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, 2008ORo
                                        TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934


For the
transition period from ____________ to ____________





Commission
file number:  0-28456





METROPOLITAN
HEALTH NETWORKS, INC.


(Exact
name of registrant as specified in its charter)





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





(561)
805-8500


(Registrant’s
telephone number, including area code)




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




Title
      of each class
              
              Name
      of each exchange on which registeredCommon
      Stock, $.001 par value per share
              
              NYSE
      Alternext US 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 oNo  x


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




Yes  ̈No  x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes xNo   ̈





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.   ̈











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


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes
 ̈No  x





As of
June 30, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $93,066,185based
on the closing sale price as reported on the NYSE Alternext US
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 16, 2009Common
      Stock, $.001 par value per share
              
              47,790,165
      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 2009 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.


-2-




METROPOLITAN
HEALTH NETWORKS, INC.




FORM
10-K


For
the Year Ended


December
31, 2008




TABLE
OF CONTENTS





Page
                  No.ITEMPART
      I1
                
                Business
                61A
                
                Risk
      Factors
                221B
                
                Unresolved
      Staff Comments
                302
                
                Properties
                303
                
                Legal
      Proceedings
                304
                
                Submission
      of Matters to a Vote of Security Holders
                30PART
      II5
                
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                306
                
                Selected
      Financial Data
                347
                
                Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations
                357A
                
                Quantitative
      and Qualitative Disclosures about Market Risk
                498
                
                Financial
      Statements and Supplementary Data
                499
                
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                509A
                
                Controls
      and Procedures
                50PART
      III10
                
                Directors,
      Executive Officers and Corporate Governance
                5211
                
                Executive
      Compensation
                5212
                
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                5213
                
                Certain
      Relationships and Related Transactions
                5214
                
                Principal
      Accounting Fees and Services
                53PART
      IV15
                
                Exhibits,
      Financial Statement Schedules
                53Exhibits
      Index
                54Signatures
                57


-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 opportunities and other similar forecasts
and statements of expectation. We intend such statements to be covered by the
safe harbor provisions for forward looking statements created
thereby.  These statements involve known and unknown risks and
uncertainties, such as our plans, objectives, expectations and intentions, and
other factors that may cause us, or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
the forward-looking statements. Many of these factors are listed in Item 1A“Risk
Factors” and elsewhere in this Form 10-K.




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




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




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





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





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





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





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





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





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





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





·
            future
      legislation and changes in governmental
  regulations;





·
            increased
      operating costs;





·
            reductions
      in premium payments to Medicare Advantage
plans;


-4-





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





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





·
            general
      economic and business conditions;





·
            increased
      competition;





·
            the
      relative health of our customers;





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





·
            federal
      and state investigations;





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





·
            impairment
      charges that could be required in future
  periods.


-5-





PART
I





ITEM 1
            DESCRIPTION
      OF BUSINESS




Through
our PSN, we provide and arrange for medical care primarily to Medicare Advantage
beneficiaries in 19 counties in the State of Florida who have enrolled in health
plans primarily operated by Humana, Inc. (“Humana”), one of the largest
participants in the Medicare Advantage program in the United
States.  Until the end of August 2008, we also operated a health
maintenance organization (the “HMO”) which provided healthcare benefits to
Medicare Advantage beneficiaries in 13 Florida counties.   As
discussed in greater detail below, the HMO was sold to Humana Medical Plan, Inc.
(the “Humana Plan”) on August 29, 2008.





Medicare
is the national, federally-administered health insurance program that covers the
cost of hospitalization, medical care, and some related health services for U.S.
citizens aged 65 and older, qualifying disabled persons and persons suffering
from end-staged renal disease.  Substantially all of our revenue in
2008 and 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.





As of
December 31, 2008, the PSN provided healthcare benefits to approximately 33,000
Medicare Advantage beneficiaries, an increase of approximately 7,600 from the
number of customers served by the PSN as of December 31, 2007.  In
connection with the sale of the HMO, we entered into a five year independent
practice association participation agreement (the “IPA Agreement”) with Humana
covering the 13 Florida counties where the HMO operated at the time of the
sale.  As a result of the sale of the HMO and the IPA Agreement, the
customer base of the PSN grew by approximately 7,400 customers upon the closing
of the transaction.





The sale
of the HMO and the IPA Agreement have been designed to allow for the expansion
of our relationship with Humana, with each party focusing on its core
competencies.  Going forward, we expect that our business efforts will
be exclusively concentrated on managing the PSN.  We believe the sale
of the HMO and the IPA Agreement offers us an opportunity to improve upon our
ability to operate cost efficiently and profitably. For instance, we anticipate
that, Humana’s existing contracts with providers, the IPA Agreement will allow
the PSN to reduce the costs of  providing certain medical services to
theses customers.





To mitigate our exposure to high cost
medical claims,we have
reinsurance arrangements that provide for the reimbursement ofcertain customermedical expenses.See “Insurance.”




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





Provider Service
Network





We
operate the PSN through our wholly owned subsidiary, Metcare of Florida,
Inc.  The PSN currently operates under three network agreements with
Humana (collectively, the “Humana Agreements”) pursuant to which the PSN
provides, on a non-exclusive basis, healthcare services to Medicare
beneficiaries in certain Florida counties who have elected to receive benefits
under a Humana Medicare Advantage HMO Plan (a “Humana Plan
Customers”).


-6-


Humana
directly contracts with the Centers for Medicare & Medicaid Services (“CMS”)
and is paid a monthly premium payment for each Humana Participating
Customer.  Among other factors, the monthly premium varies by
customer, county, age and severity of health status.  Pursuant to the
Humana Agreements, the PSN provides or arranges for the provision of covered
medical services to each Humana 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
represent a substantial percentage of the monthly premiums received by Humana
from CMS with respect to Humana Participating Customers.





Collectively,
the Humana Agreements currently cover 30 counties within the State of Florida
and at December 31, 2008, we have customers in 19 counties.  The
counties covered by and the number of customers being served under each
agreement as of December 31, 2008 are summarized in the following
table.





Network Agreement
                                
                                Counties Covered As of December
                                  31, 2008
                                
                                Number of
                                  Customers as
                                  of December
                                  31, 2008
                                
                                
                                Number of
                                  Customersas
                                  ofFebruary
                                  1,2009Central
      Florida Agreement
                                
                                Flagler,
      Volusia, Pinellas, Baker*, Clay*, Duval*, Nassau*, St. Johns*, Putnam*,
      Orange*, Osceola*, Seminole*, Pasco*, Hillsborough*
                                
                                
                                19,200
                                
                                
                                
                                20,500South
      Florida Agreement
                                
                                Miami-Dade,
      Broward, Palm Beach
                                
                                
                                6,400
                                
                                
                                
                                6,300IPA
      Agreement
                                
                                Lee,
      Charlotte, Sarasota, Martin, St. Lucie, Okeechobee, Polk, Glades, Manatee,
      Marion, Lake, Sumter, Collier
                                
                                
                                7,400
                                
                                
                                
                                8,500TOTAL
      CUSTOMERS
                                
                                
                                33,000
                                
                                
                                
                                35,300





Effective
October 1, 2008, the Central Florida Agreement was amended to include the
counties indicated by an asterisk in the foregoing table (the “Additional
Counties”).





At
December 31, 2008, the PSN was operating in Flagler, Volusia and St. Johns
counties under the Central Florida Agreement.  During 2009, we intend
to begin to make investments to commence business in several of the Additional
Counties where we do not currently have provider networks.  However,
we believe that we will not begin to realize any significant revenues from
services provided in these Additional Counties until at least 2010.





On
January 1, 2009, we commenced service to approximately 1,000 Humana
Participating Customers who utilized a special election period to transition to
a Humana Medicare Advantage HMO plan from a healthcare plan that is now being
liquidated.





As of
December 31, 2008, the Humana Agreements covered approximately 33,000 Humana
Plan Customers.  Approximately 83.0% of the Company’s consolidated
revenue for 2008 was generated through the Humana
Agreements.   As a result of the sale of the HMO and the IPA
Agreement,  this percentage will increase substantially in future
periods.





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





Our PSN
assumes full responsibility for the provision or management of all necessary
medical care for each of the approximately 33,000 Humana Participating Customers
covered by the Humana Agreements, even for services we do not provide
directly.  For the approximately 6,400 Humana Participating Customers
covered under the South Florida Humana Agreement, our PSN and Humana share in
the cost of inpatient hospital services and the PSN is responsible for the full
cost of all other medical care provided to the Humana Participating
Customers.For the
remaining 26,600 Humana Participating Customers covered under the Central
Florida Humana Agreement and the IPA Agreement, our PSN is responsible for the
cost of all medical care provided. To the extent the costs of providing such
medical care are less than the related fees received from Humana; our PSN
generates a gross profit.  Conversely, if medical expenses exceed the
fees received from Humana, our PSN experiences a deficit in gross
profit.


-7-





Effective
as of August 1, 2007, our PSN entered into a network agreement (the “CarePlus
Agreement”) with CarePlus Health Plans, Inc. (“CarePlus”), a Medicare Advantage
HMO in Florida.  CarePlus is a wholly-owned subsidiary of
Humana.  Pursuant to the CarePlus Agreement (prior to its amendment to
include additional counties on September 1, 2008 as discussed below (the
“Amendment”), the PSN can manage, 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 (each, a “CarePlus Plan
Customer”).





Like
Humana, CarePlus directly contracts with CMS and is paid a monthly premium
payment for each CarePlus Plan Customer, which premium varies by, among other
things, customer, county, age and severity of health status.  Pursuant
to the CarePlus Agreement, the PSN provides or arranges for the provision of
covered medical services to 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 managing these healthcare
services, the PSN receives a monthly network administration fee for each
CarePlus Participating Customer.  Effective March 31, 2009, the PSN
will begin to receive a capitation fee from CarePlus and will assume full
responsibility for the cost of all medical services provided to each CarePlus
Participating Customer.  The capitation fee represents a substantial
portion of the monthly premium CarePlus is to receive from CMS.





The
counties covered by the CarePlus Agreement prior to the Amendment include
Miami-Dade, Broward, Palm Beach, Orange, Osceola, Seminole, Pasco, Pinellas and
Hillsborough counties (collectively, the “Pre-Amendment CarePlus
Counties”).  Effective September 1, 2008, the PSN’s provider
relationship with CarePlus was extended to include the 13 counties covered by
the IPA Agreement (“Additional CarePlus Counties”).  CarePlus expects
to have operations in three of these Additional CarePlus Counties as of January
1, 2009. The CarePlus Agreement covered approximately 100 CarePlus Participating
Customers at December 31, 2008 and 249 CarePlus Participating Customers at
February 1, 2009.





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





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




Health Maintenance
Organization




Between
July 2005 and August 2008, we operated the HMO through our wholly owned
subsidiary Metcare Health Plans, Inc.  The HMO was first issued a
Healthcare Provider Certificate 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 the
following 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, 2006, the HMO began
to also provide services in Polk, Glades, Manatee, Marion, Lake and Sumter
counties.  Effective January 1, 2007, the HMO began to operate in
Collier County.





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


-8-





The
Purchase Price is subject to positive or negative post-closing adjustment based
upon the difference between the HMO’s estimated closing net equity, which was
approximately $5.1 million, and the HMO’s actual net equity as of the Closing
Date as determined nine months following the Closing Date (the “Closing Net
Equity”).  In addition to the Purchase Price adjustment discussed
above, the Stock Purchase Agreement requires that the Humana Plan reconcile any
changes in CMS Part D payments and Medicare payments received by the HMO after
the Closing Date for services provided prior to the Closing Date to the amounts
recorded for such items as part of the Closing Net Equity
determination.  Substantially all of the reconciliations will be
determined in 2009 and will be paid to us or the Humana Plan, as
applicable.  The ultimate settlements, if any, will increase or
decrease the gain on the sale of the HMO.





In
connection with the sale, we paid the employees of the HMO stay bonuses to seek
to ensure that the HMO business would operate normally during the period between
the signing of the Stock Purchase Agreement and the Closing Date and to
encourage the employees to assist with a smooth transition to
Humana.  In addition, we made termination payments to certain HMO
employees to recognize their past services to the Company.  We
recognized and paid all of these costs, totaling $1.6 million, in the third
quarter of 2008.





The HMO’s
revenue was generated by premiums consisting of monthly payments per customer
that were established by the CMS Contract through the competitive bidding
process.  The HMO contracted directly with CMS and was paid a monthly
premium payment for each customer enrolled in the HMO.  Among other
things, the monthly premium varied by customer, county, age and severity of
health status.





Additional
information regarding our PSN and HMO segments for 2008, 2007 and 2006 is set
forth in Note 19 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 and 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 $96.40 in 2008 will remain the
      same in 2009 for a majority of beneficiaries although some higher income
      beneficiaries will have to pay a higher deductible.  Once the
      deductible has been met, Medicare Part B generally pays 80% of the
      Medicare allowable fee schedule and beneficiaries pay the remaining
      20%.




(iii)
            Part
      C - Medicare Part C is an alternative to the traditional fee-for-service
      Medicare program and is commonly known as the Medicare Advantage
      program.  Medicare Advantage plans are health plan options
      offered by managed care companies pursuant to 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.





(iv)
            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.


-9-





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 10.1
million as of July 2008.  Also, since 2002, the number of Medicare
Advantage contracts in the United States has increased from 204 to 523 in
2008.  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
demographic profile and health status.




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 2005, risk adjusted payments accounted for 50% of
Medicare health plan payments, with the remaining 50% being reimbursed in
accordance with the traditional demographic rate book. The portion of risk
adjusted payments was increased to 75% in 2006 and 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 equals
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”), 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 annual rate increase 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 their customers, while also reducing
out-of-pocket expenses for beneficiaries.




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 PPO’s that enter or remain 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 2009 are expected to reflect an average increase of 4.3% over
2008.


-10-




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 plan that offers drug coverage must
receive their drug coverage through the prescription drug plan offered by their
Medicare Advantage plan (“MA-PD”) and may not enroll in a stand-alone
PDP.  For example, Humana Plan Customers and the HMO’s customers were
automatically enrolled in their MA-PD’s 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 PDP’s in their region.  Medicare Advantage
customers have the right to change drug plans, either MA-PD or stand-alone PDP,
one time per year, during the open enrollment period.  Dual eligible
beneficiaries and other customers qualified for the low-income subsidy may
change plans throughout the year.


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


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, 2007 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.


-11-


Enrollment
Period


Beginning
in 2006, Medicare beneficiaries have defined enrollment periods, similar to
commercial plans, in which they can select or change 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.  The annual
enrollment for a Medicare Advantage plan is from November 15 through
March 31 of the subsequent year.  Enrollment prior to December 31
will generally be effective as of January 1 of the following year and enrollment
on or after January 1 and within the enrollment period is effective the first
day of the month following enrollment. After the defined enrollment period ends,
generally only seniors turning 65 during the year, Medicare beneficiaries who
permanently relocate to another service area, dual-eligible beneficiaries,
others who qualify for special needs plans, and employer group retirees will be
permitted to enroll in or change health plans during the year. In addition, in
certain circumstances, such as the bankruptcy of a health plan, CMS may offer a
special election period during which the customers affected are allowed to
change plans.


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.


The Florida Medicare
Advantage Market





Over the
last several decades, Florida has generally been a highly attractive, rapidly
growing market.  According to information published by the Office of
Economic & Demographic Research of the Florida Legislature in November 2008,
Florida had a total population of over 19 million in 2008.  In 2005,
Florida’s population of those 65 and older was 3.0 million and was forecast to
increase to 3.4 million by 2010 and to 4.7 million by 2020.





Behind only California, which has
approximately 4.5 million Medicare eligible beneficiaries, Florida has the
second largest Medicare population in the U.S. with an estimated 3.2 million
Medicare eligible beneficiaries. At December 31, 2008, California’s Medicare
Advantage penetration was approximately 32% while Florida’s was
27%.  Our Humana Agreements cover 30 counties throughout Florida and
we have established provider networks in 19 of these counties.  We
believe that of the approximate 1.8 million Medicare eligible individuals in the
counties in which we have established networks, approximately 30% are customers
of Medicare Advantage plans.





In the
eleven counties where we do not yet have provider networks, we believe that of
the approximate 800,000 Medicare eligible individuals in these counties,
approximately 30% are customers of Medicare Advantage plans.During 2009, we intend to
begin to make investments to develop networks in several of these counties. We
believe that we will not begin to realize any material revenues from services
provided in these counties until at least 2010.





Business
Model




Provider Services
Network




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





Humana
Agreements





Pursuant
to each of the 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.  In return for such fees, the PSN assumes full
responsibility for the provision or management of all necessary medical care for
each of the Humana Participating Customers covered by the Humana Agreements,
even for services we do not provide directly.  Under both the Central
Florida Humana Agreement and the IPA Agreement, the PSN is responsible for the
full cost of all medical care provided.  Under the South Florida
Humana Agreement, the PSN and Humana share in the cost of inpatient hospital
services and the PSN is responsible for full cost 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 fees received
from Humana; our PSN generates a gross profit.  Conversely, if medical
expenses exceed the fees received from Humana, our PSN experiences a deficit in
gross profit.  In 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.


-12-





Both the
Central Florida Humana Agreement and the South Florida Humana Agreement have
one-year terms and renew automatically each December 31 for additional one-year
terms unless terminated for cause or upon 180 days’ prior notice.  In
addition, Humana may immediately terminate either of these agreements and/or any
individual physician credentialed under these agreement upon written notice,
(i) if the PSN and/or any of the PSN physician’s continued participation
may adversely affect the health, safety or welfare of any Humana customer or
bring Humana into disrepute; (ii) 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 Central Florida
Humana Agreement and the South Florida Humana Agreement 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 Pre-Existing Humana Network
Agreements.




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





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





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




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





For the
term of the 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 Volusia and Flagler counties;
  and





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





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


-13-





CarePlus
Agreement





Pursuant
to the CarePlus Agreement, the PSN provides or arranges for the provision of
covered medical services to each 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.  Effective March 31, 2009, 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 cost of all necessary
medical care for each CarePlus Participating Customer, even for services the PSN
does not provide directly.





Physician
Network





At
December 31, 2008, the PSN owned and operated nine primary care centers and an
oncology practice.  These centers provide and arrange for medical care
to approximately 24% of the PSN’s customers.





The PSN
also has contracts with IPA’s to provide and manage care to our remaining
customers.  Some of these contracts 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.  Other contracts provide for payments on a fee for
service basis, pursuant to which the provider is paid only for the services
provided.





PIQ is 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 PSN’s or Management Service
Organizations (“MSO’s”).





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





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





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.




Utilization
Management




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 the geographic markets covered by the Humana Agreements
      and the CarePlus Agreement other than the Additional
    Counties;




·
            commencing
      operations in the Additional Counties, including by, among other things,
      locating and contracting with physician practices within these Additional
      Counties;




·
            acquiring
      existing physician practices; and




·
            acquiring
      other medical service
organizations.




Increasing Patient
Volume




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




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




In
October 2008, the Central Florida Humana Agreement was amended to include nine
Additional Counties where neither the PSN nor the HMO had previously provided
healthcare services.  During 2009, we anticipate that we will seek to
build a provider network in several of these counties.  In addition,
within our existing geographic markets, we are seeking to add additional
physician practices to the PSN’s existing network either through acquisition,
start up or affiliation with a current PSN physician or medical service
organization. We identify and select opportunities based in large part on the
following broad criteria:




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





·
            a
      high concentration of Medicare
patients;





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





·
            a
      geographic proximity to our current
operations.


-15-


PSN
Competition





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





Health Maintenance
Organization





As
discussed above, on the Closing Date, we completed the sale of all of the
outstanding capital stock of the HMO to the Humana Plan.  The
following discussion generally summarizes the HMO’s business as operated by us
prior to its sale.





At the
time of its sale, the HMO was offering its Medicare Advantage health plan in 13
Florida counties. Our Medicare Advantage plan covered Medicare eligible
customers who resided at least six months or more in the service area and
offered more expansive benefits than those offered under the traditional
Medicare fee-for-service plan. Through our Medicare Advantage plan, we had the
flexibility to offer benefits not covered under traditional fee-for-service
Medicare. These benefits were designed to be attractive to seniors and included
prescription drug benefits, eye glasses, hearing aids, dental care,
over-the-counter drug plans and health club memberships. In addition we offered
a “special needs” zero premium, zero co-payment plan to dual-eligible
individuals in our markets.





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





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





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





Medical
Health Services Management and Provider Networks





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





The
disease management programs were focused on prevention and care and were
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 were focused
primarily on high-risk patient management and the treatment of our chronically
ill customers and were 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 had engaged disease
management companies to educate customers on chronic medical conditions, help
them comply with medication regimens, and counsel customers on healthy
lifestyles.





We also
had 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 were 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
ensured timely discharge from the hospital. In addition, the HMO used internal
case management programs and contracts with other third parties to manage
severely and chronically ill patients. The HMO utilized on-site critical care
intensivists, hospitalists and concurrent review nurses, who manage the
appropriate times for outpatient care, hospitalization, rehabilitation or home
care.


-16-





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





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





Provider Arrangements and
Payment Methods




Our HMO
had primarily structured its non-exclusive provider contracts on a
fee-for-service basis. At times, we also supplemented provider payments with
incentive arrangements based, in general, on the quality of healthcare
delivery.  We also sought to implement financial incentives relating
to other operational matters where appropriate.




In some
cases, particularly with respect to contracts between hospitals or healthcare
systems and our HMO, the HMO was 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, the HMO was only obligated to pay the
amount that the hospital would have received from CMS under traditional
fee-for-service Medicare.





Management
Services





The HMO
had contracted with a third party service provider, HF Administrative Services,
Inc. (“HFAS”), to provide various administrative and management services to the
HMO, 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
compensated 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
was compensated for providing additional programming services on an hourly
basis. The initial term of the Services Agreement was for five years ending on
June 30, 2010. During 2008 and 2007, we paid an aggregate of $968,000 and $1.2
million to HFAS for services in accordance with the Services
Agreement.  In connection with the sale of the HMO, the Humana Plan
agreed to make all payments due under the Services Agreement during a transition
period beginning on the Closing Date and ending on the first day of the month
following the date the Humana Plan ceased using HFAS’ systems to process new
claims for the HMO (the “Transition Period”).  Following the
Transition Period, we are responsible for the payment of all minimum fees due
under the Services Agreement until its termination in accordance with its
terms.  At the time of the sale we had estimated and accrued this
liability of approximately $1.1 million for these fees and reduced the gain on
the sale of the HMO by this amount.  As anticipated, the Transition
Period ended on December 31, 2008.





Sales and Marketing
Programs




The HMO’s
sales force consisted of internally licensed sales employees and third party
agents. The third party agents were compensated on a commission
basis.


Insurance


We rely
upon insurance to protect us from many business risks, including medical
malpractice, errors and omissions and certain significantly higher than average
customer medical expenses.  For example, to mitigate our exposure to
high cost medical claims, we have reinsurance arrangements that provide for the
reimbursement ofcertain customermedical expenses. For 2008, our
deductible per customer per year for the PSN was $40,000 in Miami-Dade, Broward
and Palm Beach counties and $200,000 in the counties covered by the Central
Florida and IPA Agreements, with a maximum benefit per customer per policy
period of $1.0 million.  The deductible per customer per year for the
HMO in 2008, to the date of sale, was $150,000, with a maximum benefit per
customer per policy period of $1.0 million for each year.  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...."


-17-





Employees





As of
December 31, 2008, we had 178 full-time employees, 25 of which are on the
corporate staff at our executive offices and 153 of which are employed by the
PSN. None of our employees are covered by a collective bargaining agreement or
are represented by a labor union. We consider our employee relations to be
good.




Government
Regulation




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




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




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




Federal
and State Reimbursement Regulation




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




Federal
“Fraud and Abuse” Laws and Regulations




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




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




Federal
Anti-Kickback Law




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


-18-




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




Physician
Incentive Plan Regulations




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




Federal
False Claims Act




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




Florida
Fraud and Abuse Regulations




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




Restrictions
on Physician Referrals





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


-19-





Privacy
Laws





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





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





Clinic
Licensure





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





Occupational Safety and
Health Administration (“OSHA”)





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





Medicare Marketing
Restrictions





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


-20-


Our Executive
Officers




Set forth
below are: (1) the names and ages of our executive officers at February 1,
2009, (2) all positions with the Company presently held by each such person
and (3) the positions held by, and principal areas of responsibility of,
each such person during the last five years.





Name
              
              Age
              
              PositionMichael
      M. Earley
              
              53
              
              Chairman
      and Chief Executive OfficerJose
      A. Guethon, M.D.
              
              46
              
              COO
      and PresidentRobert
      J. Sabo, CPA
              
              58
              
              Chief
      Financial OfficerRoberto
      L. Palenzuela, Esq.
              
              45
              
              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 2007, Mr. Earley served as a
director and member of the audit committee of MPower Communications, a publicly
traded telecommunications company.  Mr. Earley received his
undergraduate degrees in Accounting and Business Administration from the
University of San Diego.





JOSE A. GUETHON, M.D.has
served as our Chief Operating Officer and President since September
2008.  Prior to his appointment, he served as President of the PSN
since January 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 2006 and as
Chief Medical Officer of our HMO from January 2006 through December
2006.  Dr. Guethon has approximately 15 years of healthcare experience
both in clinical and administrative medicine, and is board-certified in family
practice. Prior to joining us, Dr. Guethon served as the Regional Medical
Director for JSA Healthcare Corporation, a provider 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.




ROBERT J. SABO, C.P.A. has served as our Chief
Financial Officer since November 15, 2007. Mr. Sabo has over 35 years of
financial expertise focused substantially in the Florida healthcare
industry.  From November 2003 to October 2007, 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 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.





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.


-21-




ITEM
1A.  RISK FACTORS




Our
Operations are Dependent on Humana, Inc.




We have
historically derived a substantial majority of our consolidated revenues from
our Central Florida and South Florida Humana Agreements and, following the sale
of the HMO to Humana on August 29, 2008 and our entry into the IPA Agreement in
connection with such sale, we expect that substantially all of our revenues will
be derived under the Humana Agreements.  For the twelve months ended
December 31, 2008, approximately 99.4% of the PSN’s total revenue and 83.0% of
our consolidated revenue (the “Consolidated Revenue Percentage”) was obtained
through the Humana Agreements.  For the four-month period subsequent
to the sale of the HMO, approximately 98.7% of our consolidated revenue was
obtained through the 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 operations.




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




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




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




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




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




·
            the
      health status of our customers;


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


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


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


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


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


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


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


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




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.


-22-




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





Medical
claims expense includes estimates of future medical claims that have been
incurred by the customer but for which the provider has not yet billed us (“IBNR
claims”).  IBNR claim estimates are made utilizing actuarial methods
and are continually evaluated and adjusted by management, based upon our
historical claims experience.  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 healthcare
services.  It is widely anticipated that the new Presidential and
Congressional administration will seek to reduce reimbursements to private
health insurers under Medicare Advantage and make changes to the Medicare
prescription drug benefit starting in 2010.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 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 serves and our operating
      results.





·
            Managed
      care companies began offering various new products in 2006 pursuant to the
      MMA, including regional PPOs and private fee-for-service plans. Medicare
      PPOs and private fee-for-service plans allow their customers more
      flexibility in selecting physicians than Medicare Advantage HMOs, which
      typically require customers to coordinate care with a primary care
      physician. The 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 relative attractiveness to existing and potential
      Medicare customers in their service
areas.


-23-





·
            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 to decrease the amount of premiums paid to it or cause it to increase
      the benefits it offers.





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




As
previously described, 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.  During 2005, risk adjusted payments accounted for 50%
of Medicare health plan payments, with the remaining 50% being reimbursed in
accordance with the traditional CMS demographic rate books. The portion of risk
adjusted payments was increased to 75% in 2006 and to 100% in 2007 and beyond.
As a result of this phase-in process, it is difficult to predict with certainty
our future revenue or profitability. In addition, 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 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 2006, among other changes,
provides for an accelerated phase-out of budget neutrality for risk adjustment
of payments made to Medicare Advantage plans.  The phase out began in
1997 and will be complete by 2011, when Medicare Advantage plans will no longer
receive any budget neutrality payment adjustment.  As a result of this
phase-out, we expect the premiums we receive could be reduced, dependent on the
risk scores of Humana Participating Customers.




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





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


-24-





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




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





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




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




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





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





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




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




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




We
maintain errors and omissions insurance and other insurance coverage that we
believe are adequate based on industry standards. Nonetheless, potential
liabilities may not be covered by insurance, insurers may dispute coverage or
may be unable to meet their obligations or the amount of insurance coverage
and/or related reserves may be inadequate. There can be no assurancesthat we will be able to
obtain insurance coverage in the future, or that insurance will continue to be
available on a cost-effective basis, if at all. Moreover, even if claims brought
against us are unsuccessful or without merit, we would have to defend 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.


-25-


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




We
compete in the highly competitive and regulated healthcare industry, which is
subject to continuing changes with respect to the provisioning of services and
the selection and compensation of providers.  In 2008, approximately
83.0% of our total consolidated revenue was generated pursuant to the Humana
Agreements.  For the four-month period subsequent to the sale of the
HMO, approximately 98.7% of our total consolidated revenue is 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 healthcare industry segments, some of
which have financial and other resources comparable to or greater than Humana,
are competitors to Humana.  The market in Florida has become
increasingly attractive to health plans that may compete with
Humana.  For example, HealthSpring and Coventry Health Plans, both
based outside of Florida, have in recent years announced acquisitions of health
plans in Florida.  Humana may not be able to continue to compete
profitably in the healthcare industry if additional competitors enter the same
market.




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





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





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




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.




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.




-26-




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




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




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




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




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


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


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


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


·
            damage
      to our reputation in existing and potential
  markets;


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


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




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




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




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




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.


-27-




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 provide 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 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 enters service areas where it does
not currently operate. Our rate of expansion into new geographic areas may also
be limited by:




·
            the
      PSN’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.


-28-





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,
2008, there were approximately 48.3 million shares of our Common Stock
outstanding, all of which are freely tradable without restriction or tradable in
accordance with Rule 144 of the Securities Actwith
the exception of approximately 5.7 million shares owned by certain of our
officers, directors and affiliates which may be sold publicly at any time
subject to the volume and other restrictions promulgated pursuant to Rule 144 of
the Securities Act and subject to legal restrictions such as insider trading
laws  and (ii) approximately 435,000 restricted shares of our Common
Stock owned by certain of our employees and directors which are subject to
forfeiture until vested in accordance with their terms..  In addition,
as of December 31, 2008, approximately 3.5 million shares of our Common Stock
were reserved for issuance upon the exercise of options which were previously
granted and 518,000 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 NYSE Alternext US Would Adversely Affect Us and Our
Shareholders.




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





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





The
Securities Enforcement and Penny Stock Reform Act of 1990 requires additional
disclosure relating to the market for penny stocks in connection with trades in
any stock defined as a “penny stock”.  The Securities and Exchange
Commission’s (the “Commission” or the “SEC”) regulations generally define a
penny stock to be an equity security that has a market price of less than $5.00
per share, subject to certain exceptions.  For example, such
exceptions include any equity security listed on a national securities exchange
such as the NYSE Alternext
US.  Currently, our Common Stock meets this
exception.  Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated
therewith.  In addition, if our Common Stock becomes delisted from the
NYSE
Alternext US 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.


-29-




ITEM
1B.  UNRESOLVED STAFF COMMENTS




None




ITEM 2
            PROPERTIES




Our
principal executive office is located at 250 South Australian Avenue, Suite 400,
West Palm Beach, Florida where we occupy 18,100 square feet at a current monthly
rent of approximately $25,600 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 $9,400 pursuant to a lease expiring in January
2012.




The PSN
leases nine offices serving patients in Central Florida and South Florida with
aggregate monthly rental payments of $49,100 pursuant to lease agreements with
expiration dates ranging from one to seven years from December 31,
2008.




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 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.
 On April 22, 2008, Mr. Guillama filed a First Amended Complaint and
Request for Jury Trial. We responded and made counter claims on May 16, 2008 and
we anticipate defending this action vigorously. These shares have not been
reflected as issued or outstanding in the accompanying condensed consolidated
balance sheets or in the computations of earnings per share. The parties
are currently engaging in discovery.





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





ITEM 4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




No matter
was submitted to a vote of the security holders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 2008.




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


-30-





High
                                      
                                      
                                      Low($)
                                      
                                      
                                      ($)Quarter
      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
                                      
                                      
                                      $
                                      2.21Quarter
      ended March 31, 2008
                                      
                                      $
                                      2.48
                                      
                                      
                                      $
                                      2.18Quarter
      ended June 30, 2008
                                      
                                      $
                                      2.28
                                      
                                      
                                      $
                                      1.66Quarter
      ended September 30, 2008
                                      
                                      $
                                      2.28
                                      
                                      
                                      $
                                      1.69Quarter
      ended December 31, 2008
                                      
                                      $
                                      2.07
                                      
                                      
                                      $
                                      1.30





At
February 16, 2009, we believe we had approximately 3,396 beneficial
shareholders.




Issuer
Purchases of Equity Securities




In
October 2008, our Board of Directors authorized the repurchase of up to 10
million shares of our outstanding common stock.  The number of shares
to be repurchased and the timing of the purchases  are influenced by a
number of factors, including the then prevailing market price of our common
stock, other perceived opportunities that may become available to us and
regulatory requirements. As of December 31, 2008, 5,808,202 shares remained
available for repurchase under the existing repurchase
authorization.




Common
stock repurchases under our authorized plan during the fourth quarter of 2008
were as follows:





Period
                        
                        Total Number
                          ofShares
                          Purchased
                        
                        
                        Average Price
                          Paid Per Share,
                          Including
                          Commission
                        
                        
                        Total Number of
                          Shares Purchased
                          asPart of Publicly
                          Announced Plans
                          (1)
                        
                        
                        Maximum Number of
                          Shares That May Yet Be
                          Purchased Under the
                          PlanOctober
      1, 2008 - October 31, 2008
                        
                        
                        1,092,800
                        
                        
                        $
                        1.91
                        
                        
                        
                        1,092,800
                        
                        
                        
                        8,907,200November
      1, 2008 - November 30, 2008
                        
                        
                        2,753,998
                        
                        
                        $
                        1.84
                        
                        
                        
                        3,846,798
                        
                        
                        
                        6,153,202December
      1, 2008 - December 31, 2008
                        
                        
                        345,000
                        
                        
                        $
                        1.41
                        
                        
                        
                        4,191,798
                        
                        
                        
                        5,808,202





(1) On
October 3, 2008, we announced a stock repurchase plan pursuant to which our
Board of Directors authorized us to repurchase up to 10 million shares of our
common stock.  The plan does not have a scheduled expiration
date.




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.


-31-




Equity
Compensation Plans




The
following table provides certain information regarding our existing equity
compensation plans as of December 31, 2008:




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
                      equitycompensation
                      plansEquity
      compensation plans approved by security holders
                    
                    
                    3,500,681
                    
                    
                    $
                    1.84
                    
                    
                    
                    4,672,042


-32-


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, 2003 and assume an
investment of $100 on that date and the reinvestment of dividends paid since
that date.











12/03
                  
                  
                  
                  12/04
                  
                  
                  
                  12/05
                  
                  
                  
                  12/06
                  
                  
                  
                  12/07
                  
                  
                  
                  12/08Metropolitan
      Health Networks, Inc.
                  
                  $
                  100
                  
                  
                  $
                  372
                  
                  
                  $
                  316
                  
                  
                  $
                  403
                  
                  
                  $
                  314
                  
                  
                  $
                  210NASDAQ
      Composite
                  
                  
                  100
                  
                  
                  
                  109
                  
                  
                  
                  111
                  
                  
                  
                  123
                  
                  
                  
                  140
                  
                  
                  
                  84NASDAQ
      Health Services
                  
                  
                  100
                  
                  
                  
                  126
                  
                  
                  
                  173
                  
                  
                  
                  173
                  
                  
                  
                  226
                  
                  
                  
                  165SIC
      Code 8000-8099 Health Services
                  
                  
                  100
                  
                  
                  
                  113
                  
                  
                  
                  122
                  
                  
                  
                  133
                  
                  
                  
                  136
                  
                  
                  
                  96




-33-


ITEM
6         SELECTED FINANCIAL
DATA




Set forth
below is our selected historical consolidated financial data for the five years
ended December 31, 2008.  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, 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, 2007 and
2008 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 31,2008 (4)
                                                        
                                                        
                                                        2007 (3)
                                                        
                                                        
                                                        2006 (2)
                                                        
                                                        
                                                        2005 (1)
                                                        
                                                        
                                                        2004Statement
      of Operations DataRevenue
                                                        
                                                        $
                                                        317,211,727
                                                        
                                                        
                                                        $
                                                        277,577,289
                                                        
                                                        
                                                        $
                                                        228,216,073
                                                        
                                                        
                                                        $
                                                        183,765,191
                                                        
                                                        
                                                        $
                                                        158,069,791Operating  income
      (loss)
                                                        
                                                        $
                                                        16,540,974
                                                        
                                                        
                                                        $
                                                        8,071,571
                                                        
                                                        
                                                        $
                                                        (232,952
                                                        )
                                                        
                                                        $
                                                        3,232,678
                                                        
                                                        
                                                        $
                                                        11,855,915Income
      from continuingoperations before income
taxes
                                                        
                                                        $
                                                        16,618,535
                                                        (5)
                                                        
                                                        $
                                                        9,440,738
                                                        (5)
                                                        
                                                        $
                                                        825,561
                                                        (5)
                                                        
                                                        $
                                                        3,849,549
                                                        
                                                        
                                                        $
                                                        11,473,732Net
      income
                                                        
                                                        $
                                                        10,204,467
                                                        (6)
                                                        
                                                        $
                                                        5,913,998
                                                        
                                                        
                                                        $
                                                        472,561
                                                        
                                                        
                                                        $
                                                        2,381,743
                                                        
                                                        
                                                        $
                                                        18,822,712Basic
      earnings per share
                                                        
                                                        $
                                                        0.21
                                                        
                                                        
                                                        $
                                                        0.12
                                                        
                                                        
                                                        $
                                                        0.01
                                                        
                                                        
                                                        $
                                                        0.05
                                                        
                                                        
                                                        $
                                                        0.42Diluted
      earnings per share
                                                        
                                                        $
                                                        0.20
                                                        
                                                        
                                                        $
                                                        0.11
                                                        
                                                        
                                                        $
                                                        0.01
                                                        
                                                        
                                                        $
                                                        0.05
                                                        
                                                        
                                                        $
                                                        0.38Weighted
      average common sharesoutstanding-basic
                                                        
                                                        
                                                        49,093,039
                                                        
                                                        
                                                        
                                                        50,573,349
                                                        
                                                        
                                                        
                                                        50,032,555
                                                        
                                                        
                                                        
                                                        48,975,803
                                                        
                                                        
                                                        
                                                        45,123,843Weighted
      average common sharesoutstanding-diluted
                                                        
                                                        
                                                        50,353,644
                                                        
                                                        
                                                        
                                                        51,796,185
                                                        
                                                        
                                                        
                                                        51,472,616
                                                        
                                                        
                                                        
                                                        51,007,396
                                                        
                                                        
                                                        
                                                        50,028,303Cash
      dividend declared
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Balance
      Sheet DataCash
      and equivalents
                                                        
                                                        $
                                                        2,701,243
                                                        
                                                        
                                                        $
                                                        38,682,186
                                                        
                                                        
                                                        $
                                                        23,110,042
                                                        
                                                        
                                                        $
                                                        15,572,862
                                                        
                                                        
                                                        $
                                                        11,344,113Short-term
      investments
                                                        
                                                        $
                                                        33,641,140
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        1,500,000Total
      current assets
                                                        
                                                        $
                                                        40,867,225
                                                        
                                                        
                                                        $
                                                        44,763,752
                                                        
                                                        
                                                        $
                                                        30,464,838
                                                        
                                                        
                                                        $
                                                        24,479,528
                                                        
                                                        
                                                        $
                                                        18,923,011Total
      assets
                                                        
                                                        $
                                                        49,144,355
                                                        
                                                        
                                                        $
                                                        53,811,047
                                                        
                                                        
                                                        $
                                                        41,841,033
                                                        
                                                        
                                                        $
                                                        33,115,106
                                                        
                                                        
                                                        $
                                                        28,037,263Total
      current liabilities
                                                        
                                                        $
                                                        6,339,625
                                                        
                                                        
                                                        $
                                                        15,545,068
                                                        
                                                        
                                                        $
                                                        10,911,770
                                                        
                                                        
                                                        $
                                                        3,416,244
                                                        
                                                        
                                                        $
                                                        3,224,633Total
      liabilities
                                                        
                                                        $
                                                        6,339,625
                                                        
                                                        
                                                        $
                                                        15,545,068
                                                        
                                                        
                                                        $
                                                        10,911,770
                                                        
                                                        
                                                        $
                                                        3,416,244
                                                        
                                                        
                                                        $
                                                        3,474,633Total
      working capital
                                                        
                                                        $
                                                        34,527,600
                                                        
                                                        
                                                        $
                                                        29,218,684
                                                        
                                                        
                                                        $
                                                        19,553,068
                                                        
                                                        
                                                        $
                                                        21,063,284
                                                        
                                                        
                                                        $
                                                        15,698,378Long
      - term obligations,including current portion
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        $
                                                        1,132,000Total
      stockholders' equity
                                                        
                                                        $
                                                        42,804,730
                                                        
                                                        
                                                        $
                                                        38,265,979
                                                        
                                                        
                                                        $
                                                        30,929,263
                                                        
                                                        
                                                        $
                                                        29,698,862
                                                        
                                                        
                                                        $
                                                        24,562,630





(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)
            The
      financial data for 2008 includes a deferred tax asset
      of  $1,243,716 and an income tax expense of
      $6,414,068.


(5)
              In
      accordance with FASB Statement No. 123(R), 2008, 2007 and 2006 results of
      operations include stock based compensation expense of $1,228,650,
      $615,776 and $736,315,
respectively.


(6)
            Includes
      a gain on the sale of our HMO of $5.9 million and realted stay bonuses and
      termination costs of $1.6
million.


-34-





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




The year
ended December 31, 2008, was one of transition.  As previously
discussed, on August 29, 2008, we completed the sale of the HMO to the Humana
Plan.  The sale resulted in a gain of approximately $5.9 million and
we incurred termination and stay bonus costs of approximately $1.6
million.  Following the sale, the Company operates only the PSN
segment.




The
operating results for 2008 include the results of operations of the HMO through
August 29, 2008.  After that date, as a result of the IPA Agreement,
we began providing services to the members of the HMO through the
PSN.   Similar to the Central Florida and South Florida Humana
Agreements (the “Pre-Existing Humana Network Agreements”), under the IPA
Agreement, the PSN is paid by Humana a percentage of the premium received by
Humana from CMS for each Humana Participating Customer, also called a capitation
fee.  Medical costs incurred under the Pre-Existing Humana Network
Agreements and the IPA Agreement are included in the medical expenses of the
PSN.




The
Humana Agreements are riskagreements
under which the PSN receives monthly payments per Humana Participating Customer
at a rate established by the Humana Agreements. In accordance with the Humana
Agreements, the capitation fee is a function of the premiums received from CMS
for Humana Participating Customers, regardless of the actual costs of covered
services.  To the extent that the Humana Participating 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.




Since
under the IPA Agreement, which was executed concurrent with the sale of the HMO,
we receive a percentage of the CMS premium received by Humana (instead of the
entire amount we were receiving from CMS when operating the HMO), we will
realize less per customer revenue for the HMO members than we would have if we
had continued to operate the HMO.  In addition,  during the
last four months of 2008 that the IPA Agreement was in effect, we did not
realize any substantial medical cost savings.  These factors, when
taken together, negatively impacted our gross profit and our ratio of medical
expense to revenue (“MER”) in 2008.  We anticipate that, as a result
of Humana’s existing contracts with various service providers, the IPA Agreement
will assist the PSN to reduce the cost of providing certain services to the
HMO’s members.  We believe that it may take another quarter or more to
realize a substantial portion of these projected cost
savings.  However, as a result of the sale, in the last four months of
2008 we realized a reduction in monthly operating costs associated with the
HMO.  During the fourth quarter of 2008, our operating costs were
approximately $1.0 million per month less than 2007.





Substantially
all of our revenue was directly or indirectly derived from premiums 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”, “The
Medicare Modernization Act”.




In 2008,
approximately 83.0% of our revenue came from the Humana
Agreements.  The HMO generated 16.5% of our revenue with fee for
service revenue through the PSN making up the balance.  We believe
that in 2009, substantially all of our revenue will come from the Humana
Agreements.




The HMO’s
revenue was generated by premiums consisting of monthly payments per customer
that were established by the CMS Contract through the competitive bidding
process.  The HMO contracted directly with CMS and was paid a monthly
premium payment for each customer enrolled in the HMO.  Among other
things, the monthly premium varied by patient, county, age and severity of
health status.




Relatively
small changes in our MER 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.


-35-




Critical
Accounting Policies




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




We
believe that our most critical accounting policies include “Use of Estimates,
Revenue, Expense and Receivables” 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 paid to us monthly and varies depending on the county, age
and severity of illness of the Humana Participating Customer.  We
assume the economic risk of funding our customers’ healthcare services and
related administrative costs. Premium revenue is recognized in the period in
which eligible individuals are entitled to receive healthcare
services.  Because we have the obligation to fund medical expenses, we
recognize gross revenue and medical expenses associated with the Humana
Agreements in our consolidated financial statements. We record healthcare
premium payments we receive in advance of the service period as unearned
premiums.





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





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





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





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, Business 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 are prohibited.


-36-





In
December 2007, FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements: an Amendment of ARB No. 51 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.





Off-Balance
Sheet Arrangements





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





Contractual
Obligations and Other Contractual Commitments





The
following table summarizes our significant contractual obligations and
commercial commitments as of December 31, 2008.




Payment Due by PeriodContractual
                                            
                                            
                                            
                                            
                                            Less Than
                                            
                                            
                                            
                                            1 - 3
                                            
                                            
                                            
                                            3 - 5
                                            
                                            
                                            More ThanObligations
                                            
                                            Total
                                            
                                            
                                            1 Year
                                            
                                            
                                            Years
                                            
                                            
                                            Years
                                            
                                            
                                            5 yearsOperating
      lease obligations
                                            
                                            $
                                            6,442,000
                                            
                                            
                                            $
                                            1,439,000
                                            
                                            
                                            $
                                            2,522,000
                                            
                                            
                                            $
                                            1,407,000
                                            
                                            
                                            $
                                            1,074,000Service
      Agreements
                                            
                                            
                                            750,000
                                            
                                            
                                            
                                            579,000
                                            
                                            
                                            
                                            171,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Employment
      obligations
                                            
                                            
                                            3,058,000
                                            
                                            
                                            
                                            3,058,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Accrued
      termination costs of HMO administrative services agreement
                                            
                                            
                                            1,080,000
                                            
                                            
                                            
                                            720,000
                                            
                                            
                                            
                                            360,000$
                                            11,330,000
                                            
                                            
                                            $
                                            5,796,000
                                            
                                            
                                            $
                                            3,053,000
                                            
                                            
                                            $
                                            1,407,000
                                            
                                            
                                            $
                                            1,074,000





As of
December 31, 2008, 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 areport issued in February
2009 by the Office of the Actuary at CMS, healthcare outlays are projected to
grow at a rate of 6.2% in 2008, 5.5% in 2009 and at an annual average rate of
6.2% over the period 2008 through 2018. 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 2008 and 2007


Summary





During
2007 and through August 28, 2008, we operated two financial reporting segments,
the PSN business and the HMO business.  On August 29, 2008, we sold
the HMO and subsequently only operated the PSN business.





For 2008,
we realized revenue of $317.2 million compared to $277.6 million in the prior
year, an increase of approximately $39.6 million or 14.3%.  Medical
expenses for 2008 were $280.5 million, an increase of $39.8 million or 16.5%
over 2007.  Our MER increased to 88.4% in 2008 compared to 86.7% in
2007.


-37-





Income
before income taxes for 2008 was $16.6 million compared to $9.4 million in
2007.  Income before income taxes in 2008 includes a gain on the sale
of the HMO of $5.9 million and stay bonus and terminations costs associated with
the sale of $1.6 million.  The $4.3 million difference between the
gain on the sale and the stay bonus and termination costs is equivalent to
approximately $0.05 per share, basic and diluted, of our outstanding common
stock.   The PSN reported a segment gain before income taxes and
allocated overhead of $24.8 million for 2008, compared to $29.2 million for
2007, a decrease of $4.4 million or 15.1%. The HMO segment incurred a loss
before income taxes and allocated overhead of $2.2 million for 2008, compared to
a loss of $10.5 million in 2007, a decrease of 79.0%.  Allocated
overhead was $10.2 million and $9.3 million for 2008 and 2007,
respectively.  The 2008 segment information above excludes the gain on
the Sale and the related stay bonus and termination costs.





Net
income for 2008 was $10.2 million compared to $5.9 million for
2007.  Net earnings per share, basic was $0.21 and net earnings per
share, diluted was $0.20 for 2008 compared to net earnings per share, basic of
$0.12 and net earnings per share, diluted of $0.11 for 2007.




Customer
Information





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





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




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




At
February 1, 2009, the PSN was providing services to approximately 35,300
customers.  The increase in the number of customers is due to net new
customers added during the current open enrollment period.  This
amount will change as customers may enroll and disenroll through March 31,
2009.





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





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


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


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


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


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




-38-




Revenue




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




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




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




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





This PCPM
premium increase is primarily a result of an increase in the base premium in
2008 and an additional premium as a result of an increase in the average
Medicare risk score of our customers.  The base premium rate in 2009,
excluding any potential change attributable to the current Medicare risk score
of our customers, will increase between 3% and 4%.





Premiums
paid to us are retroactively adjusted based on the updated health status of our
customers (known as a Medicare risk adjustment or “MRA”).  We record
an estimate of the retroactive MRA premium that we expect to receive in
subsequent periods.  At December 31, 2008, we have recorded $3.8
million receivable representing our estimate of the retroactive MRA premium for
2008 that we expect to receive in the summer of 2009.  The final 2007
and 2006 retroactive MRA premium adjustments, which were received in 2008 and
2007, respectively, were not materially different than the estimates we had
recorded for those years.





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





At
December 31, 2008, we estimated that we may be required to refund approximately
$100,000 related to Medicare Part D payments received and recorded a liability
for this amount.  Based upon CMS’ final determination of the Actual
Costs of the PSN for providing prescription drug benefits in 2007 and 2006, we
recorded additional revenue in the third quarter of both 2008 and 2007 of
approximately $1.0 million, representing the amount by which our 2007 and 2006
year-end estimated Part D refund liability exceeded the final
amount.





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




Revenue
for the HMO was $52.4 million in 2008 as compared to $55.1 million in
2007.  The decrease in revenue of $2.7 million is primarily
attributable to the fact that the HMO was sold as of August 29, 2008 and,
accordingly, the results of operations for 2008 reflect eight months of
revenue.   This decrease was partially offset by an overall
increase in the HMO’s customer base and monthly revenue in 2008 as compared to
2007.


-39-




Total
Medical Expense





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





We
develop our estimated medical expenses payable by using an actuarial process
that is consistently applied.  The actuarial process develops a range
of estimated medical expenses payable and we record to the amount in the range
that is our best estimate of the ultimate liability.  Each period, we
re-examine previously recorded medical claims payable estimates based on actual
claim submissions and other changes in facts and circumstances. As medical
expenses recorded in prior periods becomes more exact, we adjust the amount of
the estimate, and include the change in medical expense in the period in which
the change is identified.  In each reporting period, our operating
results include 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 $280.5 million and $240.7 million for the years ended
December 31, 2008 and 2007, respectively.   Our reported MER increased from
86.7% in 2007 to 88.4% in 2008.  Approximately $268.0 million or 95.5%
of our total medical expenses in 2008 are attributable to medical claims
expense.  In 2007, approximately $229.4 million or 95.3% of our total
medical expenses were attributable to medical claims expense.  The
balance was the expenses associated with operating our medical
centers.




Medical
costs and MER are as follows:




Year
      Ended December 31,2008
                                                                      
                                                                      
                                                                      2007HMO
                                                                      
                                                                      
                                                                      PSN
                                                                      
                                                                      
                                                                      Consolidated
                                                                      
                                                                      
                                                                      HMO
                                                                      
                                                                      
                                                                      PSN
                                                                      
                                                                      
                                                                      ConsolidatedEstimated
      medical expense for the year, excluding prior period claims
      development
                                                                      
                                                                      $
                                                                      46,826,000
                                                                      
                                                                      
                                                                      $
                                                                      234,800,000
                                                                      
                                                                      
                                                                      $
                                                                      281,626,000
                                                                      
                                                                      
                                                                      $
                                                                      51,813,000
                                                                      
                                                                      
                                                                      $
                                                                      187,456,000
                                                                      
                                                                      
                                                                      $
                                                                      239,269,000(Favorable)
      unfavorable prior period medical claims development in current year based
      on actual claims submitted
                                                                      
                                                                      
                                                                      (780,000
                                                                      )
                                                                      
                                                                      
                                                                      (374,000
                                                                      )
                                                                      
                                                                      
                                                                      (1,154,000
                                                                      )
                                                                      
                                                                      
                                                                      (638,000
                                                                      )
                                                                      
                                                                      
                                                                      2,065,000
                                                                      
                                                                      
                                                                      
                                                                      1,427,000Total
      reported medical expense for the year
                                                                      
                                                                      $
                                                                      46,046,000
                                                                      
                                                                      
                                                                      $
                                                                      234,426,000
                                                                      
                                                                      
                                                                      $
                                                                      280,472,000
                                                                      
                                                                      
                                                                      $
                                                                      51,175,000
                                                                      
                                                                      
                                                                      $
                                                                      189,521,000
                                                                      
                                                                      
                                                                      $
                                                                      240,696,000Medical
      Expense Ratio for year
                                                                      
                                                                      
                                                                      87.9%
                                                                      
                                                                      
                                                                      
                                                                      88.5%
                                                                      
                                                                      
                                                                      
                                                                      88.4%
                                                                      
                                                                      
                                                                      
                                                                      92.9%
                                                                      
                                                                      
                                                                      
                                                                      85.2%
                                                                      
                                                                      
                                                                      
                                                                      86.7%





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




Because
the Humana Agreements provide that the PSN is financially responsible for all
medical services provided to the Humana Participating Customers, medical claims
expense includes the cost of medical services provided to Humana Participating
Customers by Non-Affiliated Providers.  During 2008, the PSN’s medical
claims expense increased by approximately $39.8 million or 16.5%, primarily as a
result of the PSN’s provision of services to the HMO’s customers under the IPA
Agreement and higher medical costs associated with our PSN customers’ increasing
medical needs as reflected in the higher average  risk scores of our
customers in 2008.


-40-




The MER
for the PSN increased to 88.5% in 2008 as compared to 85.2% in 2007. During the
period subsequent to the sale of the HMO, we did not realize any substantial
medical cost savings for services provided under the IPA Agreement, which
negatively impacted our gross profit and our MER for the period subsequent to
the sale.  Since, under the IPA Agreement we receive a percentage of
the CMS premium received by Humana (instead of the entire amount we were
receiving when operating the HMO), we also realized less revenue in the last
four months following the sale of the HMO than we would have if we had continued
to operate the HMO.  The combination of these factors increased the
consolidated MER for the PSN in 2008 by 1.7%.   We anticipate
that, as a result of Humana’s existing contracts with various service providers,
the IPA Agreement will ultimately assist the PSN in reducing the cost of
providing certain services to the former HMO’s .  We believe that it
may take another quarter or more to realize a substantial portion of these
projected cost savings.




Medical
center costs include the salaries, taxes and benefits of the PSN’s employed
health professionals and staff providing primary care services, as well as the
costs associated with the operations of those
practices.  Approximately $12.5 million of our total medical expenses
in 2008 related to physician practices we own as compared to $11.3 million in
2007.




The MER
for the HMO declined to 87.9% in 2008 from 92.9% in 2007. This decline is
primarily a result of our ability to renegotiate certain contracts with
hospitals and outpatient service providers in 2008, which reduced the amount we
paid for services, improvements in our medical management techniques, and higher
premiums from CMS attributable to an increase in the 2008 base rate and
increased risk scores.  Total medical expense for the HMO in 2008
decreased by $5.1 million over that incurred in 2007 primarily due to the fact
that the HMO was sold effective August 29, 2008 and, accordingly, the results of
operations for 2008 include only eight months of total medical
expense.




The MER
is impacted by both revenue and expense.  Retroactive adjustments of
prior period premiums that are recorded in the current period impact the MER of
the current period.  If the retroactive adjustment increases revenue
of the period then the adjustment 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 MER shown in the above
table will likely change as additional claims are
submitted.  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 $2.6
million impacts the PSN’s MER by 1% in 2008 and a change of approximately $2.0
million impacts the PSN’s MER by 1% in 2007.




The
estimated medical expense payable for the PSN at December 31, 2008 was
determined to be between $22.7 million and $24.5 million and, as is our policy,
we recorded a liability of $23.1 million, which approximates the actuarial
mid-point of the range.  At December 31, 2007, our estimated medical
expenses payable for the PSN was $14.7 million.  Claims paid in 2008
for 2007 totaled $14.3 million, a favorable variance of
$374,000.  This $374,000 difference decreased the PSN’s medical
expense in 2008 and decreased the PSN’s MER by .2%.





At
December 31, 2007, our estimated medical expense payable for the HMO was $7.0
million.  Claims paid in 2008 for 2007 totaled $6.2 million which was
less than the estimated accrual by $780,000.  This difference was
recorded as a reduction in claims expense in 2008 and reduced the HMO’s MER by
1.5%.




-41-


Operating
Expenses





Year Ended December 312008
                                
                                
                                2007
                                
                                
                                (Decrease)
                                  Increase
                                
                                
                                %
                                  ChangeAdministrative
      payroll, payroll taxes andbenefits
                                
                                $
                                12,537,000
                                
                                
                                $
                                13,108,000
                                
                                
                                $
                                (571,000
                                )
                                
                                
                                -4.4
                                %Percentage
      of total revenue
                                
                                
                                4.0
                                %
                                
                                
                                4.7
                                %General
      and administrative
                                
                                
                                10,071,000
                                
                                
                                
                                11,158,000
                                
                                
                                
                                (1,087,000
                                )
                                
                                
                                -9.7
                                %Percentage
      of total revenue
                                
                                
                                3.2
                                %
                                
                                
                                4.0
                                %Marketing
      and advertising
                                
                                
                                1,865,000
                                
                                
                                
                                3,959,000
                                
                                
                                
                                (2,094,000
                                )
                                
                                
                                -52.9
                                %Percentage
      of total revenue
                                
                                
                                0.6
                                %
                                
                                
                                1.4
                                %Stay
      bonuses and termination costs
                                
                                
                                1,598,000
                                
                                
                                
                                -
                                
                                
                                
                                1,598,000
                                
                                
                                
                                100.0
                                %Percentage
      of total revenue
                                
                                
                                0.5
                                %
                                
                                
                                0.0
                                %Restructuring
      expense
                                
                                
                                -
                                
                                
                                
                                584,000
                                
                                
                                
                                (584,000
                                )
                                
                                
                                -100.0
                                %Percentage
      of total revenue
                                
                                
                                0.0
                                %
                                
                                
                                0.2
                                %Total
      operating expenses
                                
                                $
                                26,071,000
                                
                                
                                $
                                28,809,000
                                
                                
                                $
                                (2,738,000
                                )
                                
                                
                                -9.5
                                %




Administrative
Payroll, Payroll Taxes and Benefits





Administrative
payroll, payroll taxes and benefits include salaries and related costs for our
executive, administrative and sales staff.  For 2008, administrative
payroll, payroll taxes and benefits were $12.5 million, compared to the $13.1
million for 2007, a decrease of $571,000.  The decrease is primarily a
result of a $1.9 million decrease in payroll cost associated with the HMO,
primarily as a result of the sale of the HMO.  The decrease was
partially offset primarily by an increase in the PSN’s payroll costs, most of
which related to the increase in personnel that was needed to manage the
increased number of customers serviced under the IPA Agreement.




General
and Administrative




General
and administrative expenses decreased to $10.1 million in 2008 as compared to
$11.2 million in 2007, a decrease of $1.1 million, or 9.7%.  General
and administrative costs associated with the HMO decreased $2.2 million in 2008
as compared to 2007, primarily as a result of the sale of the
HMO.  The decrease was partially offset by an increase in the general
and administrative costs of the PSN, most of which related to the increase in
the number of customers serviced under the IPA Agreement.




Marketing
and Advertising





Marketing
and advertising expense, which primarily consists of advertising expenses and
brokerage commissions paid to independent sales agents of the HMO, was $1.9
million in 2008 as compared to $4.0 million in 2007, a decrease of 52.9%. The
primary reason for this decrease is the elimination of these costs upon the sale
of the HMO as a significant portion of our marketing costs were incurred during
the open enrollment period, which occurs in the last quarter of the
year.





Stay
Bonuses and Termination Costs





In
connection with the sale of the HMO, we paid the employees of the HMO stay
bonuses to seek to ensure that the HMO business would operate normally during
the period between the signing of the Stock Purchase Agreement and the Closing
Date and to encourage employees to assist with a smooth transition to
Humana.  In addition, we made termination payments to certain HMO
employees to recognize their past services to the Company.  We
recognized and paid all of these costs, totaling $1.6 million, in the third
quarter of 2008.




Restructuring
Expense





In July
2007, we implemented a restructuring plan designed to reduce costs and improve
operating efficiencies.   The restructuring plan, completed by
the end of August 2007, resulted in the closure of two of the HMO’s office
locations, one PSN medical practice, and a workforce reduction involving 16
employees.  In connection with this plan, we recorded approximately
$584,000 of restructuring costs during the third quarter of 2007, including
approximately $147,000 for severance payments, approximately $365,000 for
continuing lease obligations on closed locations and approximately $72,000 for
the write-off of certain leasehold improvements and equipment.  At the
time of its closure on July 31, 2007, the PSN medical practice served
approximately 450 customers in South Florida, all of which were moved to other
providers outside of the PSN.  Prior to its closing on July 31, this
PSN medical practice generated approximately $2.6 million of revenue in 2007 and
had a negative gross margin. Of the $584,000 restructuring charge, approximately
$400,000 related to the HMO with the balance of $184,000 associated with the
PSN.


-42-





Gain
on Sale of HMO Subsidiary





In 2008,
we sold all of the outstanding capital stock of our HMO to the Humana Plan
pursuant to the terms of the Stock Purchase Agreement, dated as of June 27,
2008, for a cash purchase price of approximately $14.6 million.  We
recognized a gain on the sale of the HMO of approximately $5.9
million.  The sale price of the HMO is subject to positive or negative
post-closing adjustment based upon the difference between the HMO’s estimated
closing net equity, which was approximately $5.1 million, and the HMO’s actual
net equity as of the Closing Date as determined nine months following the
Closing Date.  The ultimate settlements, if any, will increase or
decrease the gain on the sale of the HMO.





Other
Income





We
realized other income of $78,000 in 2008 compared to $1.4 million in
2007.  Although we did realize positive investment income in 2008,
investment income did decrease by $1.3 million compared to 2007.  This
was a result of a significant decline in interest rates and realized and
unrealized losses in our investment portfolio of approximately $811,000 during
2008.





During
the market volatility of 2008, we maintained a significant amount of our funds
in cash and cash related investments.  We invested a portion of our
cash in bond and money market funds and we did realize a decline in the market
value of these investments.  In October 2008, we engaged asset
managers to assist us in the investment of our funds and we meet regularly with
these managers to evaluate our holdings.  We anticipate that we will
continue to invest our funds in highly liquid securities.





Income
taxes




Our
effective tax rate was 38.6% in 2008 and 37.4% in 2007.   The
higher effective income tax rate in 2008 is a result of adjusting deferred tax
estimates related to the HMO.




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 2007,
we realized revenue of $277.6 million compared to $228.2 million in 2006, an
increase of approximately $49.4 million or 21.6%.  Medical expenses
for 2007 were $240.7 million, an increase of $35.1 million or 17.1% over
2006.  Our 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 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 2007 compared to
a loss of $11.7 million in 2006, a decrease of 10.3%.  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 2006.  Net
earnings per share, basic was $0.12 and net earnings per share, diluted was
$0.11 for 2007 compared to net earnings per share – basic and diluted of $0.01
for 2006.




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.




-43-


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
                            
                            
                            
                            6.4
                            %




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.




The
growth in the number of HMO customers resulted primarily from the enrollment of
new customers during the enrollment period that commenced November 15, 2006 and
ended March 31, 2007.




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 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 PSN’s
PCPM premium in 2007 was $737 as compared to $646 in 2006, an increase of
14.1%.   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 the Closed PSN Practice in
August 2007 and customer attrition due to deaths, relocations and transfers to
other insurance plans.




The final
2006 retroactive MRA premium increase from CMS, which was received in 2007, was
not materially different than the estimate we had recorded for that
year.  In 2006, CMS approved a retroactive increase in the PSN’s MRA
score for 2004 and 2005 which resulted in retroactive payments in 2006 of
$809,000.





At
December 31, 2007, we estimated that we would be required to refund $4.0 million
to CMS under the Medicare Part D program for prescription drug costs incurred
during 2007.  Accordingly, we reduced revenue in 2007 and accrued a
liability for the $4.0 million at December 31, 2007.


-44-




In 2007,
based on the final determination by CMS of Medicare Part D costs incurred by the
PSN in 2006, we recorded additional revenue of approximately $1.0 million,
representing the amount by which our 2006 year-end estimate exceeded the final
settlement amount.





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
PCPM premium 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 million and $205.6 million for the years ended
December 31, 2007 and 2006, respectively.   Our MER decreased from 90.1% in
2006 to 86.7% in 2007.  Approximately $229.4 million or 95.3% of our
total medical expenses in 2007 are attributable to medical claims
expense.  In 2006, approximately $195.0 million or 94.8% of our total
medical expenses were attributable to medical claims expense.




Medical
costs and the MER are as follows:




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
                                                              
                                                              
                                                              $
                                                              28,678,000
                                                              
                                                              
                                                              $
                                                              175,941,000
                                                              
                                                              
                                                              $
                                                              204,619,000(Favorable)
      unfavorable prior period medical claims development in current year based
      on actual claims submitted
                                                              
                                                              
                                                              (638,000
                                                              )
                                                              
                                                              
                                                              2,065,000
                                                              
                                                              
                                                              
                                                              1,427,000
                                                              
                                                              
                                                              
                                                              260,000
                                                              
                                                              
                                                              
                                                              740,000
                                                              
                                                              
                                                              
                                                              1,000,000Total
      reported medical expense for the year
                                                              
                                                              $
                                                              51,175,000
                                                              
                                                              
                                                              $
                                                              189,521,000
                                                              
                                                              
                                                              $
                                                              240,696,000
                                                              
                                                              
                                                              $
                                                              28,938,000
                                                              
                                                              
                                                              $
                                                              176,681,000
                                                              
                                                              
                                                              $
                                                              205,619,000Medical
      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.




-45-




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 MER 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 $12.8 million or 7.3%,
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 employed health professionals and staff 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 MER
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 enhanced medical management processes.  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 MER
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 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 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 medical expense and the MER
for the current period.




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, our estimated medical expenses payable
for the PSN was $12.2 million.  Claims paid in 2007 for 2006 totaled
$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 MER by .9%.





At
December 31, 2007, the range for  estimated medical expense payable
for the HMO was determined to be 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 $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 MER by
1.1%.




-46-




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
                          %General
      and administrative
                          
                          
                          11,158,000
                          
                          
                          
                          8,277,000
                          
                          
                          
                          2,881,000
                          
                          
                          
                          34.8
                          %Percentage
      of total revenue
                          
                          
                          4.0
                          %
                          
                          
                          3.6
                          %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
                          %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  $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.  The growth in customer months 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 bonus expense in 2006.




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.




Marketing
and Advertising




Marketing
and advertising expense, which primarily consists of advertising expenses and
brokerage commissions paid to independent sales agents of the HMO, was $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.





Restructuring
Expense





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 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.




-47-


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.  During 2007 and 2006, cash was
invested in highly liquid securities, primarily bond funds with short term
maturities and money market funds.




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.




Liquidity
and Capital Resources




Cash,
cash equivalents and short-term investments at December 31, 2008 totaled
approximately $36.3 million as compared to approximately $38.7 million at
December 31, 2007.




As of
December 31, 2008, we had a working capital surplus of approximately $34.5
million as compared to a working capital surplus of approximately $29.2 million
as of December 31, 2007, an increase of approximately $5.3 million or
18.2%.  This increase in working capital is primarily attributable to
the liabilities of the HMO that were assumed by Humana as part of the sale of
the HMO.




Our total
stockholders’ equity increased approximately $4.5 million, or 11.7%, from
approximately $38.3 million at December 31, 2007 to approximately $42.8 million
at December 31, 2008.  This increase was primarily a result of our net
income and the exercise of stock options reduced by shares acquired under our
stock repurchase plan.




In
October 2008, we announced the repurchase of up to 10 million shares of our
outstanding common stock.  We commenced making repurchases on October
6, 2008 and, as of December 31, 2008 and February 16, 2009, we had repurchased
4.2 million shares for $7.6 million and 5.0 million shares for $8.9 million,
respectively.  The number of shares to be repurchased and the timing
of the purchases are influenced by a number of factors, including the then
prevailing market price of our common stock, other perceived opportunities that
may become available to the Company and regulatory requirements.





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.  In October 2008, we engaged asset managers
to assist us in the investment of our funds.




At
December 31, 2008, we had no outstanding debt.




As of
December 31, 2008, 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 $2.0 million.  In connection with the Sale and the IPA
Agreement in August 2008, we secured an additional $1.0 million line of
credit.  The initial $1.0 million line of credit has been renewed to
March 2010 and the additional $1.0 million line expires in August
2009.  Any outstanding balance on these lines of credit bears interest
at the bank’s prime rate plus 3.25%.  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 lines of credit secures a $2.0 million letter of credit
that is issued in favor of Humana.





Net cash
provided by operating activities for 2008 was approximately $6.6
million.  In addition to net income of $10.2 million our significant
sources of cash from operating activities were:





·
            a
      decrease in deferred income taxes of $3.3
  million;


·
            an
      increase in income taxes payable of $1.6
  million;


·
            stock
      based compensation expense of $1.4
million;


·
            a
      decrease in accounts receivable from patients of $1.3
    million;


·
            an
      increase in accrued termination costs of HMO administrative services
      agreement of $1.1 million; and


·
            non-cash
      depreciation and amortization expense of $1.1
  million.




-48-




The cash
provided by operating activities was partially offset by the following uses of
cash:





·
            the
      gain on the sale of the HMO of $5.9
million


·
            an
      increase in due from/(to) Humana of $3.6
  million;


·
            a
      decrease in estimated medical expenses payable of $1.5 million;
      and


·
            a
      decrease in accrued expenses of $1.2
million.





Net cash
used in investing activities for 2008 was approximately $35.3 million of which
$33.5 million was attributable to our investment of cash in short-term
investments that are being managed by asset managers.  Of the
remaining $1.8 million that was used in investing activities, $1.4 million is
cash from the sale of the HMO that is being held in and subject to an escrow for
twenty four months.  The sale price of the HMO is subject to positive
or negative post-closing adjustment based upon the difference between the HMO’s
estimated closing net equity, which was approximately $5.1 million, and the
HMO’s actual net equity as of the Closing Date as determined nine months
following the Closing Date.  The escrow was established to secure our
payment of any post-closing adjustments, described below, and indemnification
obligations.





Net cash
used in financing activities for 2008 was approximately $7.3 million which
consisted primarily of $7.6 million of cash used to repurchase stock, in
accordance with the stock repurchase program discussed above, and repayment of a
note totaling $253,000.  These amounts were offset by $323,000 from
the exercise of stock options and the excess tax benefits from stock-based
compensation of $261,000.




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, 2008 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.




ITEM
      8
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




The
financial statements and supplementary data required by this Item are set forth
in the accompanying audited financial statements.




-49-


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, 2008.  Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.




(b)
Management's Annual Report on Internal Control over Financial
Reporting




Management,
with the participation of the Chief Executive Officer and the Chief Financial
Officer, is responsible for establishing and maintaining adequateinternal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:





•
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and





•
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.




Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008. 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, 2008, the
Company’s internal control over financial reporting is effective.




-50-




(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, 2008, 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, 2008, based on criteria
established in Internal
Control—Integrated Frameworkissued by COSO.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2008 and 2007, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years ended December 31, 2008 and our report dated February 24, 2009 expressed
an unqualified opinion on those financial statements.








/s/ GRANT
THORNTON LLP





Miami,
Florida


February
24, 2009





-51-




(d)   Changes in
Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during the
fourth quarter of 2008 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 2009 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation14A no later than April 30, 2009 (the “2009
Proxy Statement”).





ITEM
      11.
            EXECUTIVE
      COMPENSATION





The
information required by this item is included in our 2009 Proxy Statement and is
incorporated herein by reference.





ITEM 12
              SECURITY OWNERSHIP
      OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER
MATTERS




The
information required by this item is included in our 2009 Proxy Statement and is
incorporated herein by reference.





ITEM
      13
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE





The
information required by this item is included in our 2009 Proxy Statement and is
incorporated herein by reference.





-52-





ITEM
      14
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





The
information required by this item is included in our 2009 Proxy Statement and is
incorporated herein by reference.




PART
IV





ITEM
      15
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(a)   The
following documents are filed as a part of this Form 10-K:




(1)
            Financial
      Statements.





(2)
              All
      financial schedules required to be filed by Item 8 of this form, and by
      Item 15(d)  have been omitted as the required information is
      inapplicable or has been included in the Notes to Consolidated Financial
      Statements.





-53-





METROPOLITAN
HEALTH


NETWORKS,
INC. AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





DECEMBER
31, 2008





CONTENTS





PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              
              F-2CONSOLIDATED
      FINANCIAL STATEMENTSBalance
      Sheets
              
              F-3Statements
      of Income
              
              F-4Statements
      of Changes in Stockholders' Equity
              
              F-5Statements
      of Cash Flows
              
              F-6Notes
      to Financial Statements
              
              F-8





F-1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Metropolitan
Health Networks, Inc.





We have
audited the accompanying consolidated balance sheets of Metropolitan Health
Networks, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2008.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Metropolitan Health
Networks, Inc. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.





As
discussed in Note 13 to the consolidated financial statements, the Company has
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007.





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, 2008,
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 February 24, 2009 expressed an
unqualified opinion thereon.








/s/ GRANT
THORNTON LLP


Miami,
Florida


February
24, 2009




F-2




METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS





December 31,2008
                                        
                                        
                                        2007ASSETSCURRENT
      ASSETSCash
      and equivalents, including $13.0 million in 2007 statutorily limited to
      use by the HMO
                                        
                                        $
                                        2,701,243
                                        
                                        
                                        $
                                        38,682,186Investments,
      at fair value
                                        
                                        
                                        33,641,140
                                        
                                        
                                        
                                        -Accounts
      receivable from patients, net of allowance of $490,000  and
      $614,000 in 2008 and 2007, respectively
                                        
                                        
                                        286,003
                                        
                                        
                                        
                                        1,563,370Due
      from Humana
                                        
                                        
                                        2,823,355
                                        
                                        
                                        
                                        -Inventory
                                        
                                        
                                        315,811
                                        
                                        
                                        
                                        196,154Prepaid
      expenses
                                        
                                        
                                        570,792
                                        
                                        
                                        
                                        739,307Deferred
      income taxes
                                        
                                        
                                        262,874
                                        
                                        
                                        
                                        2,905,755Other
      current assets
                                        
                                        
                                        266,007
                                        
                                        
                                        
                                        676,980TOTAL
      CURRENT ASSETS
                                        
                                        
                                        40,867,225
                                        
                                        
                                        
                                        44,763,752PROPERTY
      AND EQUIPMENT, net of accumulated depreciation andamortization
      of $2,324,000 and $2,269,000 in 2008 and 2007,
respectively
                                        
                                        
                                        1,336,094
                                        
                                        
                                        
                                        2,181,119RESTRICTED
      CASH
                                        
                                        
                                        1,408,089
                                        
                                        
                                        
                                        -DEFERRED
      INCOME TAXES, net of current portion
                                        
                                        
                                        980,842
                                        
                                        
                                        
                                        1,403,082OTHER
      INTANGIBLE ASSETS, net of accumulated amortization of $524,000 and $99,000
      in 2008 and 2007, respectively
                                        
                                        
                                        1,184,142
                                        
                                        
                                        
                                        1,609,325GOODWILL
                                        
                                        
                                        2,587,332
                                        
                                        
                                        
                                        2,585,857OTHER
      ASSETS
                                        
                                        
                                        780,631
                                        
                                        
                                        
                                        1,267,912TOTAL
      ASSETS
                                        
                                        $
                                        49,144,355
                                        
                                        
                                        $
                                        53,811,047LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                        
                                        $
                                        483,621
                                        
                                        
                                        $
                                        1,461,668Accrued
      payroll and payroll taxes
                                        
                                        
                                        2,288,224
                                        
                                        
                                        
                                        2,546,295Income
      taxes payable
                                        
                                        
                                        1,865,926
                                        
                                        
                                        
                                        249,077Accrued
      termination costs of HMO administrative services agreement
                                        
                                        
                                        1,080,000
                                        
                                        
                                        
                                        -Accrued
      expenses
                                        
                                        
                                        621,854
                                        
                                        
                                        
                                        822,843Estimated
      medical expenses payable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,016,632Due
      to CMS
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,695,087Due
      to Humana
                                        
                                        
                                        -
                                        
                                        
                                        
                                        753,466TOTAL
      CURRENT LIABILITIES
                                        
                                        
                                        6,339,625
                                        
                                        
                                        
                                        15,545,068COMMITMENTS
      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;48,251,395
      and  51,556,732 issued and outstanding at December 31, 2008 and
      2007, respectively
                                        
                                        
                                        48,251
                                        
                                        
                                        
                                        51,557Additional
      paid-in capital
                                        
                                        
                                        37,649,331
                                        
                                        
                                        
                                        43,311,741Retained
      earnings (deficit)
                                        
                                        
                                        4,607,148
                                        
                                        
                                        
                                        (5,597,319
                                        )TOTAL
      STOCKHOLDERS' EQUITY
                                        
                                        
                                        42,804,730
                                        
                                        
                                        
                                        38,265,979TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                        
                                        $
                                        49,144,355
                                        
                                        
                                        $
                                        53,811,047





The
accompanying notes are an integral part of the consolidated financial
statements.




F-3




METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME





Years Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006REVENUE
                        
                        $
                        317,211,727
                        
                        
                        $
                        277,577,289
                        
                        
                        $
                        228,216,073MEDICAL
      EXPENSESMedical
      claims expense
                        
                        
                        267,983,448
                        
                        
                        
                        229,420,767
                        
                        
                        
                        195,017,923Medical
      center costs
                        
                        
                        12,488,679
                        
                        
                        
                        11,275,599
                        
                        
                        
                        10,600,971Total
      Medical Expenses
                        
                        
                        280,472,127
                        
                        
                        
                        240,696,366
                        
                        
                        
                        205,618,894GROSS
      PROFIT
                        
                        
                        36,739,600
                        
                        
                        
                        36,880,923
                        
                        
                        
                        22,597,179OTHER
      OPERATING EXPENSESAdministrative
      payroll, payroll taxes and benefits
                        
                        
                        12,537,118
                        
                        
                        
                        13,108,160
                        
                        
                        
                        10,843,979General
      and administrative
                        
                        
                        10,071,781
                        
                        
                        
                        11,158,177
                        
                        
                        
                        8,276,641Marketing
      and advertising
                        
                        
                        1,864,822
                        
                        
                        
                        3,959,220
                        
                        
                        
                        3,709,511Stay
      bonuses and termination costs
                        
                        
                        1,597,674
                        
                        
                        
                        -
                        
                        
                        
                        -Restructuring
      expense
                        
                        
                        -
                        
                        
                        
                        583,795
                        
                        
                        
                        -Total
      Other Operating Expenses
                        
                        
                        26,071,395
                        
                        
                        
                        28,809,352
                        
                        
                        
                        22,830,131OPERATING
      INCOME (LOSS) BEFORE GAIN ON SALE OF HMO
                        
                        
                        10,668,205
                        
                        
                        
                        8,071,571
                        
                        
                        
                        (232,952
                        )Gain
      on sale of HMO subsidiary
                        
                        
                        5,872,769
                        
                        
                        
                        -
                        
                        
                        
                        -OPERATING
      INCOME
                        
                        
                        16,540,974
                        
                        
                        
                        8,071,571
                        
                        
                        
                        (232,952
                        )OTHER
      INCOME (EXPENSE)Investment
      income, net
                        
                        
                        108,137
                        
                        
                        
                        1,396,624
                        
                        
                        
                        1,057,007Other
      income (expense), net
                        
                        
                        (30,576
                        )
                        
                        
                        (27,457
                        )
                        
                        
                        1,506Total
      other income (expense)
                        
                        
                        77,561
                        
                        
                        
                        1,369,167
                        
                        
                        
                        1,058,513INCOME
      BEFORE INCOME TAXES
                        
                        
                        16,618,535
                        
                        
                        
                        9,440,738
                        
                        
                        
                        825,561INCOME
      TAX EXPENSE
                        
                        
                        6,414,068
                        
                        
                        
                        3,526,740
                        
                        
                        
                        353,000NET
      INCOME
                        
                        $
                        10,204,467
                        
                        
                        $
                        5,913,998
                        
                        
                        $
                        472,561NET
      EARNINGS PER SHARE:Basic
                        
                        $
                        0.21
                        
                        
                        $
                        0.12
                        
                        
                        $
                        0.01Diluted
                        
                        $
                        0.20
                        
                        
                        $
                        0.11
                        
                        
                        $
                        0.01





The
accompanying notes are an integral part of the consolidated financial
statements.




F-4




METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS
      ENDED DECEMBER 31, 2008, 2007 AND
2006





$0.001
                        
                        
                        
                        
                        
                        $0.001Par Value
                        
                        
                        Common
                        
                        
                        Par Value
                        
                        
                        Additional
                        
                        
                        RetainedPreferred
                        
                        
                        Preferred
                        
                        
                        Stock
                        
                        
                        Common
                        
                        
                        Paid-in
                        
                        
                        EarningsShares
                        
                        
                        Stock
                        
                        
                        Shares
                        
                        
                        Stock
                        
                        
                        Capital
                        
                        
                        (Deficit)
                        
                        
                        TotalBALANCES
      - 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
                        )
                        
                        
                        38,265,979Exercise
      of options and warrants, net
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        541,261
                        
                        
                        
                        541
                        
                        
                        
                        322,330
                        
                        
                        
                        -
                        
                        
                        
                        322,871Stock-based
      compensation expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        694,022
                        
                        
                        
                        -
                        
                        
                        
                        694,022Shares
      issued for directors' fees
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        87,000
                        
                        
                        
                        87
                        
                        
                        
                        166,962
                        
                        
                        
                        -
                        
                        
                        
                        167,049Shares
      issued to employees
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        258,200
                        
                        
                        
                        258
                        
                        
                        
                        534,370
                        
                        
                        
                        -
                        
                        
                        
                        534,628Tax
      benefit on exercise of options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        261,000
                        
                        
                        
                        -
                        
                        
                        
                        261,000Stock
      repurchase
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,191,798
                        )
                        
                        
                        (4,192
                        )
                        
                        
                        (7,641,094
                        )
                        
                        
                        -
                        
                        
                        
                        (7,645,286
                        )Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,204,467
                        
                        
                        
                        10,204,467BALANCES
      - DECEMBER 31, 2008
                        
                        
                        5,000
                        
                        
                        $
                        500,000
                        
                        
                        
                        48,251,395
                        
                        
                        $
                        48,251
                        
                        
                        $
                        37,649,331
                        
                        
                        $
                        4,607,148
                        
                        
                        $
                        42,804,730





The
      accompanying notes are an integral part of the consolidated financial
      statements.





F-5





METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS





Years Ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                10,204,467
                                
                                
                                $
                                5,913,998
                                
                                
                                $
                                472,561Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Gain
      on sale of HMO subsidiary
                                
                                
                                (5,872,769
                                )
                                
                                
                                -
                                
                                
                                
                                -Unrealized
      gains on short-term investments
                                
                                
                                (96,000
                                )
                                
                                
                                -
                                
                                
                                
                                -Depreciation
      and amortization
                                
                                
                                1,098,424
                                
                                
                                
                                951,900
                                
                                
                                
                                554,354Bad
      debt expense
                                
                                
                                34,000
                                
                                
                                
                                549,266
                                
                                
                                
                                1,740,000Loss
      from disposal of property and equipment
                                
                                
                                10,224
                                
                                
                                
                                110,437
                                
                                
                                
                                -Stock-based
      compensation expense
                                
                                
                                1,228,650
                                
                                
                                
                                615,776
                                
                                
                                
                                736,315Shares
      issued for director fees
                                
                                
                                167,049
                                
                                
                                
                                211,016
                                
                                
                                
                                88,425Shares
      issued for legal settlement
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                68,750Deferred
      income taxes
                                
                                
                                3,326,121
                                
                                
                                
                                3,147,163
                                
                                
                                
                                329,000Excess
      tax benefits from share-based compensation
                                
                                
                                (261,000
                                )
                                
                                
                                (526,000
                                )
                                
                                
                                (240,000
                                )Changes
      in operating assets and liabilities:Accounts
      receivable from patients
                                
                                
                                1,277,367
                                
                                
                                
                                (900,927
                                )
                                
                                
                                (1,201,556
                                )Inventory
                                
                                
                                (119,657
                                )
                                
                                
                                88,623
                                
                                
                                
                                (83,347
                                )Prepaid
      expenses
                                
                                
                                133,844
                                
                                
                                
                                (32,917
                                )
                                
                                
                                (233,104
                                )Other
      current assets
                                
                                
                                (744,805
                                )
                                
                                
                                441,119
                                
                                
                                
                                (570,123
                                )Other
      assets
                                
                                
                                (28,806
                                )
                                
                                
                                43,903
                                
                                
                                
                                (30,332
                                )Accounts
      payable
                                
                                
                                (740,043
                                )
                                
                                
                                574,494
                                
                                
                                
                                (82,011
                                )Accrued
      payroll and payroll taxes
                                
                                
                                (237,789
                                )
                                
                                
                                735,867
                                
                                
                                
                                351,330Income
      taxes payable
                                
                                
                                1,616,849
                                
                                
                                
                                249,077
                                
                                
                                
                                -Accrued
      termination costs of HMO administrative services agreement
                                
                                
                                1,080,000
                                
                                
                                
                                -
                                
                                
                                
                                -Accrued
      expenses
                                
                                
                                (699,760
                                )
                                
                                
                                (194,763
                                )
                                
                                
                                498,054Estimated
      medical expenses payable
                                
                                
                                (1,454,591
                                )
                                
                                
                                2,272,895
                                
                                
                                
                                4,049,327Due
      to CMS
                                
                                
                                261,636
                                
                                
                                
                                (7,738
                                )
                                
                                
                                2,702,825Due
      from/(to) Humana
                                
                                
                                (3,576,821
                                )
                                
                                
                                1,757,911
                                
                                
                                
                                -Total
      adjustments
                                
                                
                                (3,597,877
                                )
                                
                                
                                10,087,102
                                
                                
                                
                                8,677,907Net
      cash provided by operating activities
                                
                                
                                6,606,590
                                
                                
                                
                                16,001,100
                                
                                
                                
                                9,150,468CASH
      FLOWS USED IN INVESTING ACTIVITIES:Capital
      expenditures
                                
                                
                                (396,475
                                )
                                
                                
                                (745,678
                                )
                                
                                
                                (1,929,461
                                )Restricted
      cash from sale of HMO subsidiary
                                
                                
                                (1,408,089
                                )
                                
                                
                                -
                                
                                
                                
                                -Net
      proceeds from sale of HMO subsidiary
                                
                                
                                78,439
                                
                                
                                
                                -
                                
                                
                                
                                -Cash
      paid for physician practice acqusition
                                
                                
                                (1,475
                                )
                                
                                
                                (591,204
                                )
                                
                                
                                -Short-term
      investments
                                
                                
                                (33,545,140
                                )
                                
                                
                                -
                                
                                
                                
                                -Investments
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (61,177
                                )Net
      cash (used in) investing activities
                                
                                
                                (35,272,740
                                )
                                
                                
                                (1,336,882
                                )
                                
                                
                                (1,990,638
                                )CASH
      FLOWS (USED IN)/FROM FINANCING ACTIVITIES:Repayments
      on notes payable
                                
                                
                                (253,378
                                )
                                
                                
                                (125,000
                                )
                                
                                
                                -Proceeds
      from exercise of stock options and warrants, net
                                
                                
                                322,871
                                
                                
                                
                                506,926
                                
                                
                                
                                137,350Stock
      repurchases
                                
                                
                                (7,645,286
                                )
                                
                                
                                -
                                
                                
                                
                                -Excess
      tax benefits from stock-based compensation
                                
                                
                                261,000
                                
                                
                                
                                526,000
                                
                                
                                
                                240,000Net
      cash (used in)/ provided by financing activities
                                
                                
                                (7,314,793
                                )
                                
                                
                                907,926
                                
                                
                                
                                377,350NET
      (DECREASE) INCREASE IN CASH AND EQUIVALENTS
                                
                                
                                (35,980,943
                                )
                                
                                
                                15,572,144
                                
                                
                                
                                7,537,180CASH
      AND EQUIVALENTS - beginning of year
                                
                                
                                38,682,186
                                
                                
                                
                                23,110,042
                                
                                
                                
                                15,572,862CASH
      AND EQUIVALENTS - end of year
                                
                                $
                                2,701,243
                                
                                
                                $
                                38,682,186
                                
                                
                                $
                                23,110,042





The
accompanying notes are an integral part of the consolidated financial
statements.




F-6




METROPOLITAN
      HEALTH NETWORKS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS
(continued)





Years ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Supplemental
      Disclosures:Interest
      paid
                            
                            $
                            26,272
                            
                            
                            $
                            34,182
                            
                            
                            $
                            28,086Cash
      paid for income taxes
                            
                            $
                            1,471,000
                            
                            
                            $
                            130,500
                            
                            
                            $
                            -Supplemental
      Disclosure of Non-cash Investing and Financing Activities:Issuance
      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-7




Metropolitan
Health Networks, Inc. and Subsidiaries




Year
Ended December 31, 2008




Notes
to Consolidated Financial Statements




NOTE
1 - ORGANIZATION AND BUSINESS ACTIVITY




At
December 31, 2008, our business was focused on the operation of a provider
services network (“PSN”) in the State of Florida through our wholly owned
subsidiary, Metcare of Florida, Inc.  Prior to August 29, 2008 (the
“Closing Date”), we also owned and operated a health maintenance organization
(the “HMO”) through our wholly owned subsidiary, Metcare Health Plans,
Inc.





On the
Closing Date, and as discussed in more detail in Note 3, we completed the sale
(the “Sale”) of the HMO to Humana Medical Plan, Inc. (the “Humana
Plan”).  Concurrently with the Sale, the PSN entered into a five-year
independent practice association participation agreement (the “IPA Agreement”)
with Humana, Inc. (“Humana”)  to provide or coordinate the provision
of healthcare services to the HMO’s customers pursuant to a per customer fee
arrangement.  Under the IPA Agreement, the PSN will, on a
non-exclusive basis, provide and arrange for the provision of covered medical
services, in all 13 Florida counties served by the HMO, to each customer of
Humana’s Medicare Advantage health plans who selects one of our PSN primary care
physicians as his or her primary care physician.  The IPA Agreement
has a five-year term and will renew automatically for additional one-year
periods upon the expiration of the initial term and each renewal term unless
terminated upon 90 days notice prior to the end of the applicable
term.





As of
August 30, 2008, the PSN operated under the IPA Agreement and two other network
contracts (the “Pre-Existing Humana Network Agreements” and, together with the
IPA Agreement, (the “Humana Agreements”) with Humana, one of the largest
participants in the Medicare Advantage program in the United States, to provide
medical care to Medicare beneficiaries enrolled under Humana’s health
plans.  To deliver care, we utilize our wholly-owned medical practices
and have also contracted directly or indirectly through Humana with medical
practices, service providers and hospitals (collectively the “Affiliated
Providers”).





Effective
as of October 1, 2008, the Pre-Existing Humana Network Agreement covering the
Central Florida service area were expanded to include nine additional counties
in North and Central Florida.  With these additional counties, as of
December 31, 2008, the PSN has agreements that enable it to provide services to
Humana customers in 30 Florida counties.  We currently have operations
in 19 of these counties and anticipate developing operations in several of the
remaining counties in 2009.





On
January 1, 2009, we commenced service to approximately 1,000 Humana
Participating Customers who utilized a special election period to transition to
a Humana Medicare Advantage HMO plan from a healthcare plan that is now being
liquidated.





Effective
as of August 1, 2007, the PSN entered into a network agreement (the “CarePlus
Agreement”) with CarePlus Health Plans, Inc. (“CarePlus”), a Medicare Advantage
health plan in Florida.  CarePlus is a wholly-owned subsidiary of
Humana.  Pursuant to the CarePlus Agreement, the PSN manages, on a
non-exclusive basis, healthcare services to Medicare beneficiaries in nine
Florida counties.  Effective September 1, 2008, the PSN’s provider
relationship with CarePlus was extended to include the 13 Florida counties
covered by the IPA Agreement.  CarePlus commenced operations in four
of these counties on January 1, 2009.





Under the
PSN’s agreements with Humana and CarePlus, the PSN assumes full responsibility
for the provision of all necessary medical care for each customer of Humana’s
Medicare Advantage plans and CarePlus’ Medicare Advantage plans, as applicable,
who selects one of the PSN’s primary care physicians as his or her primary care
physician, even for services it does not provide directly.





Prior to
the Sale, we managed the PSN and the HMO as separate business
segments.   Subsequent to the Sale, we operate only the PSN
business.




F-8




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of Consolidation




Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). The consolidated financial statements include the accounts of
Metropolitan Health Networks, Inc., and subsidiaries that we control, including
the HMO through the date of Sale.  All significant intercompany
balances and transactions have been eliminated in consolidation.




Use
of Estimates





The
preparation of financial statements in accordance with GAAP requires us to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The areas involving the most significant use
of estimates are medical expenses payable, premium revenue, the impact of risk
sharing provisions related to our Humana contracts and prior to the Sale, our
Medicare contract, the future benefit of our deferred tax asset and the
valuation and related impairment recognition of long-lived assets, including
goodwill. These estimates are based on knowledge of current events and
anticipated future events. We adjust these estimates each period as more current
information becomes available. The impact of any changes in estimates is
included in the determination of earnings in the period in which the estimate is
adjusted. Actual results may ultimately differ materially from those
estimates.





Revenue





Revenue
is primarily derived from risk-based health insurance arrangements in which the
premium is paid to us on a monthly basis.  We assume the economic risk
of funding our customers’ healthcare services and related administrative costs.
Premium revenue is recognized in the period in which our customers are entitled
to receive healthcare services.  Because we have the obligation to
fund medical expenses, we recognize gross revenue and medical expenses for these
contracts in our consolidated financial statements. We record healthcare premium
payments received in advance of the service period as unearned
premiums.





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





Our PSN’s
wholly owned medical practices also provide medical care to non-Humana customers
on a fee-for-service basis.  These services are typically billed to
patients, Medicare, Medicaid, health maintenance organizations and insurance
companies. Fee-for-service revenue 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.




Medicare
Part D





On
January 1, 2006, we began providing prescription drug benefits to our Medicare
Advantage customers in accordance with the requirements of Medicare Part D. The
benefits covered under Medicare Part D are in addition to the benefits covered
by the PSN under Medicare Parts A and B.   We recognize premium
revenue for the provision of Part D insurance coverage ratably.





The Part
D Payment is subject to adjustment, positive or negative, based upon the
application of risk corridors that compare the estimated
prescription  drug benefit costs (“Estimated Costs”) to
actual  prescription  drug benefit  incurred costs
(the "Actual  Costs").  To the extent the Actual Costs
exceed the Estimated Costs by more than the risk corridor, we may receive
additional payments.  Conversely, to the extent the Estimated Costs
exceed the Actual Costs by more than the risk corridor, we may be required to
refund to a portion of the Part D Payment. We estimate and recognize an
adjustment to premium revenue based upon pharmacy claims experience to date as
if the contract to provide Part D coverage were to end at the end of each
reporting period.  Accordingly, this estimate does not take into
consideration projected future pharmacy claims experience.  It is
reasonably possible that this estimate could change in the near term by an
amount that could be material. Since these amounts represent additional premium
or premium that is to be returned, any adjustment is recorded as an increase or
decrease to revenue. The final settlement for the Part D program occurs in the
subsequent year.




F-9




Medical
Expenses and Medical Claims Payable




Medical
expenses are recognized in the period in which services are provided and include
an estimate of our obligations for medical services that have been provided to
our customers but for which we have neither received nor processed claims, and
for liabilities for physician, hospital and other medical expense disputes. We
develop estimates for medical expenses incurred but not reported using an
actuarial process that is consistently applied. The actuarial models consider
factors such as time from date of service to claim receipt, claim backlogs, care
provider contract rate changes, medical care consumption and other medical
expense trends.   The actuarial process and models develop a
range for medical claims payable and we record to the amount in the range that
is our best estimate of the ultimate liability.  Each period, we
re-examine previously established medical claims payable estimates based on
actual claim submissions and other changes in facts and circumstances. As the
liability recorded in prior periods becomes more exact, we adjust the amount of
the estimates, and include the changes in medical expense in the period in which
the change is identified. In each reporting period, our operating results
include the effects of more completely developed medical expense payable
estimates associated with previously reported periods. While we believe our
medical expenses payable are adequate to cover future claims payments required,
such estimates are based on the claims experience to date and various
assumptions. Therefore, the actual liability could differ materially from the
amounts recorded.





Medical
expenses also include, among other things, the expense of operating our wholly
owned practices, capitated payments made to affiliated primary care physicians
and specialists, hospital costs, outpatient costs, pharmaceutical expense and
premiums we pay to reinsurers net of the related reinsurance
recoveries.  Capitation payments represent monthly contractual fees
disbursed to physicians and other providers who are responsible for providing
medical care to customers. Pharmacy expense 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.





We assume
responsibility for the cost of all medical services provided to the
customer.  To the extent that customers require more frequent or
expensive care than was anticipated, the premium received may be insufficient to
cover the costs of care provided. When it is probable that expected future
healthcare costs and maintenance costs will exceed the anticipated 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, 2008 or 2007 and we
do not anticipate recording a premium deficiency liability, except when
unanticipated adverse events or changes in circumstances indicate
otherwise.





Pharmacy
costs are recognized when incurred by the customer.





Cash
and Cash Equivalents





All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. From time to time, we maintain cash balances
with financial institutions in excess of federally insured limits.





Investments





Investment
securities at December 31, 2008 consisted of U.S. Treasury securities, municipal
bonds and corporate debt.  The Company classifies its debt securities
as trading and does not classify any securities as available-for-sale or held to
maturity.  Trading securities are bought and held principally for the
purpose of selling them in the near term.  Available-for-sale
securities are all securities not classified as trading or held to
maturity.   Cash and cash equivalents that have been set aside to
invest in trading securities are classified as investments.





Trading
securities are recorded at fair value based on the closing market price of the
security. Unrealized holdings gains and losses on trading securities are
included in operations.





F-10




Effective
January 1, 2008, we adopted SFAS 157 and effective October 10, 2008,
we adopted FSP No. SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, except as
it applies to the nonfinancial assets and nonfinancial liabilities subject to
FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
which prioritizes the inputs used in the valuation methodologies in measuring
fair value:





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





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





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




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




In
accordance with SFAS 157, we measure our investments at fair value. Our
investments are in Level 1 because our investments are valued using quoted
market prices in active markets.





Premiums
and discounts are amortized or accreted over the life of the available-for-sale
security as an adjustment to yield using the effective interest
method.  Dividend and interest income is recognized when
earned.





Accounts
Receivable from Patients





Accounts
receivable from patients represents amount due for medical services provided to
individuals that are not customers of our PSN who are serviced by 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.





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, 2008, 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 -
      5 yearsFurniture
      and equipment
                  5 -
      7 yearsAuto
      equipment
                  5
      yearsLeasehold
      improvements
                  3
      years or term of
lease




Deferred
Tax Asset





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





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 2008,
2007 and 2006 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




On
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including employee
stock options, based on estimated fair values. SFAS 123(R) supersedes the
Company’s previous accounting under Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
beginning in fiscal 2006.




SFAS 123R
requires companies to estimate the fair value of stock option awards on the date
of grant using an option-pricing model. The value of awards that are ultimately
expected to vest is recognized as expense over the requisite service periods in
the Company’s Consolidated Statements of Income.




Because
stock-based compensation expense recognized in the Consolidated Statement of
Income for fiscal 2008, 2007 and 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures.




F-12


Advertising
Costs





Advertising
expense was approximately $1,865,000, $3,047,000 and $3,254,000 for the years
ended December 31, 2008, 2007 and 2006, 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.





Reinsurance and
Capitation





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




Fair
Value of Financial Instruments





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





Other Comprehensive
Income





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





New
Accounting Pronouncements





In May
2008, FASB issued FAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). This statement documents the hierarchy of
the various sources of accounting principles and the framework for selecting the
principles used in preparing financial statements. FAS 162 shall be effective 60
days following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. FAS 162 will not have a material impact on our consolidated
financial statements.





In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and
Other Intangible Assets” (“FAS 142”). The objective of this FSP is to improve
the consistency between the useful life of a recognized intangible asset under
FAS 142 and the period of expected cash flows used to measure the fair value of
the asset under FAS 141(R), and other U.S. generally accepted accounting
principles. This FSP applies to all intangible assets, whether acquired in a
business combination or otherwise and shall be effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years and applied prospectively to
intangible assets acquired after the effective date. Early adoption is not
permitted. The requirements of this FSP will be effective for the Company’s 2009
fiscal year and are not expected to have a material impact on our consolidated
financial statements.




F-13





In
February, 2008, the Financial Accounting Standards Board (“FASB”) issued FSP
No. 157-2, “Effective Date of FASB Statement No. 157,” which delays
for one year the effective date of FASB Statement No. 157 (“FAS 157”),
“Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The delay is intended to
allow additional time to consider the effect of various implementation issues
that have arisen, or that may arise, from the application of FAS 157, which
became effective for fiscal years beginning after November 15, 2007 (and
for interim periods within those years). The requirements of FSP No. 157-2
will be effective for the Company’s 2009 fiscal year and are not expected to be
material.





On
December 4, 2007, the FASB issued FASB Statement No. 141(R) (“Statement No.
141(R)”) which replaces FASB Statement No. 141, Business 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 are prohibited.





In
December 2007, FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements: an Amendment of ARB No. 51 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.





NOTE
3 - SALE OF HMO





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





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





The
Purchase Price is subject to positive or negative post-closing adjustment based
upon the difference between the HMO’s estimated closing net equity, which was
approximately $5.1 million, and the HMO’s actual net equity as of the Closing
Date as determined nine months following the Closing Date (the “Closing Net
Equity”).  In addition to this Purchase Price adjustment, the Stock
Purchase Agreement requires that the Humana Plan reconcile any changes in CMS
Part D payments and Medicare payments received by the HMO after the Closing Date
for services provided prior to the Closing Date to the amounts recorded for such
items as part of the Closing Net Equity determination.  The net amount
of such reconciliations is expected to be substantially determined in 2009 and
will be paid to the Company or the Humana Plan, as applicable.  The
ultimate settlements, if any, will increase or decrease the gain on the sale of
the HMO. At December 31, 2008, we are not aware of any significant adjustments
that would impact the recorded gain.


F-14


In
connection with the Sale, we paid the employees of the HMO stay bonuses to seek
to ensure that the HMO business would operate normally during the period between
the signing of the Stock Purchase Agreement and the Closing Date and to
encourage the employees to assist with a smooth transition of the HMO business
to Humana.  In addition, we made termination payments to certain HMO
employees to recognize their past services to the Company.  We
recognized and paid all of these costs, totaling $1.6 million, in the third
quarter of 2008.


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 non-cancelable 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, 2007 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 2008, 2007 and 2006, we paid an aggregate of $1.2
million, $1.2 million and $751,000 for services in accordance with the Services
Agreement.


Upon the
Sale, this contract was assumed by Humana through December 31,
2008.  Beginning January 1, 2009, we will be responsible for the
minimum payments through June 30, 2010.  This liability and expense
has been recorded as a part of the Sale.





We also
entered into a five year IPA Agreement with Humana.  The IPA
Agreement, which pertains to the 13 Florida counties where the HMO currently
operates, provides that the PSN will provide and arrange for the provision of
covered medical services to individuals who have elected to receive benefits
under a Humana Medicare Advantage HMO Plan and selects one of the PSN’s
Physicians as his or her primary care physician.





NOTE
4 – 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, which was payable in 6 equal
installments, was satisfied at December 31, 2008.  This transaction
was accounted for under the purchase method of accounting.  The
purchase price was allocated as follows:





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





The
patient base was 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 healthcare 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.




F-15


NOTE
5 - MAJOR CUSTOMERS





Humana





Our PSN
receives a monthly fee from Humana for each Humana Medicare Advantage Plan
customer that chooses a physician that the PSN owns or has contracted with as
her or his primary care physician.  The monthly fee the PSN receives
to cover the medical care required of that customer is 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.




Revenue
from Humana accounted for approximately 83.0%, 79.7% and 86.9% of our total
revenue in 2008, 2007 and 2006, respectively.





At
December 31, 2008 we accrued $3.8 million representing our estimate of the
retroactive MRA premium for services provide in 2008 that we expect to receive
in the summer of 2009.  This includes amounts for both the PSN and for
the HMO for the period it was owned by us, as provided for in the Stock Purchase
Agreement.  The amount is included in due from Humana.  The
final 2006 and 2007 retroactive MRA premium increases for the PSN, which were
received in 2007 and 2008, respectively, were not materially different than the
estimates we had recorded for those years.  In 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 of $809,000.




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




CMS




Prior to the Sale, the HMO provided services to Medicare
beneficiaries pursuant to the Medicare Advantage program.  Under our
agreement with CMS, the HMO was paid a fixed capitation payment each month based
on the number of customers enrolled in our plan, 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 had been renewed to December 31, 2008.





Premium
revenue for the HMO was approximately, 16.5%, 19.8%, and 12.4% of our total
revenue in 2008, 2007 and 2006, respectively.





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





NOTE
6 - DUE TO/FROM HUMANA




Amounts
due to/from Humana consisted of the following:





December 31,2008
                    
                    
                    2007Due
      from Humana
                    
                    $
                    27,951,000
                    
                    
                    $
                    19,665,000Due
      to Humana
                    
                    
                    (25,128,000
                    )
                    
                    
                    (20,418,000
                    )Total
      Due From/(To) Humana
                    
                    $
                    2,823,000
                    
                    
                    $
                    (753,000
                    )




F-16





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 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
collectability 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 AICD’s
implanted in 2005.  During 2007, the remaining balance of
approximately $270,000 was written off to direct medical expenses.





NOTE
7 – INVESTMENTS





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





We did
not have an investment in trading securities at December 31, 2006 or
2007.  We invested our excess cash in those years in cash
equivalents.  During 2008, we began to utilize asset managers to
invest our excess funds.  Investments that no longer meet the criteria
of a cash equivalent are classified as investments on the consolidated balance
sheet.  These investments include securities with varying maturities
issued by federal agencies, states or municipalities.





NOTE
8 - ESTIMATED MEDICAL EXPENSES PAYABLE




Activity
in estimated medical expenses payable is as follows:




Year Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Balance
      at beginning of year
                  
                  $
                  21,709,000
                  
                  
                  $
                  16,929,000
                  
                  
                  $
                  13,144,000Incurred
      related to:Current
      year
                  
                  
                  229,413,000
                  
                  
                  
                  191,297,000
                  
                  
                  
                  166,003,000Prior
      years
                  
                  
                  (1,153,000
                  )
                  
                  
                  1,427,000
                  
                  
                  
                  1,009,000Total
      incurred
                  
                  
                  228,260,000
                  
                  
                  
                  192,724,000
                  
                  
                  
                  167,012,000Paid
      related to:Current
      year
                  
                  
                  (200,602,000
                  )
                  
                  
                  (169,736,000
                  )
                  
                  
                  (149,073,000
                  )Prior
      years
                  
                  
                  (20,352,000
                  )
                  
                  
                  (18,208,000
                  )
                  
                  
                  (14,154,000
                  )Total
      paid
                  
                  
                  (220,954,000
                  )
                  
                  
                  (187,944,000
                  )
                  
                  
                  (163,227,000
                  )HMO
      IBNR transferred upon Sale
                  
                  
                  (5,871,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Balance
      at end of year
                  
                  $
                  23,144,000
                  
                  
                  $
                  21,709,000
                  
                  
                  $
                  16,929,000





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





December 31,2008
                                
                                
                                2007
                                
                                
                                2006Estimated
      Medical Expenses PayablePSN
                                
                                $
                                23,144,000
                                
                                
                                $
                                14,692,000
                                
                                
                                $
                                12,185,000HMO
                                
                                
                                -
                                
                                
                                
                                7,017,000
                                
                                
                                
                                4,744,000$
                                23,144,000
                                
                                
                                $
                                21,709,000
                                
                                
                                $
                                16,929,000




F-17





At
December 31, 2008, we determined that the range for estimated medical expenses
payable was between $22.7 million and $24.5 million and we recorded a liability
at the approximate actuarial mid-range of $23.1 million. This amount is included
within the due from Humana in the accompanying consolidated balance
sheets.





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





The
estimated medical expenses payable at December 31, 2006 ultimately settled
during 2007 for $1.4 million more than the amounts originally estimated with
$2.1 million of unfavorable development related to the PSN and $638,000 of
favorable development related to the HMO.  This represents 1.2% of
total medical expenses recorded in 2007.





The
estimated medical expenses payable at 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.





We
maintain stop loss insurance with a commercial insurance
company.  Included in medical expense for 2008, 2007 and 2006 was stop
loss premium expense of $1.5 million, $2.6 million and $2.5 million,
respectively, and stop loss recoveries of $1.1 million, $1.4 million and $1.0
million, respectively.





NOTE
9 - PRESCRIPTION DRUG BENEFITS UNDER MEDICARE PART D





At
December 31, 2008, we recorded an estimated Part D refund liability for 2008 of
$100,000.  This amount is included in the due from Humana account in
the accompanying consolidated balance sheet as of December 31,
2008.  Based upon CMS’ final determination of Part D costs incurred by
the PSN in 2007 and 2006, we recorded additional revenue in both the third
quarter of 2008 and 2007 of approximately $1.0 million, representing the amount
by which our 2007 and 2006 year-end estimated Part D refund liability exceeded
the final amount.





Under the
terms of the Stock Purchase Agreement, if the Part D final settlement for the
periods we owned the HMO is different than what we accrued at the time of the
Sale, then we will either receive any additional premiums or pay any premiums
that are required to be refunded.





NOTE
10 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS





Property
and equipment consisted of the following:




December 31,2008
                      
                      
                      2007Medical
      equipment
                      
                      $
                      112,000
                      
                      
                      $
                      90,000Furniture
      and equipment
                      
                      
                      434,000
                      
                      
                      
                      551,000Leasehold
      improvements
                      
                      
                      1,493,000
                      
                      
                      
                      2,088,000Computers
      and office equipment
                      
                      
                      1,599,000
                      
                      
                      
                      1,699,000Other
                      
                      
                      22,000
                      
                      
                      
                      22,0003,660,000
                      
                      
                      
                      4,450,000Less
      Accumulated Depreciation and Amortization
                      
                      
                      (2,324,000
                      )
                      
                      
                      (2,269,000
                      )$
                      1,336,000
                      
                      
                      $
                      2,181,000




Depreciation
and amortization of property and equipment totaled approximately $676,000,
$843,000 and $554,000 in 2008, 2007, and 2006, respectively.




Intangible
assets consisted of:




F-18




December 31,2008
                      
                      
                      2007Customer
      lists
                      
                      $
                      1,592,000
                      
                      
                      $
                      1,592,000Non-compete
      agreement
                      
                      
                      116,000
                      
                      
                      
                      116,0001,708,000
                      
                      
                      
                      1,708,000Less
      Accumulated Amortization
                      
                      
                      (524,000
                      )
                      
                      
                      (99,000
                      )$
                      1,184,000
                      
                      
                      $
                      1,609,000




Amortization
of intangible assets totaled $425,000 in 2008 and $99,000 in
2007.  Amortization expense will be approximately $328,000 in 2009,
$308,000 in 2010, $286,000 in 2011, and $262,000 in 2012.





NOTE
11 - LINES OF CREDIT





As of
December 31, 2008, 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 $2.0 million.  In connection with the Sale and the IPA
Agreement in August 2008, we secured an additional $1.0 million line of
credit.  The initial $1.0 million line of credit has been renewed to
March 2010 and the additional $1.0 million line expires in August
2009.  Any outstanding balance on these lines of credit bears interest
at the bank’s prime rate plus 3.25%.  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 lines of credit secures
a $2.0 million letter of credit that is
issued in favor of Humana.





NOTE
12 - 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. Severance payments associated with the
restructuring were substantially paid in 2007.  The continuing lease
obligations will result in additional future cash expenditures and are expected
to be paid over the remaining lease terms.  At the time of its closure
on July 31, 2007, the PSN Practice served approximately 450 customers in South
Florida, all of which were moved to other providers outside of the
PSN.  Prior to its closing on July 31, the PSN practice generated
approximately $2.6 million of revenue in 2008 and had a negative gross margin.
Of the $584,000 restructuring charge, approximately $401,000 relates to the HMO
with the balance of $183,000 associated with the PSN.




A summary
of the restructuring activity is as follows:





Restructuring
      costs accrued in 2007
                      
                      $
                      584,000Cash
      paid
                      
                      
                      (457,000
                      )Fixed
      assets disposed of
                      
                      
                      (110,000
                      )Balance
      at December 31, 2008
                      
                      $
                      17,000





On April
9, 2007 (“Separation Date”), we entered into a mutually agreeable separation
agreement (the “Separation Agreement”) with the individual who served as our
President and Chief Operating Officer until the Separation Date. In the second
quarter 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.


F-19





NOTE
13 - INCOME TAXES




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




December 312008
                      
                      
                      2007
                      
                      
                      2006CurrentFederal
                      
                      $
                      2,699,000
                      
                      
                      $
                      165,000
                      
                      
                      $
                      24,000State
                      
                      
                      654,000
                      
                      
                      
                      -
                      
                      
                      
                      -DeferredFederal
                      
                      
                      2,890,000
                      
                      
                      
                      2,915,000
                      
                      
                      
                      299,000State
                      
                      
                      171,000
                      
                      
                      
                      447,000
                      
                      
                      
                      30,000Income
      Tax Expense
                      
                      $
                      6,414,000
                      
                      
                      $
                      3,527,000
                      
                      
                      $
                      353,000




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




Years ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Statutory
      federal tax
                  
                  $
                  5,650,000
                  
                  
                  $
                  3,304,000
                  
                  
                  $
                  281,000State
      income taxes, net of federal income tax benefit
                  
                  
                  545,000
                  
                  
                  
                  291,000
                  
                  
                  
                  30,000Permanent
      differences and other, net
                  
                  
                  219,000
                  
                  
                  
                  (68,000
                  )
                  
                  
                  42,000Income
      tax expense
                  
                  $
                  6,414,000
                  
                  
                  $
                  3,527,000
                  
                  
                  $
                  353,000





Deferred
tax assets are as follows:




DEFERRED TAX ASSETS:
 
 December 31,2008
                            
                            
                            2007Allowances
      for doubtful accounts
                            
                            $
                            238,000
                            
                            
                            $
                            285,000Net
      operating loss carryforward
                            
                            
                            -
                            
                            
                            
                            2,182,000Stock-based
      compensation expense
                            
                            
                            725,000
                            
                            
                            
                            495,000Accrued
      expenses
                            
                            
                            29,000
                            
                            
                            
                            395,000Depreciation
      and amortization
                            
                            
                            213,000
                            
                            
                            
                            342,000Deferral
      of HMO start-up costs
                            
                            
                            -
                            
                            
                            
                            490,000Alternative
      minimum tax Carryforward
                            
                            
                            -
                            
                            
                            
                            380,000Other,
      net
                            
                            
                            39,000
                            
                            
                            
                            (260,000
                            )Total
      deferred tax assets
                            
                            $
                            1,244,000
                            
                            
                            $
                            4,309,000Deferred
      income taxes - current
                            
                            $
                            263,000
                            
                            
                            $
                            2,906,000Deferred
      income taxes - noncurrent
                            
                            
                            981,000
                            
                            
                            
                            1,403,000$
                            1,244,000
                            
                            
                            $
                            4,309,000




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.




F-20


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.  In 2008
and 2007, we recognized tax benefits of $260,000 and $177,000, which reduced our
income tax expense, upon the expiration of the statute of limitations applicable
to the tax years during which the benefits were generated.




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




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





We are
subject to income taxes in the U.S. federal jurisdiction and the state of
Florida.  Tax regulations are subject to interpretation of the related
tax laws and regulations and require significant judgment to
apply.  We have utilized all of our available net operating loss
carryforwards, including net operating loss carryforwards related to years prior
to 2003.  These net operating losses are open for examination by the
relevant taxing authorities.  Upon adoption of Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes,we evaluated our tax positions with regard to these
years.  The statute of limitations for the federal and Florida 2005
tax years will expire in the next twelve months.





The
Internal Revenue Service concluded its examination of our 2005 Federal income
tax return during 2008.  We did not recognize a change to the total
amount of unrecognized tax benefit as a result of the
examination.  Tax years subsequent to 2004 remain subject to federal
and state examination.





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





There are
no unrecognized tax benefits at December 31, 2008.





In, 2008,
2007 and 2006, tax benefits of $261,000, $526,000 and $240,000, respectively,
were recorded directly to equity as a result of the exercise of non-qualified
stock options.





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
14 - STOCKHOLDERS' EQUITY




As of
December 31, 2008 and 2007, 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,
2008 and 2007, the aggregate and per share amounts of cumulative dividend
arrearages were approximately $566,667 ($113 per share) and $516,667 ($103 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, 2008, none of the
holders of our Series A Preferred Stock have converted any shares to common
stock.




F-21


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.




During
2008, we issued 268,200 restricted shares and options to purchase 982,000 shares
of common stock to employees.  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
2008, we issued 87,000 restricted shares of common stock and options to purchase
43,500 shares of common stock to the non-management members of our Board of
Directors. During 2007, we issued 157,300 restricted shares of our common stock
and options to purchase 78,600 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.




During
2007, we also issued options to a consultant to purchase 100,000 shares of our
common stock.  These options, which fully vested on December 31, 2007
and originally expired on June 30, 2008, have an exercise price equal to the
closing price of our common stock on the day preceding the grant
date.  During the first quarter of 2008, we extended the expiration
date from June 30, 2008 to September 30, 2008 for the options issued to the
consultant in 2007.  In accordance with FAS 123(R), Share-Based Payment,we
revalued the options and accounted for the increase in value as additional
expense which is being amortized ratably over the vesting period.




Shares
reserved for future issuance at December 31, 2008 are as follows:




Number of
                                  SharesShares
      Issuable Upon the Exercise of Outstanding Stock Options
                                
                                
                                3,501,000Shares
      Issuable Upon the conversion of Preferred Stock
                                
                                
                                518,000Total
                                
                                
                                4,019,000





In October 2008, we announced that the Board of Directors has
authorized the repurchase of up to 10 million shares of our outstanding common
stock.  We commenced making stock repurchases on October 6, 2008 and,
as of December 31, 2008, we had repurchased 4.2 million shares for $7.6
million.  Between January 1, 2009 and February 16, 2009 we had
repurchased an additional 828,000 shares for $1.3 million.  We cancel
the stock that has been repurchased and reduce common stock and paid-in capital
for the acquisition price of the stock.





NOTE
15 - STOCK -BASED COMPENSATION





As of
December 31, 2008, we had three nonqualified stock option plans, the 2001 Stock
Option Plan, the Supplemental Stock Option Plan, and the Omnibus Equity
Compensation Plan (together the “Plans”).  The Plans are administered
by the Compensation Committee of the Board of Directors.  A total of
9,000,000 shares of our common stock are authorized for issuance pursuant to
awards granted under the Omnibus Equity Compensation Plan.  Total
compensation cost that has been charged against income in 2008, 2007 and 2006
for nonqualified stock options under the Plans was $602,000, $588,000 and
$736,000, respectively (excluding termination costs on sale of the
HMO).





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.




F-22


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 31,2008
                        
                        
                        2007
                        
                        
                        2006Risk
      Free Interest Rate
                        
                        
                        1.98%-3.13
                        %
                        
                        
                        4.53%
      - 4.92
                        %
                        
                        
                        4.56%
      - 4.99
                        %Expected
      Option Life (in years)
                        
                        
                        2-4.5
                        
                        
                        
                        1 -
      4.5
                        
                        
                        
                        2 -
      4.5Expected
      Volatility
                        
                        
                        50
                        %
                        
                        
                        50
                        %
                        
                        
                        50
                        %Dividends
      to be Paid
                        
                        None
                        
                        
                        None
                        
                        
                        None




A summary
of option activity under the Plans and the changes during the year ended
December 31, 2008 is presented below:




Options
                      
                      Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Term (Years)
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding
      at December 31, 2007
                      
                      
                      3,887,062
                      
                      
                      $
                      1.53
                      
                      
                      
                      5.84
                      
                      
                      $
                      3,400,883Granted
      during 2008
                      
                      
                      1,025,500
                      
                      
                      $
                      2.29Exercised
                      
                      
                      (575,334
                      )
                      
                      $
                      0.69Forfeited
                      
                      
                      (84,000
                      )
                      
                      $
                      2.19Expired
                      
                      
                      (752,547
                      )
                      
                      $
                      1.68Outstanding
      at December 31, 2008
                      
                      
                      3,500,681
                      
                      
                      $
                      1.84
                      
                      
                      
                      6.86
                      
                      
                      $
                      431,166Vested
      or expected to vest at December 31, 2008
                      
                      
                      3,293,704
                      
                      
                      $
                      1.82
                      
                      
                      
                      6.74
                      
                      
                      $
                      431,166Exercisable
      at December 31, 2008
                      
                      
                      2,120,831
                      
                      
                      $
                      1.64
                      
                      
                      
                      5.60
                      
                      
                      $
                      431,166




The
weighted average grant date fair value of option grants during the years 2008,
2007 and 2006 was $0.84, $0.60, and $0.84, respectively.  The fair
value of non vested options is determined based on the opening trading price of
our shares at grant date.  The aggregate intrinsic value of options
exercised in 2008, 2007 and 2006 was approximately $745,000, $1.4 million and
$749,000, respectively, and is based on the difference between the exercise
price and quoted market value at the end of each period.




A summary
of the status of our non vested options as of December 31, 2008 and changes
during the year then ended presented below:




F-23




Non Vested Options
                      
                      Shares
                      
                      
                      Weighted
                        Average
                        Grant Date
                        Fair ValueNon
      vested at January 1, 2008
                      
                      
                      1,249,798
                      
                      
                      $
                      0.96Granted
                      
                      
                      1,025,500
                      
                      
                      $
                      0.84Vested
                      
                      
                      (811,448
                      )
                      
                      $
                      0.83Forfeited
                      
                      
                      (84,000
                      )
                      
                      $
                      0.88Non
      vested at December 31, 2008
                      
                      
                      1,379,850
                      
                      
                      $
                      0.82





As of
December 31, 2008, there was $517,000 of total unrecognized compensation cost
related to non-vested nonqualified stock options granted under the
Plans.  That cost is expected to be recognized over a weighted average
period of 2.0 years.  The total fair value of options vested during
2008, 2007 and 2006 was $695,000, $910,000,  and $769,000,
respectively.




Cash
received from option exercises under all share based payment arrangements for
the years ended December 31, 2008, 2007 and 2006 was $323,000, $507,000, and
$137,000 respectively.  A tax benefit of $261,000, $526,000, and
$240,000 was realized from option exercise of the share-based payment
arrangements in 2008, 2007, and 2006 respectively.




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




NOTE
16 - EARNINGS PER SHARE





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





Year Ended December 31,2008
                
                
                2007
                
                
                2006Net
      Income
                
                $
                10,204,000
                
                
                $
                5,914,000
                
                
                $
                473,000Less:  Preferred
      stock dividend
                
                
                (50,000
                )
                
                
                (50,000
                )
                
                
                (50,000
                )Income
      available to common shareholders
                
                $
                10,154,000
                
                
                $
                5,864,000
                
                
                $
                423,000Denominator:Weighted
      average common shares outstanding
                
                
                49,093,000
                
                
                
                50,573,000
                
                
                
                50,033,000Basic
      earnings per common share
                
                $
                0.21
                
                
                $
                0.12
                
                
                $
                0.01Income
      available to common shareholders
                
                $
                10,154,000
                
                
                $
                5,864,000
                
                
                $
                423,000Add:
      Preferred stock dividend
                
                
                50,000
                
                
                
                -
                
                
                
                -$
                10,204,000
                
                
                $
                5,864,000
                
                
                $
                423,000Denominator:Weighted
      average common shares outstanding
                
                
                49,093,000
                
                
                
                50,573,000
                
                
                
                50,033,000Common
      share equivalents of outstanding stock:Convertible
      preferred stock
                
                
                518,000
                
                
                
                -
                
                
                
                -Nonvested
      stock
                
                
                170,000
                
                
                
                172,000
                
                
                
                -Options
      and warrants
                
                
                573,000
                
                
                
                1,051,000
                
                
                
                1,440,000Weighted
      average common shares outstanding
                
                
                50,354,000
                
                
                
                51,796,000
                
                
                
                51,473,000Diluted
      earnings per common share
                
                $
                0.20
                
                
                $
                0.11
                
                
                $
                0.01





The
following securities were not included in the computation of diluted earnings
per share for the years ended December 31, 2008, 2007 and 2006, as their effect
would be anti-dilutive:


F-24





Year Ended December 31,Security Excluded From Computation
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Stock
      Options
                    
                    
                    1,688,000
                    
                    
                    
                    636,000
                    
                    
                    
                    557,000Convertible
      Preferred Stock
                    
                    
                    -
                    
                    
                    
                    355,000
                    
                    
                    
                    496,000




NOTE
17 - 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 2008.
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 $243,000, $100,000, and $148,000 for purposes of making matching
contributions for the 2008, 2007, and 2006 plan years, respectively. The rights
of the participants in the 401(k) Plan to our contributions do not fully vest
until such time as the participant has been employed by us for three
years.





NOTE
18 - COMMITMENTS AND CONTINGENCIES




Leases





We lease
office and medical facilities under various non-cancelable operating
leases.  Approximate future minimum payments under these leases for
the years subsequent to December 31, 2008 are as follows:




Less
                  
                  
                  NetSublease
                  
                  
                  MinimumBuildings
                  
                  
                  Equipment
                  
                  
                  Amount
                  
                  
                  Payment2009
                  
                  $
                  1,195,000
                  
                  
                  $
                  244,000
                  
                  
                  $
                  114,000
                  
                  
                  $
                  1,325,0002010
                  
                  
                  1,166,000
                  
                  
                  
                  213,000
                  
                  
                  
                  117,000
                  
                  
                  
                  1,262,0002011
                  
                  
                  969,000
                  
                  
                  
                  174,000
                  
                  
                  
                  120,000
                  
                  
                  
                  1,023,0002012
                  
                  
                  710,000
                  
                  
                  
                  98,000
                  
                  
                  
                  93,000
                  
                  
                  
                  715,0002013
                  
                  
                  599,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  599,000Thereafter
                  
                  
                  1,074,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,074,000Total
                  
                  $
                  5,713,000
                  
                  
                  $
                  729,000
                  
                  
                  $
                  444,000
                  
                  
                  $
                  5,998,000





The
renewal options on the leases range from 3 to 5 years and contain escalation
clauses of up to 5%.  Rental expense for 2008, 2007, and 2006 was $1.9
million each year.




In
connection with the sale of the pharmacy division in 2004, we have subleased
pharmacy facilities to the purchaser of the pharmacy division.  In the
event of such purchaser’s default, we could potentially be responsible to
fulfill these lease commitments.  At December 31, 2008, the total
lease payments remaining totaled $444,000.  At February 1, 2009, we
are not aware of any default by the purchaser.




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.
 On April 22, 2008, Mr. Guillama filed a First Amended Complaint and
Request for Jury Trial. We responded and made counter claims on May 16, 2008 and
we anticipate defending this action vigorously. These shares have not been
reflected as issued or outstanding in the accompanying condensed consolidated
balance sheets or in the computations of earnings per share.The parties are currently engaging in
discovery.


F-25





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





NOTE
19 - SEGMENTS




Prior to
the Sale, we managed the PSN and HMO as separate business
segments.  We identified our segments in accordance with the
aggregation provisions of Statement of Financial Accounting Standards (“FASB”)
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 and
the nature of the services and benefits provided. The results of each segment
are measured by income before income taxes. We allocate all selling, general and
administrative expenses, investment and other income, interest expense, goodwill
and certain other assets and liabilities to our segments.  Our
segments do share overhead costs.





Effective
with the Sale, we operate only the PSN segment.  The 2008 results of
operations for the HMO segment are for the period from January 1, 2008 through
the date of the Sale.




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





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


F-26





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





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





YEAR ENDED DECEMBER 31, 2006
                      
                      PSN
                      
                      
                      HMO
                      
                      
                      TotalRevenue
      from external customers
                      
                      $
                      199,981,000
                      
                      
                      $
                      28,235,000
                      
                      
                      $
                      228,216,000Investment
      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 is approximately $633,000 of investment
income and depreciation and amortization of approximately
$178,000.  This amount is reduced by interest income of approximately
$633,000.  Corporate assets were approximately $8,640,000 at December
31, 2006.


F-27





NOTE
20 - VALUATION AND QUALIFYING ACCOUNTS




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




Year
      Ended December 31,2008
                
                
                2007
                
                
                2006Allowance
      for doubtful trade accounts - continuing operations:Balance
      at beginning of period
                
                $
                614,000
                
                
                $
                601,000
                
                
                $
                556,000Charged
      to costs and expenses
                
                
                -
                
                
                
                282,000
                
                
                
                119,000Increase
      (Deductions - accounts written off)
                
                
                (124,000
                )
                
                
                (269,000
                )
                
                
                (74,000
                )Balance
      at end of period
                
                $
                490,000
                
                
                $
                614,000
                
                
                $
                601,000Allowance
      for note receivable:Balance
      at beginning of period
                
                $
                143,000
                
                
                $
                143,000
                
                
                $
                161,000Charged
      to costs and expenses
                
                
                34,000
                
                
                
                -
                
                
                
                -Increase
      (Deductions - accounts written off)
                
                
                -
                
                
                
                -
                
                
                
                (18,000
                )Balance
      at end of period
                
                $
                177,000
                
                
                $
                143,000
                
                
                $
                143,000Allowance
      for AICD receivable:Balance
      at beginning of period
                
                $
                -
                
                
                $
                1,621,000
                
                
                $
                -Charged
      to costs and expenses
                
                
                -
                
                
                
                267,000
                
                
                
                1,621,000Increase
      (Deductions - accounts written off)
                
                
                -
                
                
                
                (1,888,000
                )
                
                
                -Balance
      at end of period
                
                $
                -
                
                
                $
                -
                
                
                
                1,621,000




F-28





NOTE
21 - SELECTED QUARTERLY FINANCIAL DATA (unaudited)





For the Quarter EndedDecember 31,
                    2008
                  
                  
                  September 30,
                    2008
                  
                  
                  June 30, 2008
                  
                  
                  March 31,
                    2008Revenue
                  
                  $
                  80,036,000
                  
                  
                  $
                  78,950,000
                  
                  
                  $
                  82,211,000
                  
                  
                  $
                  76,014,000Gross
      profit
                  
                  $
                  9,335,000
                  
                  
                  $
                  7,701,000
                  
                  
                  $
                  11,930,000
                  
                  
                  $
                  7,773,000Net
      income (loss)
                  
                  $
                  2,570,000
                  
                  
                  $
                  4,268,000
                  
                  
                  $
                  3,705,000
                  
                  
                  $
                  (338,000
                  )Net
      income (loss) per share - basic
                  
                  $
                  0.05
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.07
                  
                  
                  $
                  (0.01
                  )Net
      income (loss) per share - diluted
                  
                  $
                  0.05
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.07
                  
                  
                  $
                  (0.01
                  )





For the Quarter EndedDecember 31,
                  2007
                
                
                September 30,
                  2007
                
                
                June 30, 2007
                
                
                March 31,
                  2007Revenue
                
                $
                69,917,000
                
                
                $
                69,622,000
                
                
                $
                69,937,000
                
                
                $
                68,101,000Gross
      profit
                
                $
                11,015,000
                
                
                $
                9,117,000
                
                
                $
                8,831,000
                
                
                $
                7,917,000Net
      income
                
                $
                2,558,000
                
                
                $
                1,597,000
                
                
                $
                1,531,000
                
                
                $
                228,000Net
      income per share - basic
                
                $
                0.05
                
                
                $
                0.03
                
                
                $
                0.03
                
                
                $
                -Net
      income per share - diluted
                
                $
                0.05
                
                
                $
                0.03
                
                
                $
                0.03
                
                
                $
                -





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




Significant
Fourth Quarter Adjustments




As a
result of new information that became available, in the fourth quarter of 2008,
we recorded a $3.8 million adjustment for the estimated retroactive premium that
we expect to receive in the summer of 2009 related to the final MRA premium
adjustment for 2008.  Of this amount, $3 million relates to premium
revenue recorded in the first three quarters of 2008.





During
the fourth quarter of 2008, estimated medical claims expense related to dates of
service prior to this quarter were greater than the amount recorded at September
30, 2008 by approximately $452,000 (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 2008.  This amount was recorded as a decrease
in medical claims expense in the fourth quarter of 2008.





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





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.  Based upon CMS’ final determination of Part D costs incurred
by the PSN in 2007 and 2006, we recorded additional revenue in both the third
quarter of 2008 and 2007 of approximately $1.0 million, representing the amount
by which our 2007 and 2006 year-end estimated Part D refund liability exceeded
the final amount.  Also in the fourth quarter of 2008, we determined
that, based on our continued review of actual pharmacy costs in 2008, our
accrual for the Part D liability for 2008 was too high.  Accordingly,
we reduced the estimated liability and increased premium revenue by
approximately $1.5 million to reduce the liability that had been accrued over
the first three quarters.





F-29





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.





F-30




METROPOLITAN
HEALTH NETWORKS, INC.




EXHIBIT
INDEX




Year
Ended December 31, 2008




(3)
Exhibits




2.1
            Stock
      Purchase Agreement, dated as of June 27, 2008, by and between Humana
      Medical Plans, Inc. and Metropolitan Health Networks, Inc.
      (12)





3.1.
            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, 2006 (8)





10.7.
            Amended
      and Restated Employment Agreement between Metropolitan and Robert J. Sabo
      dated November 9, 2007 (9)





10.8.
            Amended
      and Restated Employment Agreement between Metropolitan and Roberto L.
      Palenzuela dated January 3, 2006
(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, 2008 (10)





10.15
            Summary
      of 2008 Annual Bonus Plan for Executive Officers and certain key
      management employees (11)





10.16
            Summary
      of Director Compensation Plan*




-54-




10.17
            Form
      of Restricted Stock Award Agreement for Restricted Stock Grants to
      Directors pursuant to the Omnibus Compensation
  Plan*





10.18
            Form
      of Restricted Stock Award Agreement for Restricted Stock Grants to
      Management pursuant to the Omnibus Compensation
  Plan*





10.19
            Amendment
      to Employment Agreement, dated as of December 22, 2008, by and between
      Metropolitan and Michael M. Earley
(14)





10.20
            Amendment
      to Employment Agreement, dated as of December 22, 2008, by and between
      Metropolitan and Jose A. Guethon, M.D.
(14)





10.21
            Amendment
      to Employment Agreement, dated as of December 22, 2008, by and between
      Metropolitan and Robert J. Sabo
(14)





10.22
            Amendment
      to Employment Agreement, dated as of December 22, 2008, by and between
      Metropolitan and Roberto L. Palenzuela
(14)





10.23
            Summary
      of 2009 Bonus Plan for Executive Officers and certain key management
      employees (15)





10.24
            Independent
      Practice Association Agreement, dated as of August 29, 2008, by and
      between Metcare of Florida, Inc. and Humana, Inc
  (16)





10.25
            Physician
      Practice Management Participation Amendment, dated as of September 4,
      2008, by and between Metcare of Florida, Inc. and Humana Medical Plan,
      Inc. and Humana Health Insurance Company of Florida, Inc. and Humana
      Insurance Company, Employers Health Insurance Company and their affiliates
      who underwrite or administer health plans
(17)





21.1
            List
      of Subsidiaries*





23.1
            Consent
      of Independent Registered Public Accounting
  Firm*





31.1.
            Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*





31.2.
            Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*





32.1.
            Certification
      of the Chief Executive Officer and pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002**





32.2.
            Certification
      of the Chief Financial Officer and pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002**





*     filed
herewith


**    furnished
herewith








-55-





(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, 2006, as filed with the Commission on March 16,
  2007.





(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 our Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009 filed with the Commission on August 5, 2008 (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,
  2006.





(9)
            Incorporated
      by reference to Metropolitan's Current Report on Form 8-K filed with the
      Commission on October 20, 2007.





(10)
            Incorporated
      by reference to Metropolitan's Current Report on Form 8-K filed with the
      Commission on April 9, 2008.





(11)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on February 12, 2008.





(12)
            Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007, as filed with the Commission on March 26,
  2008.





(13)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on July 1, 2008.





(14)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on December 23, 2008.





(15)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on February 11, 2009.





(16)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on September 2, 2008.  Confidential treatment has been granted
      with respect to certain portions of this exhibit. Omitted portions were
      filed separately with the Commission on September 2,
  2008.





(17)
            Incorporated
      by reference to our Current Report on Form 8-K filed with the Commission
      on September 9, 2008. Confidential treatment has been granted with respect
      to certain portions of this exhibit. Omitted portions were filed
      separately with the Commission on September 9,
  2008.





-56-





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 24th day of February
2009.




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.




February
      24, 2009
                                  /s/ MICHAEL M. EARLEYMichael
      M. EarleyChairman
      and Chief Executive OfficerFebruary
      24, 2009
                                  /s/ ROBERT J. SABORobert
      J. SaboChief
      Financial OfficerFebruary
      24, 2009
                                  /s/ KARL M. SACHSKarl
      M. SachsDirectorFebruary
      24, 2009
                                  /s/ MARTIN W. HARRISONMartin
      W. HarrisonDirectorFebruary
      24, 2009
                                  /s/ ERIC HASKELLEric
      HaskellDirectorFebruary
      24, 2009
                                  /s/ BARRY T. ZEMANBarry
      T. ZemanDirectorFebruary
      24, 2009
                                  /s/ DAVID A. FLORMANDavid
      A. FlormanDirectorFebruary
      24, 2009
                                  /s/ ROBERT E. SHIELDSRobert
      E. ShieldsDirector




-57-