31,600
                  
                  
                  
                  396,400
                  
                  
                  
                  367,200
                  
                  
                  
                  8.0
                  %





The
increase in total customer months for 2008 as compared to 2007 is primarily a
result of the following:





·
            growth
      in the number of HMO customers, resulting primarily from the enrollment of
      new customers during the enrollment period that commenced November 15,
      2007 and ended March 31, 2008;


·
            the
      assumption by our PSN, on December 1, 2007, of the management of five
      South Florida physician practices not previously affiliated with the PSN,
      which included approximately 1,000 Humana Medicare Advantage
      customers;


·
            HMO
      enrollments during a special enrollment period that occurred in the summer
      of 2007 for customers of a competing Medicare Advantage plan that had its
      contract terminated by CMS in July 2007;
and


·
            the
      net effect of new enrollments and disenrollments, deaths, customers moving
      from the covered areas, customers transferring to another physician
      practice or customers making other insurance
  selections;




The
increase was partially offset by a reduction of approximately 450 customers in
South Florida from a PSN practice that we closed in August 2007, all of which
were moved to other providers outside of the PSN.




Revenue




The
following table provides a breakdown of our sources of revenue.




Year Ended December 31
                  
                  
                  $
                  
                  
                  %2008
                  
                  
                  2007
                  
                  
                  Increase
                    (Decrease)
                  
                  
                  ChangePSN
      revenue from Humana
                  
                  $
                  263,268,000
                  
                  
                  $
                  221,255,000
                  
                  
                  $
                  42,013,000
                  
                  
                  
                  19.0
                  %PSN
      fee-for-service revenue
                  
                  
                  1,570,000
                  
                  
                  
                  1,257,000
                  
                  
                  
                  313,000
                  
                  
                  
                  24.9
                  %Total
      PSN revenue
                  
                  
                  264,838,000
                  
                  
                  
                  222,512,000
                  
                  
                  
                  42,326,000
                  
                  
                  
                  19.0
                  %Percentage
      of total revenue
                  
                  
                  83.5
                  %
                  
                  
                  80.2
                  %HMO
      revenue
                  
                  
                  52,374,000
                  
                  
                  
                  55,065,000
                  
                  
                  
                  (2,691,000
                  )
                  
                  
                  -4.9
                  %Percentage
      of total revenue
                  
                  
                  16.5
                  %
                  
                  
                  19.8
                  %Total
      revenue
                  
                  $
                  317,212,000
                  
                  
                  $
                  277,577,000
                  
                  
                  $
                  39,635,000
                  
                  
                  
                  14.3
                  %




The PSN’s
most significant source of revenue during both 2008 and 2007 was the premium
revenue generated pursuant to the Humana Agreements (the “Humana Related
Revenue”).  The Humana Related Revenue increased from $221.3 million
in 2007 to $263.3 million in 2008, an increase of approximately $42.0 million or
19.0%.




Approximately
$21.5 million of the increase in the Humana Related Revenue is attributable to
the IPA Agreement pursuant to which we began providing services to the customers
of the HMO following its sale to the Humana Plan.  The balance of the
increase is primarily attributable to a 6.5% increase in the PSN’s PCPM
premium in 2008 as compared to 2007.





This PCPM
premium increase is primarily a result of an increase in the base premium in
2008 and an additional premium as a result of an increase in the average
Medicare risk score of our customers.


-39-


At
December 31, 2008, we recorded a $3.8 million receivable representing our
estimate of the retroactive MRA premium for 2008 that we expected to receive in
the summer of 2009.  The final 2007 and 2006 retroactive MRA premium
adjustments, which were received in 2008 and 2007, respectively, were not
materially different than the estimates we had recorded for those
years.
 
 At
December 31, 2008, we estimated that we may be required to refund approximately
$100,000 related to Medicare Part D payments received and recorded a liability
for this amount.  Based upon CMS’ final determination of the Actual
Costs of the PSN for providing prescription drug benefits in 2007 and 2006, we
recorded additional revenue in the third quarter of both 2008 and 2007 of
approximately $1.0 million, representing the amount by which our 2007 and 2006
year-end estimated Part D refund liability exceeded the final
amount.
 
 The
fee-for-service revenue represents amounts earned from medical services provided
to non-Humana customers in our owned physician practices.
  Total
Medical Expense
 
 Total
medical expense represents the estimated total cost of providing patient care
and is comprised of two components, medical claims expense and medical center
costs.  Medical claims expense is recognized in the period in which
services are provided and includes an estimate of our obligations for medical
services that have been provided to our customers but for which we have neither
received nor processed claims, and for liabilities for physician, hospital and
other medical expense disputes.  Medical claims expense includes such
costs as inpatient and outpatient services, pharmacy benefits and physician
services by Non-Affiliated Providers.  Medical center costs represent
the operating costs of the physician practices owned by the PSN.
 
 Medical
costs and MER are as follows:
  2008
                    
                    
                    2007HMO
                    
                    
                    PSN
                    
                    
                    Consolidated
                    
                    
                    HMO
                    
                    
                    PSN
                    
                    
                    ConsolidatedEstimated
      medical expense for the year, excluding prior period claims
      development
                    
                    $
                    46,826,000
                    
                    
                    $
                    234,800,000
                    
                    
                    $
                    281,626,000
                    
                    
                    $
                    51,813,000
                    
                    
                    $
                    187,456,000
                    
                    
                    $
                    239,269,000(Favorable)
      unfavorable prior period medical claims development in current year based
      on actual claims submitted
                    
                    
                    (780,000
                    )
                    
                    
                    (373,000
                    )
                    
                    
                    (1,153,000
                    )
                    
                    
                    (638,000
                    )
                    
                    
                    2,065,000
                    
                    
                    
                    1,427,000Total
      reported medical expense for the year
                    
                    $
                    46,046,000
                    
                    
                    $
                    234,427,000
                    
                    
                    $
                    280,473,000
                    
                    
                    $
                    51,175,000
                    
                    
                    $
                    189,521,000
                    
                    
                    $
                    240,696,000Medical
      Expense Ratio for year
                    
                    
                    87.9
                    %
                    
                    
                    88.5
                    %
                    
                    
                    88.4
                    %
                    
                    
                    92.9
                    %
                    
                    
                    85.2
                    %
                    
                    
                    86.7
                    %Medical
      Expense PCPM
                    
                    $
                    793
                    
                    
                    $
                    693
                    
                    
                    $
                    708
                    
                    
                    $
                    787
                    
                    
                    $
                    628
                    
                    
                    $
                    656
  In the
table above, favorable adjustments to amounts we recorded in prior periods for
estimated claims payable appear in parentheses while unfavorable adjustments do
not appear in parentheses.  Favorable adjustments reduce total medical
expense for the respective applicable period and unfavorable claims development
increases total medical expense for the applicable period.
  Because
the Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers, medical claims
expense includes the cost of medical services provided to
Humana Participating Customers by Non-Affiliated
Providers.  During 2008, the PSN’s medical claims expense increased by
approximately $39.8 million or 16.5%, primarily as a result of the PSN’s
provision of services to the HMO’s customers under the IPA Agreement and higher
medical costs associated with our PSN customers’ increasing medical needs as
reflected in the higher average  risk scores of our customers in
2008.
  -40-
  For the
PSN, a change in either revenue or medical claims expense of approximately $2.6
million impacts the PSN’s MER by 1% in 2008 and a change of approximately $2.0
million impacts the PSN’s MER by 1% in 2007.
  Because
the Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers, medical claims
expense includes the cost of medical services provided to
Humana Participating Customers by Non-Affiliated Providers.
  Total
medical expenses were $280.5 million and $240.7 million for the years ended
December 31, 2008 and 2007, respectively.   Our reported MER increased from
86.7% in 2007 to 88.4% in 2008.  Approximately $268.0 million or 95.5%
of our total medical expenses in 2008 are attributable to medical claims
expense.  In 2007, approximately $229.4 million or 95.3% of our total
medical expenses were attributable to medical claims expense.  The
balance was the expenses associated with operating our medical
centers.
  Medical
expense on a PCPM basis was $708 in 2008 as compared to $658 in
2007.  This increase of 7.6% is primarily a result of increasing
medical costs and utilization during 2008.
  The MER
for the PSN increased to 88.5% in 2008 as compared to 85.2% in 2007. During the
period subsequent to the sale of the HMO, we did not realize an immediate
reduction in medical costs for services provided under the IPA
Agreement.  This negatively impacted our gross profit and our MER for
the period subsequent to the sale since, under the IPA Agreement, we receive a
percentage of the CMS premium received by Humana (instead of the entire amount
we were receiving when operating the HMO).  As a result, we realized
less revenue in the last four months following the sale of the HMO than we would
have if we had continued to operate the HMO.  The combination of these
factors increased our MER in 2008 by 0.9%.
  Medical
center costs include the salaries, taxes and benefits of the PSN’s employed
health professionals and staff providing primary care services, as well as the
costs associated with the operations of those
practices.  Approximately $12.5 million of our total medical expenses
in 2008 related to physician practices we own as compared to $11.3 million in
2007.
  The MER
for the HMO declined to 87.9% in 2008 from 92.9% in 2007. This decline is
primarily a result of our ability to renegotiate certain contracts with
hospitals and outpatient service providers in 2008, which reduced the amount we
paid for services, improvements in our medical management techniques, and higher
premiums from CMS attributable to an increase in the 2008 base rate and
increased risk scores.  Total medical expense for the HMO in 2008
decreased by $5.1 million over that incurred in 2007 primarily due to the fact
that the HMO was sold effective August 29, 2008 and, accordingly, the results of
operations for 2008 include only eight months of total medical
expense.
  The
estimated medical expense payable for the PSN at December 31, 2008 was
determined to be between $22.7 million and $24.5 million and, as is our policy,
we recorded a liability of $23.1 million, which approximates the actuarial
mid-point of the range.  At December 31, 2007, our estimated medical
expenses payable for the PSN was $14.7 million.  Claims paid in 2008
for 2007 totaled $14.3 million, a favorable variance of
$374,000.  This $374,000 difference decreased the PSN’s medical
expense in 2008 and decreased the PSN’s MER by .2%.
 
 At
December 31, 2007, our estimated medical expense payable for the HMO was $7.0
million.  Claims paid in 2008 for 2007 totaled $6.2 million which was
less than the estimated accrual by $780,000.  This difference was
recorded as a reduction in claims expense in 2008 and reduced the HMO’s MER by
1.5%.
  -41-
 
 Other
Operating Expenses
 
 Year
      Ended December 31
                    
                    
                    (Decrease)
                    
                    
                    %2008
                    
                    
                    2007
                    
                    
                    Increase
                    
                    
                    ChangeAdministrative
      payroll, payroll taxes and benefits
                    
                    $
                    12,537,000
                    
                    
                    $
                    13,108,000
                    
                    
                    $
                    (571,000
                    )
                    
                    
                    -4.4
                    %Percentage
      of total revenue
                    
                    
                    4.0
                    %
                    
                    
                    4.7
                    %General
      and administrative
                    
                    
                    10,071,000
                    
                    
                    
                    11,158,000
                    
                    
                    
                    (1,087,000
                    )
                    
                    
                    -9.7
                    %Percentage
      of total revenue
                    
                    
                    3.2
                    %
                    
                    
                    4.0
                    %Marketing
      and advertising
                    
                    
                    1,865,000
                    
                    
                    
                    3,959,000
                    
                    
                    
                    (2,094,000
                    )
                    
                    
                    -52.9
                    %Percentage
      of total revenue
                    
                    
                    0.6
                    %
                    
                    
                    1.4
                    %Stay
      bonuses and termination costs
                    
                    
                    1,598,000
                    
                    
                    
                    -
                    
                    
                    
                    1,598,000
                    
                    
                    
                    100.0
                    %Percentage
      of total revenue
                    
                    
                    0.5
                    %
                    
                    
                    0.0
                    %Restructuring
      expense
                    
                    
                    -
                    
                    
                    
                    584,000
                    
                    
                    
                    (584,000
                    )
                    
                    
                    -100.0
                    %Percentage
      of total revenue
                    
                    
                    0.0
                    %
                    
                    
                    0.2
                    %Total
      other operating expenses
                    
                    $
                    26,071,000
                    
                    
                    $
                    28,809,000
                    
                    
                    $
                    (2,738,000
                    )
                    
                    
                    -9.5
                    %
  Administrative
Payroll, Payroll Taxes and Benefits
 
 Administrative
payroll, payroll taxes and benefits include salaries and related costs for our
executive, administrative and sales staff.  For 2008, administrative
payroll, payroll taxes and benefits were $12.5 million, compared to the $13.1
million for 2007, a decrease of $571,000.  The decrease is primarily a
result of a $1.9 million decrease in payroll cost associated with the HMO,
primarily as a result of the sale of the HMO.  The decrease was
partially offset primarily by an increase in the PSN’s payroll costs, most of
which related to the increase in personnel that was needed to manage the
increased number of customers serviced under the IPA Agreement.
  General
and Administrative
  General
and administrative expenses decreased to $10.1 million in 2008 as compared to
$11.2 million in 2007, a decrease of $1.1 million, or 9.7%.  General
and administrative costs associated with the HMO decreased $2.2 million in 2008
as compared to 2007, primarily as a result of the sale of the
HMO.  The decrease was partially offset by an increase in the general
and administrative costs of the PSN, most of which related to the increase in
the number of customers serviced under the IPA Agreement.
  Marketing
and Advertising
 
 Marketing
and advertising expense, which primarily consists of advertising expenses and
brokerage commissions paid to independent sales agents of the HMO, was $1.9
million in 2008 as compared to $4.0 million in 2007, a decrease of 52.9%. The
primary reason for this decrease is the elimination of these costs upon the sale
of the HMO, as a significant portion of our marketing costs were incurred during
the open enrollment period, which occurs in the last quarter of the
year.
 
 Stay
Bonuses and Termination Costs
 
 In
connection with the sale of the HMO, we paid the employees of the HMO stay
bonuses and termination payments. We recognized and paid all of these costs,
totaling $1.6 million, in the third quarter of 2008.
  Restructuring
Expense
 
 In July
2007, we implemented a restructuring plan designed to reduce costs and improve
operating efficiencies.   The restructuring plan, completed by
the end of August 2007, resulted in the closure of two of the HMO’s office
locations, one PSN medical practice, and a workforce reduction involving 16
employees.  In connection with this plan, we recorded approximately
$584,000 of restructuring costs during the third quarter of 2007, including
approximately $147,000 for severance payments, approximately $365,000 for
continuing lease obligations on closed locations and approximately $72,000 for
the write-off of certain leasehold improvements and equipment.  At the
time of its closure on July 31, 2007, the PSN medical practice served
approximately 450 customers in South Florida, all of which were moved to other
providers outside of the PSN.  Prior to its closing on July 31, this
PSN medical practice generated approximately $2.6 million of revenue in 2007 and
had a negative gross margin. Of the $584,000 restructuring charge, approximately
$400,000 related to the HMO with the balance of $184,000 associated with the
PSN.
  -42-
 
 Gain
on Sale of HMO Subsidiary
 
 In 2008,
we recognized a gain on the sale of the HMO of approximately $5.9
million.
 
 Other
Income
 
 We
realized other income of $78,000 in 2008 compared to $1.4 million in
2007.  Although we did realize positive investment income in 2008,
investment income did decrease by $1.3 million compared to 2007.  This
was a result of a significant decline in interest rates and realized and
unrealized losses in our investment portfolio of approximately $811,000 during
2008.
 
 Income
taxes
 
 Our
effective tax rate was 38.6% in 2008 and 37.4% in 2007.   The
higher effective income tax rate in 2008 is a result of adjusting deferred tax
estimates related to the HMO.
 
 Liquidity
and Capital Resources
  Cash,
cash equivalents and short-term investments at December 31, 2009 totaled
approximately $33.8 million as compared to approximately $36.3 million at
December 31, 2008.  This reduction is primarily a result of posting
$5.0 million of short-term investments to secure a $3.0 million line of credit,
and classifying this collateral as a non-current asset at December 31, 2009, and
the repurchase of shares discussed below.
  As of
December 31, 2009, we had a working capital surplus of approximately $27.7
million as compared to a working capital surplus of approximately $34.5 million
as of December 31, 2008, a decrease of approximately $6.8 million or
19.7%.  This decrease in working capital is primarily attributable to
the posting of the collateral under the letter of credit agreement discussed
above and our repurchase of $15.9 million of our common stock in 2009, both of
which were partially offset by cash flow from operations.
  We have
an investment policy with respect to the investment of our cash and
equivalents.  The goal of the investment policy is to obtain the
highest yield possible while investing only in highly rated instruments or
investments with nominal risk of loss of principal.  The investment
policy sets forth a list of “Permitted Investments” and provides that any
exceptions to the policy must be approved by the Chief Financial Officer or the
Chief Executive Officer.  We anticipate that we will continue to
invest our funds in highly liquid securities.
 
 In
December 2009, we entered into a one year commercial line of credit agreement
with a bank, which provides for borrowings and issuance of letters of credit of
up to $3.0 million.  The line of credit is secured by investments of
$5.0 million.  Under this line of credit, as of December 31, 2009, we
had a $3.0 million letter of credit issued in favor of Humana.
 
 At
December 31, 2009, we had $716,000 of debt related to the acquisition of a
physician practice.
 
 In
October 2008, we announced authorization for the repurchase of up to 10 million
shares of our outstanding common stock. On August 3, 2009, the Board of
Directors approved a 5 million share increase to the share repurchase
program.  On February 24, 2010, the Board approved an increase to the share
repurchase program of an additional 5 million shares, bringing the total number
of shares of common stock authorized for repurchase under the program to 20
million shares.  In 2009, we repurchased 7.8 million shares and
options exercisable to purchase 684,200 shares of our common stock for an
aggregate of $15.9 million.  In 2008, we repurchased 4.2 million
shares for an aggregate of $7.6 million. Between January 1, 2010 and
February 25, 2010, we repurchased an additional 1.6 million shares for $3.7
million.  The number of shares to be repurchased and the timing of the
purchases are influenced by a number of factors, including the then prevailing
market price of our common stock, other perceived opportunities that may become
available to us and regulatory requirements.
 
 Our total
stockholders’ equity increased approximately $100,000 or 0.2%, from
approximately $42.8 million at December 31, 2008 to approximately $42.9 million
at December 31, 2009.  This increase was primarily a result of our net
income reduced primarily offset by the shares acquired under our stock
repurchase plan.
  -43-
  Net cash
provided by operating activities for 2009 was approximately $20.4
million.  In addition to net income of $14.4 million our significant
sources of cash from operating activities were:
 
 ·
              an
      increase in due from (to) Humana of  $5.1
  million;
 ·
              stock
      based compensation expense of $1.2 million;
and
 ·
              non-cash
      depreciation and amortization expense of
  $884,000.
 
 The cash
provided by operating activities was partially offset by the following uses of
cash:
 
 ·
              the
      gain on the sale of the HMO of $1.3 million;
and
 ·
              a
      decrease in accrued termination costs related to the HMO administrative
      services agreement of $960,000.
 
 Net cash
used in investing activities for 2009 was approximately
$472,000.  During 2009, we sold short-term investments of $1.6
million, acquired $1.1 million of fixed assets and invested $1.0 million in the
purchase of a physician practice.
 
 Net cash
used in financing activities for 2009 was approximately $15.8
million.  Approximately $15.9 million of which was used to repurchase
our common stock, in accordance with the stock repurchase program discussed
above.
  ITEM
7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Market
risk generally represents the risk of loss that may result from the potential
change in value of a financial instrument as a result of fluctuations in
interest rates and market prices.  We do not currently have any
trading derivatives nor do we expect to have any in the future.  We
have established policies and internal processes related to the management of
market risks, which we use in the normal course of our business
operations.
  Interest
Rate Risk
 
 We
monitor the third-party depository institutions that hold our cash, cash
equivalents and investments. We diversify our cash, cash equivalents and
investments among counterparties and investment positions to minimize exposure
to any one of these entities or investments.  As of December 31, 2009,
other than one of our investment positions which represented 5.5% of our total
investment portfolio, none of our other investment positions represented more
than 5.0% of our total investment portfolio.  Our emphasis is
primarily on safety of principal while maximizing yield on those funds. To
achieve this objective, we maintain our portfolio of cash equivalents and
investments in a variety of securities, including U.S. Treasury securities,
municipal bonds and corporate debt. As of December 31, 2009, the fair value of
our investment positions was approximately $27.0 million, over 37.8% of which
had a term to maturity of less than two years and a credit rating by a major
rating agency of A or higher.  Our investments are classified as
trading securities. Investments in both fixed rate and floating rate interest
earning securities carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than predicted if
interest rates fall. Due in part to these factors, the value of our investments
and/or our income from investments may decrease in the future.
 
 Intangible
Asset Risk
  We have
intangible assets and perform goodwill impairment tests (apart from the required
annual impairment test of goodwill) whenever events or circumstances indicate
that the carrying value may not be recoverable from estimated future cash flows.
As a result of our periodic evaluations, we may determine that the intangible
asset values need to be written down to their fair values, which could result in
material charges that could be adverse to our operating results and financial
position. We evaluate the continuing value of goodwill by using valuation
techniques based on multiples of earnings, revenue and EBITDA (i.e., earnings
before interest, taxes, depreciation and amortization), particularly with regard
to entities similar to us that have recently been acquired.  We also
consider the market value of our own stock and those of companies similar to
ours.   As of December 31, 2009 we believe our intangible assets,
including goodwill are recoverable, however, changes in the economy, the
business in which we operate and our own relative performance could change the
assumptions used to evaluate intangible asset recoverability.  We
continue to monitor those assumptions and their effect on the estimated
recoverability of our intangible assets.
  -44-
 
 Equity
Price Risk
 
 We do not
own any equity investments, other than in our subsidiaries. As a result, we do
not currently have any direct equity price risk.
 
 Commodity
Price Risk
  We do not
enter into contracts for the purchase or sale of commodities. As a result, we do
not currently have any direct commodity price risk.
  ITEM
      8
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
  The
financial statements and supplementary data required by this Item are set forth
in the accompanying audited financial statements.
 
 ITEM
      9
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None
 
 ITEM 9A.
              CONTROLS
      AND PROCEDURES
  (a)
              Evaluation
      of Disclosure Controls and
Procedures
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as of December 31, 2009.  Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
  (b)
              Management's
      Annual Report on Internal Control over Financial
  Reporting
  Management,
with the participation of the Chief Executive Officer and the Chief Financial
Officer, is responsible for establishing and maintaining adequateinternal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
 
 •
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;
 
 •
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and
 
 •
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.
  Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
  -45-
  Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.
  Based on
our assessment, management believes that, as of December 31, 2009, the
Company’s internal control over financial reporting is effective.
  Grant
Thornton LLP, the registered public accounting firm that audited the
consolidated financial statements included in this Annual Report on Form 10-K,
has issued an attestation report on our internal control over financial
reporting.
  -46-
  (c)
              Attestation
      Report of Independent Registered Public Accounting
  Firm
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 Metropolitan
Health Networks, Inc.
 
 We have
audited Metropolitan Health Networks, Inc. and subsidiaries (the Company)
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Annual Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control—Integrated Frameworkissued by COSO.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years ended December 31, 2009 and our report dated March 2, 2010 expressed an
unqualified opinion on those financial statements.
 
 /s/ GRANT
THORNTON LLP
 
 Miami,
Florida
 March 2,
2010
  -47-
  (d)
              Changes in Internal Control
      over Financial Reporting
  There
were no changes in our internal control over financial reporting during the
fourth quarter of 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
  PART
III
  ITEM
      10
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Code
of Ethics
 
 As part
of our system of corporate governance, our Board of Directors has adopted a code
of ethics that is specifically applicable to our Chief Executive Officer and
senior financial officers. This Code of Ethics for Senior Financial Officers, as
well as our Code of Business Conduct and Ethics, applicable to all directors,
officers and employees, are available on our web site at
http://www.metcare.com.  Shareholders may request a free copy of these
documents from:
 
 Metropolitan
Health Networks, Inc.
 Attn:  Roberto
L. Palenzuela, General Counsel and Secretary
 250 South
Australian Avenue, Suite 400
 West Palm
Beach, Florida 33401
 (561)805-8500.
 
 If we
make substantive amendments to this Code of Business Conduct and Ethics or grant
any waiver, including any implicit waiver, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K within four days
of such amendment or waiver.
  Corporate
Governance Guidelines — Certain Committee
Charters
  We have
adopted Corporate Governance Guidelines as well as charters for our Audit,
Compensation and Governance and Nominating Committees. These documents are
available on our web site at http://www. metcare.com.  Shareholders
may request a free copy of any of these documents from the address and phone
number set forth above under “Code of Ethics.” The information contained on our
web site is not incorporated by reference into this Annual Report on
Form 10-K.
 
 The
information required by this item about our Executive Officers is included in
Part I, “Item 1. Business” of this Annual Report on Form 10-K
under the caption “Our Executive Officers.” All other information required by
this item is incorporated herein by reference from our definitive Proxy
Statement for the 2010 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation14A no later than April 30, 2010 (the “2010
Proxy Statement”).
 
 ITEM
      11.
              EXECUTIVE
      COMPENSATION
 
 The
information required by this item is included in our 2010 Proxy Statement and is
incorporated herein by reference.
 
 ITEM 12
              SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER
  MATTERS
  The
information required by this item is included in our 2010 Proxy Statement and is
incorporated herein by reference.
 
 ITEM
      13
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
 
 The
information required by this item is included in our 2010 Proxy Statement and is
incorporated herein by reference.
  -48-
 
 ITEM
      14
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
 
 The
information required by this item is included in our 2010 Proxy Statement and is
incorporated herein by reference.
  PART
IV
 
 ITEM
      15
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
 
 (a)
              The
      following documents are filed as a part of this Form
  10-K:
 
 (1)
              Consolidated
      Financial Statements.
 
 (2)
              All
      financial schedules required to be filed by Item 8 of this form, and by
      Item 15(d)  have been omitted as the required information is
      inapplicable or has been included in the Notes to Consolidated Financial
      Statements.
  -49-
 
 METROPOLITAN
HEALTH
 NETWORKS,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 DECEMBER
31, 2009
 
 CONTENTS
 
 PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                F-2CONSOLIDATED
      FINANCIAL STATEMENTSBalance
      Sheets
                F-3Statements
      of Income
                F-4Statements
      of Changes in Stockholders' Equity
                F-5Statements
      of Cash Flows
                F-6Notes
      to Consolidated Financial Statements
                F-8
  F-1
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 Metropolitan
Health Networks, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Metropolitan Health
Networks, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2009.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Metropolitan Health
Networks, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Metropolitan Health Networks, Inc. and
subsidiaries internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 2, 2010 expressed an
unqualified opinion thereon.
 
 /s/ GRANT
THORNTON LLP
 Miami,
Florida
 March 2,
2010
  F-2
  METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
 December 31,2009
                              
                              
                              2008ASSETSCURRENT
      ASSETSCash
      and equivalents
                              
                              $
                              6,794,809
                              
                              
                              $
                              2,701,243Investments,
      at fair value
                              
                              
                              27,036,310
                              
                              
                              
                              33,641,140Accounts
      receivable from patients, net of allowance of $583,000  and
      $490,000 in 2009 and 2008, respectively
                              
                              
                              517,314
                              
                              
                              
                              286,003Due
      from Humana, net
                              
                              
                              -
                              
                              
                              
                              2,823,355Inventory
                              
                              
                              216,170
                              
                              
                              
                              315,811Prepaid
      expenses
                              
                              
                              427,985
                              
                              
                              
                              570,792Deferred
      income taxes
                              
                              
                              510,816
                              
                              
                              
                              262,874Other
      current assets
                              
                              
                              211,649
                              
                              
                              
                              266,007TOTAL
      CURRENT ASSETS
                              
                              
                              35,715,053
                              
                              
                              
                              40,867,225PROPERTY
      AND EQUIPMENT, net of accumulated depreciation andamortization
      of $2,809,000 and $2,324,000 in 2009 and 2008,
respectively
                              
                              
                              1,909,635
                              
                              
                              
                              1,336,094RESTRICTED
      CASH AND INVESTMENTS
                              
                              
                              6,444,678
                              
                              
                              
                              1,408,089DEFERRED
      INCOME TAXES, net of current portion
                              
                              
                              1,167,475
                              
                              
                              
                              980,842OTHER
      INTANGIBLE ASSETS, net of accumulated amortization of $877,000 and
      $524,000 in 2009 and 2008, respectively
                              
                              
                              930,569
                              
                              
                              
                              1,184,142GOODWILL
                              
                              
                              4,362,332
                              
                              
                              
                              2,587,332OTHER
      ASSETS
                              
                              
                              802,500
                              
                              
                              
                              780,631TOTAL
      ASSETS
                              
                              $
                              51,332,242
                              
                              
                              $
                              49,144,355LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                              
                              $
                              455,306
                              
                              
                              $
                              483,621Accrued
      payroll and payroll taxes
                              
                              
                              2,959,708
                              
                              
                              
                              2,288,224Income
      taxes payable
                              
                              
                              2,271,638
                              
                              
                              
                              1,865,926Due
      to Humana, net
                              
                              
                              1,385,200
                              
                              
                              
                              -Accrued
      termination costs of HMO administrative services agreement
                              
                              
                              -
                              
                              
                              
                              1,080,000Accrued
      expenses
                              
                              
                              618,575
                              
                              
                              
                              621,854Current
      portion of long-term debt
                              
                              
                              318,182
                              
                              
                              
                              -TOTAL
      CURRENT LIABILITIES
                              
                              
                              8,008,609
                              
                              
                              
                              6,339,625LONG-TERM
      DEBT, net of current portion
                              
                              
                              397,727
                              
                              
                              
                              -TOTAL
      LIABILITIES
                              
                              
                              8,406,336
                              
                              
                              
                              6,339,625COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      EQUITYPreferred
      stock, par value $.001 per share; stated value $100 per
    share;10,000,000
      shares authorized; 5,000 issued and outstanding
                              
                              
                              500,000
                              
                              
                              
                              500,000Common
      stock, par value $.001 per share; 80,000,000 shares
      authorized;40,902,391
      and  48,251,395 issued and outstanding at December 31, 2009 and
      2008, respectively
                              
                              
                              40,902
                              
                              
                              
                              48,251Additional
      paid-in capital
                              
                              
                              23,329,290
                              
                              
                              
                              37,649,331Retained
      earnings
                              
                              
                              19,055,714
                              
                              
                              
                              4,607,148TOTAL
      STOCKHOLDERS' EQUITY
                              
                              
                              42,925,906
                              
                              
                              
                              42,804,730TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              51,332,242
                              
                              
                              $
                              49,144,355
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-3
  METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME
 
 Years Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007REVENUE
                      
                      $
                      354,407,100
                      
                      
                      $
                      317,211,727
                      
                      
                      $
                      277,577,289MEDICAL
      EXPENSEMedical
      claims expense
                      
                      
                      299,039,806
                      
                      
                      
                      267,983,448
                      
                      
                      
                      229,420,767Medical
      center costs
                      
                      
                      14,512,051
                      
                      
                      
                      12,488,679
                      
                      
                      
                      11,275,599Total
      Medical Expense
                      
                      
                      313,551,857
                      
                      
                      
                      280,472,127
                      
                      
                      
                      240,696,366GROSS
      PROFIT
                      
                      
                      40,855,243
                      
                      
                      
                      36,739,600
                      
                      
                      
                      36,880,923OTHER
      OPERATING EXPENSESAdministrative
      payroll, payroll taxes and benefits
                      
                      
                      11,287,110
                      
                      
                      
                      12,537,118
                      
                      
                      
                      13,108,160General
      and administrative
                      
                      
                      7,564,251
                      
                      
                      
                      10,071,781
                      
                      
                      
                      11,158,177Marketing
      and advertising
                      
                      
                      359,249
                      
                      
                      
                      1,864,822
                      
                      
                      
                      3,959,220Stay
      bonuses and termination costs of HMO subsidiary
                      
                      
                      -
                      
                      
                      
                      1,597,674
                      
                      
                      
                      -Restructuring
      expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      583,795Total
      Other Operating Expenses
                      
                      
                      19,210,610
                      
                      
                      
                      26,071,395
                      
                      
                      
                      28,809,352OPERATING
      INCOME (LOSS) BEFORE GAIN ON SALE OF HMO
                      
                      
                      21,644,633
                      
                      
                      
                      10,668,205
                      
                      
                      
                      8,071,571Gain
      on sale of HMO subsidiary
                      
                      
                      1,336,470
                      
                      
                      
                      5,872,769
                      
                      
                      
                      -OPERATING
      INCOME
                      
                      
                      22,981,103
                      
                      
                      
                      16,540,974
                      
                      
                      
                      8,071,571OTHER
      INCOME (EXPENSE)Investment
      income, net
                      
                      
                      390,183
                      
                      
                      
                      108,137
                      
                      
                      
                      1,396,624Other
      income (expense), net
                      
                      
                      (22,607
                      )
                      
                      
                      (30,576
                      )
                      
                      
                      (27,457
                      )Total
      other income (expense)
                      
                      
                      367,576
                      
                      
                      
                      77,561
                      
                      
                      
                      1,369,167INCOME
      BEFORE INCOME TAXES
                      
                      
                      23,348,679
                      
                      
                      
                      16,618,535
                      
                      
                      
                      9,440,738INCOME
      TAX EXPENSE
                      
                      
                      8,900,113
                      
                      
                      
                      6,414,068
                      
                      
                      
                      3,526,740NET
      INCOME
                      
                      $
                      14,448,566
                      
                      
                      $
                      10,204,467
                      
                      
                      $
                      5,913,998EARNINGS
      PER SHARE:Basic
                      
                      $
                      0.32
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.12Diluted
                      
                      $
                      0.31
                      
                      
                      $
                      0.20
                      
                      
                      $
                      0.11
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
  METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2009, 2008 AND
      2007
 $0.001
                    
                    
                    
                    
                    
                    $0.001Par Value
                    
                    
                    Common
                    
                    
                    Par Value
                    
                    
                    Additional
                    
                    
                    RetainedPreferred
                    
                    
                    Preferred
                    
                    
                    Stock
                    
                    
                    Common
                    
                    
                    Paid-in
                    
                    
                    EarningsShares
                    
                    
                    Stock
                    
                    
                    Shares
                    
                    
                    Stock
                    
                    
                    Capital
                    
                    
                    (Deficit)
                    
                    
                    TotalBALANCES
      - JANUARY 1, 2007
                    
                    
                    5,000
                    
                    
                    $
                    500,000
                    
                    
                    
                    50,268,964
                    
                    
                    $
                    50,269
                    
                    
                    $
                    41,453,311
                    
                    
                    $
                    (11,074,317
                    )
                    
                    $
                    30,929,263Exercise
      of options and warrants, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    915,872
                    
                    
                    
                    916
                    
                    
                    
                    506,010
                    
                    
                    
                    -
                    
                    
                    
                    506,926Stock-based
      compensation expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    578,267
                    
                    
                    
                    -
                    
                    
                    
                    578,267Shares
      issued for directors' fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    157,296
                    
                    
                    
                    157
                    
                    
                    
                    210,859
                    
                    
                    
                    -
                    
                    
                    
                    211,016Shares
      issued to employees
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    214,600
                    
                    
                    
                    215
                    
                    
                    
                    37,294
                    
                    
                    
                    -
                    
                    
                    
                    37,509Tax
      benefit on exercise of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    526,000
                    
                    
                    
                    -
                    
                    
                    
                    526,000Cumulative
      effect of adopting U.S. GAAP
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (437,000
                    )
                    
                    
                    (437,000
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,913,998
                    
                    
                    
                    5,913,998BALANCES
      - DECEMBER 31, 2007
                    
                    
                    5,000
                    
                    
                    
                    500,000
                    
                    
                    
                    51,556,732
                    
                    
                    
                    51,557
                    
                    
                    
                    43,311,741
                    
                    
                    
                    (5,597,319
                    )
                    
                    
                    38,265,979Exercise
      of options and warrants, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    541,261
                    
                    
                    
                    541
                    
                    
                    
                    322,330
                    
                    
                    
                    -
                    
                    
                    
                    322,871Stock-based
      compensation expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    694,022
                    
                    
                    
                    -
                    
                    
                    
                    694,022Shares
      issued for directors' fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    87,000
                    
                    
                    
                    87
                    
                    
                    
                    166,962
                    
                    
                    
                    -
                    
                    
                    
                    167,049Shares
      issued to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    258,200
                    
                    
                    
                    258
                    
                    
                    
                    534,370
                    
                    
                    
                    -
                    
                    
                    
                    534,628Tax
      benefit on exercise of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    261,000
                    
                    
                    
                    -
                    
                    
                    
                    261,000Stock
      repurchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,191,798
                    )
                    
                    
                    (4,192
                    )
                    
                    
                    (7,641,094
                    )
                    
                    
                    -
                    
                    
                    
                    (7,645,286
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,204,467
                    
                    
                    
                    10,204,467BALANCES
      - DECEMBER 31, 2008
                    
                    
                    5,000
                    
                    
                    
                    500,000
                    
                    
                    
                    48,251,395
                    
                    
                    
                    48,251
                    
                    
                    
                    37,649,331
                    
                    
                    
                    4,607,148
                    
                    
                    
                    42,804,730Stock-based
      compensation expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    687,980
                    
                    
                    
                    -
                    
                    
                    
                    687,980Shares
      issued for directors' fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    100,974
                    
                    
                    
                    101
                    
                    
                    
                    165,372
                    
                    
                    
                    -
                    
                    
                    
                    165,473Shares
      issued to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    366,700
                    
                    
                    
                    367
                    
                    
                    
                    501,657
                    
                    
                    
                    -
                    
                    
                    
                    502,024Stock
      repurchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,816,678
                    )
                    
                    
                    (7,817
                    )
                    
                    
                    (15,873,026
                    )
                    
                    
                    -
                    
                    
                    
                    (15,880,843
                    )Tax
      benefit of options repurchased
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    197,976
                    
                    
                    
                    -
                    
                    
                    
                    197,976Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,448,566
                    
                    
                    
                    14,448,566BALANCES
      - DECEMBER 31, 2009
                    
                    
                    5,000
                    
                    
                    $
                    500,000
                    
                    
                    
                    40,902,391
                    
                    
                    $
                    40,902
                    
                    
                    $
                    23,329,290
                    
                    
                    $
                    19,055,714
                    
                    
                    $
                    42,925,906
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-5
  METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
      FLOWS
 
 Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    $
                    14,448,566
                    
                    
                    $
                    10,204,467
                    
                    
                    $
                    5,913,998Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Gain
      on sale of HMO subsidiary
                    
                    
                    (1,336,470
                    )
                    
                    
                    (5,872,769
                    )
                    
                    
                    -Unrealized
      (gains) on short-term investments
                    
                    
                    (44,222
                    )
                    
                    
                    (96,000
                    )
                    
                    
                    -Depreciation
      and amortization
                    
                    
                    884,133
                    
                    
                    
                    1,098,424
                    
                    
                    
                    951,900Bad
      debt expense
                    
                    
                    93,000
                    
                    
                    
                    34,000
                    
                    
                    
                    549,266Loss
      from disposal of property and equipment
                    
                    
                    572
                    
                    
                    
                    10,224
                    
                    
                    
                    110,437Stock-based
      compensation expense
                    
                    
                    1,190,003
                    
                    
                    
                    1,228,650
                    
                    
                    
                    615,776Shares
      issued for director fees
                    
                    
                    165,473
                    
                    
                    
                    167,049
                    
                    
                    
                    211,016Deferred
      income taxes
                    
                    
                    (236,599
                    )
                    
                    
                    3,326,121
                    
                    
                    
                    3,147,163Excess
      tax benefits from stock-based compensation
                    
                    
                    (197,976
                    )
                    
                    
                    (261,000
                    )
                    
                    
                    (526,000
                    )Changes
      in operating assets and liabilities:Accounts
      receivable from patients
                    
                    
                    (324,311
                    )
                    
                    
                    1,277,367
                    
                    
                    
                    (900,927
                    )Inventory
                    
                    
                    99,641
                    
                    
                    
                    (119,657
                    )
                    
                    
                    88,623Prepaid
      expenses
                    
                    
                    142,807
                    
                    
                    
                    133,844
                    
                    
                    
                    (32,917
                    )Other
      current assets
                    
                    
                    54,358
                    
                    
                    
                    (744,805
                    )
                    
                    
                    441,119Other
      assets
                    
                    
                    (42,510
                    )
                    
                    
                    (28,806
                    )
                    
                    
                    43,903Accounts
      payable
                    
                    
                    296,685
                    
                    
                    
                    (740,043
                    )
                    
                    
                    574,494Accrued
      payroll and payroll taxes
                    
                    
                    671,484
                    
                    
                    
                    (237,789
                    )
                    
                    
                    735,867Income
      taxes payable
                    
                    
                    405,712
                    
                    
                    
                    1,616,849
                    
                    
                    
                    249,077Accrued
      termination costs of HMO administrative services agreement
                    
                    
                    (960,000
                    )
                    
                    
                    1,080,000
                    
                    
                    
                    -Accrued
      expenses
                    
                    
                    (3,279
                    )
                    
                    
                    (699,760
                    )
                    
                    
                    (194,763
                    )Estimated
      medical expenses payable
                    
                    
                    -
                    
                    
                    
                    (1,454,591
                    )
                    
                    
                    2,272,895Due
      to CMS
                    
                    
                    -
                    
                    
                    
                    261,636
                    
                    
                    
                    (7,738
                    )Due
      from/(to) Humana
                    
                    
                    5,100,025
                    
                    
                    
                    (3,576,821
                    )
                    
                    
                    1,757,911Total
      adjustments
                    
                    
                    5,958,526
                    
                    
                    
                    (3,597,877
                    )
                    
                    
                    10,087,102Net
      cash provided by operating activities
                    
                    
                    20,407,092
                    
                    
                    
                    6,606,590
                    
                    
                    
                    16,001,100CASH
      FLOWS (USED IN) INVESTING ACTIVITIES:Capital
      expenditures
                    
                    
                    (1,084,031
                    )
                    
                    
                    (396,475
                    )
                    
                    
                    (745,678
                    )Restricted
      cash from sale of HMO subsidiary
                    
                    
                    -
                    
                    
                    
                    (1,408,089
                    )
                    
                    
                    -Net
      proceeds from sale of HMO subsidiary
                    
                    
                    -
                    
                    
                    
                    78,439
                    
                    
                    
                    -Cash
      paid for physician practice acqusitions
                    
                    
                    (1,000,000
                    )
                    
                    
                    (1,475
                    )
                    
                    
                    (591,204
                    )Short-term
      investments
                    
                    
                    1,612,463
                    
                    
                    
                    (33,545,140
                    )
                    
                    
                    -Net
      cash (used in) investing activities
                    
                    
                    (471,568
                    )
                    
                    
                    (35,272,740
                    )
                    
                    
                    (1,336,882
                    )CASH
      FLOWS (USED IN)/FROM FINANCING ACTIVITIES:Repayments
      on notes payable
                    
                    
                    (159,091
                    )
                    
                    
                    (253,378
                    )
                    
                    
                    (125,000
                    )Proceeds
      from exercise of stock options and warrants, net
                    
                    
                    -
                    
                    
                    
                    322,871
                    
                    
                    
                    506,926Stock
      repurchases
                    
                    
                    (15,880,843
                    )
                    
                    
                    (7,645,286
                    )
                    
                    
                    -Excess
      tax benefits from stock-based compensation
                    
                    
                    197,976
                    
                    
                    
                    261,000
                    
                    
                    
                    526,000Net
      cash (used in)/ provided by financing activities
                    
                    
                    (15,841,958
                    )
                    
                    
                    (7,314,793
                    )
                    
                    
                    907,926NET
      INCREASE (DECREASE) IN CASH AND EQUIVALENTS
                    
                    
                    4,093,566
                    
                    
                    
                    (35,980,943
                    )
                    
                    
                    15,572,144CASH
      AND EQUIVALENTS - beginning of year
                    
                    
                    2,701,243
                    
                    
                    
                    38,682,186
                    
                    
                    
                    23,110,042CASH
      AND EQUIVALENTS - end of year
                    
                    $
                    6,794,809
                    
                    
                    $
                    2,701,243
                    
                    
                    $
                    38,682,186
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-6
 
 METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
      (continued)
 Years ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Supplemental
      Disclosures:Interest
      paid
                  
                  $
                  25,859
                  
                  
                  $
                  26,272
                  
                  
                  $
                  34,182Cash
      paid for income taxes
                  
                  $
                  8,731,000
                  
                  
                  $
                  1,471,000
                  
                  
                  $
                  130,500Supplemental
      Disclosure of Non-cash Investing and Financing Activities:Issuance
      of notes payable for physician practice acquisitions
                  
                  $
                  875,000
                  
                  
                  $
                  -
                  
                  
                  $
                  375,000Liabilities
      assumed in connection with assumption of contracts
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,429,000
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F-7
 
 Metropolitan
Health Networks, Inc. and Subsidiaries
  Year
Ended December 31, 2009
  Notes
to Consolidated Financial Statements
  NOTE
1 - ORGANIZATION AND BUSINESS ACTIVITY
  Our
business is focused on the operation of a provider services network (“PSN”) in
the State of Florida through our wholly-owned subsidiary, Metcare of Florida,
Inc.  Prior to August 29, 2008 (the “Closing Date”), we also owned and
operated a health maintenance organization (the “HMO”) through our wholly-owned
subsidiary, Metcare Health Plans, Inc. Prior to the sale, we managed the
PSN and the HMO as separate business segments.   Subsequent to
the sale, we operate only the PSN business.
 
 On the
Closing Date, we completed the sale of the HMO to Humana Medical Plan, Inc. (the
“Humana Plan”).  Concurrently with the sale, the PSN entered into a
five-year independent practice association participation agreement (the “IPA
Agreement”) with Humana  to provide or coordinate the provision of
healthcare services to the HMO’s customers pursuant to a per customer fee
arrangement.  Under the IPA Agreement, the PSN, on a non-exclusive
basis, provides and arranges for the provision of covered medical services, in
all 13 Florida counties previously served by the HMO, to each customer of
Humana’s Medicare Advantage health plans who selects one of our PSN’s primary
care physicians as his or her primary care physician.  The IPA
Agreement has a five-year term and will renew automatically for additional
one-year periods upon the expiration of the initial term and each renewal term
unless terminated upon 90 days notice prior to the end of the applicable
term.
 
 Since
August 30, 2008, the PSN has operated under the IPA Agreement and two other
network contracts (the “Pre-Existing Humana Network Agreements” and, together
with the IPA Agreement, the “Humana Agreements”), to provide medical care to
Medicare beneficiaries enrolled under Humana’s health plans.  To
deliver care, we utilize our wholly-owned medical practices and have also
contracted directly or indirectly through Humana with medical practices, service
providers, pharmacies and hospitals (collectively the “Affiliated
Providers”). For the approximately 6,000 Humana Participating Customers
covered under the Humana Agreement covering Miami-Dade, Broward and Palm Beach
counties, our PSN and Humana share in the cost of inpatient hospital services
and the PSN is responsible for the full cost of all other medical care provided
to the Humana Participating Customers.For the remaining
29,500 Humana Participating Customers covered under our other two Humana
Agreements, our PSN is responsible for the cost of all medical care
provided.
 
 At
December 31, 2009, pursuant to the Humana Agreements, we have the contractual
right to provide services to Humana customers in 30 Florida
counties.  We currently have operations in 19 of these
counties.
 
 The PSN
also has a network agreement (the “CarePlus Agreement”) with CarePlus Health
Plans, Inc. (“CarePlus”), a Medicare Advantage health plan in Florida, which
covered approximately 200 customers at December 31, 2009.  CarePlus is
a wholly-owned subsidiary of Humana.  Pursuant to the CarePlus
Agreement the PSN has the right to manage, on a non-exclusive basis, healthcare
services to Medicare beneficiaries in 22 Florida counties who have elected to
receive benefits through CarePlus’ Medicare Advantage plans (each, a “CarePlus
Plan Customer”).  Like Humana, CarePlus directly contracts with CMS
and is paid a monthly premium payment for each CarePlus Plan
Customer.  In return for managing these healthcare services, the PSN
receives a monthly network administration fee for each CarePlus Participating
Customer.  Commencing on February 1, 2010, the PSN began to receive a
monthly premium payment from CarePlus and assumed full responsibility for the
cost of all medical services provided to each CarePlus Participating
Customer.  The capitation fee represents a substantial portion of the
monthly premium CarePlus receives from CMS.
 
 At
December 31, 2009, we operated in six of the 22 Florida counties covered by the
CarePlus Agreement.  Effective January 1, 2010, we began to operate in
6 additional counties and we terminated care in one county.
  F-8
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis
of Consolidation
  Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The consolidated financial statements include the accounts of
Metropolitan Health Networks, Inc., and subsidiaries that we control, including
the HMO through the date of sale.  All significant intercompany
balances and transactions have been eliminated in consolidation.
  Use
of Estimates
 
 The
preparation of financial statements in accordance with U.S. GAAP requires us to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The areas involving the most significant use
of estimates are medical expenses payable, premium revenue, the impact of risk
sharing provisions related to our Humana contracts and prior to the sale of the
HMO, our Medicare contract, the future benefit of our deferred tax asset and the
valuation and related impairment recognition of long-lived assets, including
goodwill. These estimates are based on knowledge of current events and
anticipated future events. We adjust these estimates each period as more current
information becomes available. The impact of any changes in estimates is
included in the determination of earnings in the period in which the estimate is
adjusted. Actual results may ultimately differ materially from those
estimates.
 
 Revenue
 
 Revenue
is primarily derived from risk-based health insurance arrangements in which the
premium is paid to us on a monthly basis.  We assume the economic risk
of funding our customers’ healthcare services and related administrative costs.
Premium revenue is recognized in the period in which our customers are entitled
to receive healthcare services.  Because we have the obligation to
fund medical expenses, we recognize gross revenue and medical expenses for these
contracts in our consolidated financial statements. We record healthcare premium
payments received in advance of the service period as unearned
premiums.
 
 Periodically
we receive retroactive adjustments to the premiums paid to us based on the
updated health status of our customers (known as a Medicare risk adjustment or
“MRA” score).  The factors considered in this update include changes
in demographic factors, risk adjustment scores, customer information and
adjustments required by the risk sharing requirements for prescription drug
benefits under Part D of the Medicare program.  In addition, the
number of customers for whom we receive capitation fees may be retroactively
adjusted due to enrollment changes not yet processed, or not yet reported. These
retroactive adjustments could, in the near term, materially impact the revenue
that has been recorded.  We record any adjustments to this revenue at
the time the information necessary to make the determination of the adjustment
is available, the collectibility of the amount is reasonably assured, or the
likelihood of repayment is probable.
 
 Our PSN’s
wholly owned medical practices also provide medical care to non-Humana customers
on a fee-for-service basis.  These services are typically billed to
patients, Medicare, Medicaid, health maintenance organizations and insurance
companies. Fee-for-service revenue, which is less than 1% of total revenue, is
recorded at the net amount expected to be collected from the patient or from the
insurance company paying the bill.  Often this amount is less than the
charge that is billed and such discounts reduce the revenue
recorded.
  Investment
income includes realized and unrealized gains and losses on trading securities
and is recorded in other income as earned.
  Medicare
Part D
 
 We
provide prescription drug benefits to our Medicare Advantage customers in
accordance with the requirements of Medicare Part D. The benefits covered under
Medicare Part D are in addition to the benefits covered by the PSN under
Medicare Parts A and B.   Premium revenue for the provision of
Part D insurance coverage is included in our monthly premium payment from
Humana.
  F-9
  The Part
D Payment we receive from Humana is subject to adjustment, positive or negative,
based upon the application of risk corridors that compare the estimated
prescription drug benefit costs (“Estimated Costs”) to
actual  prescription  drug benefit  incurred costs
(the "Actual  Costs").  To the extent the Actual Costs
exceed the Estimated Costs by more than the risk corridor, we may receive
additional payments.  Conversely, to the extent the Estimated Costs
exceed the Actual Costs by more than the risk corridor, we may be required to
refund a portion of the Part D Payment. We estimate and recognize an adjustment
to premium revenue based upon pharmacy claims experience to date as if the
contract to provide Part D coverage were to end at the end of each reporting
period.  Accordingly, this estimate does not take into consideration
projected future pharmacy claims experience.  It is reasonably
possible that this estimate could change in the near term by an amount that
could be material. Since these amounts represent additional premium or premium
that is to be returned, any adjustment is recorded as an increase or decrease to
revenue. The final settlement for the Part D program occurs in the subsequent
year.
  Medical
Expenses and Medical Claims Payable
  Medical
expenses are recognized in the period in which services are provided and include
an estimate of our obligations for medical services that have been provided to
our customers but for which we have neither received nor processed claims, and
for liabilities for physician, hospital and other medical expense disputes. We
develop estimates for medical expenses incurred but not reported using an
actuarial process that is consistently applied. The actuarial models consider
factors such as time from date of service to claim receipt, claim backlogs, care
provider contract rate changes, medical care consumption and other medical
expense trends.   The actuarial process and models develop a
range for medical claims payable and we record to the amount in the range that
is our best estimate of the ultimate liability.  Each period, we
re-examine previously established medical claims payable estimates based on
actual claim submissions and other changes in facts and circumstances. As the
liability recorded in prior periods becomes more exact, we adjust the amount of
the estimates, and include the changes in medical expense in the period in which
the change is identified. In each reporting period, our operating results
include the effects of more completely developed medical expense payable
estimates associated with previously reported periods. While we believe our
medical expenses payable are adequate to cover future claims payments required,
such estimates are based on the claims experience to date and various
assumptions. Therefore, the actual liability could differ materially from the
amounts recorded.   Medical expenses payable are included in the
due to/from Humana in the accompanying consolidated balance sheets.
 
 Medical
expenses also include, among other things, the expense of operating our wholly
owned practices, capitated payments made to affiliated primary care physicians
and specialists, hospital costs, outpatient costs, pharmaceutical expense and
premiums we pay to reinsurers net of the related reinsurance
recoveries.  Capitation payments represent monthly contractual fees
disbursed to physicians and other providers who are responsible for providing
medical care to customers. Pharmacy expense is recognized when incurred by the
customer, net of rebates from drug manufacturers. Rebates are recognized when
the rebates are earned according to the contractual arrangements with the
respective vendors.
 
 We assume
responsibility for the cost of all medical services provided to the
customer.  To the extent that customers require more frequent or
expensive care than was anticipated, the premium received may be insufficient to
cover the costs of care provided. When it is probable that expected future
healthcare costs and maintenance costs will exceed the anticipated revenue on
the agreement, we would recognize a premium deficiency liability in current
operations. Losses recognized as a premium deficiency result in a beneficial
effect in subsequent periods as future operating losses under these contracts
are charged to the liability previously established. There are no premium
deficiency liabilities recorded at December 31, 2009 or 2008 and we do not
anticipate recording a premium deficiency liability, except when unanticipated
adverse events or changes in circumstances indicate otherwise.
 
 Cash
and Cash Equivalents
 
 All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. From time to time, we maintain cash balances
with financial institutions in excess of federally insured limits.
 
 Investments
 
 Investment
securities at December 31, 2009 consisted of U.S. Treasury securities, municipal
bonds and corporate debt.  We classify our debt securities as trading
and do not classify any securities as available-for-sale or held to
maturity.  Trading securities are bought and held principally for the
purpose of selling them in the near term.  Available-for-sale
securities are all securities not classified as trading or held to
maturity.   Cash and cash equivalents that have been set aside to
invest in trading securities are classified as investments.
 
 Trading
securities are recorded at fair value based on the closing market price of the
security. Unrealized holdings gains and losses on trading securities are
included in operations.
  F-10




Fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or a
liability. There is a  three-tier value hierarchy, which prioritizes
the inputs used in the valuation methodologies in measuring fair
value:





Level 1—
              Observable inputs that reflect
      quoted prices (unadjusted) for identical assets or liabilities in active
      markets.





Level 2—
            Include other inputs that are
      directly or indirectly observable in the
    marketplace.





Level 3—
            Unobservable inputs which are
      supported by little or no market
  activity.




The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.




We measure our investments at fair
value. Our investments are in Level 1 because our investments are valued using
quoted market prices in active markets.





Dividend and interest income is
recognized when earned.





Accounts Receivable from
Patients





Accounts
receivable from patients represents amounts due for medical services provided to
individuals that are not customers of our PSN who are serviced by our owned
physician practices. We do not obtain collateral for these
amounts.  Accounts receivable from patients are shown net of
allowances for estimated uncollectible accounts.





The
allowance for doubtful accounts is our best estimate of the amount of probable
losses in our existing accounts receivable and is based on a number of factors,
including collection history and a review of past due balances, with a
particular emphasis on past due balances greater than 90 days
old.  Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote.





Inventory





Inventory consists principally of
medical supplies which are stated at the lower of cost or market with cost
determined by the first-in, first-out method.





Property and
Equipment





Property and equipment is recorded at
cost. Expenditures for major improvements and additions are charged to the asset
accounts, while replacements, maintenance and repairs, which do not extend the
lives of the respective assets, are charged to expense.





Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying value of the
asset.  At December 31, 2009, we are not aware of any indicators of
impairment.





We calculate depreciation using the
straight-line method over the estimated useful lives of the assets. Amortization
of leasehold improvements is computed on a straight-line basis over the shorter
of the estimated useful lives of the assets or the remaining term of the lease.
The range of useful lives is as follows:




Medical
      equipment
              5 - 7
  yearsComputer and office
      equipment
              3 - 5
  yearsFurniture and
      equipment
              5 - 7
  yearsAuto
    equipment
              5 yearsLeasehold
      improvements
              3 years or term of
      lease


F-11


Deferred Tax Asset





Realization of our deferred tax asset is
dependent on generating sufficient taxable income prior to the expiration of our
various deferred tax items.  The amount of the deferred tax asset
considered realizable could
change in the near term if estimates of future taxable income are modified and
such changes could be material.





U.S. GAAP requires the establishment of
a valuation allowance to reduce the deferred tax assets reported if, based on
the weight of the evidence, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.  After consideration
of all the evidence, both positive and negative (including, among others,
projections of future taxable income, net operating loss carryforwards and our
profitability in recent years), we determined that future realization of our
deferred tax assets was more likely than not and, accordingly, we have not
recorded a valuation allowance.  In the event we determined that we
would not be able to realize all or part of our net deferred tax assets in the
future, an adjustment to establish a deferred tax asset valuation allowance
would be charged to income in the period such determination is
made.




Goodwill and Other Intangible
Assets




Goodwill
represents the unamortized excess of cost over the fair value of the net
tangible and other intangible assets acquired related to the acquisition of
certain physician practices by the PSN.  U.S. GAAP requires that we
not amortize goodwill to earnings, but instead requires that we test at least
annually for impairment at a level of reporting referred to as the reporting
unit and more frequently if adverse events or changes in circumstances indicate
that the asset may be impaired. Goodwill is assigned to the reporting unit that
is expected to benefit from a specific acquisition.  We believe that
all of our operations as of December 31, 2009 are conducted in one reporting
unit.





We amortize intangible assets with
determinable lives over 1 to 5 years.





U.S. GAAP requires a two-step process to
review intangible assets for impairment. The first step is a screen for
potential impairment, and the second step measures the amount of impairment, if
any. Impairment tests are performed, at a minimum, in the fourth quarter of each
year supported by our long-range business plan, annual planning process, and the
market value of our shares and metrics of comparable
companies.  Goodwill impairment tests completed for 2009, 2008 and
2007 did not result in an impairment loss.





Earnings Per Share




Earnings per share, basic is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Earnings per share, diluted reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.





Stock Based
Compensation




We measure and recognize compensation
expense for all share-based payment awards made to employees and directors,
including employee stock options, based on estimated fair
values.




We estimate the fair value of stock
option awards on the date of grant using an option-pricing model. The value of
awards that are ultimately expected to vest is recognized as expense over the
requisite service periods in the Consolidated Statements of
Income.




Because stock-based compensation expense
recognized in the Consolidated Statements of Income for fiscal 2009, 2008 and
2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures.





Advertising
Costs





Advertising
expense was approximately $359,000, $1,865,000, and $3,047,000 for the years
ended December 31, 2009, 2008 and 2007, respectively and is expensed as
incurred.





Income Taxes





Income taxes are accounted for under the
asset and liability method.  Under this method, deferred income tax
assets and liabilities are determined based upon differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases using enacted tax rates in effect for the year in
which the differences are expected to reverse.  The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in earnings in
the period that includes the enactment date.  A valuation allowance is
established when it is more likely than not that some or all of the deferred tax
assets will not be realized.


F-12


We recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more-likely-than-not sustain the position following an
audit.  For tax positions meeting the more-likely-than-not threshold,
the amount recognized in the financial statements is the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement
with the relevant tax authority.





Reinsurance and
Capitation





To mitigate our exposure to high cost
medical claims,we have
reinsurance arrangements
that provide for the reimbursement ofcertain customermedical expenses.For the PSN the deductibles for 2009
and 2008 were $40,000 in Miami-Dade, Broward and Palm Beach Counties and
$200,000 for all other counties, with a maximum benefit per customerper policy period of
$1,000,000.Our
deductible per customer per year was $125,000 for the HMO for the first six
months of 2008 and$150,000
during the period between July 1, 2008 and August 29, 2008, with a maximum
benefit per customer per policy periodof $1,000,000.




Fair Value of Financial
Instruments





The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, and accrued expenses
approximate fair value due to the short-term nature of these
instruments.  The carrying amount of our long-term debt approximates
fair value based on the debt’s interest rate.





Other Comprehensive
Income





For all years presented, other than net
income we had no comprehensive income items.





New Accounting
Pronouncements





Effective January 1, 2009, U.S. GAAP requires the accounting
for any entity in a business combination to recognize the full value of the
assets acquired and liabilities assumed in the transaction at the acquisition
date; the immediate expense recognition of transaction costs; and accounting for restructuring plans
separately from the business combination. The acquirer in a business combination
is defined as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition dateas the date that the acquirer achieves
control.  U.S. GAAP requires us to recognize intangible assets separately
from goodwill.We adopted these requirements on January
1, 2009 and applied them to the business combination that was completed in 2009,
and we will apply them to
all such transactions in the future.





In addition, on April 1, 2009, U.S. GAAP
was amended to require that assets acquired and liabilities assumed in a
business combination that arise from contingencies (a “pre-acquisition contingency”) be recognized at fair value, if the
fair value can be determined during the measurement period.  If the
fair value of a pre-acquisition contingency cannot be determined during the
measurement period, U.S. GAAP requires that the contingency be
recognized at the acquisition.  This
amendmentwaseffective January 1, 2009 and could
impact our accounting for future acquisitions.




In May 2009, U.S. GAAP established
general standards of accounting for disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The standard is based on the same principles that currently exist
in the auditing standards. U.S. GAAP requires disclosure for certain
nonrecognized subsequent events, the nature of the event and an estimate of its
financial effect or a statement that such an estimate cannot be made. We adopted
this provision for the quarter ended June 30, 2009and the disclosures required by this
new standard are included in the accompanying consolidated financial
statements.




In June 2009, the FASB issued FASB
Statement No. 168,The FASB Accounting
Standards CodificationTMand the Hierarchy
of Generally Accepted Accounting Principles, or SFAS 168. The FASB Accounting
Standards CodificationTM(“ASC”) is the source of authoritative U.S.
GAAP recognized by the FASB and supersedes all existing non-SEC accounting and
reporting standards. All ASC content carries the same level of authority and
anything outside of the ASC is nonauthoritative. SFAS 168 was effective for us
beginning with our third quarter 2009 condensed consolidated financial
statements. The adoption of this standard in the third quarter of 2009 only
changed the way we reference accounting standards in our
disclosures.


F-13





NOTE 3 - SALE OF HMO





On the Closing Date, we completed the
sale of all of the outstanding capital stock of our HMO to the Humana Plan
pursuant to the terms of the Stock Purchase Agreement, dated as of June 27,
2008, by and between the Humana Plan and us, (the “Stock Purchase Agreement”)
for a cash purchase price of approximately $14.6 million (the “Purchase
Price”).  We recognized a gain on the sale of the HMO of approximately
$5.9 million in 2008.





Approximately ten percent of the
Purchase Price has been deposited in escrow for 24 months to secure our payment
of any post-closing adjustments, described below, and indemnification
obligations.  This amount is presented as a component of restricted
cash and investments on the consolidated balance sheets.  Concurrent
with the sale, our PSN and Humana entered into the IPA
Agreement.





The Purchase Price is subject to
positive or negative post-closing adjustment based upon the difference between
the HMO’s estimated closing net equity, which was approximately $5.1 million,
and the HMO’s actual net equity as of the Closing Date. The settlement period
for determining the HMO’s actual net equity is December 31, 2009.  In addition to this
settlement, the Stock Purchase Agreement requires that the Humana Plan reconcile
any changes in CMS Part D payments and Medicare payments received by the HMO
after the Closing Date for services provided prior to the Closing Date to the
amounts recorded for such items as part of the Closing Net Equity
determination.  The ultimate settlements, if any, will increase or
decrease the gain on the sale of the HMO. AtDecember 31, 2009 we have adjusted the net equity
settlement for any additional significant adjustments that have been identified
subsequent to August 29, 2008 that would impact the recorded
gain.  These adjustments, which are described below,have been recordedin 2009as a gain on the sale of HMO
subsidiaryof $1.3
million.We expect the final net equity
settlement to occur in the first half of 2010





The gain on sale in 2009 of $1.3 million
includes additional gain from the closing net equity settlement for the HMO and
the settlement of certain liabilities of the HMO in 2009 at amounts lower than
the liability recorded at the time of the sale.


In connection with the sale, we paid
certain employees of the HMO stay bonuses and termination
payments.  We recognized and paid all of these costs, totaling $1.6
million, in the third quarter of 2008.
  NOTE
4 – PHYSICIAN PRACTICE ACQUISITION





Effective July 31, 2009, we acquired
certain assets of one of our contracted independent primary care physician
practices for approximately $1.9 million.  This transaction has been
accounted for under the acquisition method.  Approximately $1.8
million of the purchase price has been allocated to goodwill while approximately
$76,000 has been allocated to the non-compete agreement and $24,000 has been
allocated to patient records.  The amount allocated to the non-compete
is being amortized over two years and the cost associated with the patient
records is being amortized over one year.





NOTE
5 - MAJOR CUSTOMERS





Humana





Our PSN
receives a monthly fee from Humana for each Humana Medicare Advantage Plan
customer that chooses a physician that the PSN owns or has contracted with as
her or his primary care physician.  The monthly fee the PSN receives
to cover the medical care required of that customer is based on a percentage of
the premium received by Humana from CMS. Fees received by the PSN under these
Humana Agreements are reported as revenue.




Revenue from Humana accounted for
approximately99.6%,83.0%,and 79.7%of our total revenue in2009,2008and 2007, respectively.





At
December 31, 2009, we recorded a $1.4 million receivable representing our
estimate of the retroactive MRA premium for 2009 that we expect to receive in
the summer of 2010.This amount is included in due
to/fromHumana in the accompanyingconsolidatedbalance sheets.




In2009, we received the final MRA premium
increase for services provided in 2008 in the amount of $3.0
million as compared to the estimated increase of $3.8 million that had been
recorded at December 31, 2008.  The difference of $800,000 reducedrevenuein2009.  In August 2008, we were
notified of the final retroactiveMRA premium adjustment for services
provided in 2007 from CMS based on the increased risk scores of its customer
base.  The amount of the adjustment was not materially different than
the estimate we recorded at December 31, 2007.


F-14


Humana
may  immediately  terminate any of the
Humana  Agreements  in the event that, among other things,
the  PSN  and/or  any
of  its  Affiliated  Provider's  continued
participation may adversely affect the health, safety or welfare of any Humana
customer or bring  Humana  into  disrepute; in the
event of one of the PSN's physician's death or incompetence;  if the
PSN engages in or acquiesces to any act of bankruptcy,  receivership
or reorganization; or  if Humana loses its authority to do business in
total or as to any limited  segment or business (but only to
that  segment).  The PSN and Humana may also terminate each
of the Pre-Existing Humana Agreements upon 90 days' prior written notice (with a
60 day opportunity to cure, if possible) in the event of the other's material
breach of the applicable Humana Agreement.  The Humana Agreements may
also be terminated upon 180-day notice of non-renewal by either
party.  Failure to maintain the Humana Agreements on favorable terms,
for any reason, would adversely affect our
results  of  operations  and  financial
condition. The IPA Agreement,
which began on August 30, 2008, has a five-year term and will renew
automatically for additional one-year periods upon the expiration of the initial
term and each renewal term unless terminated upon 90 days notice prior to the
end of the applicable term.  After the initial five year term, either
party may terminate the agreement without cause by providing to the other party
120 days prior notice.




CMS




Prior to its sale, the HMO provided
services to Medicare beneficiaries pursuant to the Medicare Advantage
program.  Under our agreement with CMS, the HMO received a capitation
payment each month based on the number of customers enrolled in our plan,
adjusted for demographic and health risk factors.





Premium revenue for the HMO was
approximately 16.5% and 19.8% of our total revenue in 2008 and 2007,
respectively.





In 2008 and 2007, we received the final
retroactive MRA premium increase for premiums paid by CMS to the HMO for 2007
and 2006, respectively.  These amounts were not materially different
than the estimates we had recorded for those years.





NOTE 6 - DUE TO/FROM
HUMANA




Amounts due to/from Humana consisted of
the following:




December 31,2009
            
            
            2008Due from
    Humana
            
            $
            39,278,000
            
            
            $
            27,951,000Due to
    Humana
            
            
            (40,663,000
            )
            
            
            (25,128,000
            )Total Due (To)/From
      Humana
            
            $
            (1,385,000
            )
            
            $
            2,823,000


Underour Humana Agreements, we have the right
to offset certain sums owed to us by Humana under the applicable agreement
against certain sums we owe to Humana under the applicable agreement and Humana
has a comparable right.  In the event we owe Humana funds after any
such offset, we are required to pay Humana upon notification of such deficit and
Humana may offset future payments to us under the applicable agreement by such
deficit.





NOTE
7 – INVESTMENTS





Investments
consist solely of trading securities.  Trading securities are reported
at fair value, with unrealized gains and losses included in
earnings.  For trading securities held at December 31, 2009, the
amount of unrealized gain was $44,000.   For trading securities
held at December 31, 2008, the amount of unrealized gain was
$96,000.  In 2009, included in investment income was $26,000 of net
realized gains.  In 2008, included in investment income was $907,000
of losses on our investments.





In 2008,
we began to utilize asset managers to invest our excess
funds.  Investments that no longer meet the criteria of a cash
equivalent are classified as investments on the consolidated balance
sheets.  These investments include securities with varying maturities
issued by federal agencies, states or municipalities.


F-15


NOTE
8 - ESTIMATED MEDICAL EXPENSES PAYABLE





Activity
in estimated medical expenses payable is as follows:




Year
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Balance
      at beginning of year
                  
                  $
                  23,144,000
                  
                  
                  $
                  21,709,000
                  
                  
                  $
                  16,929,000Incurred
      related to:Current
      year
                  
                  
                  264,543,000
                  
                  
                  
                  229,413,000
                  
                  
                  
                  191,297,000Prior
      years
                  
                  
                  20,000
                  
                  
                  
                  (1,153,000
                  )
                  
                  
                  1,427,000Total
      incurred
                  
                  
                  264,563,000
                  
                  
                  
                  228,260,000
                  
                  
                  
                  192,724,000Paid
      related to:Current
      year
                  
                  
                  (237,155,000
                  )
                  
                  
                  (200,602,000
                  )
                  
                  
                  (169,736,000
                  )Prior
      years
                  
                  
                  (23,195,000
                  )
                  
                  
                  (20,352,000
                  )
                  
                  
                  (18,208,000
                  )Total
      paid
                  
                  
                  (260,350,000
                  )
                  
                  
                  (220,954,000
                  )
                  
                  
                  (187,944,000
                  )HMO
      IBNR transferred upon Sale
                  
                  
                  -
                  
                  
                  
                  (5,871,000
                  )
                  
                  
                  -Balance
      at end of year
                  
                  $
                  27,357,000
                  
                  
                  $
                  23,144,000
                  
                  
                  $
                  21,709,000




Estimated
medical expenses payable for the PSN and HMO are as follows:





December
      31,2009
                    
                    
                    2008
                    
                    
                    2007PSN
                    
                    $
                    27,357,000
                    
                    
                    $
                    23,144,000
                    
                    
                    $
                    14,692,000HMO
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,017,000$
                    27,357,000
                    
                    
                    $
                    23,144,000
                    
                    
                    $
                    21,709,000





At December 31,2009, we determined that the range for
estimated medical expenses payable wasbetween $25.8million and $29.4million and we recordeda liability at the approximate
actuarial mid-range of $27.4million. Thisamount is included within the dueto/fromHumana in the accompanying consolidated
balance sheets.





Amounts
incurred related to prior years vary from previously estimated liabilities as
the claims ultimately are settled. In 2009, amounts paid subsequent to year end
for 2008 was substantially the same as what was accrued at December 31,
2008.  In 2008, amounts paid subsequent to year end for 2007 were less
than the amount of the liability that was recorded at December 31, 2008 by $1.2
million resulting in favorable claims development.  Of this amount,
$374,000 of favorable development related to the PSN and $780,000 of favorable
development related to the HMO.  Favorable claims development occurs
when claims paid are less than the amount accrued at the end of the year which
results in lower claims expense in the following year.  In 2008, this
favorable development reduced claims expense by .4%.





The
estimated medical expenses payable at December 31, 2006 ultimately settled
during 2007 for $1.4 million more than the amounts originally
estimated.  This represents .5% of medical claim expenses recorded in
2006. The $1.4 million change in the amount incurred related to years prior to
2006 was a result of unfavorable developments in our medical claims
expense.





We
maintain stop loss insurance with a commercial insurance
company.  Included in medical expense for 2009, 2008 and 2007 was stop
loss premium expense of $872,000, $1.5 million, and $2.6 million, respectively,
and stop loss recoveries of $332,000, $1.1 million, and $1.4 million,
respectively.





NOTE
9 - PRESCRIPTION DRUG BENEFITS UNDER MEDICARE PART D





At December 31,2009, we recorded a receivable of
$961,000 based on the amount we estimate actual 2009 Part D costs will exceed
the revenue received.  We recorded an estimated Part D refund
liability for 2008 of $100,000.  These amounts are included in due
to/from Humana in the accompanying consolidated balance sheets.  CMS’
final determination in 2009 of Part D costs for benefits provided in 2008 was
not materially different than the $100,000 recorded at December 31,
2008.  Based upon the final determination of Part D costs incurred by
the PSN in 2007 and 2006, we recorded additional revenue in both the third
quarter of 2008 and 2007 of approximately $1.0 million, representing the amount
by which our 2007 and 2006 year-end estimated Part D refund liability exceeded
the final amount.


F-16




Under the
terms of the Stock Purchase Agreement, if the Part D final settlement for the
periods we owned the HMO is different than what we estimated at the time of the
sale, then we will either receive any additional premiums or pay any amounts
that are required to be refunded.  Substantially all of the reconciliations
are expected to be completed in the first half of 2010 and will be paid to us or
Humana, as applicable.  The ultimate settlements, if any, will
increase or decrease the gain on the sale of the HMO.





NOTE 10 - PROPERTY AND EQUIPMENT AND
INTANGIBLE ASSETS





Property and equipment consisted of the
following:




December 31,2009
                    
                    
                    2008Medical
      equipment
                    
                    $
                    131,000
                    
                    
                    $
                    112,000Furniture
      and equipment
                    
                    
                    456,000
                    
                    
                    
                    434,000Leasehold
      improvements
                    
                    
                    1,558,000
                    
                    
                    
                    1,493,000Computers
      and office equipment
                    
                    
                    2,552,000
                    
                    
                    
                    1,599,000Other
                    
                    
                    22,000
                    
                    
                    
                    22,0004,719,000
                    
                    
                    
                    3,660,000Less
      Accumulated Depreciation and Amortization
                    
                    
                    (2,809,000
                    )
                    
                    
                    (2,324,000
                    )$
                    1,910,000
                    
                    
                    $
                    1,336,000




Depreciation and amortization of
property and equipment totaled approximately $510,000, $676,000, and $843,000 in
2009, 2008, and 2007, respectively.




Intangible assets consisted
of:




December
      31,2009
                    
                    
                    2008Customer
      lists
                    
                    $
                    1,616,000
                    
                    
                    $
                    1,592,000Non-compete
      agreement
                    
                    
                    192,000
                    
                    
                    
                    116,0001,808,000
                    
                    
                    
                    1,708,000Less
      Accumulated Amortization
                    
                    
                    (877,000
                    )
                    
                    
                    (524,000
                    )$
                    931,000
                    
                    
                    $
                    1,184,000




Amortization of intangible assets
totaled $354,000 in 2009, $425,000 in 2008 and $99,000 in
2007.  Amortization expense will be approximately $360,000 in 2010,
$308,000 in 2011, $262,000 in 2012.





NOTE 11 - LINES OF
CREDIT





In December 2009, we entered into
aone year commercial line
of credit agreement with a
bank, which provides for borrowings and issuance of letters of credit of up to
$3.0 million.  The line of credit is secured by investments of $5.0
million.The
$5.0 million of investments securing the new line of credit is includedin restricted cash in the
December 31, 2009consolidatedbalance
sheet.Under this line of credit,as ofDecember31,2009, we had a $3.0 million letter of
credit issued in favor of Humana.





NOTE 12 - RESTRUCTURING EXPENSES AND
SEPARATION ARRANGEMENTS





On December 7, 2009,weannounced that Michael Earley,ourChairman of the Board and Chief
Executive Officer of the Company, announced plans to step down as Chairman and
CEO upon the earlier of March 31, 2010 or the engagement of his
successor.We entered into an amended and restated employment
agreement with Mr. Earley dated as of December 4, 2009 (the “Amended Employment
Agreement”).  Under the Amended Employment Agreement, Mr. Earley will
receive the various benefits that he would have been entitled to receive under
his prior equity compensation awards and employment agreement upon a termination
without cause. In addition, the exercise period on all outstanding stock options
held by Mr. Earley was extended to the earlier of December 31, 2010 or the
option’s stated maturity date assuming he was then employed by us. In the fourth quarter of 2009, weexpensedapproximately $500,000 related to the
amount payable under the Amended EmploymentAgreement and the stock-based
compensation associated with the increase in the fair value of the
stockoptionsheld by Mr. Earleythatwere extended.  On March
1, 2010, Mr. Earley agreed to continue to serve as our CEO until the earlier of
June 30, 2010 or the employment of his successor.  F-17


In July 2007, we implemented a
restructuring plan designed to reduce costs and improve operating
efficiencies.The restructuring plan, which was
completed by the end of August 2007, resulted in the closure of two of the HMO’s
office locations, one PSN medical practice (the “PSN Practice”), and a workforce
reduction involving 16 employees.In connection with this plan,we recorded approximately
$584,000 of restructuring costs during the third quarter of 2007 including
approximately $147,000 for severance payments, approximately $365,000 for
continuing lease obligations on closed locations and approximately $72,000 for
the write-off of certain leasehold improvements and equipment.  During
the third quarter of 2007, we made cash payments related to the restructuring of
$191,000. Severance payments associated with the restructuring were
substantially paid in 2007.  The continuing lease obligations will
result in additional future cash expenditures and are expected to be paid over
the remaining lease terms.  At the time of its closure on July 31,
2007, the PSN Practice served approximately 450 customers in South Florida, all
of which were moved to other providers outside of the PSN.  Prior to
its closing on July 31, the PSN practice generated approximately $2.6 million of
revenue in 2008 and had a negative gross margin.Of the $584,000 restructuring charge,
approximately $401,000 relates to the HMO with the balance of $183,000
associated with the PSN.   These amounts have all been
paid.





On April 9,2007(“Separation Date”), we entered into a mutually agreeable
separation agreement (the “Separation Agreement”) with the individual who served as our
President and Chief Operating Officer until the Separation Date. In the
second quarter of2007, we accrued approximately $500,000
related to the amount payable under the Separation Agreement and the value of
certain options held by this individual that, in accordance with their terms,
became fully vested on the
Separation Date,  subject to a three-month exercise
period.





On June 26,2007, we entered into an agreement with this
individual to repurchase for $10,000 options she held to purchase 800,000 shares
of our common stock with an exercise price of $1.83 per
share.  This amount has been reflected as a reduction of additional
paid-in capital.





NOTE 13 - INCOME
TAXES




The components of the provision for
income taxes are as follows:




December
      312009
                    
                    
                    2008
                    
                    
                    2007CurrentFederal
                    
                    $
                    8,303,000
                    
                    
                    $
                    2,699,000
                    
                    
                    $
                    165,000State
                    
                    
                    834,000
                    
                    
                    
                    654,000
                    
                    
                    
                    -9,137,000
                    
                    
                    
                    3,353,000
                    
                    
                    
                    165,000DeferredFederal
                    
                    
                    (217,000
                    )
                    
                    
                    2,890,000
                    
                    
                    
                    2,915,000State
                    
                    
                    (20,000
                    )
                    
                    
                    171,000
                    
                    
                    
                    447,000(237,000
                    )
                    
                    
                    3,061,000
                    
                    
                    
                    3,362,000Income
      Tax Expense
                    
                    $
                    8,900,000
                    
                    
                    $
                    6,414,000
                    
                    
                    $
                    3,527,000




A reconciliation of the amount computed
by applying the statutory federal income tax rate to income from continuing
operations before income taxes with our income tax expense is as
follows:




Years ended December
      31,2009
                    
                    
                    2008
                    
                    
                    2007Statutory federal
      tax
                    
                    $
                    8,172,000
                    
                    
                    $
                    5,650,000
                    
                    
                    $
                    3,304,000State income taxes, net of federal
      income tax benefit
                    
                    
                    848,000
                    
                    
                    
                    545,000
                    
                    
                    
                    291,000Permanent differences and other,
      net
                    
                    
                    (120,000
                    )
                    
                    
                    219,000
                    
                    
                    
                    (68,000
                    )Income tax
      expense
                    
                    $
                    8,900,000
                    
                    
                    $
                    6,414,000
                    
                    
                    $
                    3,527,000


F-18







December
31,2009
                      
                      
                      2008Allowances for doubtful
      accounts
                      
                      $
                      225,000
                      
                      
                      $
                      238,000Stock-based compensation
      expense
                      
                      
                      929,000
                      
                      
                      
                      725,000Accrued
      expenses
                      
                      
                      286,000
                      
                      
                      
                      29,000Depreciation and
      amortization
                      
                      
                      219,000
                      
                      
                      
                      213,000Other,
      net
                      
                      
                      19,000
                      
                      
                      
                      39,000Total deferred tax
      assets
                      
                      $
                      1,678,000
                      
                      
                      $
                      1,244,000Deferred income taxes -
      current
                      
                      $
                      511,000
                      
                      
                      $
                      263,000Deferred income taxes -
      noncurrent
                      
                      
                      1,167,000
                      
                      
                      
                      981,000$
                      1,678,000
                      
                      
                      $
                      1,244,000




In 2007 we derecognized certain deferred
tax assets totaling approximately $437,000, which were accounted for as an
addition to the accumulated deficit at January 1, 2007.  In 2008 and
2007, we recognized tax benefits of $260,000 and $177,000, which reduced our
income tax expense, upon the expiration of the statute of limitations applicable
to the tax years during which the benefits were generated.




A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:




December
      31
                    
                    
                    December
      312008
                    
                    
                    2007Balance
      at beginning of year
                    
                    $
                    260,000
                    
                    
                    $
                    437,000Reductions
      as a result of lapse of applicable statute of limitations
                    
                    
                    (260,000
                    )
                    
                    
                    (177,000
                    )Balance
      at end of year
                    
                    $
                    -
                    
                    
                    $
                    260,000




There are no unrecognized tax benefits
at December 31, 2009.





We are subject to income taxes in the
U.S. federal jurisdiction and the state of Florida.  Tax regulations
are subject to interpretation of the related tax laws and regulations and
require significant judgment to apply.  We have utilized all of our
available net operating loss carryforwards, including net operating loss
carryforwards related to years prior to 2003.  These net operating
losses are open for examination by the relevant taxing
authorities.





The statute of limitations for the
federal and Florida 2006 tax years will expire in the next twelve
months.





The Internal Revenue Service concluded
its examination of our 2005 Federal income tax return during 2009.  We
did not recognize a change to the total amount of unrecognized tax benefit as a
result of the examination.  Tax years subsequent to 2004 remain
subject to federal and state examination.





We recognize interest related to
unrecognized tax benefits in interest expense, which is included in other income
in the condensed consolidated statements of operations, and penalties in
operating expenses for all periods presented.  Interest expense of
$25,000 was accrued in the first nine months of 2007 and was reversed in 2008
when the statute of limitations expired.





In 2009, we recorded directly to equity
$198,000 of tax benefits as a result of the repurchase of non-qualified stock
options.  In 2008 and 2007, tax benefits of $261,000, and $526,000,
respectively, were recorded directly to equity as a result of the exercise of
non-qualified stock options.


F-19


NOTE 14 - STOCKHOLDERS'
EQUITY




As of December 31, 2009 and 2008, we had
designated 10,000,000 preferred shares as Series A Preferred Stock, par value
$.001, of which 5,000 were issued and outstanding. Each share of Series A
Preferred Stock has a stated value of $100 and pays dividends equal to 10% of
the stated value per annum. At December 31, 2009 and 2008, the aggregate and per
share amounts of cumulative dividend arrearages were approximately $616,667
($123 per share) and $566,667 ($113 per share), respectively. Each share of
Series A Preferred Stock is convertible into shares of common stock at the
option of the holder at the lesser of 85% of the average closing bid price of
the common stock for the ten trading days immediately preceding the conversion
or $6.00. We have the right to deny conversion of the Series A Preferred Stock
at which time the holder shall be entitled to receive, and we shall pay,
additional cumulative dividends at 5% per annum together with the initial
dividend rate to equal 15% per annum. In the event of any liquidation,
dissolution or winding up of the Company, holders of the Series A Preferred
Stock shall be entitled to receive a liquidating distribution before any
distribution may be made to holders of our common stock.  We have the
right to redeem the Series A Preferred Stock at a price equal to 105% of the
price paid for the shares. The Series A Preferred Stock has no voting
rights.  Through December 31, 2009, none of the holders of our Series
A Preferred Stock have converted any shares to common stock.




We have also designated 7,000 shares of
preferred stock as Series B Preferred Stock, with a stated value of $1,000 per
share. No shares of series B preferred stock have been
issued.




In
February 2010, the Board of Directors approved the issuance to employees of
592,000 restricted shares of common stock and options to purchase 879,000 shares
of common stock. The restricted shares and stock options vest in equal annual
installments over a four year period from the date of grant.  The
stock options have an exercise price equal to the closing price of our common
stock on the grant date.  Compensation expense related to the
restricted stock and options will be recognized ratably over the vesting
period.




During
2009, we issued a total of 101,000 restricted shares of common stock and options
to purchase 50,000 shares of common stock to the non-management members of our
Board of Directors. The restricted shares and stock options vest one year from
date of grant.  The stock options have an exercise price equal to the
closing price of our common stock on the grant date. Compensation expense
related to the restricted stock and options is recognized ratably over the
vesting period.




During
2009, we issued to our employees 367,000 restricted shares of common stock and
options to purchase 1.4 million shares of common stock. The restricted shares
and stock options vest in equal annual installments over a four year period from
the date of grant.  The stock options have an exercise price equal to
the closing price of our common stock on the grant date.  Compensation
expense related to the restricted stock and options is recognized ratably over
the vesting period.




During 2008, we issued 87,000 restricted
shares of common stock and options to purchase 43,500 shares of common stock to
the non-management members of our Board of Directors. The options have an
exercise price equal to the closing price of our common stock on the day
preceding the grant date.  These restricted shares and stock options
are vest one year from the date of grant.  Compensation expense
related to the restricted shares and stock options is recognized ratably over
the vesting period.




During
2008, we issued 268,200 restricted shares and options to purchase 982,000 shares
of common stock to employees.  The restricted shares and stock options
vest in equal annual installments over a four year period from the date of
grant.  The options, which vest in equal annual installments over a
four year period from the date of grant.  The stock options have an
exercise price equal to the closing price of our common stock on the grant date.
Compensation expense related to the restricted stock and options is recognized
ratably over the vesting period.





During
2007, we also issued options to a consultant to purchase 100,000 shares of our
common stock.  These options, which fully vested on December 31, 2007
and originally expired on June 30, 2008, have an exercise price equal to the
closing price of our common stock on the day preceding the grant
date.  During the first quarter of 2008, we extended the expiration
date from June 30, 2008 to September 30, 2008 for the options issued to the
consultant.  In accordance with U.S. GAAP,we revalued the options
and accounted for the increase in value as additional expense which was
immediately expensed.




Restricted shares of common stock are
reflected as issued and outstanding from the date of issuance for purposes of
the consolidated statements of changes in stockholders’
equity.




F-20




Shares reserved for future issuance at
December 31, 2009 are as follows:





Number of
                      SharesShares
      Issuable Upon the Exercise of Outstanding Stock Options
                    
                    
                    4,202,000Shares
      Issuable Upon the conversion of Preferred Stock
                    
                    
                    881,000Total
                    
                    
                    5,083,000





In October 2008, we announced that the
Board of Directorsauthorized the repurchase of up to 10
million shares of our outstanding common stock.On August 3, 2009, the Board
of Directors approved a 5 million share increase to the share repurchase
program.On February 24, 2010, the Board of
Directors approved an increase to the share repurchase program of an additional
5 million shares,bringing
the total number of shares of common stock authorized for repurchase under the program to
20million
shares.During2009, werepurchased7.8million sharesandoptions exercisabletopurchase684,200 shares of our common
stockfor an aggregate of
$15.9 million.  From October 6, 2008 (the
date of our first repurchases under the plan) throughDecember 31, 2008, we repurchased 4.2 million shares
for $7.6million.Between January 1, 2010 andFebruary 25, 2010, we repurchased1.6shares of common stock for
$3.7million.We cancel thecommonstock that has been repurchased and
reduce common stock and additional paid-in capital for the acquisition
price of the
stock.The
number of shares to be repurchased and the timing of the purchases are
influenced by a number of factors, including the then prevailing market price of
our common stock, other perceived opportunities that may become available to us
and regulatory requirements.





On September 10, 2009 (the “Repurchase
Closing Date”), we repurchased 500,000 shares of our common stock from certain
of our directors and executive officers for approximately $1.1
million.  The shares were repurchased at a per share price of $2.1462,
which was 2% below the closing price of our common stock on September 8, 2009,
the date we entered into definitive repurchase agreements with such officers and
directors.  In addition, on the Repurchase Closing Date, we
repurchased options exercisable for an aggregate of567,500 sharesof our common stock from certain of our
executive officers for approximately $332,000, which represents the difference
between the exercise price of the options and $2.1462.  The shares
underlying the options repurchased are also included in the number of shares
repurchased during the third quarter of 2009 anddeplete the repurchase authority granted
by our Board.





On December 8, 2009,we repurchased options exercisable for
an aggregate of116,700sharesof our common stock from certain of our
executiveofficers for
approximately $222,000,
which represents the
difference between theexercise price of the options and
$1.9012, which was 2% below
the closing price ofour
common stock on December 8,
2009, the date we entered intothedefinitive repurchase
agreement.  The shares underlying the options repurchased are included
in the number of shares repurchased anddeplete the repurchase authority granted
by our Board.





NOTE 15 - STOCK -BASED
COMPENSATION





As of December 31, 2009, we had three
nonqualified stock option plans, the 2001 Stock Option Plan, the Supplemental
Stock Option Plan, and the Omnibus Equity Compensation Plan (together the
“Plans”).  The Plans are administered by the Compensation Committee of
the Board of Directors.  A total of 9,000,000 shares of our common
stock are authorized for issuance pursuant to awards granted under the Omnibus
Equity Compensation Plan.  Total compensation cost that has been
charged against income in 2009, 2008 and 2007 for nonqualified stock options
under the Plans was$602,000 (excluding employee termination
costs), $602,000 (excluding
termination costs on sale of the HMO), and $588,000,
respectively.





Stock
Options





Option awards are generally granted with
an exercise price equal to the closing market price of our common stock on the
grant date, generally vest ratably over 4 years of continuous service and
generally expire 10 years after the date of the grant.  The
options provide for accelerated vesting if there is a change in control as
defined by the Plans.





The fair value of each option award was
estimated on the date of grant using the Black-Scholes option pricing model
using the assumptions noted in the table below.  Because this option
valuation model incorporates ranges of assumptions for inputs, those ranges are
disclosed.  Expected volatilities are primarily based on implied
volatilities from the historical volatility of our stock.  We use
historical data to estimate option exercise and employee termination within the
valuation model.  The expected terms of the options granted represent
the period of time that option grants are expected to be outstanding based on
historical data.  The range given below results from certain groups of
employees exhibiting different behavior.  The risk free rate for the
periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of grant.


F-21




Year
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Risk
      Free Interest Rate
                  
                  
                  .90%-1.83
                  %
                  
                  
                  1.98%-3.13
                  %
                  
                  
                  4.53%
      - 4.92
                  %Expected
      Option Life (in years)
                  
                  
                  2-4.5
                  
                  
                  
                  2-4.5
                  
                  
                  
                  1 -
      4.5Expected
      Volatility
                  
                  
                  50
                  %
                  
                  
                  50
                  %
                  
                  
                  50
                  %Dividends
      to be Paid
                  
                  None
                  
                  
                  None
                  
                  
                  None




A summary of option activity under the
Plans and the changes during the year ended December 31, 2009 is presented
below:




Options
                  
                  Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Term(Years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding at December 31,
      2008
                  
                  
                  3,500,681
                  
                  
                  $
                  1.84
                  
                  
                  
                  6.86
                  
                  
                  $
                  431,166Granted during
      2009
                  
                  
                  1,406,184
                  
                  
                  $
                  1.65Repurchased by
      Company
                  
                  
                  (684,167
                  )
                  
                  $
                  1.35Forfeited
                  
                  
                  (17,500
                  )
                  
                  $
                  2.00Expired
                  
                  
                  (3,100
                  )
                  
                  $
                  1.83Outstanding at December 31,
      2009
                  
                  
                  4,202,098
                  
                  
                  $
                  1.85
                  
                  
                  
                  7.29
                  
                  
                  $
                  939,152Vested
      or expected to vest at December 31, 2009
                  
                  
                  3,858,818
                  
                  
                  $
                  1.85
                  
                  
                  
                  7.17
                  
                  
                  $
                  858,845Exercisable
      at December 31, 2009
                  
                  
                  1,913,564
                  
                  
                  $
                  1.86
                  
                  
                  
                  5.66
                  
                  
                  $
                  403,773




The weighted average per share grant
date fair value of option grants during the years 2009, 2008 and2007 was $0.59, $0.84, and $0.60,
respectively.  The fair value of non vested options is determined
based on the opening trading price of our shares at grant date.  The
aggregate intrinsic value of options exercised in 2008 and 2007 was
approximately $745,000 and $1.4 million, respectively, and is based on the
difference between the exercise price and quoted market value at the end of each
period.The
intrinsic value of options repurchased by us in 2009 was $513,000.




A summary of the status of our non
vested options as of December 31, 2009 and changes during the year then ended is
presented below:




Non Vested Options
                    
                    Shares
                    
                    
                    Weighted
                      Average
                      Grant Date
                      Fair ValueNon
      vested at January 1, 2009
                    
                    
                    1,379,850
                    
                    
                    $
                    0.82Granted
                    
                    
                    1,406,184
                    
                    
                    $
                    0.59Vested
                    
                    
                    (480,000
                    )
                    
                    $
                    0.72Forfeited
                    
                    
                    (17,500
                    )
                    
                    $
                    0.76Non
      vested at December 31, 2009
                    
                    
                    2,288,534
                    
                    
                    $
                    0.70




As of December 31, 2009,there was $1,164,000 of total
unrecognizedcompensation
cost related to non-vested nonqualified stock options granted under the
Plans.  That cost is expected to be recognized over a weighted average
periodof 2.0
years.The total
fair value of options vested during 2009, 2008 and 2007 was $346,000, $695,000
and $910,000, respectively.




F-22




Cash received from option exercises
under all share based payment arrangements for the years ended December 31, 2008
and 2007 was $323,000, and $507,000, respectively.  A tax benefit of
$198,000 was realized from the repurchase of options in 2009.  A tax
benefit of $261,000, and $526,000 was realized from option exercises in 2008 and
2007 respectively.It is our policy to issue new shares to
satisfy share option purchases.





Restricted
Stock Awards




Restricted
stock awards are granted with a fair value equal to the market price of our
common stock on the date of grant. Compensation expense is recorded
straight-line over the vesting period, generally four years from the date of
grant.




The
weighted average per share grant date fair value of our restricted stock awards
was $1.68, $2.15, and $1.78 for the years ended December 31, 2009, 2008,
and 2007, respectively. Activity for our restricted stock awards was as follows
for the year ended December 31, 2009:




Shares
                      
                      
                      Weighted
                        Average
                        GrantDate
                        FairValueNon
      vested restricted stock at December 31, 2008
                      
                      
                      435,000
                      
                      
                      $
                      2.01Granted
                      
                      
                      468,000
                      
                      
                      $
                      1.68Vested
                      
                      
                      (184,000
                      )
                      
                      $
                      1.87Forfeited
                      
                      
                      -
                      
                      
                      $
                      -Non
      vested restricted stock at December 31, 2009
                      
                      
                      719,000
                      
                      
                      $
                      1.84





The fair
value of restricted shares vested during the years ended December 31, 2009,
2008, and 2007 was $367,000, $574,000, and $117,000, respectively. Total
compensation expense not yet recognized related to non vested restricted stock
awards was $546,000 at December 31, 2009. We expect to recognize this
compensation expense over a weighted-average period of approximately 1.68 years.
There are no other contractual terms covering restricted stock awards once
vested.




F-23




NOTE 16 - EARNINGS PER
SHARE





The following table sets forth the
computations of earnings per share, basic and earnings per share,
diluted:





Year Ended December
      31,2009
                      
                      
                      2008
                      
                      
                      2007Net Income
                      
                      $
                      14,449,000
                      
                      
                      $
                      10,204,000
                      
                      
                      $
                      5,914,000Less:  Preferred stock
      dividend
                      
                      
                      (50,000
                      )
                      
                      
                      (50,000
                      )
                      
                      
                      (50,000
                      )Income available to common
      shareholders
                      
                      $
                      14,399,000
                      
                      
                      $
                      10,154,000
                      
                      
                      $
                      5,864,000Denominator:Weighted average common shares
      outstanding
                      
                      
                      44,496,000
                      
                      
                      
                      49,093,000
                      
                      
                      
                      50,573,000Basic earnings per common
      share
                      
                      $
                      0.32
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.12Income available to common
      shareholders
                      
                      $
                      14,399,000
                      
                      
                      $
                      10,154,000
                      
                      
                      $
                      5,864,000Add: Preferred stock
      dividend
                      
                      
                      50,000
                      
                      
                      
                      50,000
                      
                      
                      
                      -$
                      14,449,000
                      
                      
                      $
                      10,204,000
                      
                      
                      $
                      5,864,000Denominator:Weighted average common shares
      outstanding
                      
                      
                      44,496,000
                      
                      
                      
                      49,093,000
                      
                      
                      
                      50,573,000Common share equivalents of
      outstanding stock:Convertible preferred
      stock
                      
                      
                      881,000
                      
                      
                      
                      518,000
                      
                      
                      
                      -Nonvested common
      stock
                      
                      
                      270,000
                      
                      
                      
                      170,000
                      
                      
                      
                      172,000Options and
      warrants
                      
                      
                      294,000
                      
                      
                      
                      573,000
                      
                      
                      
                      1,051,000Weighted average common shares
      outstanding
                      
                      
                      45,941,000
                      
                      
                      
                      50,354,000
                      
                      
                      
                      51,796,000Diluted earnings per common
      share
                      
                      $
                      0.31
                      
                      
                      $
                      0.20
                      
                      
                      $
                      0.11





The following securities were not
included in the computation of diluted earnings per share for the years ended
December 31, 2009, 2008 and 2007, as their effect would be
anti-dilutive:





Security Excluded FromComputation
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Stock
      options
                  
                  
                  2,912,000
                  
                  
                  
                  1,688,000
                  
                  
                  
                  636,000Restricted
      stock
                  
                  
                  89,000
                  
                  
                  
                  -
                  
                  
                  
                  -Convertible
      preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  355,000




NOTE 17 - EMPLOYEE BENEFIT
PLAN




We have adopted a tax qualified employee
savings and retirement plan covering our eligible employees, the Metropolitan
Health Networks 401(k) Plan (the “401(k) Plan”). The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code (the “Code”) and
contains a feature described in Code Section 401(k) under which a participant
may elect to reduce their taxable compensation by the statutorily prescribed
annual limit of $16,500 for 2009. Under the 401(k) Plan, new employees are
eligible to participate after three consecutive months of service. At our
discretion, we may make a matching contribution and a non-elective contribution
to the 401(k) Plan. We expensed approximately $221,000, $243,000, and $100,000
for purposes of making matching contributions for the 2009, 2008, and 2007 plan
years, respectively. The rights of the participants in the 401(k) Plan to our
contributions do not fully vest until such time as the participant has been
employed by us for three years.





NOTE 18 - COMMITMENTS AND
CONTINGENCIES




Leases





We lease office and medical facilities
under various non-cancelable operating leases.  Approximate future
minimum payments under these leases for the years subsequent to December 31,
2009 are as follows:




F-24




Less
                          
                          
                          NetSublease
                          
                          
                          MinimumBuildings
                          
                          
                          Equipment
                          
                          
                          Amount
                          
                          
                          Payment2010
                          
                          $
                          1,069,000
                          
                          
                          $
                          213,000
                          
                          
                          $
                          117,000
                          
                          
                          $
                          1,165,0002011
                          
                          
                          905,000
                          
                          
                          
                          174,000
                          
                          
                          
                          120,000
                          
                          
                          
                          959,0002012
                          
                          
                          652,000
                          
                          
                          
                          98,000
                          
                          
                          
                          93,000
                          
                          
                          
                          657,0002013
                          
                          
                          613,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          613,0002014
                          
                          
                          563,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          563,000Thereafter
                          
                          
                          1,077,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,077,000Total
                          
                          $
                          4,879,000
                          
                          
                          $
                          485,000
                          
                          
                          $
                          330,000
                          
                          
                          $
                          5,034,000




The renewal options on the leases range
from 3 to 5 years and contain escalation clauses of up to 5%.  Rental
expense for 2009, 2008, and 2007 was $1.6 million in 2009 and $1.9 million in
2008 and 2007.




We utilizedvendors during the year to assist us in
theongoingimplementation of anelectronic medical records
systemaswell as attaining other operational
objectives.  Payments under these service contracts for the years
subsequent to December 31, 2009 are approximately $987,000, $305,000 and
$151,000 in the years 2010, 2011 and 2012, respectively.  Some
contracts will renew automatically unless written notice is provided to the
vendor withinastated period of time prior to the end
of the contract period.





In connection with the sale of the
pharmacy division in 2004, we have subleased pharmacy facilities to the
purchaser of the pharmacy division.  In the event of such purchaser’s
default, we could potentially be responsible to fulfill these lease
commitments.  At December 31, 2009, the total lease payments remaining
totaled$330,000.  At March 2, 2010, we are
not aware of any default by the purchaser.




Litigation




We are a party to various legal
proceedings which are either immaterial in amount to us or involve ordinary
routine litigation incidental to our business and the business of our
subsidiaries.  There are no material pending legal
proceedings, other than
routine litigation incidental to our business to which we are a party or of
which any of our property is the subject.





NOTE 19 - SEGMENTS




Prior to thesaleof the HMO, we managed the PSN and HMO as separate
business segments.  We identifiedour segments in accordance
withU.S. GAAP, which is consistent with information
used by our Chief Executive Officer in managing our business. The segment
information aggregates products with similar economic characteristics. These
characteristics include the
nature of customer groups and the nature of the services and benefits provided.
The results of each segment are measured by income before income taxes. We
allocate all selling, general and administrative expenses, investment and other
income, interestexpense, goodwill and certain other
assets and liabilities to our segments.  Our segments do share
overhead costs.





Effective with theHMO’s sale, we operate only the PSN
segment.  The2008results of operations for the HMO
segment are for the period from January 1,2008throughAugust 28, 2008,the date of thesale.


F-25




YEAR ENDED DECEMBER 31, 2008
                  
                  PSN
                  
                  
                  HMO
                  
                  
                  TotalRevenue from external
      customers
                  
                  $
                  264,838,000
                  
                  
                  $
                  52,374,000
                  
                  
                  $
                  317,212,000Investment
      income
                  
                  
                  -
                  
                  
                  
                  146,000
                  
                  
                  
                  146,000Depreciation and
      amortization
                  
                  
                  672,000
                  
                  
                  
                  137,000
                  
                  
                  
                  809,000Segment profit (loss) before
      allocated overhead excluding gain on sale of HMO, related stay bonuses and
      termination costs and income taxes
                  
                  
                  24,748,000
                  
                  
                  
                  (1,859,000
                  )
                  
                  
                  22,889,000Allocated corporate
      overhead
                  
                  
                  6,875,000
                  
                  
                  
                  3,298,000
                  
                  
                  
                  10,173,000Segment profit (loss) after
      allocated overhead excluding gain on sale of HMO, related stay bonuses and
      termination costs and income taxes
                  
                  
                  17,876,000
                  
                  
                  
                  (5,533,000
                  )
                  
                  
                  12,343,000Segment
    assets
                  
                  
                  46,832,000
                  
                  
                  
                  -
                  
                  
                  
                  46,832,000





Included in allocated corporate overhead
in 2008 is $35,000 of investment losses and depreciation and amortization of
approximately $290,000.  To allow for comparison between periods, the
gain on the sale of the HMO of $5.9 million and the related stay bonuses and
termination costs of $1.6 million have been excluded from the above segment
information.  Corporate assets were approximately $2,312,000 at December
31, 2008.  All gooodwill resides within the PSN
segment.





YEAR ENDED DECEMBER 31, 2007
                  
                  PSN
                  
                  
                  HMO
                  
                  
                  TotalRevenue from external
      customers
                  
                  $
                  222,512,000
                  
                  
                  $
                  55,065,000
                  
                  
                  $
                  277,577,000Investment
      income
                  
                  
                  -
                  
                  
                  
                  651,000
                  
                  
                  
                  651,000Depreciation and
      amortization
                  
                  
                  319,000
                  
                  
                  
                  315,000
                  
                  
                  
                  634,000Segment profit (loss) before
      allocated overhead and income taxes
                  
                  
                  29,228,000
                  
                  
                  
                  (10,463,000
                  )
                  
                  
                  18,765,000Allocated corporate
      overhead
                  
                  
                  4,668,000
                  
                  
                  
                  4,657,000
                  
                  
                  
                  9,325,000Segment profit (loss) after
      allocated overhead and before income taxes
                  
                  
                  24,560,000
                  
                  
                  
                  (15,120,000
                  )
                  
                  
                  9,440,000Segment
    assets
                  
                  
                  31,193,000
                  
                  
                  
                  17,022,000
                  
                  
                  
                  48,215,000





Included in allocated corporate overhead
in 2007 is $745,000 of investment income and depreciation and amortization of
approximately $318,000.  Corporate assets were approximately
$5,596,000 at December 31, 2007.  All goodwill resides within the PSN
segment.




F-26




NOTE 20 - VALUATION AND QUALIFYING
ACCOUNTS




Activity in our Valuation and Qualifying
Accounts consists of the following:




Year Ended December
      31,2009
                        
                        
                        2008
                        
                        
                        2007Allowance for doubtful trade
      accounts - continuingoperations:Balance at beginning of
      period
                        
                        $
                        490,000
                        
                        
                        $
                        614,000
                        
                        
                        $
                        601,000Charged to costs and
      expenses
                        
                        
                        93,000
                        
                        
                        
                        -
                        
                        
                        
                        282,000Increase (Deductions - accounts
      written off)
                        
                        
                        -
                        
                        
                        
                        (124,000
                        )
                        
                        
                        (269,000
                        )Balance at end of
      period
                        
                        $
                        583,000
                        
                        
                        $
                        490,000
                        
                        
                        $
                        614,000Allowance for note
      receivable:Balance at beginning of
      period
                        
                        $
                        177,000
                        
                        
                        $
                        143,000
                        
                        
                        $
                        143,000Charged to costs and
      expenses
                        
                        
                        
                        
                        
                        
                        34,000
                        
                        
                        
                        -Increase (Deductions - accounts
      written off)
                        
                        
                        (177,000
                        )
                        
                        
                        -
                        
                        
                        
                        -Balance at end of
      period
                        
                        $
                        -
                        
                        
                        $
                        177,000
                        
                        
                        $
                        143,000Allowance for AICD
      receivable:Balance at beginning of
      period
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,621,000Charged to costs and
      expenses
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        267,000Increase (Deductions - accounts
      written off)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,888,000
                        )Balance at end of
      period
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -


F-27




NOTE 21 - SELECTED QUARTERLY FINANCIAL
DATA (unaudited)





For the Quarter EndedDecember 31,
                            2009
                          
                          
                          September 30,
                            2009
                          
                          
                          June 30, 2009
                          
                          
                          March 31,
                            2009Revenue
                          
                          $
                          88,752,000
                          
                          
                          $
                          88,138,000
                          
                          
                          $
                          87,076,000
                          
                          
                          $
                          90,441,000Gross
profit
                          
                          $
                          13,396,000
                          
                          
                          $
                          7,627,000
                          
                          
                          $
                          8,897,000
                          
                          
                          $
                          10,935,000Net income
                          
                          $
                          4,837,000
                          
                          
                          $
                          2,426,000
                          
                          
                          $
                          3,152,000
                          
                          
                          $
                          4,034,000Net income  per share -
      basic
                          
                          $
                          0.12
                          
                          
                          $
                          0.05
                          
                          
                          $
                          0.07
                          
                          
                          $
                          0.09Net income per share -
      diluted
                          
                          $
                          0.11
                          
                          
                          $
                          0.05
                          
                          
                          $
                          0.07
                          
                          
                          $
                          0.08For the Quarter
      EndedDecember 31,
      2008
                          
                          
                          September 30,
      2008
                          
                          
                          June
      30, 2008
                          
                          
                          March 31,
      2008Revenue
                          
                          $
                          80,036,000
                          
                          
                          $
                          78,950,000
                          
                          
                          $
                          82,211,000
                          
                          
                          $
                          76,014,000Gross
profit
                          
                          $
                          9,335,000
                          
                          
                          $
                          7,701,000
                          
                          
                          $
                          11,930,000
                          
                          
                          $
                          7,773,000Net income
                          
                          $
                          2,570,000
                          
                          
                          $
                          4,268,000
                          
                          
                          $
                          3,705,000
                          
                          
                          $
                          (338,000
                          )Net income per share -
      basic
                          
                          $
                          0.05
                          
                          
                          $
                          0.08
                          
                          
                          $
                          0.07
                          
                          
                          $
                          (0.01
                          )Net income per share -
      diluted
                          
                          $
                          0.05
                          
                          
                          $
                          0.08
                          
                          
                          $
                          0.07
                          
                          
                          $
                          (0.01
                          )





Gross profit in the above chart for the
first and second quarters of 2008 differ from the gross profit reported in the
10Qs for those quarters by approximately $147,000 and $170,000,
respectively.  These differences resulted from the reclassification of
certain expenses that did not relate to the costs associated with operating a
physician practice; primarily amortization related to intangible assets of
acquired practices.





Significant Fourth Quarter
Adjustments





As a
result of new information that became available in the fourth quarter of 2009
and 2008, we recorded a $1.4 million and $3.8 million adjustment, respectively,
for the estimated retroactive premium that we expect to receive in the summer of
the subsequent year related to the final MRA premium adjustment for the prior
year.  These amounts increased revenue and gross profit for these
quarters.  Of this amount, $1.1 and $3 million relates to premium
revenue recorded in the first three quarters of 2009 and 2008,
respectively.





In the
fourth quarter of 2009, we realized a reinsurance reimbursement related to high
cost pharmacy claims paid during the first three quarters of 2009 in the amount
of $1.9 million, which reduced medical costs and increased gross profit in this
quarter.





During the fourth quarter of 2009,
estimated medical claims expense related to dates of service prior to this
quarter were less than the amount recorded at September30, 2009 by approximately $1.9 million
(favorable variance).  This reduction was a result of actual
utilization and settlement amounts being less than those used in our original
estimate of medical expenses payable at the end of the third quarter of
2009.  The $1.9 million was recorded as a decrease in medical claims
expense in the fourth quarter of 2009and increased gross profit in the
quarter.





During the fourth quarter of 2008,
estimated medical claims expense related to dates of service prior to this
quarter were greater than the amount recorded at September 30, 2008 by
approximately $452,000 (unfavorable variance).  This increase was a
result of actual utilization and settlement amounts being greater than those
used in our original estimate of medical expenses payable at the end of the
third quarter of 2008.  The $452,000 was recorded as an increase in
medical claims expense in the fourth quarter of 2008 and decreased gross profit
for the quarter.


F-28


During the fourth quarter of 2009, we
recorded expense ofapproximately $500,000 related to the
amount payable under the Amended EmploymentAgreement of Mr. Michael Earley and the
additional expense associated with the increase in the fair value of the
stockoptionsheld by Mr. Earleythatwere extended.




In the fourth quarter of 2009, we
increased the gain on the sale of the HMO by $525,000 as a result of additional
information relating to the final net equity settlement.




During the fourth quarter of 2008, we
determined that our effective tax rate for 2008 would be approximately 1% higher
in 2008 than we had estimated.  As a result, we increased income tax
expense by $337,000 in the fourth quarter, which reduced net
income.





In the fourth quarter of 2008, we
determined that, based on our continued review of actual pharmacy costs in 2008,
our accrual for the Part D liability for 2008 was too
high.  Accordingly, we reduced the estimated liability and increased
premium revenue by approximately $1.5 million to reduce the liability that had
been accrued over the first three quarters.


F-29




METROPOLITAN HEALTH NETWORKS,
INC.




EXHIBIT INDEX




Year Ended December 31,
2009




(3) Exhibits





2.1
              
              Stock Purchase Agreement, dated as
      of June 27, 2008, by and between Humana Medical Plans, Inc. and
      Metropolitan HealthNetworks, Inc. (1)3.1.
              
              Articles of Incorporation, as
      amended (2)3.2
              
              Amended and Restated Bylaws
      (3)10.1
              
              Physician Practice Management
      Participation Agreement, dated August 2, 2001, between Metropolitan of
      Florida, Inc. and Humana, Inc. (4)10.2.
              
              Letter of Agreement, dated February
      2003, between Metropolitan of Florida, Inc. and Humana, Inc.
      (5)10.3.
              
              Physician Practice Management
      Participation Agreement, dated December 1, 1998, between Metcare of
      Florida, Inc. and Humana, Inc. (5)10.4.
              
              Omnibus Equity Compensation Plan, as amended
      and restated (6)10.6.
              
              Amended and Restated Employment
      Agreement between Metropolitan and Michael M. Earley datedMarch 1, 2010
  (7)10.7.
              
              Amended and Restated Employment
      Agreement between Metropolitan and Robert J. Sabo dated November 9, 2007
      (8)10.8.
              
              Amended and Restated Employment
      Agreement between Metropolitan and Roberto L. Palenzuela dated January 3,
      2006 (9)10.9
              
              Employment Agreement between
      Metcare of Florida, Inc. and Jose A. Guethon, M.D.
    (10)10.10.
              
              Formof Option Award Agreement for
      Option Grants to Directors pursuant to the Omnibus Compensation Plan
      *10.11.
              
              Form of Option Award Agreement for
      Option Grants to Key Employees pursuant to the OmnibusCompensation
      Plan*10.12
              
              Summary of 2009 Annual Bonus
      Plan for Executive
      Officers and certain key management employees
  (11)10.13
              
              Summary of Director Compensation
      Plan (15)10.14
              
              Form of Restricted Stock Award
      Agreement for Restricted Stock Grants to Directors pursuant to
      theOmnibus Compensation
      Plan*10.15
              
              Form of Restricted Stock Award
      Agreement for Restricted Stock Grants to Management pursuant to the
      Omnibus Compensation Plan*10.16
              
              Amendment to Employment Agreement,
      dated as of December 22, 2008, by and between Metropolitan and Jose A.
      Guethon, M.D. (12)10.17
              
              Amendment to Employment Agreement,
      dated as of December 22, 2008, by and between Metropolitan and Robert J.
      Sabo (12)


-50-




10.18
                    
                    Amendment
      to Employment Agreement, dated as of December 22, 2008, by and between
      Metropolitan and Roberto L. Palenzuela (12)10.19
                    
                    Independent
      Practice Association Agreement, dated as of August 29, 2009, by and
      between Metcare of Florida, Inc. and Humana, Inc (13)10.20
                    
                    Physician
      Practice Management Participation Amendment, dated as of September 4,
      2009, by and between Metcare of Florida, Inc. and Humana Medical Plan,
      Inc. and Humana Health Insurance Company of Florida, Inc. and Humana
      Insurance Company, Employers Health Insurance Company and their affiliates
      who underwrite or administer health plans (14)21.1
                    
                    List
      of Subsidiaries*23.1
                    
                    Consent
      of Independent Registered Public Accounting Firm*31.1.
                    
                    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2.
                    
                    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32.1.
                    
                    Certification
      of the Chief Executive Officer and pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002**32.2.
                    
                    Certification
      of the Chief Financial Officer and pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002**
 
 *
                filed
      herewith
 **
                furnished
      herewith
 
 (1)
                    
                    Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on July 1, 2008.(2)
                    
                    Incorporated
      by reference to our Registration Statement on Form 8-A12B filed with the
      Commission on November 19, 2004 (No. 001-32361).(3)
                    
                    Incorporated
      by reference our Current Report on Form 8-K filed with the Commission on
      September 30, 2004.(4)
                    
                    Incorporated
      by reference to the Amendment to our Registration Statement on Form SB-2/A
      filed with the Commission on August 2, 2001 (No.
      333-61566).  Portions of this document were omitted and were
      filed separately with the SEC on or about August 2, 2001 pursuant to a
      request for confidential treatment.(5)
                    
                    Incorporated
      by reference to the Amendment to our Annual Report for the year ended
      December 31, 2003 on Form 10-K/A filed with the Commission on July 28,
      2004. Portions of this document have been omitted and were filed
      separately with the SEC on July 28, 2004 pursuant to a request for
      confidential treatment.(6)
                    
                    Incorporated
      by reference on our Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 filed with the Commission on August 5,
  2009.(7)
                    
                    Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on March 2,
      2010.(8)
                    
                    Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on October 20, 2006.(9)
                    
                    Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2004, as filed with the Commission on March 22,
  2005.(10)
                    
                    Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2005, as filed with the Commission on March 16,
  2006.(11)
                    
                    Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on February 11,
2009.
  -51-
 
 (12)
                        
                        Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on December 23, 2008.(13)
                        
                        Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on September 2, 2008.  Confidential treatment has been granted
      with respect to certain portions of this exhibit. Omitted portions were
      filed separately with the Commission on September 2,
  2008.(14)
                        
                        Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on September 9, 2008. Confidential treatment has been granted with respect
      to certain portions of this exhibit. Omitted portions were filed
      separately with the Commission on September 9, 2008.(15)
                        
                        Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007, as filed with the Commission on March 8,
      2008.
  -52-
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 2nd day of March
2010.
  METROPOLITAN
      HEALTH NETWORKS, INC.By:
                /s/ MICHAEL M. EARLEYMichael
      M. EarleyChief
      Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
  March
      2, 2010
                /s/ MICHAEL M. EARLEYMichael
      M. EarleyChief
      Executive OfficerMarch
      2, 2010
                /s/ ROBERT J. SABORobert
      J. SaboChief
      Financial OfficerMarch
      2, 2010
                /s/ ERIC HASKELLEric
      HaskellChairman
      of the BoardMarch
      2, 2010
                /s/
      MARTIN W. HARRISONMartin
      W. HarrisonDirectorMarch
      2, 2010
                /s/ KARL M. SACHSKarl
      M. SachsDirectorMarch
      2, 2010
                /s/ BARRY T. ZEMANBarry
      T. ZemanDirectorMarch
      2, 2010
                /s/ DAVID A. FLORMANDavid
      A. FlormanDirectorMarch
      2, 2010
                /s/ ROBERT E. SHIELDSRobert
      E. ShieldsDirector
  -53-