***UNITED
      STATES***


***SECURITIES
      AND EXCHANGE COMMISSION***




***WASHINGTON,
      D.C. 20549***




***FORM
      10-K***





ý
            
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the fiscal year ended December 31, 2007ORo
            
            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
                Australian Avenue South, 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
            
            American
                Stock Exchange




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 o 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 oNo 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 xNo o





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. o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or 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 o    Accelerated
      filer x   Non-accelerated
      filer o


Smaller
      reporting company o





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




As
      of
      June 30, 2007, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $ 81,426,712 **** based
      on
      the closing sale price as reported on the American Stock Exchange. 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 28, 2008Common
                Stock, $.001 par value per share
            
            51,823,032
                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 2008 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, 2007**




**TABLE
      OF CONTENTS**





**ITEM**
            
            **Page
                No.****PART
                I**1
            Business
            61A
            Risk
                Factors
            241B
            Unresolved
                Staff Comments
            342
            Properties
            343
            Legal
                Proceedings
            344
            Submission
                of Matters to a Vote of Security Holders
            34**PART
                II**5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            356
            Selected
                Financial Data
            377
            Management’s
                Discussion and Analysis of Financial Conditions and Results of Operations
            387A
            Quantitative
                and Qualitative Disclosures about Market Risk
            538
            Financial
                Statements and Supplementary Data
            549
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            559A
            Controls
                and Procedures
            55**PART
                III**10
            Directors,
                and Executive Officers of the Registrant
            5711
            Executive
                Compensation
            5712
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            5713
            Certain
                Relationships and Related Transactions
            5714
            Principal
                Accounting Fees and Services
            58**PART
                IV**15
            Exhibits,
                Financial Statement Schedules
            59Exhibits
                Index
            60Signatures
            6216
            Schedule
                1 – Condensed Financial Statements – Parent Company
                Only
            69





-
          3 -




**GENERAL**




Unless
      otherwise indicated or the context otherwise requires, all references in this
      Form 10-K to “we,” “us,” “our,” “Metropolitan” or the “Company” refers to
      Metropolitan Health Networks, Inc. and its consolidated subsidiaries unless
      the
      context suggests otherwise. We disclaim any intent or obligation to update
      “forward looking statements”.




**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 opportunity 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 the
      following:




·
            the
                PSN's ability to maintain the Humana Agreements and do so on favorable
                terms;





·
            our
                ability to adequately predict and control medical expenses and to
                make
                reasonable estimates and maintain adequate accruals for incurred
                but not
                reported, or IBNR, claims; and





·
            the
                HMO's ability to renew, maintain or to successfully rebid the agreement
                with the Center for Medicare and Medicaid Services
                (“CMS”).





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 Medicare
                programs;





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





·
            failure
                to receive claims processing, billing services, data collection and
                other
                information on a timely basis from Humana or HF Administrative
                Services;





·
            failure
                to receive, on a timely or accurate basis, customer information from
                CMS;





·
            future
                legislation and changes in governmental
                regulations;





·
            increased
                operating costs;





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





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




-
          4 -




·
            loss
                of significant contracts;





·
            general
                economic and business conditions;





·
            increased
                competition;





·
            the
                relative health of our patients;





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





·
            federal
                and state investigations;





·
            our
                ability to grow our HMO customers in our current geographic markets
                and
                our ability to expand our HMO into new geographic
                markets;





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




·
            impairment
                charges that could be required in future
                periods.





-
          5 -





**PART
      I**


**ITEM 1** **DESCRIPTION
        OF BUSINESS**




***Overview***




We
      operate two primary businesses in Florida, a provider service network (“PSN”)
      that provides and arranges for medical care primarily to customers of Humana,
      Inc. (each a “Humana Plan Customer”) and our health maintenance organization
      (“HMO”) which provides healthcare benefits to Medicare beneficiaries in Florida
      that have selected our plan. As of December 31, 2007, the PSN and the HMO
      provided healthcare benefits to approximately 25,400 and approximately 6,200
      Medicare Advantage beneficiaries, respectively .
      At
      January 1, 2008, the customer base of the PSN was approximately 25,900 and
      the
      customer base of the HMO was approximately 6,900.





Both
      our
      PSN and HMO operations primarily focus on individuals covered by Medicare,
      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 2007 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.





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, and designing plans and programs intended to meet such
      needs. Our management team has extensive experience developing and managing
      providers and provider networks.





We
      were
      incorporated in the State of Florida in January 1996, and began operations
      as a
      Physician Practice Management Group. Although we thereafter acquired a number
      of
      physician practices and ancillary service providers, we abandoned the group
      practice strategy in late 1999. We acquired a diagnostic laboratory and a
      pharmacy business in 2000 and 2001, respectively. The laboratory was shut down
      in 2002 and the pharmacy was sold in November 2003.




The
      PSN’s
      first contract with Humana Inc. (“Humana”) was secured through an acquisition in
      1997, and expanded through an additional acquisition in early 1999. Pursuant
      to
      this agreement, the PSN contracted with Humana to manage certain designated
      Humana Medicare Advantage HMO customers in South Florida. In 2000, an additional
      contract was secured to manage certain designated Humana Medicare Advantage
      HMO
      customers in Central Florida. The PSN renegotiated its most significant contract
      with Humana, covering the Central Florida area, effective January 1, 2003.
      This
      renegotiation increased the percentage of Medicare premium the PSN received
      from
      Humana and resolved a number of contractual disputes between the PSN and
      Humana.




The
      HMO
      commenced operations as a Medicare Advantage HMO on July 1, 2005. As of January
      1, 2008, the HMO operates in thirteen Florida counties where it markets its
      “AdvantageCare” branded health plans.




To
      mitigate our exposure to high cost medical claims, we have
      reinsurance arrangements that provide for the reimbursement of ****** certain
      customer ****** medical
      expenses. ******  Our
      deductible per customer per year was $125,000 for the HMO for the first 6 months
      of 2007 and $150,000
      thereafter, with a maximum benefit per customer per policy period of $1,000,000.
      For the PSN the deductibles for 2007 were $40,000 in South Florida and $140,000
      in Central Florida, with a maximum benefit per customer per policy period of
      $1,000,000. The deductible for the PSN in Central Florida increased to $200,000
      as of January 1, 2008.




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 practical after they are electronically filed with, or
      furnished to, the Securities and Exchange Commission, or 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.




-
          6 -





***Provider
      Service Network***





We
      operate the PSN through Metcare of Florida, Inc., our wholly owned
      subsidiary.





We
      have
      two network contracts (the “Humana Agreements”) with Humana. Humana is one of
      the largest participants in the Medicare Advantage program in the United States.
      Our PSN provides, on a non-exclusive basis, healthcare services to Medicare
      beneficiaries in Flagler and Volusia counties (“Central Florida”) and Palm
      Beach, Broward and Miami-Dade counties (“South Florida”) who have elected to
      receive benefits under a Humana Medicare Advantage HMO Plan. As of December
      31,
      2007, the Humana Agreements covered approximately 18,900 Humana Plan Customers
      in Central Florida and 6,500 Humana Plan Customers in South Florida.
      Approximately 79.7% of our total 2007 revenue was generated through the Humana
      Agreements.





We
      have
      built our PSN physician network by contracting with primary care physicians
      for
      their services and acquiring and operating our own physician practices. As
      of
      December 31, 2007, the PSN had contracts in place with thirty-eight independent
      primary care physician practices (individually an “IPA”) and we own and operate
      nine primary care physician practices and one medical oncology physician
      practice (collectively with the IPAs, the “PSN Physicians”).





During
      2007, the PSN acquired certain assets of one of our IPAs in the Central Florida
      market, closed a wholly-owned primary care physician practice in South Florida
      and opened an additional primary care physician practice in the Central Florida
      market. In addition, effective December 1, 2007, the PSN a ssumed
      the responsibility of managing the health care of approximately 1,000 additional
      Humana Plan customers in South Florida.  These
      customers were previously being treated at three non PSN Physician practices
      with five locations in Broward and Palm Beach Counties.





Through
      our Humana Agreements we
      have
      established referral relationships with a large number of specialist
      physicians, ancillary service providers and hospitals throughout South Florida and
      Central Florida. See “Business Model - Provider Agreements” for more information
      regarding the PSN’s relationships with PSN Physicians, specialis t physicians,
      ancillary service
      providers and hospitals.





Humana
      directly contracts with the Centers for Medicare and Medicaid Services (“CMS”)
      and is paid a monthly premium payment for each customer enrolled in a Humana
      Medicare Advantage Plan. Among other factors, the monthly premium varies by
      patient, 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 Plan Customer who selects one of the PSN Physicians
      as
      his or her primary care physician (a “Humana Participating Customer”). In return
      for the provision of these medical services, the PSN receives from Humana a
      fee
      for each Humana Participating Customer. The fee rates are established by the
      Humana Agreements and comprise a substantial portion of the monthly premiums
      received by Humana from CMS with respect to Humana Participating Customers.





In
      Central Florida, our PSN assumes full
      responsibility for the provision of all necessary medical care for each Humana
      Participating Customer, even for services we do not provide directly. In South
      Florida, the PSN and Humana share in the cost of inpatient hospital services
      and
      the PSN assumes full responsibility for the provision of all other medical
      care
      provided to the Humana Participating Customers. ** To the
      extent the costs of providing such medical care are less than the related
      premiums received from Humana; our PSN generates a gross profit. Conversely,
      if
      medical expenses exceed the premiums received from Humana, our PSN experiences
      a
      gross loss.





Effective
      as of August 1, 2007, the PSN entered into a network agreement (the “CarePlus
      Agreement”) with CarePlus Health Plans, Inc., a Medicare Advantage HMO
      in
      Florida. CarePlus Health Plans, Inc. is a wholly-owned subsidiary of Humana.
      Pursuant to the CarePlus Agreement, the PSN provides, on a non-exclusive basis,
      healthcare services to Medicare beneficiaries in nine Florida counties who
      have
      elected to receive benefits through CarePlus’ Medicare Advantage plans. The
      counties covered by the CarePlus Agreement include the South Florida counties
      in
      which we provide services to Humana Plan Customers (Palm Beach, Broward and
      Miami-Dade) as well as Orange, Osceola, Seminole, Pasco, Pinellas and
      Hillsborough counties. As of December 31, 2007, the CarePlus Agreement covered
      approximately 76 CarePlus Participating Customers (as defined
      below).





Under
      the
      CarePlus Agreement, with certain limited exceptions, we are precluded from
      using
      the PSN Physicians who provide services to the Humana Participating Customers
      to
      provide services to CarePlus Participating Customers. Accordingly, the PSN
      must
      (i) locate and contract with new IPAs and/or (ii) acquire or establish and
      operate its own physician practices to service the CarePlus Partic ipating
      Customers. At December 31, 2007, five IPAs in South Florida and one center
      we
      own in South Florida have entered into contracts with the PSN to provide
      services to the CarePlus Participating Customers.




-
          7 -


CarePlus
      directly contracts with CMS and is paid a monthly premium payment for each
      customer (each a “CarePlus Plan Customer”) enrolled in a CarePlus Medicare
      Advantage Plan. Among other things, the monthly premium varies by patient,
      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
      each CarePlus Plan Customer who selects one of the PSN Physicians as his or
      her
      primary care physician (each a “CarePlus Participating Customer”). In return for
      the provision of these medical services, the PSN receives a monthly network
      administration fee for each CarePlus Participating Customer. Upon the earlier
      of
      the number of CarePlus Participating Customers exceeding 500 in a given calendar
      month or March 31, 2008, the PSN will begin receiving a fee for each CarePlus
      Participating Customer and, in connection therewith, the PSN will assume full
      responsibility for the provision of all necessary medical care for each CarePlus
      Participating Customer, even for services we do not provide directly.





** Substantially
      all of our PSN’s revenue is generated from the Humana Agreements. We do receive
      additional revenue in the medical practices we own and operate by providing
      primary care services to non-Humana Participating Customers on a fee-for-service
      basis.




***Health
      Maintenance Organization***




We
      operate the HMO through Metcare Health Plans, Inc., our wholly owned subsidiary
      that was issued a Health Care Provider Certificate ("HCPC") by Florida's Agency
      for Health Care Administration ("AHCA") on March 16, 2005. The Department of
      Financial Services, Office of Insurance Regulation ("OIR") approved the HMO's
      application and a Certificate of Authority to operate a HMO in the State of
      Florida (“COA”) on April 22, 2005.





Effective
      July 1, 2005, the HMO entered into a contract with CMS (the “CMS Contract”) to
      begin offering Medicare Advantage plans to Medicare beneficiaries in six Florida
      counties - Lee, Charlotte, Sarasota, Martin, St. Lucie and Okeechobee. The
      HMO
      began marketing its "AdvantageCare" branded plan in July 2005. Beginning January
      1, 2007, the HMO began to provide services in Polk, Glades, Manatee, Marion,
      Lake and Sumter. Effective January 1, 2008, the HMO began to operate in Collier
      County.





The
      HMO
      is required to maintain satisfactory minimum net worth requirements established
      by the Florida State Office of Insurance Regulation. The HMO is restricted
      from
      making dividend payments without appropriate regulatory notifications and
      approvals or to the extent such dividends would put us out of compliance with
      statutory capital requirements. Additional information regarding our statutory
      requirements is set forth in Note
      15
      to the “Notes to Consolidated Financial Statements” contained in this Form 10-K.





We
      are
      continuing to evaluate expanding our HMO business into other counties within
      Florida. We presently do not provide
      HMO services in the geographic markets covered by the Humana Agreements. We
      view
      our HMO business as an extension of our existing core competencies.





The
      HMO’s
      revenue is generated by premiums consisting of monthly payments per customer
      that are established by the CMS Contract through
      the competitive bidding process. The HMO contracts directly with the Centers
      for
      Medicare and Medicaid Services (“CMS”) and is paid a monthly premium payment for
      each customer enrolled in our Plan. Among other things, the monthly premium
      varies by patient, county, age and severity of health status. The HMO recorded
      its first revenue in the third quarter of 2005. See “The Medicare Program and
      Medicare Managed Care – Competitive Bidding Process.”





Our
      HMO
      continues to require a considerable amount of capital. During 2007, we incurred
      losses before allocated overhead and income taxes of approximately $10.5 million
      in connection with the development and operation of the HMO. We contributed
      approximately $14.2 million to the HMO during 2007, including $6.5 million
      relating to 2006 operations. In addition, we expect to contribute another $1.5
      million before March 31, 2008 relating to 2007 operations, to finance the
      operations and growth of the HMO. We are continuing to commit resources in
      an
      effort to increase our HMO customer base. Our future operating results will
      be
      impacted by the effectiveness of our sales and marketing efforts in enrolling
      customers and the HMO's ability to manage medical expenses. We are not in a
      position to meaningfully estimate when, if ever, the HMO’s business will become
      profitable and/or generate cash from operations and we may be required to fund
      the development and expansion of the HMO business, including any associated
      losses, for an extended period of time. We anticipate that the on-going
      development efforts, reserve requirements and operating costs for our still
      developing HMO business can be funded by our current resources and projected
      cash flows from operations until at least December 31, 2008.




-
          8 -




Additional
      information regarding our PSN and HMO segments for 2007, 2006 and 2005 is set
      forth in Note 18
      to the
“Notes to Consolidated Financial Statements” contained in this Form 10-K.





***The
      Medicare Program and Medicare Managed Care***




*Medicare*





The
      Medicare program has four primary components:




(i)
            Part
                A - Medicare Part A helps cover inpatient hospital, skilled nursing
                facility, hospice and home health care. Most individuals in the United
                States are automatically enrolled in Medicare Part A upon reaching
                the age
                of 65.




(ii)
            Part
                B - Medicare's Part B is optional and is financed largely by monthly
                premiums paid by individuals enrolled in the program. Medicare Part
                B
                covers almost all reasonable and necessary medical services, including
                doctors' services, laboratory and x-ray services, durable medical
                equipment (i.e. wheelchairs, hospital beds), ambulance services,
                outpatient hospital care, home health care, blood and medical supplies.
                Individuals are eligible to enroll in Part B if they are entitled
                to
                benefits under Part A and meet certain other criteria. Participants
                often
                have the Medicare Part B monthly premium automatically deducted from
                their
                Social Security check. The monthly Medicare Part B premium, which
                was
                $93.50 per month in 2007, increased to $96.40 in 2008. The Medicare
                Part B
                annual deductible requirement increased from $131 in 2007 to $135
                in 2008.
                Once the deductible has been met, Medicare Part B generally pays
                80% of
                the Medicare allowable fee schedule and beneficiaries pay the remaining
                20%.




(ii)
            Part
                C - Medicare Part C is an alternative to the traditional fee-for-service
                Medicare program. Initially known as the Medicare+Choice program,
                the
                Medicare Modernization Act of 2003 replaced Medicare+Choice with
                the
                Medicare Advantage program. Medicare Advantage plans are health plan
                options offered by managed care companies pursuant to a contractual
                arrangements with CMS. Each entity offering a Medicare Advantage
                plan must
                be licensed and certified as a risk bearing entity eligible to offer
                health insurance or benefits coverage in each state where the company
                offers a Medicare Advantage plan. In geographic areas where one or
                more
                managed care plans have contracted with CMS pursuant to the Medicare
                Advantage program, Medicare eligible beneficiaries may choose to
                receive
                benefits from managed care plans.





(iii)
            Part
                D - First available in 2006, Medicare Part D permits every Medicare
                recipient to select a prescription drug plan. Part D permits eligible
                individuals to choose from at least two prescription drug plans in
                their
                geographic area, including a standard coverage plan and an alternative
                plan with actuarially equivalent benefits. Part D plans cover generic
                and
                brand name drugs that are approved by the Food and Drug Administration
                and
                used for medically-accepted reasons. Medicare Part D replaces the
                transitional prescription drug discount program and replaces Medicaid
                prescription drug coverage for dual-eligible beneficiaries.





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
      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.”




Individuals
      who elect to participate in the Medicare Advantage program receive greater
      benefits than traditional fee-for-service Medicare beneficiaries, which benefits
      may include eye exams, hearing aids and routine physical exams. Out-of-pocket
      costs for the Medicare beneficiary enrolled in a Medicare Advantage Plan may
      also be lower. However, in exchange for these enhanced benefits, customers
      are
      generally required to use only the services and provider networks offered by
      the
      customer’s Medicare Advantage Plan. This participation of private health plans
      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 8.7 million as of June 2007. Also, since 2003, the number
      of
      Medicare Advantage plans in the United States has increased from 285 to 602
      as
      of June 2007. Medicare Advantage plans contract with CMS to provide benefits
      that exceed those offered under the traditional fee-for-service Medicare program
      by a significant percentage in exchange for a fixed premium payment per customer
      per month from CMS (the “PCPM”). The monthly premium varies based on the county
      in which the customer resides, as adjusted to reflect the customer’s
      demographics and the individual customer’s health status.




-
          9 -




The
      current risk adjusted payment system bases the CMS reimbursement payments on
      various clinical and demographic factors including, among other things, hospital
      inpatient diagnoses, additional diagnosis data from ambulatory treatment
      settings, hospital outpatient department and physician visits, gender, age,
      and
      Medicaid eligibility. During 2003, risk adjusted payments accounted for only
      10%
      of Medicare health plan payments, with the remaining 90% being reimbursed in
      accordance with the traditional demographic rate book. The portion of risk
      adjusted payments was increased to 30% in 2004, 50%, in 2005, and 75% in 2006,
      and increased to 100% in 2007 and thereafter. CMS requires that all managed
      care
      companies capture, collect, and submit the necessary diagnosis code information
      to CMS twice a year for reconciliation with CMS’s internal database. Under this
      system, the risk adjusted portion of the total CMS payment to the Medicare
      Advantage plans will equal the local rate set forth in the traditional
      demographic rate book, adjusted to reflect the plan’s customers average gender,
      age, and disability demographics.




*The
      Medicare Modernization Act*




The
      Medicare Prescription Drug, Improvement and Modernization Act of 2003, known
      as
      the Medicare Modernization Act (“MMA”), signed into law in December 2003,
      provided sweeping changes to the Medicare program. In part, the MMA established
      the Medicare Advantage program under Medicare Part C as a replacement for the
      Medicare+Choice program. In so doing, the MMA revised the payment methodology
      used to calculate the monthly capitation rates to be paid to Medicare Advantage
      plans, modifying the minimum increase rate to be the larger of (i) 102% of
      the
      previous year’s rate or (ii) the prior year’s rate increased by the Medicare
      growth percentage. We believe that the changes enacted by the MMA have enabled
      Medicare Advantage plans to offer more attractive and comprehensive benefits
      and
      increase preventive care to its customers, while also reducing out-of-pocket
      expenses for beneficiaries. We further believe that these changes will encourage
      increased enrollment in Medicare managed care plans in the upcoming years.




In
      addition to generally increasing the rates payable to Medicare Advantage plans
      from CMS, the MMA, among other things, (i) added the Medicare Part D
      prescription drug benefit beginning in January 2006, (ii) implemented a
      competitive bidding process for the Medicare Advantage Program and (iii)
      provided a limited annual enrollment period. The MMA also established regional
      Medicare Advantage plan offerings on a preferred provider organization (“PPO”)
      model and private fee-for-service plans, thereby expanding Medicare beneficiary
      healthcare options, and introduced provisions intended to increase competition
      among Medicare Advantage plans by establishing cost benchmarks and bonus
      payments for PPOs entering or remaining in less competitive markets. In
      addition, the MMA mandates that each Medicare Advantage organization have an
      on-going quality improvement program to improve the quality of care provided
      to
      enrollees.




The
      MMA
      made favorable changes to the premium rate calculation methodology and generally
      provides for program rates that will better reflect the increased cost of
      medical services provided by managed care organizations to Medicare
      beneficiaries. CMS has announced that the Medicare Advantage program rates
      for
      2008 are expected to reflect an average increase of 3.5% over 2007.




*Medicare
      Part D*




As
      part
      of the MMA, effective January 1, 2006, all Medicare beneficiaries are 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 that offers drug coverage must receive
      their drug coverage through their Medicare Advantage prescription drug plan
      (“MA-PD”) and may not enroll in a stand-alone PDP. For example, Humana Plan
      Customers and the HMO’s customers were automatically enrolled in their MA-PDs as
      of January 1, 2006 unless they affirmatively chose to use another
      provider’s prescription drug coverage. 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 PDPs in their region. Medicare Advantage customers
      have the right to change drug plans, either MA-PD or stand-alone PDP, one time
      during the open enrollment period. Dual eligible beneficiaries and other
      customers qualified for the low-income subsidy may change plans throughout
      the
      year.




-
          10 -




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.




****** 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 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.




*Competitive
      Bidding Process*




Beginning
      in 2006, CMS began to use a new rate calculation system for Medicare Advantage
      plans. The new system is 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, has
      been relabeled 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 pays the plan its bid
      amount, as adjusted, based on its 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 must use the rebate to provide
      beneficiaries with extra benefits, reduced cost sharing, or reduced premiums,
      including premiums for MA-PDs and other supplemental benefits. CMS has the
      right
      to audit the use of these proceeds. The remaining 25% of the excess amount
      will
      be retained in the statutory Medicare trust fund. If a Medicare Advantage plan’s
      bid is greater than the benchmark, the plan will be required to charge a premium
      to enrollees equal to the difference between the bid amount and the benchmark.




*Enrollment
      Period*




Prior
      to
      the MMA, Medicare beneficiaries were permitted to enroll in a Medicare managed
      care plan or change plans at any point during the year. Beginning in 2006,
      Medicare beneficiaries have defined enrollment periods, similar to commercial
      plans, in which they can select a Medicare Advantage plan, a stand-alone PDP,
      or
      traditional fee-for-service Medicare coverage. The annual enrollment period
      for
      a stand alone PDP is from November 15 through December 31 of each year, and
      enrollment in Medicare Advantage plans will occur 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.




In
      addition, Congress created a new enrollment period for 2007 and 2008, known
      as
      the limited open enrollment period, pursuant to the Tax Relief and Health Care
      Act of 2006. Pursuant to that Act, an individual enrolled in traditional
      fee-for-service Medicare may enroll in a Medicare Advantage plan without drug
      coverage at any time during the year. Enrollment becomes effective the month
      after the election.




-
          11 -




*The
      Florida Medicare Advantage Market*





Florida
      has been a highly attractive, rapidly growing market with a population of over
      19 million people in 2008 according to information published by the Office
      of
      Economic & Demographic Research of the Florida Legislature in November 2007.
      The U.S. Census Bureau has projected that Florida, which is now the fourth
      most
      populous state, is expected to surpass New York to become the third largest
      state by 2011. In 2000, Florida’s population of those 65 and older was 2.8
      million and is forecast to increase to 3.5 million by 2010 and to almost 5.0
      million by 2020.





Behind
      only California, which has approximately 4.4 million Medicare eligible
      beneficiaries, Florida has the second largest Medicare population in the U.S.
      with an estimated 3.1 million Medicare eligible beneficiaries. At December
      31,
      2007, California’s Medicare Advantage penetration was approximately 33% while
      Florida’s was 24%. We believe that of the approximate 981,000 and 758,000
      Medicare eligible individuals in the counties covered by the Humana Agreements
      and counties served by our HMO, respectively, approximately 38.1% and 15.0%,
      respectively, are customers of Medicare Advantage plans.





Medicare
      Advantage Penetration in Counties Covered By the Humana


Agreement
      Served By PSN


(CMS
      data
      modified January 2008)








Service
                Area
            
            Medicare
              Eligibles
            
            Medicare
              Advantage
              Penetration
            
            Penetration
              %Central
                Florida
            
            
            130,077
            
            
            37,528
            
            
            28.9
            %South
                Florida
            
            
            850,671
            
            
            335,931
            
            
            39.5
            %Total
            
            
            980,748
            
            
            373,459
            
            
            38.1
            %





Medicare
      Advantage Penetration in Counties Served By HMO


(Source:
      CMS Data Modified January 2008)





Service
                Area
            
            Medicare
              Eligibles
            
            Medicare
              Advantage
              Penetration
            
            Penetration
              %Treasure
                Coast
            
            
            92,267
            
            
            15,079
            
            
            16.3
            %Gulf
                Coast
            
            
            387,362
            
            
            50,775
            
            
            13.1
            %Central
                Florida
            
            
            278,819
            
            
            47,861
            
            
            17.2
            %Total
            
            
            758,448
            
            
            113,715
            
            
            15.0
            %





The
      Central Florida service area covered by the Humana Agreements with the PSN
      includes the counties of Flagler and Volusia; the South Florida service area
      covered by the Humana Agreements includes the counties of Broward, Miami-Dade
      and Palm Beach.





The
      Treasure Coast service area for the HMO includes Martin, St. Lucie, Glades
      and
      Okeechobee counties; the Gulf Coast service area includes Charlotte, Lee,
      Manatee, Collier and Sarasota counties. The Central Florida service area
      includes Polk, Sumter, Lake and Marion counties.





**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 and CarePlus.




-
          12 -




*Humana
      Agreements*





Pursuant
      to the Humana Agreements, the PSN provide s and
      arranges for the provision of covered medical services to each Humana
      Participating Customer. Our Humana Agreement covering the Central Florida area
      (the “Central Florida Humana Agreement”) is a global risk agreement and our
      Humana Agreement covering the South Florida area (the “South Florida Humana
      Agreement”) is a full risk agreement. Pursuant to both Humana Agreements, the
      PSN receives a capitation fee with respect to each Humana Participating
      Customer, which fee represents a significant portion of the premium that Humana
      receives from CMS with respect to that Humana Plan Customer. Under the Central
      Florida Humana Agreement, the PSN assumes full responsibility for the provision
      of all necessary medical care for each Humana Participating Customer, even
      for
      services we do not provide directly. Under
      the
      South Florida Humana Agreement, the PSN and Humana share in the cost of
      inpatient hospital services and the PSN assumes full responsibility for the
      provision of all other medical care provided to the Humana Participating
      Customer. In accordance with the Humana Agreements, we are required to comply
      with Humana’s general policies and procedures, including Humana’s policies
      regarding referrals, approvals, utilization management and quality
      assurance.




The
      Humana Agreements 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 the Humana Agreements
      and/or any individual physician credentialed under the Humana 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 the 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.






Humana
      may provide 30 days notice as to certain amendments or modifications of the
      Humana Agreements, including but not limited to, compensation rates, covered
      benefits and other terms and conditions. If Humana exercises its right to amend
      either of 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.




For
      the
      term of the Central Florida Humana Agreement:





·
            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 the Central Florida area; 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
                the Florida counties in which Humana has a Medicare Advantage
                contract.





In
      addition, for the term plus one year for each of the Humana Agreements, we
      have
      agreed that 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 health care 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.




-
          13 -





*CarePlus
      Agreement*





Under
      the
      CarePlus Agreement, the PSN will provide, on a non-exclusive basis, healthcare
      services to Medicare beneficiaries in nine Florida counties who have elected
      to
      receive benefits through CarePlus’ Medicare Advantage plans. With certain
      limited exceptions, the PSN Physicians who provide services to the Humana
      Participating Customers are
      precluded from providing services to CarePlus Participating Customers.
      Accordingly, the PSN must (i) locate and contract with new IPAs and/or (ii)
      acquire or establish and operate its own physician practices to service the
      CarePlus Participating Customers. At December 31, 2007, five IPAs in South
      Florida and one center we own in South Florida, have contracts to provide
      services to the CarePlus Participating Customers.





CarePlus
      directly contracts with CMS and is paid a monthly premium payment for each
      CarePlus Participating Customer. Among other things, the monthly premium varies
      by patient, 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 each CarePlus Plan Customer who selects one of the PSN Physicians
      as
      his or her primary care physician. In return for the provision of these medical
      services, the PSN receives a monthly network administration fee for each
      CarePlus Participating Customer. Upon the earlier of the number of CarePlus
      Participating Customers exceeding 500 in a given calendar month or March 31,
      2008, the PSN will begin receiving a capitation fee for each CarePlus
      Participating Customer and, in connection therewith, the PSN will assume full
      responsibility for the provision of all necessary medical care for each CarePlus
      Participating Customer, even for services we do not provide directly.





*Provider
      Agreements*




At
      December 31, 2007, the PSN has
      contracts with
      thirty-eight IPAs. Contracts
      with twenty-three of these IPAs
      provide for payment 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, a proprietary care
      management model that we implemented in 2002. The contracts with the other
      fifteen IPAs provide for payments on a fee for service basis, pursuant to which
      the provider is paid only for the services provided.





PIQ
      is a
“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 PSNs or Management Service
      Organizations (“MSOs”).





The
      contracts with our IPAs generally have one-year terms and renew automatically
      for one-year periods unless either party provides written notice at least 120
      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 South Florida and Central
      Florida areas
      that are under contract with Humana. These providers have
      contracted with Humana t o
      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.





*Claims
      Processing*




The
      PSN
      does not pay or process any of the payments to its providers. Pursuant to the
      Humana Agreements, Humana, among other things, processes claims received from
      providers, makes a determination 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 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.




-
          14 -




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.




The
      PSN
      is certified as a Utilization Review Agent by AHCA. Utilization review is a
      process whereby multiple data are analyzed and considered to ensure that
      appropriate health services are provided in a cost-effective manner. Factors
      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*




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 its existing geographic
                markets;




·
            acquiring
                existing physician practices; and




·
            acquiring
                other medical service organizations with Humana or CarePlus
                contracts.






*Increasing
      Patient Volume* **






We
      believe the PSN’s existing network of providers has the capacity to care
      for additional H umana  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 patients using the PSN network through the general marketing
      efforts of Humana and through our own targeted marketing efforts towards
      Medicare eligible patients.




*Selectively
      Expanding Its Network*  *of*  *Physician
      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
                geographic proximity to underserved areas within our service regions;
                and





·
            a
                geographic proximity to our current
                operations.





*PSN
      Competition*




We believe
      that there are at least 7 and 20 Medicare Advantage plans in the Central Florida
      and South Florida markets, respectively. It is our understanding that as of
      December 2007 Humana has enrolled in its Medicare Advantage Plans approximately
      50% and 39% of the persons enrolled in Medicare Advantage Plans in Central
      Florida and South Florida, respectively. We also believe that through our PSN
      Physicians we provide medical services to approximately 90% and 5% of the Humana
      Plan Customers in the Central Florida and South Florida markets,
      respectively.





Some
      of
      our direct competitors in the PSN industry, all of which are based and operating
      in Florida, are Continucare Corporation, MCCI, Primary Care Associates, Inc.,
      and Island Doctors. We
      believe that Continucare Corporation, MCCI, and Primary Care Associates, Inc.
      provide PSN services to Humana in South Florida and Island Doctors provides
      PSN
      services to Humana in Central Florida. See
“RISK FACTORS - Our Industry is Already Very Competitive...”




-
          15 -




Health
      Maintenance Organization





Effective
      January 1, 2008, the HMO was offering its Medicare Advantage health plan in
      thirteen Florida counties. Our Medicare Advantage plan covers Medicare eligible
      customers who reside at least six months or more in the service area and offers
      more expansive benefits than those offered under the traditional Medicare
      fee-for-service plan. Through our Medicare Advantage Plan, we have the
      flexibility to offer benefits not covered under traditional fee-for-service
      Medicare. These benefits are designed to be attractive to seniors and include
      prescription drug benefits, eye glasses, hearing aids, dental care,
      over-the-counter drug plans and health club memberships. In addition we offer
      a
“special needs” zero premium, zero co-payment plan to dual-eligible individuals
      in our markets.





During
      2007, the HMO’s Medicare Advantage customers did not pay a monthly premium. In
      some cases, the HMO customers are subject to co-payments and deductibles,
      depending upon the market and benefit. Except
      in
      limited cases, including emergencies, our HMO
      customers are required to use primary care physicians  within
      the HMO’s network of providers  and
      generally must receive referrals from their primary care physician in order
      to
      see a specialist or ancillary providers.





Pursuant
      to the CMS Contract, the HMO has agreed to provide services to Medicare
      beneficiaries pursuant to the Medicare Advantage program. Under the CMS
      Contract, CMS pays the HMO a capitation payment based on the number of customers
      enrolled, which payment is adjusted for demographic and health risk factors.
      Inflation, changes in utilization patterns and average per capita
      fee-for-service Medicare costs are also considered in the calculation of the
      fixed capitation payment by CMS. The initial term of the CMS Contract has been
      renewed to December 31, 2008 and is subject to annual renewal at the election
      of
      CMS. Amounts payable under the CMS Contract are subject to annual revision
      by
      CMS. Pursuant to the CMS Contract, the HMO is required to comply with federal
      Medicare laws and regulations and the CMS contract is subject to termination
      by
      CMS in the event of the HMO’s noncompliance.





The
      amount of premiums we receive for each Medicare customer is established by
      the
      CMS Contract through the competitive bidding process. The premium varies
      according to various demographic factors, including the customer’s geographic
      location, age, and gender, and is further adjusted based on our plans’ average
      risk scores. In addition to the premiums paid to us, the CMS Contract regulates,
      among other matters, benefits provided, quality assurance procedures, and
      marketing and advertising for our Medicare products.





To
      successfully operate the HMO, we believe we will have to continue our
      development and enhancement of the following capabilities, among others: medical
      management, sales and marketing, customer service and regulatory compliance.
      No
      assurances can be given that we will be successful in operating this segment
      of
      our business despite our allocation of a substantial amount of resources for
      this purpose. If the HMO does not develop as anticipated or planned, we may
      have
      to devote additional managerial and/or capital resources to the HMO, which
      could
      limit our ability to manage and/or grow the PSN. There can be no assurances
      that, if for any reason, we elect to discontinue the HMO business and/or seek
      to
      sell such business, we will be able to fully recoup our expenditures to date
      with respect to the HMO business.





*Medical
      Health Services Management and Provider Networks*





One
      of
      our primary goals is to arrange for high quality healthcare services for our
      HMO
      customers. To achieve our goal of ensuring high quality, cost-effective
      healthcare, we have established various quality, disease and utilization
      management programs.





The
      disease management programs are focused on prevention and care and are designed
      to support the coordination of healthcare intervention, physician/patient
      relationships and plans of care, preventive care, and patient empowerment with
      the goal of improving the quality of patient care and controlling related costs.
      These disease management programs are focused primarily on high-risk patient
      management and the treatment of our chronically ill customers and are designed
      to efficiently treat patients with specific high risk or chronic conditions
      such
      as coronary artery disease, congestive heart failure, diabetes, asthma related
      conditions, and certain other conditions. In addition to internal disease
      management efforts, the HMO has engaged disease management companies to educate
      customers on chronic medical conditions, help them comply with medication
      regimens, and counsel customers on healthy lifestyles.




-
          16 -




We
      also
      have implemented utilization and case management programs to seek to provide
      more efficient and effective use of healthcare services by our HMO customers.
      The case management programs are designed to improve outcomes for customers
      with
      chronic conditions through standardization, proactive management, coordinating
      fragmented healthcare systems to reduce duplication, and improve collaboration
      with physicians. These programs monitor hospitalization, coordinate care, and
      ensure timely discharge from the hospital. In addition, the HMO uses internal
      case management programs and contracts with other third parties to manage
      severely and chronically ill patients. The HMO utilizes on-site critical care
      intensivists, hospitalists and concurrent review nurses, who manage the
      appropriate times for outpatient care, hospitalization, rehabilitation or home
      care.





Additionally,
      we internally monitor and evaluate, and seek to enhance, the performance of
      the
      HMO providers. Our related programs include:





**•**
            review
                of utilization of preventive measures and disease/case management
                resources and related outcomes;**•**
            customer
                satisfaction surveys;**•**
            review
                of grievances and appeals by customers and providers;**•**
            orientation
                visits to, and site audits of, select providers;**•**
            ongoing
                provider and customer education programs; and**•**
            medical
                record audits.


As
      more
      fully described below under “Provider Arrangements and Payment Methods,” the
      HMO’s reimbursement methods are also designed to encourage providers to utilize
      preventive care, and the disease and case management services in an effort
      to
      improve clinical outcomes.





We
      believe strong provider relationships are essential to increasing our HMO
      customer base, improving the quality of care to our HMO customers and making
      our
      health plan profitable. We have established comprehensive networks of providers
      in each of the areas the HMO serves. The HMO seeks providers who have experience
      in managing the Medicare population, including experience in providing care
      through a risk-sharing or other relationship with a Medicare Advantage plan.
      Our
      goal is to create mutually beneficial and collaborative arrangements with our
      HMO providers. We believe provider incentive arrangements should not only help
      us attract providers, but also help align their interests with our objective
      of
      providing high-quality, cost-effective healthcare and ultimately encourage
      providers to deliver a level of care that promotes customer wellness, reduces
      avoidable catastrophic outcomes, and improves clinical outcomes.





In
      our
      efforts to improve the quality and cost-effectiveness of heath care for our
      HMO
      customers, we continue to refine and develop new methods of medical management
      and physician engagement. Two such initiatives are currently underway; the
      acute
      care system and post-discharge recovery plan. These initiatives focus on timely
      outreach and close monitoring of customers identified as high-risk or clinically
      unstable and the development of a comprehensive recovery plan to stabilize
      those
      types of customers.





Generally,
      the HMO contracts for pharmacy services through an unrelated pharmacy benefits
      manager, or PBM, who is reimbursed at a discount to the “average wholesale
      price” for the provision of covered outpatient drugs. In addition, the HMO is
      entitled to share in the PBM’s rebates based on pharmacy utilization relating to
      certain qualifying medications.





We
      strive
      to be the preferred Medicare Advantage partner for providers in each market
      the
      HMO serves. In addition to risk-sharing and other incentive-based financial
      arrangements, we seek to promote a provider-friendly relationship by paying
      claims promptly, providing periodic performance and efficiency evaluations,
      providing convenient, web-based access to eligibility data and other
      information, and encouraging provider input on plan benefits. We also emphasize
      quality assurance and compliance by periodically reviewing our HMO’s networks
      and providers. By fostering a collaborative, interactive relationship with
      our
      providers, we are better able to gather data relevant to improving the health
      of
      our customers.




-
          17 -




*Provider
      Arrangements and Payment Methods*




Our
      HMO
      has primarily structured its non-exclusive  provider
      contracts  on
      a
      fee-for-service basis. We may
      also
      supplement provider payments with incentive arrangements based, in general,
      on
      the quality of healthcare delivery. For example, as an incentive to encourage
      our providers to deliver high quality care for their patients and assist us
      with
      our quality assurance and medical management programs, we seek to implement
      incentive arrangements whereby we compensate our providers for “quality
      performance,” for specified preventive health services and additional payments
      for providing specified encounter data on a timely basis. We also seek to
      implement financial incentives relating to other operational matters where
      appropriate.




In
      some
      cases, particularly with respect to contracts between hospitals or health care
      systems and our HMO, we may be at risk for medical expenses above and beyond
      a
      negotiated amount (a so-called “stop loss” provision), which amount is typically
      calculated by reference to a percentage of billed charges, in some cases back
      to
      the first dollar of medical expense. In the case of a Medicare patient who
      is
      admitted to a non-contracting hospital, we are only obligated to pay the amount
      that the hospital would have received from CMS under traditional fee-for-service
      Medicare.





We
      believe our incentive arrangements with physicians help to align their interests
      with those of the HMO and with those of our customers by improving both clinical
      and financial outcomes. We will continue to seek to implement these arrangements
      where possible in our HMO’s existing and new service areas.




*Management
      Services*




The
      HMO
      has engaged a third party service provider, HF Administrative Services, Inc.
      (“HFAS”), to provide various administrative and management services, including,
      but not limited to, claims processing and adjudication, certain management
      information services, and customer services pursuant to the terms of an
      Administrative Services Agreement (the “Services Agreement”).




The
      HMO
      compensates HFAS for its management services based upon the number of customers
      enrolled in the HMO, subject to various monthly minimum payments. The minimum
      monthly fee was $25,000 per month through July 2007 which increased to $60,000
      per month for the remaining term of the Services Agreement. In addition, HFAS
      is
      compensated for providing additional programming services on an hourly basis.
      The initial term of the Services Agreement is for five years ending on June
      30,
      2010. Thereafter, the Services Agreement is automatically renewable for
      additional one-year terms unless terminated by either party for any reason
      upon
      180 days notice. During 2007 and 2006, we paid an aggregate of $1.2 million
      and
      $751,000 to HFAS for services in accordance with the Services
      Agreement.




Pursuant
      to the Services Agreements, HFAS verifies claims by the HMO’s affiliated
      providers against the HMO’s policies regarding customer eligibility, benefits,
      referrals and pre-authorizations and makes a determination whether and to what
      extent to allow such claims using the HMO’s guidelines. HFAS provides notice to
      the HMO of claim denials. The HMO has the right and responsibility within three
      business days of receipt of a claim denial to independently review such claim
      and approve, deny or modify the claim, as appropriate. The HMO has access to
      the
      management information systems provided and maintained by HFAS for its benefit.
      In addition, HFAS is required under the Services Agreement to provide the HMO
      with reports and information regarding claim adjudication.




Either
      party may terminate the Services Agreement upon prior written notice (with
      a 30
      day opportunity to cure) in the event of the other’s material breach of the
      Services Agreement in any manner, including but not limited to, the HMO’s
      failure to maintain sufficient funds in order for HFAS to pay claims, or in
      the
      event the HMO engages in or acquiesce to any act of bankruptcy, receivership
      or
      reorganization or in the event either party fails to secure any license,
      government approval or exemption required by law. See “RISK FACTORS - We Depend
      on Third Parties to Provide Us Crucial Information and Data.”




*Sales
      and Marketing Programs*




As
      of
      December 31, 2007, the
      HMO ’s
      sales
      force consists of internally licensed sales employees and third party agents. The third
      party agents are compensated on a commission basis. Medicare Advantage
      enrollment is generally an individual decision made by the customer. Our
      sales
      and marketing programs are tailored to each of our local service areas and
      are
      designed with the goal of educating, attracting, and retaining customers and
      providers. We regularly participate in local community health fairs and events,
      and seek to become involved with local senior citizen organizations to promote
      our products and the benefits of preventive care. In addition , the
      HMO ’s
      sales
      agents and representatives focus their efforts on in-person contacts with
      potential enrollees.  The
      HMO’s marketing efforts
      also utilize direct mail and print advertising.




-
          18 -




Medicare
      Advantage sales and marketing activities are heavily regulated by CMS and other
      governmental agencies. For example, CMS has oversight over all marketing
      materials used by Medicare Advantage plans and imposes advance approval
      requirements with respect to marketing materials. Our sales activities are
      limited to activities such as conveying information regarding the benefits
      of
      preventive care, describing the operations of managed care plans, and providing
      information about eligibility requirements. The activities of our sales agents
      and third-party brokers are also heavily regulated.




Prior
      to
      2006, Medicare beneficiaries could enroll in or change health plans at any
      time
      during the year. Commencing in 2006, Medicare beneficiaries have a limited
      annual enrollment period during which they can choose between a Medicare
      Advantage plan and traditional fee-for-service Medicare. After this annual
      enrollment period ends, generally only seniors turning 65 during the year,
      dual-eligible beneficiaries, Low-Income Subsidy beneficiaries, others who
      qualify for special needs plans, Medicare beneficiaries permanently relocating
      to another service area, and employer group retirees will be permitted to enroll
      in or change health plans. See “Industry - The Medicare Modernization Act -
      Enrollment Period.”





*Quality
      Assurance*





The
      HMO
      has implemented processes designed to ensure compliance with regulatory and
      accreditation standards. Internal programs that credential providers are
      designed to help ensure we meet the audit standards of federal and state
      agencies, including CMS and AHCA, as well as applicable external accreditation
      standards.




Our
      providers must satisfy specific criteria, such as licensing, credentialing,
      patient access, office standards, after-hours coverage, and other factors.
      Our
      participating hospitals must also meet specific criteria, including
      accreditation criteria established by CMS.




*HMO* *Competition*




The
      Medicare Advantage market is highly competitive. The recent changes in Medicare
      reimbursement have resulted in and may continue to result in new plans entering
      the market or existing plans expanding into new markets or increasing sales
      and
      marketing efforts. These changes may also result in the development of different
      models, such as Preferred Provider Organizations that could impact the growth
      of
      the HMO. There are a number of Medicare Advantage plans being offered to
      Medicare beneficiaries in the thirteen Florida counties where the HMO operates
      including plans being offered by Coventry Health Care, Well Care Health Plans,
      Universal Healthcare and Quality Health Plan. As of January 1, 2007, we estimate
      that we have enrolled approximately .9% of the Medicare eligible customers
      in
      the counties served by the HMO. See “RISK FACTORS - Our Industry is Already Very
      Competitive...”




We
      believe that our HMO has certain strengths which make it competitive within
      the
      markets we serve including, but not limited to:




·
            Our
                strong network of physicians and hospitals that provide medical care
                to
                our customers.




·
            Our
                management experience in non urban Florida counties.




·
            Our
                Partners-In-Quality program which rewards physicians for providing
                quality
                care to our customers.




**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 of **** certain
      customer **** medical
      expenses. ****  Our
      deductible per customer per year was $125,000 for the HMO for the first 6 months
      of 2007 and $150,000
      thereafter, with a maximum benefit per customer per policy period of $1,000,000.
      For the PSN the deductibles for 2007 were $40,000 in South Florida and $140,000
      in Central Florida, with a maximum benefit per customer per policy period of
      $1,000,000. The deductible for the PSN increased to $200,000 in Central Florida
      as of January 1, 2008. 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 "RISK
      FACTORS - Claims Relating to Medical Malpractice and Other
      Litigation...."




-
          19 -




**Employees**




As
      of
      December 31, 2007, we had 199 full-time employees, 19 of which are on the
      corporate staff at our executive offices and 119 and 61 are employed by the
      PSN
      and the HMO, respectively. 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
      businesses are 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. 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, HMO customers, affiliated providers and the
      public. The government agencies administering these laws and regulations have
      broad latitude to 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 Will
      Materially Impact Our Operations...”, “CMS Risk Adjustment Payment System...”, “Our
      Business Activities Are Highly Regulated...”, “The Healthcare Industry is Highly
      Regulated...”, “If the HMO Is Required to Maintain Higher Statutory Capital
      Levels...” 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.




*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 government
      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 HMO or the PSN) and the entities with which a health care provider does
      business. Many of these laws cover health care plans like the HMO and the
      PSN.




-
          20 -


*Federal
      Anti-Kickback Law*




The
      federal Anti-Kickback Law makes it a criminal felony offense to knowingly and
      willfully offer, pay, solicit or receive remuneration in order to induce
      business for which reimbursement is provided under federal health care programs,
      including without limitation, the Medicare and Medicaid programs. Violations
      of
      these laws are punishable by monetary fines, civil and criminal penalties,
      exclusion from care programs and forfeiture of amounts collected in violation
      of
      such laws. The scope of prohibited payments covered by the Anti-Kickback Law
      is
      broad and includes economic arrangements involving hospitals, physicians and
      other health care providers, including joint ventures, space and equipment
      rentals, purchases of physician practices and management and personal services
      contracts.




*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 provides, in part, that the federal government may
      bring a lawsuit against any person or entity whom it believes has knowingly
      presented, or caused to be presented, a false or fraudulent request for payment
      from the federal government, or who has made a false statement or used 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 may be
      considered a violation of the federal False Claims Act. 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.




*Florida
      Fraud and Abuse Regulations*




Florida
      enacted “The Patient Brokering Act” which imposes criminal penalties, including
      jail terms and fines, for receiving or paying any commission, bonus, rebate,
      kickback, or bribe, directly or indirectly in cash or in kind, or engage 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*





Federal
      regulations under the Social Security Act that restrict physician referrals
      to
      health care entities with which they have financial relationships (commonly
      referred to as the “Stark Law”) prohibit certain patient referrals by
      physicians. Specifically, the Stark Law prohibits a physician, or an immediate
      family customer, who has a financial relationship with a health care entity,
      from referring Medicare patients with limited exceptions, to that entity for
      certain “designated health services”. A financial relationship is defined to
      include an ownership or investment in, or a compensation relationship with,
      a
      health care entity. The Stark Law also prohibits a health care entity receiving
      a prohibited referral from billing the Medicare or Medicaid programs for any
      services rendered to a patient as a result of the prohibited referral. The
      Stark
      Law contains certain exceptions that protect parties from liability if the
      parties comply with all of the requirements of the applicable exception. The
      sanctions under the Stark Law include denial and refund of payments, civil
      monetary penalties and exclusions from participation in the Medicare
      programs.





Since
      the
      Stark Law’s enactment, the law and its associated regulations have been the
      subject of substantial administrative rulemaking by CMS. The most recent
      guidance was issued in September of 2007, with an effective date of December
      4,
      2007, and, like CMS’s previous interpretative documents, substantially altered
      the generally understood meanings of the Stark Law and, more importantly,
      certain of the regulatory exceptions, in some cases making impermissible
      arrangements that were previously thought to be safely within the scope of
      a
      Stark Law exception.




-
          21 -




*Privacy
      Laws* **





The
      privacy, security and transmission of health information is subject to federal
      and state laws and regulations, including the Healthcare Insurance Portability
      and Accountability Act of 1996 (“HIPAA”). 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. HIPAA 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 certain health care providers 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.





*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.





*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 the Company for their health care.





*State
      Regulation*





The
      HMO
      is subject to the rules, regulations and oversight by the OIR and AHCA in the
      areas of licensing and solvency. The HMO files reports with these state agencies
      describing its capital structure, ownership, financial condition, certain
      inter-company transactions and business operations. It also is generally
      required to demonstrate, among other things, that it has an adequate provider
      network, that its systems are capable of processing provider’s claims in a
      timely fashion and of collecting and analyzing the information needed to manage
      their business. State regulations also require the prior approval or notice
      of
      acquisitions or similar transactions involving a HMO, and of certain
      transactions between a HMO and its parent or affiliated entities or persons.
      Generally, HMOs are limited in their ability to pay dividends to their
      stockholders.





The
      HMO
      is required to maintain a minimum level of statutory capital. These requirements
      assess the capital adequacy of a HMO based upon investment asset risks,
      insurance risks, interest rate risks and other risks associated with its
      business to determine the amount of statutory capital believed to be required
      to
      support the HMO’s business. If the HMO’s statutory capital level falls below
      certain required capital levels, it may be required to submit a capital
      corrective plan to the state office of Insurance Regulation, and at certain
      levels may be subjected to regulatory orders, including regulatory control
      through rehabilitation or liquidation proceedings.




-
          22 -




**Our
      Executive Officers**




Set
      forth
      below are: (1) the names and ages of our executive officers at March 1,
      2008, (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**
            
            **Position**Michael
                M. Earley
            
            52
            
            Chairman
                and Chief Executive OfficerRobert
                J. Sabo, CPA
            
            57
            
            Chief
                Financial OfficerJose
                A. Guethon, M.D.
            
            45
            
            President
                of PSNRoberto
                L. Palenzuela, Esq.
            
            44
            
            General
                Counsel and Secretary





**MICHAEL
      M. EARLEY** has
      served as our Chairman and Chief Executive Officer since March 2003 and was
      appointed Chairman of the Board in September 2004. 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 2006, 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.





**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 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 was 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.





**JOSE
      A. GUETHON, M.D.** has
      served as President of the PSN since January 2006. 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 2005 and as Chief Medical Officer of our HMO from January 2005
      through December 2005. 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 service 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.




***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.




-
          23 -





***ITEM
      1A. RISK FACTORS***




***Our
      Operations are Dependent on Humana, Inc.***




The
      PSN
      currently derives, and expects to continue to derive, substantially all of
      its
      revenue from its Humana Agreements which provide for the receipt of capitation
      fees. For the twelve months ended December 31, 2007, approximately 99.4% of
      the
      PSN total revenue and 79.7% of our consolidated revenue was obtained through
      these Humana Agreements. Humana may immediately terminate either 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
      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 operation.




***There
      Can be No Assurance that We Will be Successful in Our Operation of the
      HMO.***




Although
      we have operated as a risk provider since 1997, we have only operated the HMO
      since July 1, 2005. While the HMO's business has continued to grow, such growth
      has required and is expected to continue to require a considerable amount of
      capital. In the year ended December 31, 2007, the HMO's business generated
      a
      $10.5 million segment loss before allocated overhead and income taxes. We
      contributed approximately $14.2 million to the HMO during 2007, including $6.5
      million relating to the HMO’s operations in 2006. In addition, we will
      contribute another $1.5 million by March 31, 2008 to fund the 2007 operations
      and growth. We
      project that in 2008, the HMO's business will continue to generate a loss before
      allocated overhead and income taxes. The HMO’s actual cash needs and losses for
      2008 are expected to be strongly influenced by, among other things, the HMO’s
      membership levels and medical expense utilization rates as wells as the cost
      and
      effectiveness of various marketing programs we may undertake. We are not in
      a
      position to meaningfully estimate when, if ever, the HMO's business will become
      profitable and/or generate cash from operations, and we may be required to
      fund
      the development and expansion of the HMO business, including any associated
      losses, for an extended period of time. Nonetheless, we anticipate that the
      on-going development efforts, reserve requirements and operating costs for
      our
      still developing HMO business can be funded by our current resources and
      projected cash flows from operations until at least December 31,
      2008.





To
      successfully operate the HMO, we believe we will need to continue to implement
      measures to reduce the HMO’s medical expenses and other operating costs as a
      percentage of revenue and continue to develop and enhance the following
      capabilities, among others: sales and marketing, medical management, customer
      service and regulatory compliance. No assurances can be given that we will
      be
      successful in such endeavors or in operating this segment of our business
      despite our allocation of a substantial amount of resources for this purpose.





If
      the
      HMO does not develop as anticipated or planned, we would likely explore
      strategic alternatives for the business and/or devote additional managerial
      and/or capital resources to the HMO. There can be no assurances that, if for
      any
      reason, we elect to discontinue the HMO business and/or seek to sell such
      business, we will be able to fully recoup our expenditures to date with respect
      to the HMO business.





The
      failure of the HMO to develop and perform as projected could also limit our
      ability to manage and/or grow the PSN. Most of our senior management team
      provides management, support and assistance to both the HMO and the PSN. To
      the
      extent one business consumes a higher than anticipated amount of our executive
      resources, the other business could suffer.





In
      our
      contract with CMS we commit to provide various healthcare services for a year
      long period and we must notify CMS by June if we intend not to renew a contract
      term that commences in January. Accordingly, even if we deemed it economically
      necessary or desirable to scale back or discontinue operations in one or more
      HMO service areas, our financial and service commitments to CMS and our
      customers might preclude us from doing so at the desired date, which would
      likely increase our losses associated with such service area. Moreover, we
      believe there are certain inherent economies of scale associated with our
      business. Accordingly, any individual decision to scale back or discontinue
      operations in even part of one service area could have a disproportionately
      large negative effect on our results of operations.




-
          24 -




Because
      we must elect whether or not to renew our contracts with CMS approximately
      six
      months before a service period commences, our ability to accurately project
      the
      results of future operations for at least 18 months is very important. Because
      of the short history of the HMO, it is difficult to accurately make long term
      projections regarding the HMO business. We have found it difficult to precisely
      budget our customer growth and medical expenses. Although we have implemented
      a
      strategy to improve our ability to reduce these planning impediments, we
      recognize that they may remain significant obstacles to our ability to project
      the results of the HMO business.





***Because
      Most 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 and the CMS Contract are risk  agreements
      under which we receive  monthly
      payments for each Humana Participating Customer and each customer enrolled
      in
      our HMO (collectively, the “Participating Customers”) 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 Participating Customers, regardless of the actual utilizatio n
      rate of
      covered services. In return, the PSN or the HMO, as applicable, through its
      affiliated providers, assumes full financial responsibility for the provision
      of
      all necessary medical care to the Participating Customers, regardless of whether
      or not its affiliated providers directly provide the covered medical
      services.




To
      the
      extent that the Participating Customers require more care than is anticipated,
      aggregate capitation rates may be insufficient to cover the costs associated
      with the treatment of such 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.




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, or IBNR, 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.




We
      attempt to control these costs through a variety of techniques, including
      capitation and other risk-sharing payment methods, collaborative relationships
      with primary care physicians and other providers, advance approval for hospital
      services and referral requirements, case and disease management and quality
      assurance programs, information systems, and reinsurance. Despite our efforts
      and programs to manage our medical expenses, we may not be able to continue
      to
      manage these expenses effectively in the future.




***If
      Our HMO Contracts Are Not Renewed or Are Terminated, the HMO’s Business Would Be
      Negatively Impacted.***




A
      new CMS
      Contract was entered into effective January 1, 2008 and expires on December
      31,
      2008. Pursuant to the CMS Contract, the HMO is required to comply with federal
      Medicare laws and regulations, and the CMS Contract is subject to termination
      by
      CMS in the event of the HMO’s noncompliance. If the HMO is unable to renew or to
      successfully rebid for the CMS Contract, or if the CMS
      Contract is terminated, its business would be negatively impacted.




-
          25 -




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





Medical
      claims expense include 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. 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.





***Reductions
      in Government Funding for Medicare Programs Could Adversely Affect Our Results
      of Operations***




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,
      retroactive and prospective 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
      such as Humana, have taken and may continue to take steps to control the cost,
      use and delivery of health care services. Any changes that limit or reduce
      Medicare reimbursement levels could have a material adverse effect on our
      business. For example, the following events could result in an adverse effect
      on
      our results of operations:




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


·
            reductions
                in funding of programs;


·
            expansion
                of benefits without adequate
                funding;


·
            elimination
                of coverage for certain benefits;
                or


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




***The
      MMA Materially Impacted Our Operations and Could Reduce Our Profitability and
      Increase Competition for Customers.***




The
      MMA
      substantially changed the Medicare program and is complex and wide-ranging.
      While many of these changes have generally benefited and are expected to
      continue to benefit the Medicare Advantage sector, certain provisions of the
      MMA
      have increased competition, created challenges with respect to educating the
      PSN’s and the HMO’s existing and potential customers about the changes, and
      created other risks and substantial and potentially adverse uncertainties,
      including the following:





·
            Increased
                reimbursement rates for Medicare Advantage plans could continue to
                result
                in a further increase in the number of plans that participate in
                the
                Medicare program. This could create new competition that could adversely
                affect the number of customers the PSN or the HMO serve and their
                respective results of operations.





·
            Managed
                care companies began offering various new products in 2006 pursuant
                to the
                MMA, including regional preferred provider organizations, or 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 MMA 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 or HMO’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 directly or indirectly cause
                the
                PSN and/or the HMO to decrease the amount of premiums paid to it
                or cause
                it to increase the benefits it
                offers.




-
          26 -


·
            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. This “lock-in”
                may make it difficult for the HMO to retain an adequate sales force.
                The
                new annual enrollment process and subsequent “lock-in” provisions of the
                MMA may adversely affect our level of revenue growth as it will limit
                the
                HMO’s ability to market to and enroll new customers in its established
                service areas outside of the annual enrollment period. Such limitations
                could adversely and materially affect our profitability and results
                of
                operations.





·
            Managed
                care companies that offer Medicare Advantage plans are required to
                offer
                prescription drug benefits as part of their Medicare Advantage plans.
                Managed care plans offering drug benefits are, under the new law,
                called
                MA-PDs. 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
                new Medicare Part D prescription drug benefit could reduce Participating
                Customer enrollment and revenue.




***CMS’s
      Risk Adjustment Payment System and Budget Neutrality Payment Adjustments Make
      Our Revenue and Profitability Difficult to Predict and 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 incentives for Medicare plans
      to
      enroll and treat less healthy Medicare beneficiaries. CMS has been phasing-in
      this payment methodology, which uses a risk adjustment model that bases a
      portion of the total CMS reimbursement payments on various clinical and
      demographic factors. These factors include hospital inpatient diagnoses,
      diagnostic data from ambulatory treatment settings, including hospital
      outpatient facilities and physician visits, gender, age, and Medicaid
      eligibility. CMS requires that all managed care companies capture, collect,
      and
      submit the necessary diagnosis code information to CMS twice a year for
      reconciliation with CMS’s internal database. As part of the phase-in, during
      2003, risk adjusted payments accounted for 10% of Medicare health plan payments,
      with the remaining 90% being reimbursed in accordance with the traditional
      CMS
      demographic rate books. The portion of risk adjusted payments was increased
      to
      30% in 2004, 50% in 2005, and 75% in 2006 and to 100% in 2007 and beyond. As
      a
      result of this process, it is difficult to predict with certainty our future
      revenue or profitability. In addition, the HMO’s and/or Humana’s risk scores for
      any period may result in favorable or unfavorable adjustments to the payments
      directly or indirectly received from CMS and our Medicare premium revenue.
      There
      can be no assurance that our contracting physicians and hospitals will be
      successful in improving the accuracy of related recording diagnostic code
      information and thereby enhancing its risk scores.




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 2005, 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, dependent on the HMO’s and
      Humana’s risk scores.




***A
      Disruption in Our Healthcare 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.




-
          27 -




***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 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.





***We
      Depend on Third Parties 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.




The
      HMO
      relies on HFAS ,
      a third
      party service provide r,
      to provide
      various administrative and management services, including, but not limited
      to,
      claims processing and adjudication, certain management information services,
      and
      customer services pursuant to the terms of the Services Agreement.





Because
      these services are outsourced as opposed to performed internally , we
      have less
      control over the manner in which these matters are handled and the accuracy
      and
      timeliness of the data provided to us than if we handled these functions
      internally. Additionally, any loss of information by Humana
      or HFAS could have a material adverse effect on our business and the results
      of
      its operations.





***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 or the HMO involved in medical care decisions may be
      exposed to the risk of medical malpractice claims. A small percentage 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
      and/or HMO 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. Similar to other managed care
      companies, the HMO may also be subject to other claims of its customers in
      the
      ordinary course of business, including claims arising out of decisions to deny
      or restrict reimbursement for services.




We
      cannot
      predict with certainty the eventual outcome of any pending litigation or
      potential future litigation, and there
      can
      be no assurances ** that
      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.




-
          28 -




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. T here
      can
      be no assurances ** that
      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 ourself 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
      Affec*** ***t
      Our Revenue; the PSN Competes with Other Service Providers for Humana’s
      Business.***




We
      compete in the highly competitive and regulated health care industry, which
      is
      subject to continuing changes with respect to the provisioning of services
      and
      the selection and compensation of providers. In 2007, approximately 79.7% of
      our
      revenue was generated pursuant to the Humana Agreements. Humana competes with other health plans in securing and serving
      patients in the Medicare Advantage Program. Companies in other health care
      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
      or
      the HMO. For example, Healthspring and Coventry Health Plans, both based outside
      of Florida, have recently announced acquisitions of health plans in Florida.
      Humana and the HMO may not be able to continue to compete effectively in the
      health care industry if additional competitors enter the same
      market.




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 Continucare
      Corporation, Primary Care Associates, Inc., MCCI and Island Doctors, all based
      and operating in Florida. We believe that Continucare Corporation, Primary
      Care
      Associates, Inc. and MCCI provide PSN services to Humana in South Florida and
      Island Doctors provides PSN services to Humana
      in
      Central Florida. Additionally, companies in other health care 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 health care 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/or the
      HMO and have
      significantly greater financial, sales and marketing, and other
      resources .
      We
      believe that most of our competitors also have more experience operating as
      an
      HMO and that
      these competitors may be able to respond more rapidly to changes in the
      regulatory environment in which they operate and changes in managed care
      organization business or to devote greater resources to the development and
      promotion of their services than we can. Furthermore, it is our belief that
      some
      of our competitors may make strategic acquisitions or establish cooperative
      relationships among themselves.




***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 employment contracts with certain executive officers and key management
      personnel, these agreements may not provide sufficient incentive for these
      persons to 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.




-
          29 -




***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;


·
            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
      Health Care 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
      health care 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 are generally aimed at protecting
      patients and federal health care programs and not our shareholders, 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 the 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 or the HMO’s right to directly or indirectly participate in
                the Medicare program;


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


·
            forfeiture
                or recoupment of amounts the PSN and/or the HMO 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 or the HMO’s products and
                services; and


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




The
      U.S. Department of Health and Human Services Office of the Inspector
      General, Office of Audit Services, or OIG, conducts reviews of Medicare
      Advantage plans to determine whether they have applied payment increases
      consistent with the requirements of the MMA. Under the MMA, when a Medicare
      Advantage plan receives a payment increase, it must reduce beneficiary premiums
      or cost sharing, enhance benefits, put additional payment amounts in a benefit
      stabilization fund, or use the additional payment amounts to stabilize or
      enhance access. There can be no assurances that the findings of an audit or
      investigation of our business would not have an adverse effect on us or require
      substantial modifications to our operations. In addition, private citizens,
      acting as whistleblowers, are entitled to bring enforcement actions under a
      special provision of the federal False Claims Act.




-
          30 -




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.




***If
      the HMO Is Required to Maintain Higher Statutory Capital Levels for Our Existing
      Operations or if We Are Subject to Additional Capital Reserve Requirements
      as We
      Pursue New Business Opportunities, Our Liquidity May Be Adversely
      Affected.***




The
      HMO
      is subject to state regulations that, among other things, require the
      maintenance of minimum levels of statutory capital, or net worth, and restrict
      the payment of dividends without appropriate regulatory notification and
      approvals.




At
      December 31, 2007, all of the HMO’s cash and cash equivalents are subject to the
      restriction on the payment of dividends. The State of Florida may raise the
      statutory capital level from time to time. Other states have adopted risk-based
      capital requirements based on guidelines adopted by the National Association
      of
      Insurance Commissioners, which tend to be, although are not necessarily, higher
      than existing statutory capital requirements. Regardless of whether Florida
      adopts risk-based capital requirements, the Florida Office of Insurance
      Regulation can require the HMO to maintain minimum levels of statutory capital
      in excess of amounts required under the applicable state laws if it determines
      that maintaining additional statutory capital is in the best interests of the
      HMO’s customers. Any increases in these requirements could materially increase
      our reserve requirements. In addition, as we continue to expand plan offerings
      in Florida or pursue new business opportunities, the HMO may be required to
      maintain additional statutory capital reserves. In either case, available funds
      could be materially reduced, and we could have less capital available to our
      PSN
      business operations, both of which could harm our ability to implement our
      business strategy.




***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.




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.




***Rec*** ***ent
      Challenges Faced by CMS*** ***Related to Implementation of Part D May Temporarily Disrupt or Adversely*** ***Affect
      the PSN’s and the HMO’s Relationships with their*** ***Respective*** ***Customers.***




Partially
      in anticipation of the implementation of Part D, CMS transitioned to new
      information and reporting systems, which has generated confusing and, we believe
      in some cases, erroneous customer and payment reports concerning Medicare
      eligibility and enrollment, most of which we believe reflects inadvertently
      disenrolled dual-eligible and other beneficiaries who were already customers
      of
      our PSN or HMO. In addition, media reports have been prevalent concerning the
      confusion caused by failures in systems and reporting for Part D,
      particularly as these failures adversely affect the access of dual-eligibles
      and
      low-income beneficiaries to their prescription drugs. These developments could
      cause us to experience short-term disruptions in our operations and challenge
      our information and communications systems which could temporarily disrupt
      or
      adversely affect the PSN’s or the HMO’s relationships with their respective
      customers, resulting in a reduction of our customer base and adversely affecting
      our operating results.




-
          31 -




***We
      May Be Unsuccessful in Implementing Our Growth Strategy If We Are Unable to
      Expand into New Service Areas in a Timely Manner in Accordance with Our
      Strategic Plans.***




Our
      strategy is to continue to focus on growth within certain geographic regions
      of
      Florida. Continued growth may impair our ability to manage
      existing operations and p rovide
      services efficiently and
      to
      manage our employees adequately .
      Future
      results of operations could be materially adversely affected if we are unable
      to
      manage growth efforts effectively.




We
      are
      seeking to continue to increase the PSN and the HMO customer base and to expand
      to new service areas within our existing markets and in other
      markets.




We
      are
      likely to incur additional costs if the PSN or the HMO enters service areas
      where it does not currently operate. Our rate of expansion into new geographic
      areas may also be limited by:




·
            the
                time and costs associated with obtaining an HMO license to operate
                in a
                new area or expanding the HMO’s licensed service area, as the case may
                be;





·
            the
                PSN and/or the HMO’s inability to develop a network of physicians,
                hospitals, and other healthcare providers that meets their respective
                requirements and those of the applicable
                regulators;





·
            competition,
                which could increase the costs of recruiting customers, reduce the
                pool of
                available customers, or increase the cost of attracting and maintaining
                providers;





·
            the
                cost of providing healthcare services in those
                areas;





·
            demographics
                and population density; and





·
            the
                annual enrollment period and lock-in provisions of the
                MMA.





***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;





·
            special
                meetings of shareholders may be called only by the Chairman of the
                Board
                of Directors, the President or by the Board of Directors pursuant
                to a
                resolution adopted by a majority of the
                directors;





·
            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.





-
          32 -


***Our
      Quarterly Results Will Likely Fluctuate, Which Could Cause the Value of Our
      Common Stock to Decline.***




We
      are
      subject to quarterly variations in medical expenses due to sometimes pronounced
      fluctuations in patient utilization. We have significant fixed operating costs
      and, as a result, are highly dependent on patient utilization to sustain
      profitability. Our results of operations for any quarter are not necessarily
      indicative of results of operations for any future period or full year. For
      example, we usually experience a greater use of medical services in the winter
      months. As a result, our results of operations may fluctuate significantly
      from
      period to period, which could cause the value of our Common Stock to decline.




***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, 2007, there were approximately 51.6 million shares o f
      our
      Common Stock outstanding, all of which are freely tradable without restriction
      or tradable in accordance with Rule 144 of the Securities Act ** with
      the
      exception of
      approximately 5.8 million share s,
      owned
      by certain of our officers, director s
      and
      affiliates which
      may be sold publicly at any time subject to the volume and
      other
      restrictions promulgated pursuan t
      to Rule
      144 of the Securities Act and subject to legal restrictions such as insider
      trading laws. In
      addition, as of December 31, 2007, approximately 3.9 million shares
      o f
      our
      Common Stock were reserved for issuance upon the exercise of options which
      were
      previously granted and 355,000 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.




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 AMEX Would Adversely Affect Us and Our
      Shareholders.***




Our
      Common Stock is listed on the AMEX. To maintain listing of securities, the
      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 AMEX. If our Common Stock is delisted from trading on 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 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 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.




-
          33 -




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




None.


**ITEM 2** **PROPERTIES**




Our
      principal executive office is located at 250 Australian Avenue South, Suite
      400,
      West Palm Beach, Florida where we occupy 18,100 square feet at a current monthly
      rent of approximately $24,800 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 $9,100 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 $45,600
      pursuant to lease agreements with expiration dates ranging from one to six
      years
      from December 31, 2007.




The
      HMO
      leases three offices with aggregate monthly rental payments of $13,600 pursuant
      to lease agreements with expiration dates ranging from two to four years from
      December 31, 2007.


**ITEM 3** **LEGAL
        PROCEEDINGS**




On
      March
      13, 2007, a complaint was filed by Mr. Noel Guillama, who served as our
      President, Chairman of the Board and Chief Executive Officer from January 1996
      through February 2000, in the Circuit Court of the Fifteenth Judicial Circuit
      in
      and for Palm Beach County, naming us as a defendant. The dispute involves
      1,500,000 restricted shares of common stock issued to Mr. Guillama in connection
      with his personal guarantee of a Company line of credit in 1999. We repaid
      the
      line of credit and expected, based on documentation signed by Mr. Guillama,
      the
      1,500,000 shares issued as collateral to be returned to us. Mr. Guillama alleges
      that we breached an agreement to remove the transfer restrictions from these
      shares and is seeking damages for breach of contract and specific performance.
      We believe this lawsuit is without merit and intend to assert an appropriate
      defense. We filed a motion to dismiss the complaint in May 2007. The suit has
      been dormant since we have filed the motion to dismiss. These shares have not
      been reflected as issued or outstanding in the accompanying consolidated balance
      sheets or in the computations of earnings per share.





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 is 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, 2007. ****




-
          34 -




**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 American Stock Exchange under the
        symbol
“MDF”. The following table sets forth the high and low sales prices for our
        Common Stock, as reported by American Stock Exchange, for each full quarterly
        period within the two most recent years:
  **High**
              
              **Low****($)**
              
              **($)****COMMON
                  STOCK**Quarter
                  ended March 31, 2006
              
              $
              2.46
              
              $
              1.82Quarter
                  ended June 30, 2006
              
              $
              2.79
              
              $
              1.94Quarter
                  ended September 30, 2006
              
              $
              2.86
              
              $
              2.21Quarter
                  ended December 31, 2006
              
              $
              3.39
              
              $
              2.12Quarter
                  ended March 31, 2007
              
              $
              3.13
              
              $
              1.99Quarter
                  ended June 30, 2007
              
              $
              2.00
              
              $
              1.68Quarter
                  ended September 30, 2007
              
              $
              2.33
              
              $
              1.66Quarter
                  ended December 31, 2007
              
              $
              2.57
              
              $
              2.21
  At
        March
        1, 2008 we believe we had approximately 3,695 beneficial shareholders.
  *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. We presently intend to invest our earnings, if any, in the development
        and growth of our operations.
  *Equity
        Compensation Plans*
  The
        following table provides certain information regarding our existing equity
        compensation plans as of December 31, 2007:
  **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**
                **equity compensation**
                **plans**Equity
                  compensation plans approved by security holders
              
              
              3,887,062
              
              $
              1.53
              
              
              **2,503,176**
  -
            35 -
  *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, 2002 and assume an
        investment of $100 on that date and the reinvestment of dividends paid since
        that date.
 
 Metropolitan Health Networks
  **12/02**
              
              **12/03**
              
              **12/04**
              
              **12/05**
              
              **12/06**
              
              **12/07****Metropolitan
                  Health Networks, Inc.**
              
              **$**
              **100.00**
              
              **$**
              **447.06**
              
              **$**
              **1,664.71**
              
              **$**
              **1,411.76**
              
              **$**
              **1,800.00**
              
              **$**
              **1,405.88****NASDAQ
                  Composite**
              
              
              **100.00**
              
              
              **149.34**
              
              
              **161.86**
              
              
              **166.64**
              
              
              **186.18**
              
              
              **205.48****NASDAQ
                  Health Services**
              
              
              **100.00**
              
              
              **135.61**
              
              
              **168.24**
              
              
              **184.41**
              
              
              **186.06**
              
              
              **181.42****SIC
                  Code 8000 - 8099 Health Services**
              
              
              **100.00**
              
              
              **128.89**
              
              
              **146.12**
              
              
              **152.18**
              
              
              **161.14**
              
              
              **153.16**
  -
            36 -
 
 **ITEM 6**
              **SELECTED
                  FINANCIAL DATA**
  Set
        forth
        below is our selected historical consolidated financial data for the five
        years
        ended December 31, 2007. 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, 2003, 2004 and 2005 are derived from our
        audited consolidated financial statements which have been audited by Kaufman,
        Rossin & Co., P.A. The consolidated statement of operations data and balance
        sheet data as of and for the years ended December 31, 2006 and 2007 are derived
        from our audited consolidated financial statements which have been audited
        by
        Grant Thornton LLP, our independent registered public accounting
        firm.
 
 **For
                  the years ended December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Statement
                  of Operations Data**Revenue
              
              $
              277,577,289
              
              $
              228,216,073
              
              $
              183,765,191
              
              $
              158,069,791
              
              $
              143,874,488Operating
                  income (loss)
              
              $
              8,071,571
              
              $
              (232,952
              )
              $
              3,232,678
              
              $
              11,855,915
              
              $
              7,106,428Income
                  from continuingoperations
                  before income taxes
              
              $
              9,440,738
              
              $
              825,561
              
              $
              3,849,549
              
              $
              11,473,732
              
              $
              5,861,303Income
                  from continuingoperations
              
              $
              5,913,998
              
              $
              472,561
              
              $
              2,381,743
              
              $
              18,853,978
              
              $
              5,861,303Loss
                  of discontinued operations, net of tax
              
              
              -
              
              
              -
              
              
              -
              
              $
              (31,266
              )
              $
              (1,459,550
              )Net
                  income
              
              $
              5,913,998
              
              $
              472,561
              
              $
              2,381,743
              
              $
              18,822,712
              
              $
              4,401,753Basic
                  income from continuingoperations
                  per share
              
              $
              0.12
              
              $
              0.01
              
              $
              0.05
              
              $
              0.42
              
              $
              0.17Basic
                  earnings per share
              
              $
              0.12
              
              $
              0.01
              
              $
              0.05
              
              $
              0.42
              
              $
              0.13Diluted
                  earnings per share
              
              $
              0.11
              
              $
              0.01
              
              $
              0.05
              
              $
              0.38
              
              $
              0.10Weighted
                  average common sharesoutstanding-basic
              
              
              50,573,349
              
              
              50,032,555
              
              
              48,975,803
              
              
              45,123,843
              
              
              34,750,173Weighted
                  average common sharesoutstanding-diluted
              
              
              51,796,185
              
              
              51,472,616
              
              
              51,007,396
              
              
              50,028,303
              
              
              46,914,839Cash
                  dividend declared
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Balance
                  Sheet Data**Cash
                  and equivalents
              
              $
              38,682,186
              
              $
              23,110,042
              
              $
              15,572,862
              
              $
              11,344,113
              
              $
              2,176,204Total
                  current assets
              
              $
              44,763,752
              
              $
              30,464,838
              
              $
              24,479,528
              
              $
              18,923,011
              
              $
              5,452,254Total
                  assets
              
              $
              53,811,047
              
              $
              41,841,033
              
              $
              33,115,106
              
              $
              28,037,263
              
              $
              9,223,729Total
                  current liabilities
              
              $
              15,545,068
              
              $
              10,911,770
              
              $
              3,416,244
              
              $
              3,224,633
              
              $
              7,822,298Total
                  liabilities
              
              $
              15,545,068
              
              $
              10,911,770
              
              $
              3,416,244
              
              $
              3,474,633
              
              $
              9,726,390Total
                  working capital/(deficit)
              
              $
              29,218,684
              
              $
              19,553,068
              
              $
              21,063,284
              
              $
              15,698,378
              
              $
              (2,370,044
              )Long
                      - term obligations,  including current
                      portion
              
              
              -
              
              
              -
              
              
              -
              
              $
              1,132,000
              
              $
              2,983,576Total
                      stockholder's equity/(accumulated deficit)
              
              $
              38,265,979
              
              $
              30,929,263
              
              $
              29,698,862
              
              $
              24,562,630
              
              $
              (502,661
              )
  (1)
        The
        financial data for 2005 includes a deferred tax asset of $7,993,000 and an
        income tax expense of $1,467,806.
 (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 $4,308,837 and an
        income tax expense of $3,526,740.
 (4)
        In
        accordance with FASB 123(R) 2007 and 2006 results of operations include stock
        based compensation expense
 of
        $615,776 and $736,315, respectively.
  -
            37 -
 
 **ITEM 7**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**
  As
        of
        December 31, 2007, substantially all of our revenue was 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. See “ITEM 1 - DESCRIPTION OF BUSINESS -
        Medicare”, “-Medicare Modernization Act”.
  For
        the
        twelve months ended December 31, 2007, approximately 79.7% of our revenue
        came
        from the Humana Agreements. The Humana Agreements 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. ** Failure
        to maintain the Humana Agreements on favorable terms would adversely affect
        our
        results of operations and financial condition.
  The
        Humana Agreements are risk  agreements
        under which the PSN, receives monthly payments per Humana Participating
        Customer at
        a rate
        established by the Agreements, also called a capitation fee. In accordance
        with
        the Agreements, the capitation fee is a
        function of the
        number of Humana Participating Customers, regardless of the actual utilization
        rate of covered services.
  The
        HMO’s
        revenue is generated by premiums consisting of monthly payments per customer
        that are established by the CMS Contract and through the competitive bidding
        process. The HMO contracts directly with CMS and is paid a monthly premium
        payment for each customer enrolled in our Plan. Among other things, the monthly
        premium varies by patient, county, age and severity of health status.
  To
        the
        extent that the Humana Participating Customers or the HMO’s customers require
        more or costlier care than is anticipated, aggregate capitation fees may
        be
        insufficient to cover the costs associated with the treatment of such customers.
        If medical expenses exceed our estimates, except in very limited circumstances,
        we will be unable to increase the premiums we receive under these contracts
        during the then-current terms.
  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 ( “IBNR”) claims, may have a
        material adverse effect on our financial condition, results of operations
        and/or
        cash flows.
  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.
  **Critical
        Accounting Policies**
  Our
        significant accounting policies are more fully ** described
        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” and “Use of Estimates, Deferred Tax Asset.”
  *Use
        of Estimates, Revenue, Expense and Receivables* .
 
 Our
        revenue is primarily derived from risk-based health insurance arrangements
        in
        which the premium is fixed and paid to us on a monthly basis. We assume the
        economic risk of funding our customers’ health care services and related
        administrative costs. Premium revenue is recognized in the period in which
        eligible individuals are entitled to receive health care 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 health care premium payments we receive in advance of the service
        period as unearned premiums.
  -
            38 -
 
 CMS periodically retroactively adjusts the premiums paid to us based on the updated
        health status 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, CMS also
        retroactively adjusts the number of customers enrolled in our HMO or PSN
        as a
        result of enrollment discrepancies. These retroactive adjustments could,
        in the
        near term, materially impact the revenue that has been recorded by us for
        both
        our HMO and PSN. We record any adjustments to this revenue at the time the
        information necessary to make the determination of the adjustment is available
        and the collectibility of the amount is reasonably assured.
 
 Medical
        expenses for both the PSN and HMO 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
        or processed claims, and for liabilities for physician, hospital and other
        medical expense disputes. We estimate liabilities for physician, hospital
        and
        other medical expense disputes based upon an analysis of potential outcomes,
        assuming a combination of litigation and settlement strategies. 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.
 
 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 6
        to the Consolidated Financial Statements and RISK FACTORS - “A Failure To
        Estimate Incurred But
        Not
        Reported...”
 
 *Use
        of Estimates, Deferred Tax Asset* .
  We
        account for income taxes in accordance with Statement of Financial Accounting
        Standard No. 109, or FAS 109, *Accounting for Income Taxes,* as
        clarified by FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“Interpretation No. 48”). Under this method, deferred income taxes are
        determined based on the estimated future tax effects of differences between
        the
        financial statement and tax bases of assets and liabilities given the provisions
        of enacted tax laws. Deferred income tax provisions and benefits are based
        on
        changes to the assets or liabilities from year to year. In providing for
        deferred taxes, we consider tax regulations of the jurisdictions in which
        we
        operate, estimates of future taxable income, and available tax planning
        strategies. If tax regulations, operating results or the ability to implement
        tax-planning strategies vary, adjustments to the carrying value of deferred
        tax
        assets and liabilities may be required. Valuation allowances are recorded
        related to deferred tax assets based on the “more likely than not” criteria of
        FAS No. 109.
  Interpretation
        No. 48 requires that 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 percent
        likelihood of being realized upon ultimate settlement with the relevant tax
        authority.
  In
        the
        event we determine that we cannot, on a more likely than not basis, realize
        all
        or part of our 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.
  -
            39 -
  Net
        operating loss carryforwards by year of expiration are as follows:
  Year
                  ofExpiration
              
              Amount2022
              
              $
              4,769,0002025
              
              
              1,193,000$
              5,962,000
  **Pending
        Adoption of an Accounting Pronouncement**
 
 On
        December 4, 2007, the FASB issued FASB Statement No. 141(R) (“Statement No.
        141(R)”) which replaces FASB Statement No. 141, *Busin* *ess
        Combinations* (“Statement
        No. 141”) . 
        Statement No. 141(R) fundamentally changes many aspects of existing accounting
        requirements for business combinations. It requires, among other things,
        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.
        Statement No. 141(R) defines the acquirer as the entity that obtains control
        of
        one or more businesses in the business combination and establishes the
        acquisition date as the date that the acquirer achieves control.  Statement
        No. 141(R) retains the guidance in Statement No. 141 for identifying and
        recognizing intangible assets separately from goodwill.  If we enter into
        any business combination after the adoption of Statement No. 141(R), a
        transaction may significantly impact our financial position and earnings,
        but
        not cash flows, compared to acquisitions prior to the adoption of Statement
        No.
        141(R). The adoption of Statement No. 141(R) is effective beginning in 2009
        and
        both early adoption and retrospective application is prohibited.
 
 In
        September 2006, SFAS No. 157,*Fair
        Value Measurements*,
        which
        defines fair value, establishes a framework for measuring fair value pursuant
        to
        generally accepted accounting principles, and expands disclosures about fair
        value measurements was issued. SFAS No. 157 does not require any new fair
        value
        measurements, but provides guidance on how to measure fair value by providing
        a
        fair value hierarchy used to classify the source of the information. This
        statement was to be effective for fiscal years beginning after November 15,
        2007
        however; the portion of SFAS No. 157 related to non-financial assets and
        liabilities, except those that are recognized or disclosed at fair value
        in the
        financial statements on a recurring basis (at least annually), has been
        deferred. We do not anticipate a significant impact on our financial position,
        earnings or cash flows upon adoption.
 
 SFAS
        No.
        159, *The
        Fair Value Option for Financial Assets and Financial Liabilities, Including
        an
        amendment of FASB Statement No. 115* was
        issued in February 2007. SFAS No. 159 allows entities to voluntarily choose
        to
        measure many financial assets and financial liabilities at fair value through
        earnings.  Upon initial adoption, SFAS No. 159 provides entities with
        a one-time chance to elect the fair value option for existing eligible items.
        The effect of the first measurement to fair value is reported as a
        cumulative-effect adjustment to the opening balance of retained earnings
        in the
        year SFAS No. 159 is adopted.  SFAS No. 159 is effective as of the
        beginning of fiscal years starting after November 15, 2007.  We do not
        anticipate a significant impact on our financial position, earnings or cash
        flows upon adoption.
 
 Also
        in
        December 2007, FASB Statement No. 160, *Noncontrolling
        Interests in Consolidated Financial Statements: an amendment of ARB No.
        51* (“Statement 160”) was issued by the FASB. Statement 160 amends ARB 51 to
        establish accounting and reporting standards for the noncontrolling interest
        in
        a subsidiary and for the deconsolidation of a subsidiary.  It also amends
        certain of ARB 51’s consolidation procedures for consistency with the
        requirements of Statement No. 141(R), *Business
        Combinations* .
        Statement 160 is effective for fiscal years beginning on or after December
        15,
        2008. The adoption of Statement 160 is not expected to have any 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.
  -
            40 -
  **Contractual
        Obligations and Other Contractual Commitments**
 
 The
        following table summarizes our significant contractual obligations and
        commercial commitments as of December 31, 2007.
  **Payment
                  Due by Period****Contractual**
              
              
              
              **Less
                  Than**
              
              **1
                  - 3**
              
              **3
                  - 5**
              
              **More
                  Than****Obligations**
              
              **Total**
              
              **1
                  Year**
              
              **Years**
              
              **Years**
              
              **5
                  years**Operating
                  lease obligations
              
              $
              7,113,000
              
              $
              1,429,000
              
              $
              2,615,000
              
              $
              1,623,000
              
              $
              1,446,000Service
                  Agreements
              
              
              2,850,000
              
              
              1,371,000
              
              
              1,479,000Employment
                  obligations
              
              
              2,743,000
              
              
              2,743,000
              
              
              -
              
              
              -
              
              
              -Other
              
              
              432,000
              
              
              432,000
              
              
              -
              
              
              -
              
              
              -$
              13,138,000
              
              $
              5,975,000
              
              $
              4,094,000
              
              $
              1,623,000
              
              $
              1,446,000
 
 As
        of
        December 31, 2007, we had no outstanding long-term debt and no payment
        obligations that would constitute capital lease obligations.
 
 **Impact
        of Inflation**
 
 Inflation
        has a significant impact on the cost of medical care. According to a  report
        issued in January 2007 by the Office of the Actuary at CMS, health care outlays
        are projected to grow at a rate of 6.9% annually between 2008 and 2016. 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. We seek to minimize the impact of
        these
        increases by developing fixed fee or capitation arrangements with our healthcare
        providers that run for multiple years and which include built-in price increases
        that are more in line with the projected increases in Medicare reimbursement,
        which we are estimating to be approximately 3% annually.
 
 **Comparison
        of 2007 and 2006**
 **Summary**
 
 We
        operated in two financial reporting segments, the PSN business and the HMO
        business in both 2007 and 2006.
  For
        the
        year ended December 31, 2007, we realized revenue of $277.6 million compared
        to
        $228.2 million in the prior year, an increase of approximately $49.4 million
        or
        21.6%. Medical expenses for 2007 were $240.1 million, an increase of $35.1
        million or 17.1% over 2006. Our ratio of medical expense to revenue (the
        “Medical Expense Ratio” or “MER”) decreased to 86.7% in 2007 compared to 90.1%
        in 2006.
  Income
        before income taxes for 2007 was $9.4 million compared to $826,000 in 2006.
        The
        PSN reported a segment gain before income taxes and allocated overhead of
        $29.2
        million for the year ended December 31, 2007, compared to $19.9 million for
        2006, an increase of $9.3 million or 46.7%. The HMO segment incurred a loss
        before income taxes and allocated overhead of $10.5 million for the year
        ended
        December 31, 2006, compared to a loss of $11.7 million in 2006, a decrease
        of
        10.6%. Allocated overhead amounted to $9.3 million and $7.4 million for the
        years ended December 31, 2007 and 2006, respectively.
  Net
        income for 2007 was $5.9 million compared to $473,000 for the year ended
        December 31, 2006. Net earnings per share, basic was $0.12 and net earnings
        per
        share, diluted was $0.11 for 2007 compared to $0.01 for 2006.
  -
            41 -
  **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,
        2007
        and 2006 and (ii) the aggregate customers months for the PSN and the HMO
        during
        2007 and 2006. Customer months are the aggregate number of months of healthcare
        services we have provided to our customers during a period of time.
  Customers at December
                  31
              
              Customer Months In
              
              Percentage Change
                  in Customer Months2007
              
              2006
              
              2007
              
              2006
              
              Between YearsPSN
              
              
              25,400
              
              
              25,600
              
              
              302,100
              
              
              309,500
              
              
              -2.4
              %HMO
              
              
              6,200
              
              
              3,800
              
              
              65,100
              
              
              35,600
              
              
              82.9
              %Total
              
              
              31,600
              
              
              29,400
              
              
              367,200
              
              
              345,100
  At
        February 1, 2008 the HMO had approximately 7,000 customers and the PSN had
        approximately 25,800 customers
  We
        implemented a restructuring plan, in July 2007, 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, among other things, one
        PSN
        medical practice (the “closed PSN Practice”). At the time of its closure on July
        31, 2007, the closed PSN Practice served approximately 450 Humana Participating
        Customers in South Florida, all of which were moved to other providers outside
        of our PSN.
  **Revenue**
  The
        following table provides a breakdown of our sources of revenue.
  Year
                  Ended December 31
              
              $
              
              %2007
              
              2006
              
              Increase
                (Decrease)
              
              ChangePSN
                  revenue from Humana
              
              $
              221,255,000
              
              $
              198,429,000
              
              $
              22,826,000
              
              
              11.5
              %PSN
                  fee-for-service revenue
              
              
              1,257,000
              
              
              1,552,000
              
              
              (295,000
              )
              
              -19.0
              %Total
                  PSN revenue
              
              
              222,512,000
              
              
              199,981,000
              
              
              22,531,000
              
              
              11.3
              %Percentage
                  of total revenue
              
              
              80.2
              %
              
              87.6
              %HMO
                  revenue
              
              
              55,065,000
              
              
              28,235,000
              
              
              26,830,000
              
              
              95.0
              %Percentage
                  of total revenue
              
              
              19.8
              %
              
              12.4
              %Total
                  revenue
              
              $
              277,577,000
              
              $
              228,216,000
              
              $
              49,361,000
              
              
              21.6
              %
 
 The
        PSN’s
        most significant source of revenue during both 2007 and 2006 was the premium
        revenue generated pursuant to the Humana Agreements (the “Humana Related
        Revenue”). The Humana Related Revenue increased from $198.4 million in 2006 to
        $221.3 million in 2007, an increase of approximately 11.5%.
  The
        increase in the Humana Related Revenue is primarily attributable to premium
        increases and the increase in the Medicare risk score attributable to the
        Humana
        Participating Customers. The average premium per customer per month premium
        increased approximately 14.1% in 2007 as compared to 2006.
  This premium
        increase was partially offset by a 2.4% decrease in Humana Participating
        Customer months from 309,500 in 2006 to 302,100 in 2007, which lowered Humana
        Related Revenue by approximately $5.2 million. The decline in Humana
        Participating Customer months in 2007 from 2006 was partially a result of
        the
        closing of one of the PSN medical offices in August 2007 and customer attrition
        due to deaths, relocations and transfers to other insurance plans.
  -
            42 -
 
 Based
        on
        the payments we have received from Humana in early 2008, we believe that
        the per
        customer per month premium from Humana will increase
        approximately 5% to 6% from 2007, excluding any potential change from the
        current Medicare risk score of these individuals.
  The
        fee-for-service revenue represents amounts earned from medical services provided
        to non-Humana customers in our owned physician practices.
  Revenue
        for the HMO was $55.1 million in 2007 as compared to $28.2 million in 2006.
        The
        increase in revenue in 2007 is primarily attributable to the 82.9% increase
        in
        our customer months during 2007 and a 6.8% increase in the per customer per
        month premium from CMS in 2007 as compared to 2006.
  **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 for both the PSN and HMO 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. 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
        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.
 
 Total
        medical expenses were $240.7.2 million and $205.6 million for the years ended
        December 31, 2007 and 2006, respectively.   Our reported Medical Expense
        Ratio decreased from 90.1% in 2006 to 86.7% in the current year. Approximately
        $229.4 million or 95.3% of our total medical expenses in 2007 are attributable
        to medical claims expense such as inpatient and outpatient services, pharmacy
        benefits and physician services by non-affiliated providers. In 2006,
        approximately $195.0 million or 94.8% of our total medical expenses were
        attributable to medical claims expense.
  -
            43 -
  Year
                  Ended December 31,2007
              
              2006HMO
              
              PSN
              
              Consolidated
              
              HMO
              
              PSN
              
              ConsolidatedEstimated
                  medical expense for the year, excluding prior period claims
                  development
              
              $
              51,813,000
              
              $
              187,456,000
              
              $
              239,269,000
              
              $
              29,066,000
              
              $
              178,987,000
              
              $
              208,053,000(Favorable)
                  unfavorable prior period medical claims development in current
                  year based
                  on actual claims submitted
              
              
              (638,000
              )
              
              2,065,000
              
              
              1,427,000
              
              
              (128,000
              )
              
              (2,306,000
              )
              
              (2,434,000
              )Total
                  reported medical expense for the year
              
              $
              51,175,000
              
              $
              189,521,000
              
              $
              240,696,000
              
              $
              28,938,000
              
              $
              176,681,000
              
              $
              205,619,000Reported
                  Medical Expense Ratio for year
              
              
              92.9
              %
              
              85.2
              %
              
              86.7
              %
              
              102.5
              %
              
              88.3
              %
              
              90.1
              %
 
 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 providers other than the PSN’s affiliated providers
        (“Non-Affiliated Providers”). ** The
        reported Medical Expense Ratio for the PSN decreased to 85.2% in 2007 as
        compared to 88.3% in 2006. During 2007, the PSN realized the benefit of the
        various medical management techniques implemented in 2006 to improve the
        medical
        management of our customers. We believe that the impact of these techniques
        is a
        primary reason for the PSN’s reduced MER.
  The
        PSN’s
        medical claims expense increased by approximately $12.9 million or 7.8%,
        primarily as a result of higher medical costs associated with our PSN customers’
increasing medical needs as indicated by the higher risk scores in 2007.
        Medical
        center costs include the salaries, taxes and benefits of the PSN’s affiliated
        health professionals providing primary care services, as well as other costs
        associated with the operations of those practices. Approximately $11.3 million
        of our total medical expenses in 2007 related to physician practices we own
        as
        compared to $10.6 million in 2006.
  The
        reported Medical Expense Ratio for the HMO declined to 92.9% in 2007 from
        102.5%
        in 2006. This decline is primarily a result of our ability to renegotiate
        certain contracts with hospitals and outpatient service providers in 2007
        that
        reduced the amount we paid for services provided. In addition, during 2007,
        the
        HMO made improvements to the pre-approval process for medical services provided
        to the HMO's customers and medical management processes were enhanced. Partially
        as a result of these efforts, we realized a 3.2% decrease in the per customer
        medical expense cost. Total medical expense for the HMO in 2007 increased
        by
        $22.2 million over that incurred in 2006 primarily as a result of the increased
        customer months in 2007.
  The
        reported Medical Expense Ratio is impacted by both revenue and expense.
        Retroactive adjustments of prior period premiums that are recorded in the
        current period impact the MER of that period. If the retroactive adjustment
        increases revenue of the period then the impact reduces the recorded MER.
        Conversely, if the retroactive adjustment reduces revenue of the period,
        then
        the MER for the period is higher. These retroactive adjustments include,
        among
        other things, the mid-year and annual risk score 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 claims 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.
  -
            44 -
  For
        the
        PSN, a change in either revenue or medical claims expense of approximately
        $2.2
        million impacts the PSN’s MER by 1% in 2007 and a change of $2.0 million impacts
        the PSN’s MER by 1% in 2006. A change of approximately $551,000 in 2007 in
        either revenue or medical claims expense impacts the MER for the HMO by 1%.
        In
        2006, a change in either revenue or medical claims expense of approximately
        $282,000 impacts the HMO’s MER by 1%.
  The
        estimated medical expense payable for the PSN at December 31, 2007 was
        determined to be between $14.3 million and $15.4 million and, as is our policy,
        we recorded a liability at $14.7 million, the actuarial mid-point of the
        range.
        At December 31, 2006, the estimated medical expenses payable was estimated
        to be
        $12.2 million compared to actual claims paid in 2007 for 2006 of $14.2 million,
        a difference of $2.0 million. This $2.0 million difference increased the
        PSN’s
        medical expense in 2007 and increased the PSN’s Medical Expense Ratio by
        .9%.
 
 At
        December 31, 2007, we estimated our estimated medical expense payable for
        the
        HMO was between $7.0 million and $7.9 million and we recorded a liability
        of
        $7.0 million. At December 31, 2006, our estimated medical expense payable
        for
        the HMO was estimated to be $4.7 million. Claims paid in 2007 for 2006 totaled
        $4.0 million which was less than the estimated accrual by $638,000. This
        difference was recorded as a reduction in claims expense in 2007 and reduced
        the
        HMO’s Medical Expense Ratio by 1.1%.
 
 **Operating
        Expenses**
  Year
                    Ended December 31
                
                
                
                %2007
                
                2006
                
                Increase
                
                ChangeAdministrative
                    payroll, payroll taxes and benefits
                
                $
                13,108,000
                
                $
                10,844,000
                
                $
                2,264,000
                
                
                20.9
                %Percentage
                    of total revenue
                
                
                4.7
                %
                
                4.8
                %Marketing
                    and advertising
                
                
                3,959,000
                
                
                3,709,000
                
                
                250,000
                
                
                6.7
                %Percentage
                    of total revenue
                
                
                1.4
                %
                
                1.6
                %Restructuring
                    expense
                
                
                584,000
                
                
                -
                
                
                584,000
                
                
                -Percentage
                    of total revenue
                
                
                0.2
                %
                
                0.0
                %General
                    and administrative
                
                
                11,158,000
                
                
                8,277,000
                
                
                2,881,000
                
                
                34.8
                %Percentage
                    of total revenue
                
                
                4.0
                %
                
                3.6
                %Total
                    operating expenses
                
                $
                28,809,000
                
                $
                22,830,000
                
                $
                5,979,000
                
                
                26.2
                %
 
 *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 2007, administrative payroll,
        payroll taxes and benefits were $13.1 million, compared to the prior year’s
        total of $10.8 million in 2006, an increase of $2.3 million. A portion of
        this
        increase was a direct result of the additional administrative personnel required
        as a result of the 82.9% increase in the HMO’s customer months during 2007. This
        growth was the primary reason payroll, payroll taxes and benefit costs
        associated with the HMO segment were $5.3 million in 2007 as compared to
        $4.2
        million in 2006, an increase of approximately 26.2%.
 
 Corporate
        payroll, payroll taxes and benefits increased from $4.3 million to $5.3 million,
        an increase of $1.0 million or 23.3%. This increase is primarily the result
        of a
        $500,000 charge relating to a mutually agreeable separation agreement with
        the
        individual who served as our President and Chief Operating Officer until
        April
        7, 2007. In addition, the bonus expense awarded to our employees, which is
        based
        primarily on our operating results, was approximately $700,000 higher than
        that
        of 2006.
  *Marketing
        and Advertising*
  Marketing
        and advertising expense, which primarily consists
        of advertising expenses and brokerage commissions paid to independent sales
        agents, was $4.0 million in 2007 as compared to $3.7 million in 2006, an
        increase of 6.7%. The 2007 increase primarily related to additional marketing
        costs and commissions the HMO incurred in marketing its plans during the
        special
        enrollment period afforded customers of a competing Medicare Advantage plan
        that
        had its contract terminated by CMS in July 2007.
  -
            45 -
 
 *Restructuring
        Expense*
 
 I n
        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 one PSN medical practice, two
        of the
        HMO’s office locations, 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.
 
 *General
        and Administrative*
  General
        and administrative expenses increased to $11.2 million in 2007 as compared
        to
        $8.3 million in 2006, an increase of $2.9 million, or 34.8%. Approximately
        $2.0
        million of this increase is attributable to the HMO. As a result of the 82.9%
        increase in customer months, the HMO incurred increased costs for claims
        processing and customer services of $1.1 million. In addition, fees for
        actuarial services increased by $800,000 over 2006 which increase primarily
        related to, among other things, the 2008 plan design and bid process for
        the HMO
        and development of cost data to assist the HMO in identifying areas where
        costs
        could be reduced. In addition, fees paid to our Board of Directors increased
        in
        2007 by $173,000 over the amount paid in 2006; professional service costs
        increased approximately $300,000, and depreciation expense increased by
        $274,000.
  **Other
        Income (Expense)**
  We
        realized other income of $1.4 million in 2007 compared to $1.1 million in
        2006.
        The increase was primarily as a result of an increase in investment income
        of
        $340,000 as we had more cash to invest and interest rates increased over
        2006
        for most of 2007. Cash is invested in highly liquid securities, primarily
        bond
        funds with short term maturities and money market funds. We expect to continue
        to invest our excess cash in this manner in 2008.
  **Income
        taxes**
  The
        2007
        results included income taxes of approximately $3.5 million, as compared
        to
        $353,000 in 2006. This difference is a result of the increase in pre-tax
        income
        between 2007 and 2006.
  *Comparison
        of 2006 and 2005*
  **Summary**
  In
        2005
        and 2006, we operated in two financial reporting segments, the PSN business
        and
        the HMO business. ** The HMO
        business commenced operations in July 2005.
  For
        the
        year ended December 31, 2006, we realized revenue of $228.2 million compared
        to
        $183.8 million in the prior year, an increase of approximately $44.4 million
        or
        24.2%. Medical expenses for 2006 were $205.6 million, an increase of $40.5
        million over 2005. Our Medical Expense Ratio increased to 90.1% in 2006 compared
        to 89.9% in 2005. As described below, effective July 1, 2005, the HMO began
        to
        provide services and realize revenue as compared to a full year of operations
        in
        2006.
  Income
        before income taxes for 2006 was $826,000 compared to $3.8 million in 2005.
        The
        PSN reported a segment gain before income taxes and allocated overhead of
        $19.9
        million for the year ended December 31, 2006, an increase of $4.4 million
        or a
        28.4% increase as compared to the prior year. The HMO segment, which commenced
        operations in July 2005, incurred a net loss before income taxes and allocated
        overhead of $11.7 million for the year ended December 31, 2006, compared
        to a
        loss of $6.6 million in 2005. Allocated overhead amounted to $7.4 million
        and
        $5.0 million in the years ended December 31, 2006 and 2005, respectively.
        Our
        results of operations for 2006, like those of 2005, were negatively impacted
        by
        the losses related to the operations of our Medicare Advantage HMO.
  Net
        income for 2006 was $473,000 compared to $2.4 million for the year ended
        December 31, 2005. Net earnings per share, basic and diluted was $0.01 for
        2006
        compared to $0.05 for 2005. The decrease in the basic net earnings per share
        in
        2006, while primarily due to the decrease in net income, is also partially
        affected by the increase in the number of weighted average shares outstanding,
        from 48,975,803 in 2005 to 50,032,555 in 2006. The majority of the shares
        issued
        during 2006 relate to shares issued upon the exercise of stock options.
  -
            46 -
  **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,
        2006
        and December 31, 2005 and (ii) the aggregate customers months for the PSN
        and
        the HMO during 2006 and 2005. Customer months are the aggregate number of
        months
        of healthcare services we have provided to our customers during a period
        of
        time.
  Customers at December
                  31
              
              Customer Months In
              
              Percentage Change in
                  Customer Months2006
              
              2005
              
              2006
              
              2005
              
              Between YearsPSN
              
              
              25,600
              
              
              26,200
              
              
              309,500
              
              
              315,000
              
              
              -1.7
              %HMO
              
              
              3,800
              
              
              1,400
              
              
              35,600
              
              
              4,200
              
              
              747.6
              %Total
              
              
              29,400
              
              
              27,600
              
              
              345,100
              
              
              319,200
 
 In
        August
        2005, the PSN discontinued its contractual relationship with one of its South
        Florida-based physician practices providing care to approximately 110 of
        the
        Humana Participating Customers and discontinued our contractual relationship
        with two additional South Florida-based physician practices providing care
        to
        approximately 680 of the Humana Participating Customers due to non-compliance
        with our policies and procedures. For the nine months ended September 30,
        2005,
        the revenue and medical expenses related to these practices were $3.9 million
        and $4.1 million, respectively, resulting in a medical expense ratio of 104.2%
        and a net loss of approximately $163,000.
  **Revenue**
  The
        following table provides a breakdown of our sources of revenue.
  Year
                  Ended December 31,
              
              $
              
              %2006
              
              2005
              
              Increase
              
              ChangePSN
                  revenue from Humana
              
              $
              198,429,000
              
              $
              179,646,000
              
              $
              18,783,000
              
              
              10.5
              %PSN
                  fee-for-service revenue
              
              
              1,552,000
              
              
              1,294,000
              
              
              258,000
              
              
              19.9
              %Total
                  PSN revenue
              
              
              199,981,000
              
              
              180,940,000
              
              
              19,041,000
              
              
              10.5
              %Percentage
                  of total revenue
              
              
              87.6
              %
              
              98.5
              %HMO
                  revenue
              
              
              28,235,000
              
              
              2,825,000
              
              
              25,410,000
              
              
              899.5
              %Percentage
                  of total revenue
              
              
              12.4
              %
              
              1.5
              %Total
                  revenue
              
              $
              228,216,000
              
              $
              183,765,000
              
              $
              44,451,000
              
              
              24.2
              %
  The
        PSN’s
        significant source of revenue during both 2006 and 2005 was the premium revenue
        generated pursuant to the Humana Agreements (the “Humana Related Revenue”). The
        Humana Related Revenue increased from $179.6 million in 2005 to $198.4 million
        in 2006, an increase of approximately 10.5%.
  The
        increase in Humana Related Revenue in 2006 (the “Humana Increase”) is primarily
        attributable to:
  ·
              approximately
                  $21.4 million in premium increases of which $19.1 million of the
                  increase
                  related to Medicare Part D; and
 ·
              Medicare
                  risk adjustments (“MRA”) that were retroactively approved by CMS in 2006
                  for 2004 and 2005 (approximately $809,000 of the Humana Increase).
  -
            47 -
 
 This
        Humana Increase was partially offset by a 1.7% decrease in Humana Participating
        Customer months from 315,000 in 2005 to 309,000 in 2006, which decreased
        Humana
        Related Revenue by approximately $3.3 million. As previously discussed, the
        decline in customer months in 2006 from 2005 was primarily a result of the
        termination of the contractual relationship with certain physicians during
        the
        last half of 2005.
  The
        PSN’s
        average per customer per month premium increased during 2006 approximately
        15%
        in the Central Florida market and 7% in the South Florida market as compared
        to
        2005. This increase is substantially due to the Part D premium, which began
        in
        2006.
  The
        fee-for-service revenue represents amounts earned from medical services provided
        to non-Humana customers in our owned physician practices.
  Revenue
        for the HMO was $28.2 million in 2006 as compared to $2.8 million in 2005.
        The
        HMO began generating revenue during the last two quarters of 2005. The increase
        in revenue in 2006 is primarily attributable to the increase in our customer
        base during 2006 and the operation of the HMO for the full year. Included
        in the
        HMO’s 2006 revenue is approximately $53,000 attributable to MRA scores that were
        retroactively approved by CMS in 2006 for 2005.
  **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 for both the PSN and HMO 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 either
        not yet received or 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
        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.
 
 Total
        medical expenses were $205.6 million and $165.1 million for the years ended
        December 31, 2006 and 2005, respectively.   Our Medical Expense Ratio
        increased from 89.9% in 2005 to 90.1% in 2006. Approximately $195.0 million
        or
        94.8% of our total medical expenses in 2006 are attributable to medical claims
        such as inpatient and outpatient services, pharmacy benefits and physician
        services by non-affiliated providers. In 2005, approximately $154.8 million
        or
        93.8% of our total medical expenses were attributable to medical
        claims
  -
            48 -
  Year
                  Ended December 31,2006
              
              2005HMO
              
              PSN
              
              Consolidated
              
              HMO
              
              PSN
              
              ConsolidatedEstimated
                  medical expense for the year, excluding prior period claims
                  development
              
              $
              29,066,000
              
              $
              178,987,000
              
              $
              208,053,000
              
              $
              2,676,000
              
              $
              162,260,000
              
              $
              164,936,000(Favorable)
                  unfavorable prior period medical claims development in current
                  year based
                  on actual claims submitted
              
              
              (128,000
              )
              
              (2,306,000
              )
              
              (2,434,000
              )
              
              (263,000
              )
              
              458,000
              
              
              195,000Total
                  reported medical expense for the year
              
              $
              28,938,000
              
              $
              176,681,000
              
              $
              205,619,000
              
              $
              2,413,000
              
              $
              162,718,000
              
              $
              165,131,000Reported
                  Medical Expense Ratio for year
              
              
              102.5
              %
              
              88.3
              %
              
              90.1
              %
              
              85.4
              %
              
              89.9
              %
              
              89.9
              %
 
 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. ** The
        reported Medical Expense Ratio for the PSN decreased to 88.4% in 2006 as
        compared to 89.9% in 2005. During 2006, the PSN implemented various medical
        management techniques to improve the medical management of our customers.
        Some
        of these techniques included chart audits for all PSN Physicians, increasing
        our
        focus on certain elements of our Partners in Quality Program, implementing
        an
        outreach program for our more acutely ill customers in an effort to better
        manage the care for these individuals and developing a comprehensive recovery
        plan for customers that had serious events, such as hospitalizations or
        significant procedures.
  The
        PSN’s
        medical claims expense increased by approximately $13.7 million, primarily
        as a
        result of the drug costs associated with the Part D benefit implemented in
        2006.
        Medical center costs include the salaries, taxes and benefits of the PSN’s
        affiliated health professionals providing primary care services, as well
        as
        other costs associated with the operations of those practices. Approximately
        $10.6 million of our total medical expenses in 2006 related to physician
        practices we own as compared to $10.3 million in 2005.
  During
        2005, the PSN incurred approximately $4.0 million of medical expenses related
        to
        the implantation of certain Implantable Automatic Defibrillators (“AICD”). CMS
        has directed that the costs of certain of these procedures that meet 2005
        eligibility requirements be paid by CMS rather than billed to Medicare Advantage
        plans. At December 31, 2005, we had estimated a recovery for AICD claims
        we had
        paid at December 31, 2005 of approximately $2.2 million, which was recorded
        as a
        reduction of medical expenses in 2005. During 2006, we continued to work
        with
        Humana to make certain that these cases met the eligibility criteria for
        payment
        by CMS. As a result of this effort, during 2006 we collected approximately
        $260,000 of this amount and recorded a charge of $1.6 million to medical
        expenses to reflect management’s concern about the ultimate collectibility of
        this amount in light of, among other things, revised guidance by CMS regarding
        its reimbursement policies. At December 31, 2006 we estimated future recoveries
        of approximately $270,000 related to AICDs implanted in 2005. These amounts
        decreased our Medical Expense Ratio by 1.2 % in 2005 and increased our Medical
        Expense Ratio by 0.8% in 2006.
 
 On
        February 26, 2007, CMS sent a notice to all Medicare Advantage organizations
        that certain formulas that had previously been provided by CMS for 2006
        involving in the Part D risk corridor calculations were in error and needed
        to
        be corrected. These formulas related to fixed and flexible capitated Part
        D
        payment demonstration target amounts. The HMO was not impacted by these formula
        errors however; the PSN, through Humana, provides drug coverage that includes
        these types of arrangements. Since this formula error impacted 2006, we
        decreased our 2006 revenue by approximately $1.2 million for the estimated
        amount that was refunded back to CMS through Humana.
  -
            49 -
 
 The
        HMO’s
        Medical Expense Ratio in 2006 was 102.5% as compared to 85.4% in 2005.
        Substantially all of this increase was attributed to the rapid growth of
        the HMO
        in 2006, which, among other things, negatively impacted the medical management
        process and also resulted in higher than expected costs paid for medical
        services. During 2006, we determined that our process requiring customers
        to
        obtain approval before receiving certain medical procedures was not effective
        and resulted in excess utilization and higher than expected costs paid for
        medical services. In early 2007, we changed this process which has resulted
        in
        more appropriate care for our customers. As a result of the increased number
        of
        customers, the HMO is renegotiating the rates paid to certain hospitals and
        providers of outpatient services. We anticipate that as our customer base
        continues to grow, we will be able to positively impact our HMO’s Medical
        Expense Ratio by entering into more capitated, rather than fee-for-service,
        contracts. Total
        medical expenses for the HMO increased $26.5 million primarily as a result
        of
        the increase in customer months during 2006 over 2005.
 
 The
        reported Medical Expense Ratio is impacted by both revenue and expense.
        Retroactive adjustments of prior period premiums that are recorded in the
        current period impact the MER of that period. If the retroactive adjustment
        i ncreases
        revenue of the period then the impact reduces the recorded MER. Conversely,
        if
        the retroactive adjustment reduces revenue of the period, then the MER for
        the
        period is higher. These retroactive adjustments include, among other things,
        the
        mid-year and annual risk score 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 estimated actual
        MER shown in the above table will likely change as additional claims 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.
  For
        the
        PSN, a change in either revenue or medical claims expense of approximately
        $1.9
        million impacts the PSN’s MER by 1% in 2006 and a change of $1.8 million impacts
        the PSN’s MER by 1% in 2005. A change of approximately $282,000 in 2006 in
        either revenue or medical claims expense impacts the MER for the HMO by 1%.
        In
        2005, a change in either revenue or medical claims expense of approximately
        $28,000 impacts the HMO’s MER by 1%.
  The
        estimated medical expense payable for the PSN at December 31, 2006 was
        determined to be between $12.2 million and $14.3 million and, as is our policy,
        we recorded an accrual of $12.2 million. At December 31, 2005, the estimated
        medical expense payable for the PSN was estimated to be $12.5 million compared
        to actual claims paid in 2006 for 2005 of $13.2 million, a difference of
        $743,000. This difference increased the PSN’s medical expense and increased the
        MER by 0.4% in 2006.
 
 At
        December 31, 2006, we estimated our estimated medical expense payable for
        the
        HMO was between $4.7 million and $5.4 million and we recorded a liability
        of
        $4.7 million. At December 31, 2005, our estimated medical expense payable
        for
        the HMO was estimated to be $694,000. Claims paid for 2005 in 2006 totaled
        $960,000 which exceeded the estimated accrual by $266,000. This difference
        was
        recorded as additional claims expense in 2006 and increased the HMO’s MER in
        2006 by 0.9%.
 
 **Other
        Expenses**
 
 Year
                  Ended December 31
              
              $2006
              
              2005
              
              IncreaseAdministrative
                  payroll, payroll taxes and benefits
              
              
              10,844,000
              
              
              6,867,000
              
              $
              3,977,000Percentage
                  of total revenue
              
              
              4.8
              %
              
              3.7
              %Marketing
                  and advertising
              
              
              3,709,000
              
              
              2,754,000
              
              $
              955,000Percentage
                  of total revenue
              
              
              1.6
              %
              
              1.5
              %General
                  and administrative
              
              
              8,277,000
              
              
              5,781,000
              
              $
              2,496,000Percentage
                  of total revenue
              
              
              3.5
              %
              
              3.1
              %Total
                  expenses
              
              $
              22,830,000
              
              $
              15,402,000
              
              $
              7,428,000
  -
            50 -
  *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 2006, administrative payroll,
        taxes and benefits were $10.8 million, compared to the prior year’s total of
        $6.9 million, an increase of $3.9 million. Payroll, payroll taxes and benefit
        costs associated with the HMO segment were $4.2 million in 2006 as compared
        to
        $2.5 million in 2005, an increase of approximately 68%. The HMO commenced
        operations in 2005 and these costs were incurred for only a portion of the
        year.
        In addition, during 2006 we increased the number of full time equivalents
        employed by the HMO from 47 to 71 as the number of customers enrolled in
        the HMO
        increased.
  As
        the
        HMO increased in size and activity we also increased our corporate staff
        from 49
        at December 31, 2005 to 68 at December 31, 2006, resulting in an increase
        in
        payroll, payroll taxes and benefits to $4.3 million in 2006 as compared to
        $2.5
        million in 2005, a 72% increase. Substantially all of this increase is a
        result
        of the addition of new employees or a full year of compensation for employees
        added in 2005 with approximately $736,000 of the increase related to stock-based
        compensation expense.
  *Marketing
        and Advertising*
  Marketing
        and advertising expense, which primarily consists of advertising expense
        and
        brokerage commissions paid to independent sales agents, for 2006 was $3.7
        million as compared to $2.8 million in 2005, an increase of 32.1%. When we
        launched the HMO in the second half of 2005, we incurred large initial marketing
        and advertising costs while introducing, branding and selling our HMO product.
        In 2006, we continued to brand our plan and also increased our marketing
        and
        advertising for new customers. Commencing in 2006, CMS instituted a limited
        enrollment period for Medicare Advantage plans between November and March
        which
        increased our marketing and advertising costs during the last quarter of
        2006.
  *General
        and Administrative*
  General
        and administrative expenses for 2006 were $8.3 million, an increase of $2.5
        million, or 43.2% over the prior year. Approximately $1.8 million of this
        increase is attributable to the HMO being operational for all of 2006. The
        HMO
        incurred increased costs of $593,000 for claims processing and customer services
        costs, $400,000 in professional services fees primarily attributable to the
        expansion in 2007, $269,000 in lease costs relating to rents for the entire
        year
        and $149,000 in recruitment costs. Corporate general and administrative costs
        increased approximately $668,000 as a result of an increase in fees paid
        to our
        Board of Directors of $140,000; professional service costs of approximately
        $250,000, recruitment costs of $141,000 and lease costs of $70,000.
  **Other
        Income (Expense)**
  We
        realized other income of $617,000 in 2005 compared to $1.1 million in 2006.
        The
        increase was primarily as a result of an increase in investment income of
        $607,000 as we had more cash to invest and rates increased over 2005. Cash
        is
        invested in highly liquid securities, primarily certificates of deposits
        with
        short term maturities and money market funds.
  **Income
        taxes**
  The
        2006
        results included income taxes of approximately $353,000, as compared to $1.5
        million. This difference is a result of the decrease in pre-tax income between
        2005 and 2006.
  **Liquidity
        and Capital Resources**
  Cash
        and
        equivalents at December 31, 2007 totaled approximately
        $38.7 million as compared to approximately $23.1 million at December 31,
        2006.
        As of December 31, 2007, we had a working capital surplus of approximately
        $29.2
        million as compared to a working capital surplus of approximately $19.6 million
        as of December 31, 2006, an increase of approximately $9.7 million or 49.4%.
        This increase in working capital is primarily attributable to our improved
        cash
        position which is largely the result of cash generated by operations.
  The
        HMO
        is required to maintain statutory minimum net worth requirements established
        by
        the Florida State Office of Insurance Regulation. At December 31, 2007, the
        statutory minimum net worth requirement was approximately $4.7 million and
        the
        actual statutory net surplus was approximately $3.2 million. Subsequent to
        year
        end, we transferred approximately $1.5 million to the HMO so that the HMO
        complies with all applicable statutory requirements. At December 31, 2007,
        the statutorily restricted cash and cash equivalents totals $13.0 million,
        including the $1.5 million transferred subsequent to year end as an addition
        to
        statutory net worth. The HMO is restricted from making dividend payments
        without
        appropriate regulatory notifications and approvals or to the extent such
        dividends would put them in non- compliance with statutory net worth
        requirements. At December 31, 2007, all of the HMO’s cash and cash
        equivalents are subject to these dividend restrictions. Statutorily restricted
        cash is available for us to pay the liabilities of the HMO.
  -
            51 -
 
 Our
        total
        stockholders’ equity increased approximately $7.3 million, or 23.6%, from
        approximately $30.9 million at December 31, 2006 to approximately $38.2 million
        at December 31, 2007.
  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.
  At
        December 31, 2007, we had no outstanding debt.
  Net
        cash provided
        by operating activities for the year ended December 31, 2007 was
        approximately $16.0 million. In
        addition to net income of $5.9 million our significant sources of cash from
        operating activities were:
  ·
              a
                  decrease in deferred income taxes of $3.1
                  million;
 ·
              an
                  increase in the amount due to Humana of $2.0
                  million;
 ·
              an
                  increase in estimated medical expense payable of $2.3
                  million;
 ·
              an
                  increase in accounts payable, accrued payroll and payroll taxes
                  and
                  accrued expenses totaling $1.3 million;
                  and
 ·
              non-cash
                  depreciation and amortization expense of
                  $952,000.
 
 The
        cash
        flows provided by these sources were partially offset by the use
        of
        cash in operating activities resulting from an increase in accounts receivable
        of $901,000.
  The
        increase in the amount
        due to Humana is primarily a result of 2007 drug costs exceeding Part D premiums
        by approximately $4 million. This amount will be refunded to Humana over
        the
        first eight months of 2008.
  Our
        increase in estimated medical expenses payable, also known as IBNR, is primarily
        attributable to the growth of the HMO. The HMO had 3,800 customers at December
        31, 2006. Our customer base increased to 6,200 customers at December 31,
        2007.
        In addition, the HMO’s medical expenses increased from $28.9 million in 2006 to
        $51.2 million in 2007. These factors significantly contributed to the increase
        in the estimated medical expense payable.
  Net
        cash
        used in investing activities for the year ended December
        31 ,
        2007
        was approximately $1.3 million of which $746,000 related to capital expenditures
        and $591,000 related to the acquisition of a physician’s practice.
  Net
        cash
        provided by financing activities for the year ended December
        31 ,
        2007
        was approximately $900,000 which consisted of $507,000 of proceeds from the
        exercise of stock options and $526,000 related to the tax benefit from the
        exercise of the options reduced by payments on a note payable of
        $125,000.
  We
        have a
        one year unsecured commercial line of credit agreement with a bank, which
        provides for borrowings and issuance of letters of credit of up to $1.0 million.
        This line of credit has been extended to March 2008. The outstanding balance,
        if
        any, bears interest at the bank’s prime rate. The credit facility requires us to
        comply with certain financial covenants, including a minimum liquidity
        requirement of $2.0 million. The availability under the line
        of
        credit secures a $1.0
        million letter of credit that
        we
        have caused to be issued in favor of Humana. We
        have
        not utilized this commercial line of credit in 2007 or 2006.
 
 Our
        HMO
        continues to require a considerable amount of capital. In 2007, we contributed
        approximately $14.2 million, including $6.5 million that related to 2006,
        to the
        HMO to finance the operations and growth of the HMO. In the year ended December
        31, 2007, the HMO's business generated a segment loss before allocated overhead
        and income taxes of $10.5 million. Although we expect that we will realize
        a
        gross profit, we anticipate that the HMO will continue to generate a loss
        in
        2008 before allocated overhead and income taxes. The amount of the loss will
        be
        determined by a number of factors including medical utilization and related
        costs, and our decisions related to expansion and growth efforts. We are
        not in
        a position to meaningfully estimate when, if ever, the HMO's business will
        become profitable and/or generate cash from operations, and we may be required
        to fund the development and expansion of the HMO business, including any
        associated losses, for an extended period of time. Nonetheless, we anticipate
        that the on-going development efforts, reserve requirements and operating
        costs
        for our still developing HMO business can be funded by our current resources
        and
        projected cash flows from operations until at least December 31,
        2008.
  -
            52 -
 
 ***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.
  ***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, 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, 2007 we believe our intangible assets, including goodwill, which
        fully relates to the PSN, 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.
 
 ***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.
  -
            53 -
  **Item 8**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
                  (UNAUDITED)**
 
 **For the Quarter Ended****December 31, 2007**
              
              **September 30, 2007**
              
              **June 30, 2007**
              
              **March 31, 2007**Revenue
              
              $
              69,917,123
              
              $
              69,622,067
              
              $
              69,936,634
              
              $
              68,101,456Gross
                  profit
              
              $
              11,015,267
              
              $
              9,117,449
              
              $
              8,831,096
              
              $
              7,917,111Net
                  income
              
              $
              2,557,530
              
              $
              1,597,233
              
              $
              1,530,963
              
              $
              228,272Net
                  income per share - basic
              
              $
              0.05
              
              $
              0.03
              
              $
              0.03
              
              $
              -Net
                  income per share - diluted
              
              $
              0.05
              
              $
              0.03
              
              $
              0.03
              
              $
              -
  **For
                  the Quarter Ended****December 31, 2006**
              
              **September 30, 2006**
              
              **June 30, 2006**
              
              **March 31, 2006**Revenue
              
              $
              55,728,588
              
              $
              60,838,341
              
              $
              56,881,610
              
              $
              54,767,533Gross
                  Profit
              
              $
              2,926,788
              
              $
              8,642,312
              
              $
              5,987,758
              
              $
              5,219,023Net
                  (loss)/income
              
              $
              (2,720,313
              )
              $
              2,532,029
              
              $
              404,147
              
              $
              256,697Net
                  (loss)/income per share - basic
              
              $
              (0.05
              )
              $
              0.05
              
              $
              0.01
              
              $
              -Net
                  (loss)/income per share - diluted
              
              $
              (0.05
              )
              $
              0.05
              
              $
              0.01
              
              $
              -
  **Significant
        Fourth Quarter Adjustments**
  In
        the
        fourth quarter of 2007 we recorded a receivable and recorded revenue of
        approximately $1.3 million related to 2007 retroactive premium payments for
        certain of our HMO customers in 2007 that had not been recognized by CMS
        for
        inclusion in the HMO customer base. Of this amount, approximately $900,000
        were
        premiums earned prior to the fourth quarter.
        In accordance with our policy, we recognized this revenue when we were
        reasonably assured that CMS would recognize these individuals as customers
        of
        our HMO. We received these premium payments from CMS in 2008. We paid the
        medical costs associated with these customers during 2007, even while we
        were
        submitting these customers to CMS for reconsideration. In December 2007 and
        January 2008, CMS finalized the transactions to recognize these customers.
        We
        received retroactive premium payments in 2008 totaling $1.3 million to cover
        the
        premiums for those months in 2007 that these customers were covered by the
        HMO.
 
 During
        the fourth quarter of 2007, estimated medical claims expense related to dates
        of
        service prior to this quarter were less than the amount recorded at September
        30, 2007 by approximately $4.2 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 2007. This amount was recorded as a decrease in medical claims
        expense in the fourth quarter of 2007.
 
 On
        February 26, 2007, CMS sent a notice to all Medicare Advantage organizations
        that certain formulas that had previously been provided by CMS for 2006
        involving the Part D risk corridor calculations were in error and needed
        to be
        corrected. These formulas related to fixed and flexible capitated Part D
        payment
        demonstration target amounts. However; the PSN, through Humana, provides
        drug
        coverage that includes these types of arrangements. Since this formula error
        impacted 2006, we calculated the impact and recorded that amount as a decrease
        to our 2006 fourth quarter revenue of approximately $1.2 million for the
        estimated amount that we will be required to refund back to CMS through Humana.
        This amount was repaid to Humana in 2007. The HMO was not impacted by these
        formula errors.
 
 During
        the fourth quarter of 2006, estimated medical claims expense related to dates
        of
        service prior to this quarter exceeded the amount recorded at September 30,
        2006
        by approximately $600,000. This additional amount was the result of higher
        than
        expected utilization and settlement amounts considered in our original estimate
        of medical claims incurred but not reported at the end of the third quarter
        of
        2006. This amount was recorded as an increase in medical claims expense in
        the
        fourth quarter of 2006. In addition, we reduced the receivable from Humana
        for
        AICDs by $620,000 to reflect the impact of ongoing reviews of the cases in
        dispute.
  -
            54 -
  **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, 2007. 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 adequate  internal
        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.
  Management
        assessed the effectiveness of the Company’s internal control over financial
        reporting as of December 31, 2007. 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, 2007, the
        Company’s internal control over financial reporting is
        effective.
  -
            55 -
 
 *(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, 2007, 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, 2007, based on criteria
        established in *Internal
        Control—Integrated Framework* issued
        by
        COSO.
 
 We
        also
        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, 2007 and 2006, and the related consolidated
        statements of income, changes in stockholders' equity and cash flows for
        each of
        the two years then ended, and our report dated March 3, 2008 expressed an
        unqualified opinion on those financial statements.
 
 /s/
        GRANT
        THORNTON LLP
 
 Miami,
        Florida
 March
        3,
        2008
  -
            56 -
  *(d)
        Changes in Internal Control over Financial Reporting*
  There
        were no changes in our internal control over financial reporting during the
        fourth quarter of 2007 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 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 Annual Meeting of Shareholders to be held on June 26, 2008
        to
        be filed with the Commission pursuant to Regulation 14A (the “2008 Proxy
        Statement”)
 
 **ITEM 11.**
              **EXECUTIVE
                  COMPENSATION**
 
 Information
        responsive to this item is incorporated herein by reference from our 2008
        Proxy
        Statement.
 
 **ITEM 12**
              **SECURITY
                  OWNERSHIP OF******CERTAIN
                  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                  MATTERS**
  The
        information contained in our 2008 Proxy Statement with respect to security
        ownership of certain beneficial owners and management and related stockholder
        matters is incorporated by reference in response to this item.
  **ITEM 13**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                  INDEPENDENCE**
 
 The
        information is contained in our 2008 Proxy Statement with respect to certain
        relationships and related transactions and Director independence is incorporated
        by reference in response to this item.
  -
            57 -
  **ITEM 14**
              **PRINCIPAL
                  ACCOUNTING FEES AND
                  SERVICES**
 
 The
        information is contained in our 2008 Proxy Statement with respect to principal
        accounting fees and services, is incorporated by reference in response to
        this
        item.
  -
            58 -
 
 **PART
        IV**
 
 **ITEM 15**
              **EXHIBITS,
                  FINANCIAL STATEMENT
                  SCHEDULES**
 
 (a)
        The
        following documents are filed as a part of this Form 10-K:
  (1)
        Financial Statements.
  -
            59 -
 
 **METROPOLITAN
        HEALTH**
 **NETWORKS,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2007**
  **C
        O N T E N T S**
 
 PageREPORTS
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
              
              
              F-2CONSOLIDATED
                  FINANCIAL STATEMENTSBalance
                  Sheets
              
              
              F-4Statements
                  of Income
              
              
              F-5Statements
                  of Changes in Stockholders' Equity
              
              
              F-6Statements
                  of Cash Flows
              
              
              F-7Notes
                  to Financial Statements
              
              
              F-9
  -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, 2007 and
        2006,
        and the related consolidated statements of income, changes in stockholders'
        equity, and cash flows for each of the two years in the period ended December
        31, 2007. Our audits of the basic financial statements included the financial
        statement schedule listed in the index appearing under Item 15 ( a)(2).
        These financial statements and financial statement schedule are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements and financial statement schedule 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, 2007 and 2006, and the
        results of their operations and their cash flows for each of the two years
        in
        the period ended December 31, 2007 in conformity with accounting principles
        generally accepted in the United States of America. Also, in our opinion,
        the
        related financials statement schedule, when considered in relation to the
        basic
        financial statement taken as a whole, presents fairly, in all material respects,
        the information set forth therein.
 
 As
        discussed in Note 11 to the consolidated financial statements, the Company
        has
        adopted Financial Accounting Standards Board Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes* in 2007.
        Also discussed in Note 11 to the consolidated financial statements, the Company
        has adopted Securities and Exchange Commission Staff Accounting Bulletin
        No.
        108, *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements* in 2006.
        In addition, as discussed in Note 13 to the consolidated financial statements,
        the Company has adopted Financial Accounting Standards Board Statement No.
        123(R), *Share-Based
        Payment* in
        2006.
 
 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,
        2007,
        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 3, 2008 expressed an unqualified opinion
        thereon.
 
 /s/
        GRANT
        THORNTON LLP
 Miami,
        Florida
 March
        3,
        2008
  -F-2-
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders
 Metropolitan
        Health Networks, Inc. and Subsidiaries
 West
        Palm
        Beach, Florida
 
 We
        have
        audited the accompanying consolidated statements of income, changes in
        stockholders' equity and cash flows for the year ended December 31, 2005.
        Our
        audit also included the 2005 information presented in Schedule I. These
        financial statements and schedule are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these financial
        statements and schedule 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 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 audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the results of operations and cash flows of
        Metropolitan Health Networks, Inc. and Subsidiaries for the year ended December
        31, 2005, in conformity with accounting principles generally accepted in
        the
        United States of America. Also, in our opinion, the 2005 information presented
        in Schedule I, when considered in relation to the basic consolidated financial
        statements taken as a whole, presents fairly, in all material respects the
        information set forth therein.
 
 KAUFMAN,
        ROSSIN & CO., P.A.
  Miami,
          Florida
 March
        11,
        2006, except for the 2005 information
 presented
        in Schedule I, as to which the date is March 22, 2007
  -F-3-
 
 **METROPOLITAN
        HEALTH NETWORKS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **December
                  31,****2007**
              
              **2006****ASSETS**CURRENT
                  ASSETSCash
                  and equivalents, including $13.0 million in 2007 and $12.5 in 2006
                  statutorily limited to use by the HMO
              
              $
              38,682,186
              
              $
              23,110,042Accounts
                  receivable from patients, net of allowance of $614,000 and $601,000
                  in
                  2007 and 2006, respectively
              
              
              1,563,370
              
              
              674,709Due
                  from Humana, net of allowance of $1.6 million in 2006
              
              
              -
              
              
              2,970,821Inventory
              
              
              196,154
              
              
              284,777Prepaid
                  expenses
              
              
              739,307
              
              
              706,390Deferred
                  income taxes
              
              
              2,905,755
              
              
              1,600,000Other
                  current assets
              
              
              676,980
              
              
              1,118,099TOTAL
                  CURRENT ASSETS
              
              
              44,763,752
              
              
              30,464,838PROPERTY
                  AND EQUIPMENT, net of accumulated depreciation and amortization
                  of
                  $2,269,000 and $1,561,000, respectively
              
              
              2,181,119
              
              
              2,275,105INVESTMENT
              
              
              688,997
              
              
              688,997GOODWILL
              
              
              2,585,857
              
              
              1,992,133DEFERRED
                  INCOME TAXES
              
              
              1,403,082
              
              
              5,767,000OTHER
                  INTANGIBLE ASSETS, net of accumulated amortization of
                  $99,000
              
              
              1,588,498
              
              
              -OTHER
                  ASSETS
              
              
              599,742
              
              
              652,960TOTAL
                  ASSETS
              
              $
              53,811,047
              
              $
              41,841,033**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,461,668
              
              $
              887,174Estimated
                  medical expenses payable
              
              
              7,016,632
              
              
              4,743,737Due
                  to CMS
              
              
              2,695,087
              
              
              2,702,825Accrued
                  payroll and payroll taxes
              
              
              2,546,295
              
              
              1,810,428Due
                  to Humana
              
              
              753,466
              
              
              -Accrued
                  expenses
              
              
              1,071,920
              
              
              767,606TOTAL
                  CURRENT LIABILITIES
              
              
              15,545,068
              
              
              10,911,770COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS'
                  EQUITYPreferred
                  stock, par value $.001 per share; stated value $100 per share;
                  10,000,000
                  shares authorized; 5,000 issued and outstanding, with a liquidation
                  preference of $516,667 and $466,667 in 2007 and 2006
              
              
              500,000
              
              
              500,000Common
                  stock, par value $.001 per share; 80,000,000 shares authorized;
                  51,556,732
                  and 50,268,964 issued and outstanding at December 31, 2007 and
                  2006,
                  respectively
              
              
              51,557
              
              
              50,269Additional
                  paid-in capital
              
              
              43,311,741
              
              
              41,453,311Accumulated
                  deficit
              
              
              (5,597,319
              )
              
              (11,074,317
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              38,265,979
              
              
              30,929,263TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              53,811,047
              
              $
              41,841,033
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -F-4-
 
 **METROPOLITAN
        HEALTH NETWORKS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 
 **Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**REVENUE
              
              $
              277,577,289
              
              $
              228,216,073
              
              $
              183,765,191MEDICAL
                  EXPENSESMedical
                  claims expense
              
              
              229,420,767
              
              
              195,017,923
              
              
              154,784,254Medical
                  center costs
              
              
              11,275,599
              
              
              10,600,971
              
              
              10,346,491Total
                  Medical Expenses
              
              
              240,696,366
              
              
              205,618,894
              
              
              165,130,745GROSS
                  PROFIT
              
              
              36,880,923
              
              
              22,597,179
              
              
              18,634,446OTHER
                  OPERATING EXPENSESAdministrative
                  payroll, payroll taxes and benefits
              
              
              13,108,160
              
              
              10,843,979
              
              
              6,866,806Marketing
                  and advertising
              
              
              3,959,220
              
              
              3,709,511
              
              
              2,754,198Restructuring
                  expense
              
              
              583,795
              
              
              -
              
              
              -General
                  and administrative
              
              
              11,158,177
              
              
              8,276,641
              
              
              5,780,764Total
                  Other Operating Expenses
              
              
              28,809,352
              
              
              22,830,131
              
              
              15,401,768OPERATING
                  INCOME (LOSS)
              
              
              8,071,571
              
              
              (232,952
              )
              
              3,232,678OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              1,396,624
              
              
              1,057,007
              
              
              449,752Other
                  (expense) income
              
              
              (27,457
              )
              
              (16,396
              )
              
              115,451Recovery
                  on note receivable - pharmacy
              
              
              -
              
              
              17,902
              
              
              51,668Total
                  other income (expense)
              
              
              1,369,167
              
              
              1,058,513
              
              
              616,871INCOME
                  BEFORE INCOME TAXES
              
              
              9,440,738
              
              
              825,561
              
              
              3,849,549INCOME
                  TAX EXPENSE
              
              
              3,526,740
              
              
              353,000
              
              
              1,467,806NET
                  INCOME
              
              $
              5,913,998
              
              $
              472,561
              
              $
              2,381,743NET
                  EARNINGS PER SHARE:Basic
              
              $
              0.12
              
              $
              0.01
              
              $
              0.05Diluted
              
              $
              0.11
              
              $
              0.01
              
              $
              0.05
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -F-5-
 
 **METROPOLITAN
        HEALTH NETWORKS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**
 
 **Common**
              
              
              
              **Additional****Preferred**
              
              **Preferred**
              
              **Stock**
              
              **Common**
              
              **Paid-in**
              
              **Prepaid**
              
              **Accumulated****Shares**
              
              **Stock**
              
              **Shares**
              
              **Stock**
              
              **Capital**
              
              **Expenses**
              
              **Deficit**
              
              **Total**BALANCES
                  - DECEMBER 31, 2004
              
              
              5,000
              
              $
              500,000
              
              
              48,004,262
              
              $
              48,004
              
              $
              37,527,529
              
              $
              (97,282
              )
              $
              (13,415,621
              )
              $
              24,562,630Shares
                  issued for compensation
              
              
              -
              
              
              -
              
              
              47,614
              
              
              48
              
              
              134,702
              
              
              -
              
              
              -
              
              
              134,750Exercise
                  of options and warrants
              
              
              -
              
              
              -
              
              
              1,799,650
              
              
              1,799
              
              
              1,426,658
              
              
              -
              
              
              -
              
              
              1,428,457Repurchase
                  of warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (85,000
              )
              
              -
              
              
              -
              
              
              (85,000
              )Amortization
                  of securities issued for
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              -professional
                  services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              97,282
              
              
              -
              
              
              97,282Tax
                  benefit on exercise of options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,179,000
              
              
              -
              
              
              -
              
              
              1,179,000Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,381,743
              
              
              2,381,743BALANCES
                  - DECEMBER 31, 2005
              
              
              5,000
              
              
              500,000
              
              
              49,851,526
              
              
              49,851
              
              
              40,182,889
              
              
              -
              
              
              (11,033,878
              )
              
              29,698,862Exercise
                  of options and warrants
              
              
              -
              
              
              -
              
              
              427,133
              
              
              427
              
              
              463,362
              
              
              -
              
              
              -
              
              
              463,789Stock-based
                  compensation expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              736,315
              
              
              -
              
              
              -
              
              
              736,315Repurchase
                  of shares from exercise of option
              
              
              -
              
              
              -
              
              
              (94,695
              )
              
              (94
              )
              
              (326,345
              )
              
              -
              
              
              -
              
              
              (326,439
              )Shares
                  issued for directors' fees
              
              
              -
              
              
              -
              
              
              60,000
              
              
              60
              
              
              88,365
              
              
              -
              
              
              -
              
              
              88,425Shares
                  issued for legal settlement
              
              
              -
              
              
              -
              
              
              25,000
              
              
              25
              
              
              68,725
              
              
              -
              
              
              -
              
              
              68,750Tax
                  benefit on exercise of options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              240,000
              
              
              -
              
              
              -
              
              
              240,000Cumulative
                  effect of adopting SAB 108
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (513,000
              )
              
              (513,000
              )Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              472,561
              
              
              472,561BALANCES
                  - DECEMBER 31, 2006
              
              
              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 FASB Interpretation No. 48
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (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
              )
              $
              38,265,979
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -F-6-
 
 **METROPOLITAN
        HEALTH NETWORKS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 **Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              5,913,998
              
              $
              472,561
              
              $
              2,381,743Adjustments
                  to reconcile net income to net cash provided
                  by/(used in) operating activities:Depreciation
                  and amortization
              
              
              951,900
              
              
              554,354
              
              
              355,318Bad
                  debt expense
              
              
              549,266
              
              
              1,740,000Loss
                  from disposal of property and equipment
              
              
              110,437
              
              
              -
              
              
              -Stock-based
                  compensation expense
              
              
              615,776
              
              
              736,315
              
              
              -Shares
                  issued for director fees
              
              
              211,016
              
              
              88,425
              
              
              -Shares
                  issued for legal settlement
              
              
              -
              
              
              68,750
              
              
              -Stock
                  issued for compensation and services
              
              
              -
              
              
              -
              
              
              134,750Amortization
                  of securities issued for professional services
              
              
              -
              
              
              -
              
              
              97,282Deferred
                  income taxes
              
              
              3,147,163
              
              
              329,000
              
              
              1,467,110Excess
                  tax benefits from share-based compensation
              
              
              (526,000
              )
              
              (240,000
              )
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable from patients
              
              
              (900,927
              )
              
              (1,201,556
              )
              
              (2,709,536
              )Inventory
              
              
              88,623
              
              
              (83,347
              )
              
              16,200Prepaid
                  expenses
              
              
              (32,917
              )
              
              (233,104
              )
              
              (50,447
              )Other
                  current assets
              
              
              441,119
              
              
              (570,123
              )
              
              16,014Other
                  assets
              
              
              43,903
              
              
              (30,332
              )
              
              (215,936
              )Accounts
                  payable
              
              
              574,494
              
              
              (82,011
              )
              
              128,713Estimated
                  medical expenses payable
              
              
              2,272,895
              
              
              4,049,327
              
              
              694,410Due
                  to CMS
              
              
              (7,738
              )
              
              2,702,825
              
              
              -Accrued
                  payroll and payroll taxes
              
              
              735,867
              
              
              351,330
              
              
              141,668Due
                  from/(to) Humana
              
              
              1,757,911Accrued
                  expenses
              
              
              54,314
              
              
              498,054
              
              
              108,820Total
                  adjustments
              
              
              10,087,102
              
              
              8,677,907
              
              
              184,366Net
                  cash provided by operating activities
              
              
              16,001,100
              
              
              9,150,468
              
              
              2,566,109CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (745,678
              )
              
              (1,929,461
              )
              
              (420,998
              )Cash
                  paid for physician practice acqusition
              
              
              (591,204
              )
              
              -
              
              
              -Short-term
                  investments
              
              
              -
              
              
              -
              
              
              1,500,000Investments
              
              
              -
              
              
              (61,177
              )
              
              (627,819
              )Redemption
                  of restricted certificates of deposit
              
              
              -
              
              
              -
              
              
              1,000,000Net
                  cash (used in)/ provided by investing activities
              
              
              (1,336,882
              )
              
              (1,990,638
              )
              
              1,451,183CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayments
                  on notes payable
              
              
              (125,000
              )
              
              -
              
              
              (1,132,000
              )Repurchase
                  of warrants
              
              
              -
              
              
              -
              
              
              (85,000
              )Proceeds
                  from exercise of stock options and warrants, net
              
              
              506,926
              
              
              137,350
              
              
              1,428,457Excess
                  tax benefits from stock-based compensation
              
              
              526,000
              
              
              240,000
              
              
              -Net
                  cash provided by financing activities
              
              
              907,926
              
              
              377,350
              
              
              211,457NET
                  INCREASE IN CASH AND EQUIVALENTS
              
              
              15,572,144
              
              
              7,537,180
              
              
              4,228,749CASH
                  AND EQUIVALENTS - beginning of year
              
              
              23,110,042
              
              
              15,572,862
              
              
              11,344,113CASH
                  AND EQUIVALENTS - end of year
              
              $
              38,682,186
              
              $
              23,110,042
              
              $
              15,572,862
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -F-7-
 
 **METROPOLITAN
        HEALTH NETWORKS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (continued)**
 
 **Years
                  ended December 31,****2007**
              
              **2006**
              
              **2005**Supplemental
                  Disclosures:Interest
                  Paid
              
              $
              34,182
              
              $
              28,086
              
              $
              20,195Supplemental
                  Disclosure of Non-cash Investing and Financing Activities:Tax
                  benefit on exercise of stock options
              
              $
              -
              
              $
              -
              
              $
              1,179,000Issuance
                  of note payable for physician practice acquisition
              
              $
              375,000
              
              $
              -
              
              $
              -Liabilities
                  assumed in connection with assumption of contracts
              
              $
              1,429,000
              
              $
              -
              
              $
              -
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  -F-8-
 
 **Metropolitan
        Health Networks, Inc. and Subsidiaries**
  **Year
        Ended December 31, 2007**
  **Notes
        to Consolidated Financial Statements**
  **NOTE
        1 - ORGANIZATION AND BUSINESS ACTIVITY**
  Metropolitan
        Health Networks, Inc. (also referred to as “Metropolitan” “the Company,” “we,”
“us,” and “our”) owns and operates provider service networks (“PSN”) through our
        wholly owned subsidiary, Metcare of Florida, Inc. We also operate a health
        maintenance organization (“HMO”) through our wholly owned subsidiary, METCARE
        Health Plans, Inc.
 
 The
        PSN operates
        under agreements  (the
        “Humana Agreements”) with a
        national health maintenance organization, Humana Inc. (“Humana”) to provide
        medical care to Medicare beneficiaries. To
        deliver care, we utilize our wholly-owned medical
        practices and also have
        contracted directly or indirectly though Humana with
        non-owned medical practices ,
        service providers and
        hospitals (collectively the “Affiliated Providers”). The PSN  operates
        in South Florida and Central Florida. Approximately 79.7%, 86.9% and 97.8% of our total revenue in 2007, 2006 and
        2005, respectively, was through the Humana Agreements.
 
 Effective
        August 1, 2007, the PSN entered into a network agreement (the “CarePlus
        Agreement”) with CarePlus Health Plans, Inc., a Medicare Advantage health plan
        in Florida. CarePlus is a wholly-owned subsidiary of Humana. Pursuant to
        the
        CarePlus Agreement, the PSN will provide, on a non-exclusive basis, healthcare
        services to Medicare beneficiaries in nine Florida counties.
 
 The
        HMO
        has been operating and marketing its "AdvantageCare" branded plan since July
        2005. At December 31, 2007, the HMO offers plans in 13 counties in Florida. The
        HMO’s
        agreement with the Center for Medicare and Medicaid Services (“CMS”) is
        generally renewed for a one-year term each December 31 unless CMS notifies
        the HMO of its decision not to renew by May 1 of the contract year, or the
        HMO notifies CMS of its decision not to renew by the first Monday in June
        of the
        contract year. Approximately 19.8%, 12.4% and 1.5% of our total revenue in
        2007,
        2006 and 2005, respectively, was generated by the HMO.
 
 We
        manage
        the PSN and HMO as separate business segments. We
        identified our segments in accordance with the aggregation provisions of
        Statement of Financial Accounting Standards (“SFAS”) No. 131, *Disclosures
        about Segments of an Enterprise and Related Information,* 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,
        the nature of the services provided, and benefits. The results of each segment
        are measured by income before income taxes. We allocate all selling, general
        and
        administrative expenses, investment and other income, interest expense, goodwill
        and certain other assets and liabilities to our segments. Our segments do
        share
        overhead costs.
 
 **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
        (“GAAP”). The
        consolidated financial statements include the accounts of Metropolitan Health
        Networks, Inc., and subsidiaries that we control. All
        significant intercompany balances and transactions have been eliminated in
        consolidation.
  **Use
        of Estimates**
 
 The
        preparation of financial statements in accordance with 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 and Medicare contracts, amounts
        in
        dispute with Humana, 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.
  -F-9-
 
 **Revenue**
 
 Revenue
        is primarily derived from risk-based health insurance arrangements in which
        the
        premium is fixed and is paid to us on a monthly basis. We assume the economic
        risk of funding our customers’ health care services and related administrative
        costs. Premium revenue is recognized in the period in which eligible individuals
        are entitled to receive health care services. Because we have the obligation
        to
        fund the medical expenses, we recognize gross revenue and medical expenses
        for
        these contracts in our consolidated financial statements. We record health
        care
        premium payments received in advance of the service period as unearned
        premiums.
 
 CMS
        periodically retroactively adjusts the premiums paid to us based on the updated
        health status of participants (known as a medical risk adjustment or “MRA”
score). The factors considered in this update include changes in demographic
        factors, risk scores, customer information and adjustments required by the
        risk
        sharing requirements for prescription drug benefits under Part D of the Medicare
        program. We record an estimate of the retroactive MRA score premium adjustments
        that we expect to receive in subsequent periods for both the HMO and PSN.
        However, there can be no assurance that our estimate of the retroactive risk
        score premium adjustment receivable will not be materially different than
        the
        amount ultimately approved by CMS.
 
 R etroactive
        customer adjustments resulting from enrollment changes not yet processed,
        or not
        yet reported by Humana or CMS also occur. These
        retroactive adjustments could, in the near term, materially impact the revenue
        that has been recorded by us for both the HMO and PSN. We record any adjustment
        to this revenue at the time the information necessary to make the determination
        of the adjustment is received from the Humana or CMS and the collectibility
        of
        the amount is reasonably assured.
  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 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 is recorded as earned and is included in other income.
  **Medical
        Expense and Medical Claims Payable**
  Medical
        expenses for both the PSN and HMO 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.
  -F-10-
 
 Medical
        expense also includes, 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 represents payments for customers’ prescription drug benefits,
        net of rebates from drug manufacturers. Rebates are recognized when the rebates
        are earned according to the contractual arrangements with the respective
        vendors.
  Both
        the
        HMO and PSN 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 revenue from Humana for the PSN, and CMS for
        the
        HMO, may be insufficient to cover the costs of care provided. When it is
        probable that expected future health care costs and maintenance costs will
        exceed the anticipated capitated 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, 2007 or 2006 and because our contracts renew annually, we do
        not anticipate recording a premium deficiency liability, except when
        unanticipated adverse events or changes in circumstances indicate
        otherwise.
 
 **Cash,
        Cash Equivalents and Investments**
 
 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
        with maturities of less than one year are classified as short-term.
 
 **Accounts
        Receivable from Patients**
 
 Accounts
        receivable from patients represents amount due for medical services provided
        to
        individuals that are not customers of our HMO or PSN in our owned physician
        practices. 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 currently.
 
 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, 2007, 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:
  -F-11-




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





**Investment**





Our
      investment consists of an equity interest in a non-assessable reciprocal
      insurance organization through which we have renewed our malpractice insurance
      and is carried at cost. If impairment occurs that is not considered temporary,
      the investment will be written down to net realizable value. At December 31,
      2007, we do not believe any impairment has been incurred in connection with
      this
      investment.





**Deferred
      Tax Asset**





Realization
      of our deferred tax asset is dependent on generating sufficient taxable income
      prior to the expiration of our various net operating loss carry forwards. 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.





In
      the
      future, if we determine that we cannot, on a more likely than not basis, realize
      all or part of our
      deferred tax assets, an adjustment to establish a deferred tax asset valuation
      allowance would be charged to income in the period in which 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. SFAS No. 142, *Goodwill
      and Other Intangible Assets,* 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
      amortize intangible assets with determinable lives over 1 to 5 years.





SFAS
      No.
      142 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 2007, 2006 and
      2005 did not result in an impairment loss.





**Earnings
      Per Share**




Net
      earnings per share, basic is computed by dividing net income by the weighted
      average number of common shares outstanding during the period. Net 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**




Prior
      to
      January 1, 2006, we applied the intrinsic-value-based method of accounting
      prescribed by Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* and
      related interpretations including FASB Interpretation No. 44, *Accounting
      for Certain Transactions involving Stock Compensation, an interpretation of
      APB
      Opinion No. 25* ,
      to
      account for our fixed-plan stock options. Under this method, compensation
      expense was recorded for fixed-plan stock options only if the current market
      price of the underlying stock exceeded the exercise price on the date of grant.
      SFAS No. 123, *Accounting
      for Stock-Based Compensation* and
      SFAS
      No. 148 *Accounting
      for Stock-Based Compensation-Transition and Disclosure, an amendment to FASB
      Statement No. 123,* established accounting and disclosure requirements using a fair-value-based
      method of accounting for stock-based employee compensation plans. As allowed
      by
      SFAS No. 123, we had elected to continue to apply the intrinsic-value-based
      method of accounting described above, and had adopted only the disclosure
      requirements of these statements. Stock options issued to independent
      contractors or consultants were accounted for in accordance with SFAS
      No. 123 and expensed when issued.


-F-12-





Effective
      January 1, 2006, we adopted the fair value recognition provisions of SFAS
      No. 123(R), *Share-Based
      Payment,* using
      the modified prospective transition method, therefore we have not restated
      prior
      period results. Under this method, stock-based compensation expense for 2007
      and
      2006 includes compensation expense for all stock-based compensation awards
      granted prior to, but not yet vested as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      No.
      123. Stock-based compensation expense for all share-based payment awards granted
      after January 1, 2006 is based on the estimated fair value of the award at
      grant-date in accordance with the provisions of SFAS No. 123(R). We recognize
      these compensation costs net of an estimated forfeiture rate and recognize
      the
      compensation costs for only those shares expected to vest. We calculate the
      fair
      value of employee stock options using a Black-Scholes option pricing model
      at
      the time the stock options are granted and that amount is amortized using the
      graded-vesting attribution method over the vesting period of the stock options,
      which is generally up to four years. We estimated the forfeiture rate based
      on
      our historical experience.





As
      a
      result of adopting SFAS No. 123(R) on January 1, 2006, our income before income
      taxes and net income for the year ended December 31, 2006, was approximately
      $736,000 and $459,000, respectively, lower than if we had continued to account
      for share-based compensation under Opinion 25.





**Customer
      Acquisition Costs**





Customer
      acquisition costs are those costs primarily related to the acquisition of new
      and renewal business within our HMO. Such costs include broker commissions
      and
      other costs  we
      incur
      to acquire new business or renew existing business. We expense customer
      acquisition costs related to our employer-group prepaid health services policies
      as incurred in accordance with the *Health
      Care Organization Audit and Accounting Guide* .
      The
      arrangement between the customer and the HMO is typically for a one year period.





**Advertising
      Costs**





Advertising
      expense was approximately $3,047,000, $3,254,000 and $2,669,000 for the years
      ended December 31, 2007, 2006 and 2005, respectively and is expensed as
      incurred.





**Income
      Taxes**





We
      account for income taxes pursuant to SFAS No. 109, *Accounting
      for Income Taxes* ,
      which
      requires income taxes to be 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.





On
      January 1, 2007, we adopted the provisions of Financial Accounting Standards
      Board (“FASB”) Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“Interpretation No. 48”) *.* Previously,
      we had accounted for tax contingencies in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 5, *Accounting
      for Contingencies* .
      As
      required by Interpretation No. 48, which clarifies SFAS Statement No. 109, *Accounting
      for Income Taxes* ,
      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. We have considered the effects of the FASB
      Staff Position (“FSP”) amending Interpretation No. 48 and have considered this
      FSP as if it were adopted at the implementation date of Interpretation No.
      48.
      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.




-F-13-


**Reinsurance
      and Capitation**





To
      mitigate our exposure to high cost medical claims, we have
      reinsurance arrangements that provide for the reimbursement of ****** certain
      customer ****** medical
      expenses. ******  Our
      deductible per customer per year was $125,000 for the HMO for the first 6 months
      of 2007 and $150,000
      thereafter, with a maximum benefit per customer per policy period of $1,000,000.
      For the PSN the deductibles for 2007 were $40,000 in South Florida and $140,000
      in Central Florida, with a maximum benefit per customer per policy period of
      $1,000,000. The deductible for the PSN increased to $200,000 in Central Florida
      as of January 1, 2008.




**Fair
      Value of Financial Instruments**





The
      carrying amounts of cash and cash equivalents, accounts receivable, accounts
      payable, estimated medical expenses payable, due to CMS, and accrued expenses
      approximate fair value due to the short-term nature of these
      instruments.




**Other
      Comprehensive Income**





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





**New
      Accounting Pronouncements**





On
      December 4, 2007, the FASB issued FASB Statement No. 141(R) (“Statement No.
      141(R)”) which replaces FASB Statement No. 141, *Busin* *ess
      Combinations* (“Statement
      No. 141”) . 
      Statement No. 141(R) fundamentally changes many aspects of existing accounting
      requirements for business combinations. It requires, among other things, 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.
      Statement No. 141(R) defines the acquirer as the entity that obtains control
      of
      one or more businesses in the business combination and establishes the
      acquisition date as the date that the acquirer achieves control.  Statement
      No. 141(R) retains the guidance in Statement No. 141 for identifying and
      recognizing intangible assets separately from goodwill. If we enter into
      any business combination after the adoption of Statement No. 141(R), a
      transaction may significantly impact our financial position and earnings, but
      not cash flows, compared to acquisitions prior to the adoption of Statement
      No.
      141(R). The adoption of Statement No. 141(R) is effective beginning in 2009
      and
      both early adoption and retrospective application is prohibited.





In
      September 2006, SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value pursuant
      to
      generally accepted accounting principles, and expands disclosures about fair
      value measurements was issued. SFAS No. 157 does not require any new fair value
      measurements, but provides guidance on how to measure fair value by providing
      a
      fair value hierarchy used to classify the source of the information. This
      statement was to be effective for fiscal years beginning after November 15,
      2007
      however; the portion of SFAS No. 157 related to non-financial assets and
      liabilities, except those that are recognized or disclosed at fair value in
      the
      financial statements on a recurring basis (at least annually), has been deferred
      . We do not anticipate a significant impact on our financial position, earnings
      or cash flows upon adoption.





SFAS
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities, Including
      an
      Amendment of FASB Statement No. 115,* was
      issued in February 2007. SFAS No. 159 allows entities to voluntarily choose
      to
      measure many financial assets and financial liabilities at fair value through
      earnings.  Upon initial adoption, SFAS No. 159 provides entities with
      a one-time chance to elect the fair value option for existing eligible items.
      The effect of the first measurement to fair value is reported as a
      cumulative-effect adjustment to the opening balance of retained earnings in
      the
      year SFAS No. 159 is adopted.  SFAS No. 159 is effective as of the
      beginning of fiscal years starting after November 15, 2007.  We do not
      anticipate a significant impact on our financial position, earnings or cash
      flows upon adoption.





Also
      in
      December 2007, FASB Statement No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements: an amendment of ARB No.
      51* (Statement 160”), was issued by the FASB. Statement No. 160 amends ARB 51 to
      establish accounting and reporting standards for the noncontrolling interest
      in
      a subsidiary and for the deconsolidation of a subsidiary.  It also amends
      certain of ARB No. 51’s consolidation procedures for consistency with the
      requirements of Statement
      No. 141(R), *Business
      Combinations* . **** Statement
      No. 160 is effective for fiscal years beginning on or after December 15, 2008.
      The adoption of Statement No. 160 is not expected to have any impact on our
      financial statements.


-F-14-




**NOTE
      3 – PHYSICIAN PRACTICES**





Effective
      July 31, 2007, the PSN acquired certain assets of one of our contracted
      independent primary care physician practices
      in the Central Florida market for approximately $875,000, plus transaction
      costs
      of approximately $91,000. The acquisition price was paid in cash and a note
      payable of $375,000. The note is payable in 6 equal installments and is included
      in accrued expenses. This transaction has been accounted for under the purchase
      method of accounting. The purchase price has been allocated as
      follows:


Goodwill
              
              $
              594,000Patient
                  base
              
              
              142,000Non-compete
                  agreement
              
              
              116,000Medical
                  equipment
              
              
              114,000$
              966,000


The
      patient base is being amortized over one year and the non-compete agreement
      is
      being amortized over a 3 year period.





Effective
      December 1, 2007, the PSN assumed responsibility for managing the health care
      of
      approximately 1,000 Humana Medicare Advantage customers in South Florida. The
      1,000 Humana Medicare Advantage customers were being treated at three physician
      practices, not affiliated with the PSN, with five locations in Broward and
      Palm
      Beach Counties. In connection with this transaction, we assumed liabilities
      of
      approximately $1.4 million. The related contract acquisition cost is being
      amortized over 5 years.





In
      addition, the PSN opened a medical center in its Central Florida market on
      December 1, 2007.





**NOTE
      4 - MAJOR CUSTOMERS**





*Humana*





Our
      PSN
      receives a monthly fee from Humana for each Humana customer that chooses a
      physician that the PSN owns or has contracted with as her or his primary care
      physician. The fixed monthly fee the PSN receives to cover the medical care
      required of that customer is typically 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. During 2006, CMS approved a retroactive
      increase in the PSN’s MRA score for 2004 and 2005 which resulted in retroactive
      payments in 2006 from Humana. The retroactive payment increased 2006 revenue
      by
      $809,000. The PSN received no retroactive premiums in 2007 for 2006 that
      significantly impacted 2007 revenue. Revenue from Humana accounted for
      approximately 79.7%, 86.9%, and 97.8% of our total revenue in 2007, 2006 and
      2005, respectively.





Humana
      may immediately terminate either 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 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.




-F-15-




*CMS*




The
      HMO
      provides services to Medicare beneficiaries pursuant to the Medicare Advantage
      program. Under our agreement with CMS, the HMO is paid a fixed capitation
      payment each month based on the number of customers and adjusted for demographic
      and health risk factors. Inflation, changes in utilization patterns and average
      per capita fee-for-service Medicare costs are also considered in the calculation
      of the fixed capitation payment by CMS. The initial term of the CMS
      contract has been renewed to December 31, 2008 and is subject to annual renewal
      at the election of CMS. Amounts payable under Medicare Advantage arrangements
      are subject to annual revision by CMS.





In
      2007,
      the HMO received from CMS a retroactive adjustment for the final MRA increase
      for 2006 premiums paid by CMS to the HMO of $575,000. This amount is $340,000
      higher than our recorded estimate at December 31, 2006 of $235,000. The $340,000
      was recorded in revenue in 2007. In 2006, CMS retroactively approved increases
      in the MRA score for 2005 of $53,000. Premium revenue for the HMO was
      approximately 19.8%, 12.4% and 1.5% of our total revenue in 2007, 2006 and
      2005,
      respectively.





**NOTE
      5 - DUE TO/FROM HUMANA**




Amount
      due to/from Humana consisted of the following:




**December
                  31,****2007**
              
              **2006**Due
                  from Humana
              
              $
              19,665,000
              
              $
              20,681,000Due
                  to Humana
              
              
              (20,418,000
              )
              
              (16,089,000
              )(753,000
              )
              
              4,592,000Allowance
                  for doubtful accounts
              
              
              -
              
              
              (1,621,000
              )Total
                  Due (To)/ From Humana
              
              $
              (753,000
              )
              $
              2,971,000





Under
      our
      Agreements with Humana we have the right to offset amounts owed to us with
      amounts we owe to Humana.





During
      2005, the PSN incurred approximately $4.0 million of medical expenses related
      to
      the implantation of certain Implantable Automatic Defibrillators (“AICD”). CMS
      has directed that the costs of certain of these procedures that meet 2005
      eligibility requirements be paid by CMS rather than billed to Medicare Advantage
      plans. At December 31, 2005, we had estimated a recovery for AICD claims we
      had
      paid at December 31, 2005 of approximately $2.2 million, which was recorded
      as a
      reduction of medical expenses in 2005. During 2006, we continued to work with
      Humana to make certain that these cases met the eligibility criteria for payment
      by CMS. As a result of this effort, during 2006 we collected approximately
      $260,000 of this amount and recorded a charge of $1.6 million to direct medical
      expenses to reflect management’s concern about the ultimate collectibility of
      this amount in light of, among other things, revised guidance by CMS regarding
      its reimbursement policies. At December 31, 2006 we estimated future recoveries
      of approximately $270,000 related to AICDs implanted in 2005. During 2007,
      the
      remaining balance of approximately $270,000 was written off to direct medical
      expenses.




-F-16-


**NOTE
      6 - ESTIMATED MEDICAL EXPENSES PAYABLE**




Activity
      in estimated medical expenses payable is as follows:




Year
                Ended December 31,**2007**
            
            **2006**
            
            **2005**Balance
                at beginning of year
            
            $
            16,929,000
            
            $
            13,144,000
            
            $
            10,947,000Incurred
                related to:Current
                year
            
            
            190,798,000
            
            
            166,003,000
            
            
            129,659,000Prior
                years
            
            
            1,427,000
            
            
            1,009,000
            
            
            964,000Total
                incurred
            
            
            192,225,000
            
            
            167,012,000
            
            
            130,623,000Paid
                related to:Current
                year
            
            
            (169,736,000
            )
            
            (149,073,000
            )
            
            (116,515,000
            )Prior
                years
            
            
            (18,208,000
            )
            
            (14,154,000
            )
            
            (11,911,000
            )Total
                paid
            
            
            (187,944,000
            )
            
            (163,227,000
            )
            
            (128,426,000
            )Balance
                at end of year
            
            $
            21,210,000
            
            $
            16,929,000
            
            $
            13,144,000




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




December
                31,**2007**
            
            **2006**
            
            **2005**Estimated
                Medical Expenses PayablePSN
            
            $
            14,193,000
            
            $
            12,185,000
            
            $
            12,450,000HMO
            
            
            7,017,000
            
            
            4,744,000
            
            
            694,000$
            21,210,000
            
            $
            16,929,000
            
            $
            13,144,000




At
      December 31 ,
      2007,
      we determined that the range for estimated medical expenses payable for the
      PSN
      was between $14.3 million and $15.4 million and we recorded a liability at
      the
      actuarial mid-range of $14.7 million. This amount is included within the due
      to
      Humana in the accompanying consolidated balance sheets.





At
      December 31, 2007, we estimated that the range for estimated medical claims
      payable for the HMO was between $7.0 million and $7.9 million and we recorded
      a
      liability of $7.0 million. Based on historical results, we believe that, for
      the
      HMO, this amount represents the best estimate of the ultimate liability.




Amounts
      incurred related to prior years vary from previously estimated liabilities
      as
      the claims ultimately are settled. In 2007, 2006 and 2005, the amount of claims
      paid subsequent to the end of the year exceeded the amount of liability that
      had
      been accrued for payment of these claims at year end. When claims exceed the
      amount accrued this is known as unfavorable claims development and increases
      the
      medical expenses in the following year. Favorable claims development occurs
      when
      claims paid are less than the amount accrued at the end of the year and this
      results is lower medical expenses in the following year.





The
      estimated medical expenses payable at December 31, 2006 ultimately settled
      during 2007 for $1.4 million more than the amounts originally estimated with
      $2.1 million of unfavorable development of this amount related to the PSN and
      $638,000 of favorable development related to the HMO. This represents 0.6%
      of
      total medical expenses recorded in 2007.




The
      estimated medical expenses payableat
      December 31, 2005 ultimately settled during 2006 for $1.0 million more than
      the amounts originally estimated. This represents .5% of medical claim expenses
      recorded in 2006. The $1.0 million change in the amount incurred related to
      years prior to 2006 and was a result of unfavorable developments in our medical
      claims expense, with $740,000 related to the PSN and $260,000 related to the
      HMO.


-F-17-




Estimated
      medical expenses payable at December 31, 2004 ultimately settled during
      2005 for $964,000 more than the amount originally estimated. This amount
      represents 1.0% of medical claim expenses recorded in 2005. This difference
      resulted primarily from unfavorable developments in our medical claims expense
      within the PSN.





We
      maintain our stop loss insurance with a commercial insurance company. Included
      in medical expense for 2007, 2006 and 2005 was stop loss premium expense of
      $2.6
      million, $2.5 million, and $1.9 million and stop loss recoveries of $1.4
      million, $1.0 million, and $504,000, respectively.





**NOTE
      7 - PRESCRIPTION DRUG BENEFITS UNDER MEDICARE PART D**





On
      January 1, 2006, the HMO through CMS and the PSN through the Humana Agreements
      began providing prescription drug benefits in accordance with the requirements
      of Medicare Part D to the HMO's and PSN's Medicare Advantage customers. The
      benefits covered under Medicare Part D are in addition to the benefits covered
      by the HMO and the PSN under Medicare Parts A and B.





In
      general, pursuant to Medicare Part D, pharmacy benefits may vary in terms of
      coverage levels and out-of-pocket costs for beneficiary premiums, deductibles
      and co-insurance. However, all Part D plans must offer either "standard
      coverage" or its actuarial equivalent (with out-of-pocket threshold and
      deductible amounts that do not exceed those of standard coverage). These
      "standard" benefits represent the minimum level of benefits mandated by
      Congress. In addition to defined standard plans offered by the HMO, the PSN,
      through the Humana Agreements, offers certain prescription drug plans containing
      benefits in excess of the standard coverage limits.





The
      payment our HMO receives monthly from CMS for coverage under Medicare Part
      D
      (the "CMS Payment") generally represents the HMO's bid amount for providing
      Part
      D insurance coverage. We recognize premium revenue for the HMO's provision
      of
      Part D insurance coverage ratably over the term of the CMS contract. However,
      the ultimate amount of the CMS Payment is subject to 1) risk corridor
      adjustments and 2) subsidies provided by CMS in order for the HMO and CMS to
      share the risk associated with financing the ultimate costs of the Medicare
      Part
      D benefit.





The
      CMS
      payment is subject to adjustment, positive or negative, based upon the
      application of risk corridors that compare the prescription drug benefit costs
      estimated by the HMO in making its bid to CMS (the "Estimated Costs") to actual
      incurred prescription drug benefit costs (the "Actual Costs"). For 2006 and
      2007, in accordance with federal regulations, the HMO bore all gains and losses
      that fall within 2.5% of its Estimated Costs. To the extent the Actual Costs
      exceed the Estimated Costs by more than 2.5%, CMS may make additional payments
      to the HMO. Conversely, to the extend the Estimated Costs exceed the Actual
      Costs by more than 2.5%, the HMO may be required to refund to CMS a portion
      of
      the CMS Payment. Actual Costs subject to risk sharing with CMS are limited
      to
      the costs that are, or would have been, incurred under the CMS standard benefit
      plan. We estimate and recognize an adjustment to premium revenue from CMS
      related to the risk corridor payment adjustment based upon pharmacy claims
      experience to date as if the CMS contract 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. We record
      a
      receivable/payable in our financial statements for this amount.





Certain
      subsidies represent reimbursements from CMS for claims the HMO paid even though
      it is not ultimately required to bear the risk in connection with such claims.
      These include federally reinsured claims where an HMO customer's actual drug
      spending reaches Part D's annual catastrophic threshold and certain deductible,
      coinsurance and co-payment amounts for low-income beneficiaries. We account
      for
      these subsidies as current liabilities in our consolidated balance sheets and
      as
      an operating activity in our consolidated statements of cash flows. We do not
      recognize premium revenue or claims expense for these subsidies.





The
      HMO
      recognizes pharmacy benefit costs as incurred. The HMO has subcontracted the
      pharmacy claims administration to a third party pharmacy benefit
      manager.


-F-18-





We
      also
      receive Medicare Part D revenue pursuant to the applicable percent of premium
      provided for in the Humana Agreements. As with the HMO, we estimate the pharmacy
      benefit costs as such costs are incurred by the PSN. With regards to the
      estimated amount of any risk corridor adjustments, we have utilized estimates
      provided to us by us and have performed a separate actuarial study of any risk
      corridor adjustments. We have adjusted our premium revenue based on these
      estimates. It is reasonably possible that this estimate could change in the
      near
      term by an amount that could be material.





In
      October 2007, CMS notified the HMO that the HMO owed CMS approximately $2.7
      million for excess Part D premium payments in 2006. At December 31, 2006, the
      HMO had accrued approximately $2.7 million for this refund. The monies were
      recouped by CMS in the fourth quarter of 2007. The estimated refund for 2007
      is
      included in the Due to CMS account in the accompanying consolidated balance
      sheet as of December 31, 2007.





At
      December 31, 2006, the PSN had recorded a liability for the estimated 2006
      Part
      D settlement. Based upon CMS’ final determination in October 2007 of Part D
      costs incurred by the PSN in 2006, we recorded additional revenue in the third
      quarter of 2007 of approximately $1.0 million, representing the amount by which
      our 2006 year-end estimated Part D refund liability exceeded the final amount.
      The PSN includes the estimated Part D refund liability for 2007 in the Due
      to/from Humana account in the accompanying consolidated balance sheet as of
      December 31, 2007.





**NOTE
      8 - PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following:




December
                31,2007
            
            2006Medical
                Equipment
            
            $
            90,000
            
            $
            74,000Furniture
                and Equipment
            
            
            551,000
            
            
            505,000Leasehold
                Improvements
            
            
            2,088,000
            
            
            1,771,000Computers
                and Office Equipment
            
            
            1,699,000
            
            
            1,425,000Other
            
            
            22,000
            
            
            61,0004,450,000
            
            
            3,836,000Less
                Accumulated Depreciation and Amortization
            
            
            (2,269,000
            )
            
            (1,561,000
            )$
            2,181,000
            
            $
            2,275,000




Depreciation
      and amortization of property and equipment totaled approximately $843,000,
      $554,000, and $345,000 in 2007, 2006, and 2005, respectively.




During
      2006, we disposed of fully depreciated fixed assets with historical costs of
      $1,203,000.




**NOTE
      9 - LINE OF CREDIT**





In
      2006
      and 2007 we had an unsecured one year commercial line of credit agreement with
      a
      bank, which provides for borrowings and issuance of letters of credit of up
      to
      $1.0 million. The line of credit currently expires on March 31, 2008. The
      outstanding balance bears interest at the bank’s prime rate (7.25%) and should
      we borrow against this line of credit, the credit facility requires us to comply
      with certain financial covenants, including a minimum liquidity requirement.
      The availability
      under the line
      of
      credit secures a $1.0
      million letter of credit that
      is
      issued in favor of Humana. We
      did
      not use this commercial line of credit in 2007 or 2006.





**NOTE
      10 - RESTRUCTURING EXPENSES AND SEPARATION**





As
      part
      of our continuing efforts to enhance our profitability, 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. The severance
      payments and continuing lease obligations will result in additional future
      cash
      expenditures. We believe that the restructuring will enable us to reduce our
      related operating expenses by approximately $1.2 million per annum, with no
      or
      limited impact on the HMO’s and PSN’s ability to serve their existing customers. 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 2007 and had a negative gross margin. Of
      the
      $583,000 restructuring charge, approximately $400,000 relates to the HMO with
      the balance of $183,000 associated with the PSN.


-F-19-





Severance
      payments associated with the restructuring were substantially paid in 2007.
      Certain cash payments associated with lease terminations are expected to be
      paid
      over the remaining lease terms.





A
      summary
      of the restructuring activity
      during 2007 is as follows:





Restructuring
                costs accrued in 2007
            
            $
            584,000Cash
                paid in 2007
            
            
            (189,000
            )Fixed
                assets disposed of
            
            
            (110,000
            )Balance
                at December 31, 2007
            
            $
            285,000





On
      April
      9, 2007 ( the
      “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. Under the Separation
      Agreement, we agreed, among other things, to provide this individual with her
      base salary, to allow her to participate in certain of our benefit programs
      and
      to provide her with an automobile and mobile phone allowance for twelve months
      following the Separation Date. Under the Separation Agreement, this individual
      has agreed to be bound by restrictive covenants regarding, among other things,
      non-competition with us for a one-year period, non-solicitation of our employees
      for a two-year period and confidentiality. In the second quarter of 2007, 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
      11 - INCOME TAXES**




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




December
                312007
            
            2006
            
            2005**Current**Federal
            
            $
            165,000
            
            $
            24,000
            
            $
            -State
            
            
            -
            
            
            -
            
            
            -**Deferred**Federal
            
            
            2,915,000
            
            
            299,000
            
            
            1,253,000State
            
            
            447,000
            
            
            30,000
            
            
            215,000Income
                Tax Expense
            
            $
            3,527,000
            
            $
            353,000
            
            $
            1,468,000




-F-20-


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:




For
                the years ended December 31,2007
            
            2006
            
            2005Statutory
                federal tax
            
            $
            3,304,000
            
            $
            281,000
            
            $
            1,309,000State
                income taxes, net of federal income tax benefit
            
            
            291,000
            
            
            30,000
            
            
            140,000Permanent
                differences and other
            
            
            (68,000
            )
            
            42,000
            
            
            19,000Income
                tax expense
            
            $
            3,527,000
            
            $
            353,000
            
            $
            1,468,000




Deferred
      tax assets are as follows:




**DEFERRED
        TAX ASSETS:**




As
                of December 31,2007
            
            2006Allowances
                for doubtful accounts
            
            $
            285,000
            
            $
            297,000Net
                operating loss carryforward
            
            
            2,182,000
            
            
            6,130,000Stock-based
                compensation expense
            
            
            495,000
            
            
            277,000Accrued
                expenses
            
            
            395,000
            
            
            336,000Depreciation
                and amortization
            
            
            342,000
            
            
            250,000Deferral
                of HMO start-up costs
            
            
            490,000
            
            
            -Alternative
                minimum tax Carryforward
            
            
            380,000
            
            
            -Other,
                net
            
            
            (260,000
            )
            
            77,000Total
                deferred tax assets
            
            $
            4,309,000
            
            $
            7,367,000Deferred
                income taxes - current
            
            $
            2,906,000
            
            $
            1,600,000Deferred
                income taxes - noncurrent
            
            
            1,403,000
            
            
            5,767,000$
            4,309,000
            
            $
            7,367,000




SFAS
      No.
      109, *Accounting
      for Income Taxes* ,
      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.




As
      a
      result of the adoption of Interpretation No. 48 in 2007,
      we derecognized certain deferred tax assets totaling approximately $437,000,
      which was accounted for as an addition to the accumulated deficit at January
      1,
      2007. Also in 2007, we recognized a tax benefit of $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:




Balance
                at January 1, 2007
            
            $
            437,000Additions
                for tax positions of prior years
            
            
            -Reductions
                as a result of lapse of applicable statute of limitations
            
            
            (177,000
            )Balance
                at December 31, 2007
            
            $
            260,000


-F-21-





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 net operating
      loss carry forwards related to years prior to 2003. To the extent such net
      operating losses are utilized, the years from which the loss carryforwards
      originate are open for examination by the relevant taxing authorities. Upon
      adoption of Interpretation No. 48, we evaluated our tax positions with regard
      to
      these years. The statute of limitations for the federal and Florida 2004 tax
      years will expire in the next twelve months.





The
      Internal Revenue Service is presently examining our 2005 Federal income tax
      return. We do not expect to recognize a significant change to the total amount
      of unrecognized tax benefit as a result of the examination. Tax years subsequent
      to 2003 remain subject to federal and state examination.





We
      recognize interest related to unrecognized tax benefits in interest expense,
      which is included in other income (expense) in the condensed consolidated
      statements of income, and penalties in operating expenses for all periods
      presented. Interest of $25,000 has been accrued for 2007. No penalties have
      been
      accrued in any period presented.




The
      amount of unrecognized tax benefits at December 31, 2007, includes $260,000
      of
      unrecognized tax benefits which, if ultimately recognized, will reduce our
      annual effective tax rate.




In,
      2007,
      2006 and 2005, tax benefits of $526,000, $240,000, and $1,179,000, respectively,
      were recorded directly to equity as a result of the exercise of non-qualified
      stock options.





At
      December 31, 2007, we had net operating loss carryforwards of approximately
      $6.2 million expiring in various years through 2025.





During
      2006, we adopted the Securities and Exchange Commission’s Staff Accounting
      Bulletin (“SAB”) No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      We have
      determined that in 2004 we had included in our operating loss carry forward
      a
      tax benefit of approximately $513,000 that related to a subsidiary that had
      previously been liquidated. As a result of the prior liquidation of this
      subsidiary, the losses related to that subsidiary were not available to us
      and
      should not have been included in our deferred tax benefit when that benefit
      was
      realized in 2004 as a result of a reduction of the valuation allowance. We
      evaluated this matter using both the balance sheet (iron curtain) and income
      statement (rollover) approaches and concluded that the impact of this error
      was
      not material in 2004 and 2005. We have determined that the impact of correcting
      this misstatement is material in 2006 and, therefore, as allowed by SAB 108,
      we
      have recorded this as a cumulative effect change in the Consolidated Statements
      of Changes in Stockholders’ Equity.





**NOTE
      12 - STOCKHOLDERS' EQUITY**




As
      of
      December 31, 2007 and 2006, 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,
      2007 and 2006, the aggregate and per share amounts of cumulative dividend
      arrearages were approximately $516,667 ($103 per share) and $466,667 ($93 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, 2007, 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.




-F-22-




In
      connection with the 2006 bonus plan, during 2007, we issued 193,500 restricted
      shares and options to purchase 482,500 shares of common stock to employees.
      The
      restricted shares 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, have an exercise price equal to the
      closing price of our common stock on the day preceding the grant date.
      Compensation expense related to the restricted stock and options is recognized
      ratably over the vesting period.





During
      the 2007 third quarter, we also issued options to a consultant to purchase
      100,000 shares of our common stock. These options, which fully vest on December
      31, 2007 and expire on June 30, 2008, have an exercise price equal to the
      closing price of our common stock on the day preceding the grant date. The
      expense related to the restricted options is recognized ratably over the vesting
      period. In January 2008, the expiration date of these options was extended
      to
      September 30, 2008.





In
      addition, during 2007, we awarded an aggregate of 157,296 restricted shares
      of
      our common stock and options to purchase 78,648 shares of our common stock
      to
      the non-employee 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 scheduled to vest
      on
      the first anniversary of the date of grant. Compensation expense related to
      the
      restricted shares and stock options is recognized ratably over the vesting
      period.





Shares
      reserved for future issuance at December 31, 2007 are as follows:





**Number of**
              **Shares**Share
                Issuable Upon the Exercise of Stock Options
            
            
            3,887,000Shares
                Issuable Upon the conversion of Preferred Stock
            
            
            355,000Total
            
            
            4,242,000




**NOTE
      13 - STOCK -BASED COMPENSATION**





As
      of
      December 31, 2007, 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 6,000,000 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 2007 and 2006 for the Plans was $588,000 and $736,000,
      respectively.





We
      believe that stock option awards better align the interests of our employees
      with those of our shareholders. Option awards are generally granted with an
      exercise price equal to the closing market price of our common stock on the
      date
      preceding 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 is estimated on the date of grant using the
      Black-Scholes option pricing model that uses 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.




**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005**Risk
                Free Interest Rate
            
            
            4.53% - 4.92
            %
            
            4.56% - 4.99
            %
            
            2.82% - 4.43
            %Expected
                Option Life (in years)
            
            
            1
                -
                4.5
            
            
            2
                -
                4.5
            
            
            1
                -
                4.5Expected
                Volatility
            
            
            50
            %
            
            50
            %
            
            50
            %


-F-23-


A
      summary
      of option activity under the Plans and the changes during the year ended
      December 31, 2007 is presented below:




**Options**
            
            **Shares**
            
            **Weighted Average**
              **Exercise Price**
            
            **Weighted Average**
              **Remaining**
              **Contractual Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                at January 1, 2007
            
            
            5,235,511
            
            $
            1.52
            
            
            5.60
            
            $
            8,555,339Granted
                during 2007
            
            
            661,148
            
            $
            1.68Exercised
            
            
            (915,872
            )
            $
            0.57Forfeited
            
            
            (852,497
            )
            $
            2.38Expired
            
            
            (241,228
            )
            $
            4.32Outstanding
                at December 31, 2007
            
            
            3,887,062
            
            $
            1.53
            
            
            5.84
            
            $
            3,400,883Vested
                or expected to vest at December 31, 2007
            
            
            3,699,592
            
            $
            1.51
            
            
            5.7
            
            $
            3,268,873Exercisable
                at December 31, 2007
            
            
            2,637,264
            
            $
            1.34
            
            
            4.53
            
            $
            2,797,790




The
      weighted average grant date fair value of options grants during the years 2007,
      2006 and 2005 was $0.60, $0.84, and $0.88, 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 2007 and
      2006
      was approximately $1.4 million and $749,000, respectively.




A
      summary
      of the status of our non vested options as of December 31, 2007 and changes
      during the year then ended is presented below:




**Non
                Vested Options**
            
            **Shares**
            
            **Weighted**
              **Average Grant**
              **Date Fair Value**Non
                vested at Janaury 1, 2007
            
            
            1,703,837
            
            $
            0.96Granted
            
            
            661,148
            
            $
            0.60Vested
            
            
            (1,083,925
            )
            $
            0.84Forfeited
            
            
            (31,262
            )
            $
            0.86Non
                vested at December 31, 2007
            
            
            1,249,798
            
            $
            0.84




As
      of
      December 31, 2007, there was $463,000 of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements granted under the
      Plans. That cost is expected to be recognized over a weighted average period
      of
      1.8 years. The total fair value of options vested during the year ended December
      31, 2007 and 2006 was $910,000 and $769,000, respectively.




Cash
      received from option exercises under all share based payment arrangements for
      the years ended December 31, 2007 and 2006 was $507,000 and $137,000,
      respectively. A tax benefit of $526,000 and $240,000 was realized from option
      exercise of the share-based payment arrangements in 2007 and 2006, respectively.




It
      is our
      policy to issue new shares to satisfy share option purchases.




-F-24-


The
      following table illustrates the effect on net income and earnings per share
      if
      we had applied the fair value recognition provisions of Statement
      No. 123 to
      options granted under our Plans in all periods presented prior to the adoption
      of Statement No. 123(R). For purposes of this pro forma disclosure, the value
      of
      the options is estimated using a Black-Scholes option-pricing formula and
      amortized to expense over the options’ vesting periods.




**For the Year**
              **Ended**
              **December 31,****2005**Net
                income, as reported
            
            $
            2,381,743Less:  
                Total stock-based employee compensationexpense
                determined using the fair valuemethod,
                net of related tax
            
            
            (967,904
            )Adjusted
                net income
            
            $
            1,413,839Earnings
                per share:Basic,
                as reported
            
            $
            0.05Basic,
                pro forma
            
            $
            0.03Diluted,
                as reported
            
            $
            0.05Diluted,
                pro forma
            
            $
            0.03




**NOTE
      14 - EARNINGS PER SHARE**





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





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**Net
                Income
            
            $
            5,913,998
            
            $
            472,561
            
            $
            2,381,743Less:
                Preferred stock dividend
            
            
            (50,000
            )
            
            (50,000
            )
            
            (50,000
            )Income
                available to common shareholders
            
            $
            5,863,998
            
            $
            422,561
            
            $
            2,331,743Denominator:Weighted
                average common shares outstanding
            
            
            50,573,349
            
            
            50,032,555
            
            
            48,975,803Basic
                earnings per common share
            
            $
            0.12
            
            $
            0.01
            
            $
            0.05Income
                available to common shareholders
            
            $
            5,863,998
            
            $
            422,561
            
            $
            2,331,743Denominator:Weighted
                average common shares outstanding
            
            
            50,573,349
            
            
            50,032,555
            
            
            48,975,803Common
                share equivalents of outstanding stock:Nonvested
                stock
            
            
            172,184
            
            
            -
            
            
            -Options
                and warrants
            
            
            1,050,652
            
            
            1,440,061
            
            
            2,031,593Weighted
                average common shares outstanding
            
            
            51,796,185
            
            
            51,472,616
            
            
            51,007,396Diluted
                earnings per common share
            
            $
            0.11
            
            $
            0.01
            
            $
            0.05




Securities
      that would potentially dilute earnings per share, basic in the future were
      not
      included in the computation of diluted earnings per share because to do so
      would
      have been anti-dilutive. The anti-dilutive securities consist of the
      following:





·
            Options
                where the exercise price exceeds the average stock price for the
                year are
                considered antidilutive and are excluded form the above calculation.
                These
                options totaled 636,225 in 2007, 557,275 in 2006, and 973,325 in
                2005. The
                weighted average exercise price of these options was $2.65 in 2007,
                $4.10
                in 2006, and $3.49 in 2005.


-F-25-





·
            The
                Series A preferred stock.





**NOTE
      15 - STATUTORY CAPITAL REQUIREMENTS**





The
      HMO
      is required to maintain statutory minimum net worth requirements established
      by
      the Florida State Office of Insurance Regulation. At December 31, 2007, the
      statutory minimum net worth requirement was approximately $4.7 million and
      the
      HMO’s actual statutory net worth was approximately $3.2 million. Prior to March
      31, 2008 we will transfer $1.5 million to the HMO in compliance with applicable
      statutory requirements. At December 31, 2007, the statutorily restricted
      cash and cash equivalents were $13.0 million, including the $1.5 million
      transferred subsequent to year end. The HMO is restricted from making dividend
      payments without appropriate regulatory notifications and approvals or to the
      extent such dividends would put them out of compliance with statutory capital
      requirements. At December 31, 2007, all of the HMO’s cash and cash
      equivalents are subject to these dividend restrictions. Statutorily restricted
      cash is available for us to pay the liabilities of the HMO. The difference
      between the GAAP and statutory deficit is primarily related to certain assets
      of
      the HMO, such as specific accounts receivables of $376,000 and fixed assets
      of
      $550,000 that are not admitted assets for statutory purposes. For GAAP the
      HMO
      has a positive net worth of approximately $3.9 million.





Included
      in other assets in the accompanying consolidated balance sheets is a statutorily
      required $500,000 deposit with the Florida State Office of Insurance Regulation.




**NOTE
      16 - EMPLOYEE BENEFIT PLAN**




We
      have
      adopted a tax qualified employee savings and retirement plan covering our
      eligible employees, the Metropolitan Health Network 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 $15,000 (for the
      year
      ended December 31, 2007). 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 $100,000,
      $148,000, and $125,000 for purposes of making matching contributions for the
      2007, 2006, and 2005 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
      17 - 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, 2007 are as follows:




**Less****Sublease**
            
            **Net
                Minimum****Buildings**
            
            **Equipment******
            
            **Amount**
            
            **Payment**2008
            
            $
            1,152,000
            
            $
            277,000
            
            $
            110,000
            
            $
            1,319,0002009
            
            
            1,106,000
            
            
            244,000
            
            
            114,000
            
            
            1,236,0002010
            
            
            1,052,000
            
            
            213,000
            
            
            117,000
            
            
            1,148,0002011
            
            
            809,000
            
            
            174,000
            
            
            120,000
            
            
            863,0002012
            
            
            543,000
            
            
            98,000.00
            
            
            93,000
            
            
            548,000Thereafter
            
            
            1,446,000
            
            
            -
            
            
            -
            
            
            1,446,000Total
            
            $
            6,108,000
            
            $
            1,006,000
            
            $
            554,000
            
            $
            6,560,000




-F-26-




The
      renewal options on the leases range from 3 to 5 years and contain escalation
      clauses of up to 5%. Rental expense for 2007, 2006, and 2005 was $1.9
      million, $1.9 million, and $1.4 million, respectively.




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.




**Administrative
      Services Agreement**




In
      2005
      we engaged a third party service provider (the “service provider”) to provide
      various administrative and management services to the HMO, including, but not
      limited to, claims processing and adjudication, certain management information
      services, regulatory reporting and customer services pursuant to the terms
      of an
      Administrative Services Agreement (the “Services Agreement”). The initial term
      of the Services Agreement is for five years expiring on June 30, 2010 and
      thereafter is automatically renewable for additional one-year terms unless
      terminated by either party for any reason upon 180 days notice. We compensate
      the service provider for its management services based upon the number of
      enrolled customers in the HMO subject to monthly minimum payments. The minimum
      monthly fee was $25,000 per month through June 30, 2006 and increased to $60,000
      per month for the remaining term of the Service Agreement. In addition, the
      service provider is compensated for providing additional programming services
      on
      an hourly basis. During 2007, 2006 and 2005, we paid an aggregate of $1.2
      million, $751,000 and $487,000 for services in accordance with the Services
      Agreement.




**Litigation**




On
      March
      13, 2007, a complaint was filed by Mr. Noel Guillama, who served as our
      President, Chairman of the Board and Chief Executive Officer from January 1996
      through February 2000, in the Circuit Court of the Fifteenth Judicial Circuit
      in
      and for Palm Beach County, naming us as a defendant.  The dispute
      involves 1,500,000 restricted shares of common stock issued to Mr. Guillama
      in connection with his personal guarantee of a Company line of credit
      in 1999.   We repaid the line of credit and expected, based on
      documentation signed by Mr. Guillama, the 1,500,000 shares issued as collateral
      to be returned to us.  Mr. Guillama alleges that we have breached an
      agreement to remove the transfer restrictions from these shares and is
      seeking damages for breach of contract and specific performance.  We
      believe this lawsuit is without merit and intend to assert an appropriate
      defense.  We filed a motion to dismiss the complaint in May 2007. The
      case
      has been dormant since we filed our motion. These shares have not been reflected
      as issued or outstanding in the accompanying consolidated balance sheets or
      in
      the computations of earnings per share.





We
      are
      also a party to certain other claims arising in the ordinary course of business.
      We believe that the ou tcome
      of
      these matters will not have a material adverse effect on our financial position
      or the results of our operations.




-F-27-


**NOTE
      18 - SEGMENTS**




We
      operate in two segments for purposes of presenting financial information and
      evaluating our performance, the Provider Service Network (the “PSN”) (managed
      care and direct medical services) and the HMO. The HMO division began operations
      July 2005.




YEAR
                ENDED DECEMBER 31, 2007
            
            **PSN**
            
            **HMO**
            
            **Total**Revenue
                from external customers
            
            $
            222,512,000
            
            $
            55,065,000
            
            $
            277,577,000Interest
                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 was approximately $10,052,000 of
      operating costs, inclusive of depreciation and amortization of approximately
      $318,000. This amount was reduced by interest income of approximately $745,000.
      Corporate assets are approximately $5,596,000.




YEAR
                ENDED DECEMBER 31, 2006
            
            **PSN**
            
            **HMO**
            
            **Total**Revenue
                from external customers
            
            $
            199,981,000
            
            $
            28,235,000
            
            $
            228,216,000Interest
                income
            
            
            -
            
            
            424,000
            
            
            424,000Depreciation
                and amortization
            
            
            224,000
            
            
            152,000
            
            
            376,000Segment
                profit (loss) before allocated overhead and income taxes
            
            
            19,884,000
            
            
            (11,700,000
            )
            
            8,184,000Allocated
                corporate overhead
            
            
            4,049,000
            
            
            3,309,000
            
            
            7,358,000Segment
                profit (loss) after allocated overhead and before income
                taxes
            
            
            15,835,000
            
            
            (15,009,000
            )
            
            826,000Segment
                assets
            
            
            18,070,000
            
            
            15,131,000
            
            
            33,201,000





Included
      in allocated corporate overhead in 2006 was approximately $8,003,000 of
      operating costs, inclusive of depreciation and amortization of approximately
      $178,000. This amount was reduced by interest income of approximately $633,000.
      Corporate assets are approximately $8,640,000.




YEAR
                ENDED DECEMBER 31, 2005
            
            **PSN**
            
            **HMO**
            
            **Total**Revenue
                from external customers
            
            $
            180,940,000
            
            $
            2,825,000
            
            $
            183,765,000Interest
                (expense) income
            
            
            (3,000
            )
            
            75,000
            
            
            72,000Depreciation
                and amortization
            
            
            60,000
            
            
            16,000
            
            
            76,000Segment
                profit (loss) before allocated overhead and income taxes
            
            
            15,488,000
            
            
            (6,599,000
            )
            
            8,889,000Allocated
                corporate overhead
            
            
            3,268,000
            
            
            1,771,000
            
            
            5,039,000Segment
                profit (loss) after allocated overhead and before income
                taxes
            
            
            12,220,000
            
            
            (8,370,000
            )
            
            3,850,000Segment
                assets
            
            
            18,006,000
            
            
            6,644,000
            
            
            24,650,000




Included
      in allocated corporate overhead in 2005 was approximately $5,587,000 of
      operating costs, inclusive of depreciation and amortization of $279,000. This
      amount was adjusted by interest income of $374,000. Corporate assets were
      approximately $8,465,000.




-F-28-




**NOTE
      19 - VALUATION AND QUALIFYING ACCOUNTS**




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




**Years Ended December 31,****2007**
            
            **2006**
            
            **2005****Allowance
                for doubtful trade accounts - continuing****operations:**Balance
                at beginning of period
            
            $
            601,000
            
            $
            556,000
            
            $
            2,921,000Charged
                to costs and expenses
            
            
            282,000
            
            
            119,000
            
            
            -Increase
                (Deductions - accounts written off)
            
            
            (269,000
            )
            
            (74,000
            )
            
            (2,365,000
            )Balance
                at end of period
            
            $
            614,000
            
            $
            601,000
            
            $
            556,000**Allowance
                for note receivable:**Balance
                at beginning of period
            
            $
            143,000
            
            $
            161,000
            
            $
            200,000Charged
                to costs and expenses
            
            
            -
            
            
            -
            
            
            -Increase
                (Deductions - accounts written off)
            
            
            -
            
            
            (18,000
            )
            
            (39,000
            )Balance
                at end of period
            
            $
            143,000
            
            $
            143,000
            
            $
            161,000**Allowance
                for AICD receivable:**Balance
                at beginning of period
            
            $
            1,621,000
            
            $
            -
            
            $
            -Charged
                to costs and expenses
            
            
            267,000
            
            
            1,621,000
            
            
            -Increase
                (Deductions - accounts written off)
            
            
            (1,888,000
            )
            
            -
            
            
            -Balance
                at end of period
            
            $
            -
            
            $
            1,621,000
            
            
            -


-F-29-





(2) Financial
      schedules required to be filed by Item 8 of this form, and by Item 15(d)
      below:




Schedule
          I            Condensed
          Financial Information of Registrant





All
      other
      financial schedules have been omitted as the required information is
      inapplicable or has been included in the Notes to Consolidated Financial
      Statements.




-F-30-





**METROPOLITAN
      HEALTH NETWORKS, INC.**




**EXHIBIT
      INDEX**




**Year
      Ended December 31, 2007**




(3)
                Exhibits3.1.
            Articles
                of Incorporation, as amended (1)3.2
            Amended
                and Restated Bylaws (2)10.1
            Physician
                Practice Management Participation Agreement, dated August 2, 2001,
                between
                Metropolitan of Florida, Inc. and Humana, Inc. (3)10.2.
            Letter
                of Agreement, dated February 2003, between Metropolitan of Florida,
                Inc.
                and Humana, Inc. (4)10.3.
            Physician
                Practice Management Participation Agreement, dated December 1, 1998,
                between Metcare of Florida, Inc. and Humana, Inc.(5)10.4.
            Supplemental
                Stock Option Plan (6)10.5.
            Omnibus
                Equity Compensation Plan (7)10.6.
            Amended
                and Restated Employment Agreement between Metropolitan and Michael
                M.
                Earley dated January 3, 2005 (8)10.7.
            Amended
                and Restated Employment Agreement between Metropolitan and Robert
                J. Sabo
                dated November 9, 2006 (9)10.8.
            Amended
                and Restated Employment Agreement between Metropolitan and Roberto
                L.
                Palenzuela dated January 3, 2005 (8)10.9
            Employment
                Agreement between Metcare of Florida, Inc. and Jose A. Guethon, M.D.
                (5)10.10.
            Form
                of Option Award Agreement for Option Grants to Directors pursuant
                to the
                Omnibus Compensation Plan (5)10.11.
            Form
                of Option Award Agreement for Option Grants to Key Employees pursuant
                to
                the Omnibus Compensation Plan (5)10.12.
            Form
                of Option Award Agreement for Option Grants to Employees pursuant
                to the
                Omnibus Compensation Plan (5)10.13.
            Agreement
                between Metcare of Florida, Inc. and the Centers for Medicare and
                Medicaid
                Services (5)10.14
            Transition
                and Severance Agreement between Metropolitan and Debra A. Finnel,
                dated
                April 9, 2007 (10)10.15
            Summary
                of 2007 Annual Bonus Plan for Executive Officers and certain key
                management employees (11)10.16
            Summary
                of 2007 Director Compensation Plan*10.17
            Form
                of Restricted Stock Award Agreement for Restricted Stock Grants to
                Directors pursuant to the Omnibus Compensation
                Plan*




-
          60 -




10.18
            Form
                of Restricted Stock Award Agreement for Restricted Stock Grants to
                Management pursuant to the Omnibus Compensation Plan*14.1
            Code
                of Business Conduct and Ethics21.1
            List
                of Subsidiaries*23.1
            Consent
                of Independent Registered Public Accounting Firm*23.2
            Consent
                of Former 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 Metropolitan's Registration Statement on Form 8-A12B
                filed
                with the Commission on November 19, 2004 (No.
                001-32361).(2)
            Incorporated
                by reference to Metropolitan's Current Report on Form 8-K filed with
                the
                Commission on September 30, 2004.(3)
            Incorporated
                by reference to Metropolitan's Amendment to 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.(4)
            Incorporated
                by reference to Metropolitan's Amendment to 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.(5)
            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.(6)
            Incorporated
                by reference to Metropolitan's Amendment to Annual Report for the
                year
                ended December 31, 2003 on Form 10-K/A filed with the Commission
                on July
                28, 2004.(7)
            Incorporated
                by reference to Metropolitan's Registration Statement on Form S-8
                filed
                with the Commission on February 24, 2005 (No.
                333-122976).(8)
            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.(9)
            Incorporated
                by reference to Metropolitan's Current Report on Form 8-K filed with
                the
                Commission on October 20, 2006.(10)
            Incorporated
                by reference to Metropolitan's Current Report on Form 8-K filed with
                the
                Commission on April 9, 2007.




-
          61 -





**(11)**  **INCORPORATED
      BY REFERENCE TO METROPOLITAN'S CURRENT**


**REPORT
      ON FORM 8-K FILED WITH THE COMMISSION ON SEPTEMBER 26,**


**2007.** **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 1st day of March
      2008.*




METROPOLITAN
                HEALTH NETWORKS, INC.By:
            /s/
                MICHAEL M. EARLEYMichael
                M. Earley, Chairman and Chief
              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
                3, 2008
            /s/
                MICHAEL M. EARLEYMichael
                M. EarleyChairman
                and Chief Executive OfficerMarch
                3, 2008
            /s/
                ROBERT J. SABORobert
                J. SaboChief
                Financial OfficerMarch
                3, 2008
            /s/
                KARL M. SACHSKarl
                M. SachsDirectorMarch
                3, 2008
            /s/
                MARTIN W. HARRISONMartin
                W. HarrisonDirectorMarch
                3, 2008
            /s/
                ERIC HASKELLEric
                HaskellDirectorMarch
                3, 2008
            /s/
                BARRY T. ZEMANBarry
                T. ZemanDirectorMarch
                3, 2008
            /s/
                DAVID A. FLORMANDavid
                A. FlormanDirectorMarch
                3, 2008
            /s/
                ROBERT E. SHIELDSRobert
                E. ShieldsDirector




-
          62 -





**METROPOLITAN
      HEALTH NETWORKS, INC. - PARENT COMPANY ONLY**


**SCHEDULE
      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT**


**BALANCE
      SHEETS**





**December 31,****2007**
            
            **2006****ASSETS**CURRENT
                ASSETSPrepaid
                expenses
            
            $
            425,739
            
            $
            289,610Deferred
                income taxes
            
            
            2,905,755
            
            
            1,600,000TOTAL
                CURRENT ASSETS
            
            
            3,331,494
            
            
            1,889,610PROPERTY
                AND EQUIPMENT, net of accumulated depreciation and amortization of
                $766,000 and $449,000, respectively
            
            
            824,514
            
            
            946,446INVESTMENT
                IN AND ACCOUNTS WITH SUBSIDIARIES
            
            
            34,576,465
            
            
            23,284,788DEFERRED
                INCOME TAXES
            
            
            1,403,082
            
            
            5,767,000OTHER
                ASSETS
            
            
            36,288
            
            
            37,349TOTAL
                ASSETS
            
            $
            40,171,843
            
            $
            31,925,193**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            209,924
            
            
            14,560Accrued
                payroll and payroll taxes
            
            
            1,650,306
            
            
            714,752Accrued
                expenses
            
            
            45,634
            
            
            266,618TOTAL
                CURRENT LIABILITIES
            
            
            1,905,864
            
            
            995,930COMMITMENTS
                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; 51,557,000
                and 50,269,000 issued and outstanding, respectively
            
            
            51,557
            
            
            50,269Additional
                paid-in capital
            
            
            43,311,741
            
            
            41,453,311Accumulated
                deficit
            
            
            (5,597,319
            )
            
            (11,074,317
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            38,265,979
            
            
            30,929,263TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            40,171,843
            
            $
            31,925,193





-
          63
          -





**METROPOLITAN
      HEALTH NETWORKS, INC. - PARENT COMPANY ONLY**


**SCHEDULE
      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT**


**STATEMENTS
      OF INCOME**





**Years Ended December 31,****2007**
            
            **2006**
            
            **2005**REVENUE
            
            $
            -
            
            $
            744
            
            $
            3,497OTHER
                OPERATING EXPENSESAdministrative
                payroll, payroll taxes and benefits
            
            
            5,253,447
            
            
            4,253,552
            
            
            2,492,131Marketing
                and advertising
            
            
            -
            
            
            3,842
            
            
            16,225General
                and administrative
            
            
            4,798,201
            
            
            3,745,719
            
            
            3,078,799Total
                Other Operating Expenses
            
            
            10,051,648
            
            
            8,003,113
            
            
            5,587,155OPERATING
                LOSS
            
            
            (10,051,648
            )
            
            (8,002,369
            )
            
            (5,583,658
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            745,278
            
            
            632,612
            
            
            374,389Interest
                expense
            
            
            (32,479
            )
            
            (8,981
            )
            
            (11,371
            )Other
                income
            
            
            14,286
            
            
            2,432
            
            
            129,913Recovery
                on note receivable - pharmacy
            
            
            -
            
            
            17,902
            
            
            51,668Total
                other income (expense)
            
            
            727,085
            
            
            643,965
            
            
            544,599LOSS
                FROM OPERATIONS BEFORE INCOME TAXES
            
            
            (9,324,563
            )
            
            (7,358,403
            )
            
            (5,039,059
            )Income
                tax benefit
            
            
            (3,439,200
            )
            
            (3,146,366
            )
            
            (1,921,357
            )LOSS
                BEFORE EQUITY IN NET INCOME OF SUBSIDIARIES
            
            
            (5,885,363
            )
            
            (4,212,037
            )
            
            (3,117,702
            )EQUITY
                IN NET INCOME OF SUBSIDIARIES
            
            
            11,799,361
            
            
            4,684,598
            
            
            5,499,445NET
                INCOME
            
            $
            5,913,998
            
            $
            472,561
            
            $
            2,381,743





- 64
          -





**METROPOLITAN
      HEALTH NETWORKS, INC. - PARENT COMPANY ONLY**


**SCHEDULE
      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT**


**STATEMENTS
      OF CASH FLOWS**


**Years Ended December 31,****2007**
            
            **2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            5,913,998
            
            $
            472,561
            
            $
            2,381,743Adjustments
                to reconcile net income to net cash used in operating
                activities:Equity
                in net income of subsidiaries
            
            
            (11,799,361
            )
            
            (4,684,598
            )
            
            (5,499,445
            )Depreciation
                and amortization
            
            
            316,734
            
            
            181,358
            
            
            172,034Stock-based
                compensation expense
            
            
            826,792
            
            
            736,315
                -
            
            
            -Tax
                benefit from exercise of options
            
            
            (526,000
            )
            
            (240,000
            )
            
            -Stock
                issued for compensation and services
            
            
            
            
            
            157,176
            
            
            134,750Amortization
                of securities issued for professional services
            
            
            -
            
            
            -
            
            
            97,282Deferred
                income taxes
            
            
            3,147,163
            
            
            329,000
            
            
            1,467,110Intercompany
                tax allocation
            
            
            (6,965,940
            )
            
            (3,499,368
            )
            
            (3,389,163
            )Changes
                in operating assets and liabilities:Prepaid
                expenses
            
            
            (136,129
            )
            
            (249,535
            )
            
            200,722Other
                current assets
            
            
            -
            
            
            -
            
            
            900Other
                assets
            
            
            1,061
            
            
            (4,689
            )
            
            (1,824
            )Accounts
                payable
            
            
            195,364
            
            
            (168,954
            )
            
            (136,442
            )Accrued
                payroll and payroll taxes
            
            
            935,554
            
            
            138,409
            
            
            179,704Accrued
                expenses
            
            
            (220,985
            )
            
            160,604
            
            
            76,475Total
                adjustments
            
            
            (14,225,747
            )
            
            (7,144,282
            )
            
            (6,697,897
            )Net
                cash used in operating activities
            
            
            (8,311,749
            )
            
            (6,671,721
            )
            
            (4,316,154
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Investment
                in and accounts with Subsidiaries
            
            
            7,473,624
            
            
            7,023,023
            
            
            4,197,529Capital
                expenditures
            
            
            (194,802
            )
            
            (728,652
            )
            
            (92,832
            )Net
                cash provided by investing activities
            
            
            7,278,822
            
            
            6,294,371
            
            
            4,104,697CASH
                FLOWS FROM FINANCING ACTIVITIES:Repayments
                on notes payable
            
            
            -
            
            
            -
            
            
            (1,132,000
            )Repurchase
                of warrants
            
            
            -
            
            
            -
            
            
            (85,000
            )Proceeds
                from exercise of stock options and warrants, net
            
            
            506,926
            
            
            137,350
            
            
            1,428,457Tax
                benefit from exercise of options
            
            
            526,000
            
            
            240,000
            
            
            -Net
                cash provided by financing activities
            
            
            1,032,926
            
            
            377,350
            
            
            211,457NET
                INCREASE IN CASH AND EQUIVALENTS
            
            
            -
            
            
            -
            
            
            -CASH
                AND EQUIVALENTS - beginning of year
            
            
            -
            
            
            -
            
            
            -CASH
                AND EQUIVALENTS - end of year
            
            $
            -
            
            $
            -
            
            $
            -





- 65
          -


**METROPOLITAN
      HEALTH NETWORKS, INC. – PARENT COMPANY ONLY**


**NOTES
      TO CONDENSED FINANCIAL INFORMATION**





**NOTE
      1. BASIS OF PRESENTATION**





Parent
      Company Only financial statements should be read in conjunction with the
      Company’s consolidated financial statements.





For
      purposes of these condensed financial statements, the Parent’s investments in
      its subsidiaries are accounted for by the equity method.





**NOTE
      2.**  **INCOME TAXES**





The
      Parent and its subsidiaries have agreed that all tax liabilities or assets
      are
      recognized at the Parent Company level.




- 66
          -