Medicare is the health insurance program for retired United States citizens aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease. Medicare is funded by the federal government and administered by the Centers for Medicare and Medicaid Services, or CMS.

The Medicare eligible population is large and growing. During 2004, approximately 41.7 million people, or approximately 14% of the United States population, were enrolled in Medicare according to the Centers for Medicare and Medicaid Services, or CMS. The Henry J. Kaiser Family Foundation estimates that the number of Medicare enrollees will increase to 43.1 million in 2006, 46 million by 2010, 61 million by 2020, and 78 million by 2030. The Congressional Budget Office expects Medicare expenditures, without taking into account the new Part D prescription drug benefit, will rise at a compounded annual growth rate of 9.3%, from approximately $297 billion in 2004 to approximately $722 billion in 2014.

During 2003, risk adjusted payments accounted for only 10% of Medicare health plan payments, with the remaining 90% being reimbursed in accordance with the traditional demographic rate book. In 2004 and 2005, the portion of risk adjusted payments was increased to 30% and 50%, respectively, and will increase to 75% in 2006 and 100% in 2007. Largely as a result of limitations on reimbursement contained in the BBA, in many geographic areas Medicare managed care plans reduced benefits, making them less competitive with traditional fee-for-service Medicare, or withdrew from certain markets.

The Company’s plans are designed to be attractive to seniors and offers a broad range of benefits which vary across its markets and service areas but may include, for example, prescription drug benefits, mental health benefits, dental, vision and hearing benefits, transportation services, preventive health services such as health and fitness programs, routine physicals, various health screenings, immunizations, chiropractic services, and mammograms.

In addition to its typical Medicare Advantage benefits, the Company offers a “special needs” zero premium, zero co-payment plan to dual-eligible individuals in each of the Company’s markets.

In addition to its Medicare Advantage products, the Company offers commercial managed care products and services in certain of the markets. The Company’s commercial plans cover individuals and employer groups with medical coverage and benefits that differs from plan to plan for a set monthly premium.

The Company’s commercial products include: commercial HMO plans in Alabama and Tennessee; PPO network rental, which allows third party administrators to use the Company’s provider network for an access fee, in Tennessee; exclusive provider organization, or “EPO,” products for self-insured employers in Tennessee that provide access to the Company’s provider networks at negotiated rates; and administrative services only, or ASO, products for self-insured employers in Tennessee.

The Company also offers management services to independent physician associations, or IPAs, in its Alabama, Tennessee, and Texas markets, including claims processing, provider relations, credentialing, reporting and other general business office services.

The Company operates in each of its five markets through HMO subsidiaries. Each of the HMO subsidiaries is regulated by the department of insurance, and in some cases the department of health, in its respective state. In addition, the Company owns and operates non-regulated management company subsidiaries that provides administrative and management services to the HMO subsidiaries in exchange for a percentage of the HMO subsidiaries’ income pursuant to management agreements and administrative services agreements. Those services include: negotiation, monitoring, and quality assurance of contracts with third party healthcare providers, medical management, credentialing, marketing, and product promotion, support services and administration, personnel recruiting and retention, financial services and claims processing and other general business office services.

Medicare medical expense for the six months ended June 30, 2005 increased $85.2 million, or 54.8%, to $240.9 million from $155.7 million for the same period in 2004.

Selling, general, and administrative expense for the six months ended June 30, 2005 was $46.2 million (not including transaction expense of $6.9 million) as compared with $32.4 million for the same period last year, an increase of $13.6 million, or 41.9%.

Depreciation and amortization expense was $2.9 million in the first half of 2005 as compared with $1.7 million in the first half of the prior year, representing an increase of $1.2 million, or 73.8%.