Management's Discussion and Analysis of Financial Condition and Results of Operations, commonly known as MD&A, is our attempt to provide a narrative explanation of our financial statements, and to provide our shareholders and investors with the dynamics of our business as seen through our eyes as management. Generally, MD&A is intended to cover expected effects of known or reasonably expected uncertainties, expected effects of known trends on future operations, and prospective effects of events that have had a material effect on past operating results. Our discussion of MD&A should be read in conjunction with our consolidated financial statements, including the notes, included elsewhere in this annual report on Form 10-K. Please also review the Cautionary Notice Regarding Forward-Looking Information on page one of this annual report.

Overview

We provide dialysis services, primarily kidney dialysis treatments through 37 outpatient dialysis centers, including one center acquired on December 31, 2008, one center acquired effective January 1, 2008, and one new center opened during 2008, to patients with chronic kidney failure, also known as end-stage renal disease or ESRD. We provide dialysis treatments to dialysis patients of 11 hospitals and medical centers through acute inpatient dialysis services agreements with those entities. We provide homecare services, including home peritoneal dialysis. We engage in medical product sales, which is not a significant part of our business.

Quality Clinical Results

Our goal is to provide consistent quality clinical care to our patients from caring and qualified doctors, nurses, patient care technicians, social workers and dieticians. We have demonstrated an unwavering commitment to quality renal care through our continuous quality improvement initiatives. We strive to maintain a leadership position as a quality provider in the dialysis industry and often set our goals to exceed the national average standards. See Item 1, "Business - Operations - Quality Clinical Results."

Patient Treatments

The following table shows the number of in-center, home peritoneal and acute inpatient treatments performed by us through the dialysis centers we operate, including one center we managed until January 1,

2008(1) and one in which we had a 40% ownership interest until August 1, 2006(2), and those hospitals and medical centers with which we have inpatient acute service agreements for the periods presented:

                              Year Ended December 31,
                        2008          2007            2006
In center               248,232       228,456         197,628
Home and peritoneal      15,980        15,940          16,115
Acute                     8,240         7,930           6,350
                        272,452       252,326 (3)     220,093 (3)

(1) At that date we acquired the 80% controlling interest.
(2) At that date this center was consolidated, in which center we subsequently acquired the other 60% interest in December, 2006, and sold 30% to that facility's medical director in 2007.
(3) Includes treatments by the Georgia center managed through December 31, 2007, and acquired effective January 1, 2008: in-center treatments of 10,631 and 9,428, respectively, for 2007 and 2006, home and peritoneal treatments of 506 and 297, respectively for 2007 and 2006, and no acute treatments.

New Business Development

Our future growth depends primarily on the availability of suitable dialysis centers for development or acquisition in appropriate and acceptable areas, and our ability to manage the development costs for these potential dialysis centers while competing with larger companies, some of which are public companies or divisions of public companies with greater numbers of personnel and financial resources available for acquiring and/or developing dialysis centers in areas targeted by us. Additionally, there is intense competition for qualified nephrologists who would serve as medical directors of dialysis facilities. There is no assurance as to when any new dialysis centers or inpatient service contracts with hospitals will be implemented, or the number of stations, or patient treatments such center or service contract may involve, or if such center or service contract will ultimately be profitable.

Start-up Losses

It has been our experience that newly established dialysis centers, although contributing to increased revenues, have adversely affected our results of operations in the short term due to start-up costs and expenses and a smaller patient base. These losses are typically a result of several months of pre-opening costs, and six to eighteen months of post opening costs, in excess of revenues. We consider new dialysis centers to be "start-up centers" through their initial 12 months of operations, or when they achieve consistent profitability, whichever is sooner. For the year ended December 31, 2008, we incurred an aggregate of approximately $641,000 in pre-tax losses for start-up centers compared to $608,000 for the preceding year.

EPO Utilization

We also provide ancillary services associated with dialysis treatments, including the administration of EPO for the treatment of anemia in our dialysis patients. EPO is currently available from only one manufacturer, and no alternative drug has been available to us for the treatment of anemia in our dialysis patients. If our available supply of EPO were reduced either by the manufacturer or due to excessive demand, our revenues and net income would be adversely affected. The manufacturer of EPO could implement price increases which would adversely affect our net income.

ESRD patients must either obtain a kidney transplant or obtain regular dialysis treatments for the rest of their lives. Due to a lack of suitable donors and the possibility of transplanted organ rejection, the most prevalent form of treatment for ESRD patients is hemodialysis through a kidney dialysis machine. Hemodialysis patients usually receive three treatments each week with each treatment lasting between three and five hours on an outpatient basis. Although not as common as hemodialysis in an outpatient facility, home peritoneal dialysis is an available treatment option, representing the third most common type of ESRD treatment after outpatient hemodialysis and kidney transplantation.

Reimbursement

Approximately 54% of our medical services revenue for 2008 was derived from Medicare and Medicaid reimbursement with rates established by CMS, and which rates are subject to legislative changes. Congress approved a 1.6% composite rate increase for each of 2006 and 2007. In 2007, Medicare changed the way it reimburses dialysis providers, which includes revision of pricing for separately billable drugs and biologics, with an add-on component to make the change budget-neutral. Medicare also implemented a case mix payment system as an adjustment to the composite rate. In 2008 Congress passed legislation establishing the bundling of reimbursement payments for dialysis services, intended to take effect in 2011. See Item 1, "Business - Operations - Medicare Reimbursement." Dialysis is typically reimbursed at higher rates from private payors, such as a patient's insurance carrier, as well as higher payments received under negotiated contracts with hospitals for acute inpatient dialysis services.

The following table shows the breakdown of our revenues by type of payor for the periods presented:

                                                    Year Ended December 31,
                                                 2008           2007       2006
Medicare                                             46 %           49 %      52 %
Medicaid and comparable programs                      8              8         9
Hospital inpatient dialysis services                  4              4         3
Commercial insurers and other private payors         42             39        36
                                                    100 %          100 %     100 %

Our medical services revenue is derived primarily from four sources: outpatient hemodialysis services, home peritoneal dialysis services, inpatient hemodialysis services and ancillary services. The following table shows the breakdown of our medical services revenue (in thousands) derived from our primary revenue sources and the percentage of total medical service revenue represented by each source for the periods presented:

                                                    Year Ended December 31,
                                 2008                        2007                        2006
Outpatient
hemodialysis services   $  46,348            54 %   $  39,880            55 %   $  32,856            54 %
Home and peritoneal
dialysis services           4,189             5         3,736             5         3,625             6
Inpatient
hemodialysis services       3,109             4         2,897             4         2,191             3
Ancillary services         32,030            37        26,658            36        22,467            37
                        $  85,676           100 %   $  73,171           100 %   $  61,139           100 %

Compliance

The healthcare industry is subject to extensive regulation by federal and state authorities. There are a variety of fraud and abuse measures to combat waste, including Anti-Kickback regulations and extensive prohibitions relating to self-referrals, violations of which are punishable by criminal or civil penalties, including exclusion from Medicare and other governmental programs. Unanticipated changes in healthcare

programs or laws could require us to restructure our business practices which, in turn, could materially adversely affect our business, operations and financial condition. See Item 1, "Business - Government Regulation." We have a Compliance Program to assure that we provide the highest level of patient care and services in a professional and ethical manner consistent with applicable federal and state laws and regulations. See Item 1, "Business - Compliance Program."

Results of Operations

The following table shows our results of operations (in thousands):

                                                                Year Ended December 31,
                                                           2008          2007          2006
Medical services revenue                                 $  85,676     $  73,171     $  61,139
Product sales                                                1,161         1,078           891
Total sales                                                 86,837        74,249        62,030
Other income                                                   ---           286           430
Total operating revenues                                    86,837        74,535        62,460

Cost of medical services                                    51,452        44,248        36,969
Cost of product sales                                          660           598           549
Total cost of sales                                         52,112        44,846        37,518
Corporate selling, general and administrative expenses      10,587         7,917         6,460
Facility selling, general and administrative expenses       12,851        11,423         8,988
Total selling, general and administrative expense           23,438        19,340        15,448
Stock compensation expense                                     221           218           276
Depreciation and amortization                                2,784         2,619         2,319
Provision for doubtful accounts                              2,089         1,665         1,199
Total operating costs and expenses                          80,644        68,688        56,760

Operating income                                             6,193         5,847         5,700

Other (expense) income                                         (49 )         (40 )         101

Income before income taxes, minority and other
Equity interests and equity in affiliate earnings            6,144         5,807         5,801

Income tax provision                                         1,862         1,615         2,086

Income before minority and other equity interests
and equity in affiliate earnings                             4,282         4,192         3,715

Minority and other equity interests in income of
consolidated subsidiaries                                   (1,438 )      (1,106 )        (920 )

Equity in affiliate earnings                                   ---           ---           254

Net income                                               $   2,844     $   3,086     $   3,049

2008 Compared to 2007

Medical services revenue increased approximately $12,505,000 (17%) for the year ended December 31, 2008, compared to the preceding year. Medical services revenue for 2008 includes approximately $553,000 of amounts previously included in excess insurance liability that was determined to be non-refundable compared to approximately $442,000 in the preceding year. Dialysis treatments performed increased from approximately 252,000 in 2007 to approximately 272,000 in 2008, an 8% increase which includes treatments at a previously managed facility, in which we acquired an 80% interest effective January 1, 2008. The increase in treatments includes a full year of treatments in 2008 at the two centers acquired in the first quarter of 2007, treatments at two centers opened at the end of 2007, and treatments at our new Pennsylvania center that opened in the third quarter of 2008. Some of our patients carry commercial insurance which may require an out of pocket co-pay by the patient, which is often uncollectible by us. This co-pay is typically limited, and therefore may lead to our under-recognition of revenue at the time of service. We routinely recognize these revenues as we become aware that these limits have been met.

We record contractual adjustments based on fee schedules for a patient's insurance plan except in circumstances where the schedules are not readily determinable, in which case rates are estimated based on similar insurance plans and subsequently adjusted when actual rates are determined. Out-of-network providers generally do not provide fee schedules and coinsurance information and, consequently, represent the largest portion of contractual adjustment changes. Estimated contractual adjustments for 2007 and prior years made during 2008 resulted in an increase of approximately $1,480,000 in revenues in 2008. Based on historical data we do not anticipate that a change in estimates would have a significant impact on our financial conditions or results of operations.

Operating income increased approximately $347,000 (6%) for the year ended December 31, 2008, compared to the preceding year, including in start-up costs associated with our new centers of $641,000 in 2008 compared to $608,000 in the preceding year.

Management fee income in 2007 was pursuant to a management services agreement with a Georgia center in which we acquired an 80% interest effective January 1, 2008.

Cost of medical services sales as a percentage of sales was stable compared to the preceding year and amounted to 60% for the year ended December 31, 2008 and for the preceding year.

Approximately 27% of our medical services revenue for the year ended December 31, 2008 and for the preceding year derived from the administration of EPO to our dialysis patients. Beginning in 2006, Medicare reimburses dialysis providers for the top ten most utilized ESRD drugs at an amount equal to the cost of such drugs as determined by the Inspector General of HHS, with complementary increases in the composite rate. We believe these changes have had little impact on our average Medicare revenue per treatment. See Item 1, "Business - Operations - Medicare Reimbursement."

Our medical products operation represents a minor portion of our operations with operating revenues of $1,161,000 during 2008, and $1,078,000 during 2007 (1.3% of total 2008 and 1.4% of total 2007 operating revenues). Operating income for the medical products operation was $179,000 for 2008 and $186,000 for 2007 (2.9% of total 2008 operating income and 3.1% of total 2007 operating income).

Cost of sales for our medical products operation amounted to 57% of sales for the year ended December 31, 2008 and 56% of sales for the year ended December 31, 2007. Cost of sales for this operation is largely related to product mix.

Selling, general and administrative expenses, those corporate and facility costs not directly related to the care of patients, including, among others, administration, accounting and billing, increased by approximately $4,098,000 (21%) for the year ended December 31, 2008, compared to the preceding year. This increase reflects operations of our new dialysis centers and increased support activities resulting from expanded operations. Included are expenses of new centers incurred prior to Medicare approval for which there were no corresponding medical services revenue. Selling, general and administrative expenses as a percentage of medical services revenue amounted to approximately 27% for the year ended December 31, 2008 compared to 26% for the preceding year.

Provision for doubtful accounts increased approximately $423,000 for year ended December 31, 2008, compared to the preceding year. The provision amounted to 2% of sales for the year ended December 31, 2008 and for the preceding year. Medicare bad debt recoveries of $549,000 were recorded during the year ended December 31, 2008, compared to approximately $253,000 for the preceding year. Without the effect of the Medicare bad debt recoveries, the provision would have amounted to 3% of sales for the year ended December 31, 2008 and for the preceding year. The provision for doubtful accounts reflects our collection experience with the impact of that experience included in accounts receivable presently reserved, plus recovery of accounts previously considered uncollectible from our Medicare cost report filings. The provision for doubtful accounts is determined under a variety of criteria, primarily aging of the receivables and payor mix. Accounts receivable are estimated to be uncollectible based upon various criteria including the age of the receivable, historical collection trends and our understanding of the nature and collectibility of the receivables, and are reserved for in the allowance for doubtful accounts until they are written off.

Days sales outstanding were 84 as of December 31, 2008 compared to 93 as of December 31, 2007. Days sales outstanding are impacted by the expected and typical slower receivable turnover at our new centers opened or acquired and by payor mix. Based on our collection experience with the different payor groups comprising our accounts receivable, our analysis indicates that our allowance for doubtful accounts reasonably estimates the amount of accounts receivable that we will ultimately not collect.

After a patient's insurer has paid the applicable coverage for the patient, the patient is billed for the applicable co-payment or balance due. If payment is not received from the patient for its applicable portion, collection letters and billings are sent to that patient until such time as the patient's account is determined to be uncollectible, at which time the account will be charged against the allowance for doubtful accounts. Patient accounts that remain outstanding four months after initial collection efforts are generally considered uncollectible.

Other non-operating expense increased approximately $9,000 for the year ended December 31, 2008, compared to the preceding year. This includes a decrease in interest income of $135,000, largely resulting from lower interest rates earned on invested funds, an increase in rental income of $15,000, a decrease in miscellaneous other income of $57,010 and a decrease in interest expense to unrelated parties of $168,000 resulting from reduced average borrowings and lower interest rates on borrowed funds.

Although operations of additional centers have resulted in additional revenues, certain of these centers are still in the start-up stage and, accordingly, their operating results will adversely impact our overall results of operations until they achieve a patient count sufficient to sustain profitable operations.

Minority and other equity interests represents the proportionate equity interests of minority owners of our subsidiaries whose financial results are included in our consolidated results. Equity in affiliate earnings represents our proportionate interest in the earnings of our Toledo, Ohio subsidiary until its consolidation effective August 1, 2006, prior to which it was accounted for on the equity method.

2007 Compared to 2006

Medical services revenue increased approximately $12,032,000 (20%) for the year ended December 31, 2007, compared to the preceding year. Medical services revenue for 2007 includes approximately $442,000 of amounts previously included in excess insurance liability that was determined to be non-refundable compared to approximately $688,000 in the preceding year. Dialysis treatments performed increased from approximately 220,000 in 2006 to approximately 252,000 in 2007, a 15% increase which includes treatments at managed facilities, one for which we acquired the 60% interest not already owned by the company in December, 2006. The increase in treatments includes treatments at the three centers acquired in the first quarter of 2006, three new centers opened during 2006, and two centers acquired in the first quarter of 2007. Some of our patients carry commercial insurance which may require an out of pocket co-pay by the patient, which is often uncollectible by us. This co-pay is typically limited, and therefore may lead to our under-recognition of revenue at the time of service. We routinely recognize these revenues as we become aware that these limits have been met.

We record contractual adjustments based on fee schedules for a patient's insurance plan except in circumstances where the schedules are not readily determinable, in which case rates are estimated based on similar insurance plans and subsequently adjusted when actual rates are determined. Out-of-network providers generally do not provide fee schedules and coinsurance information and, consequently, represent the largest portion of contractual adjustment changes. Estimated contractual adjustments for 2006 and prior years made during 2007 resulted in approximately a $381,000 reduction in revenues in 2007. Based on historical data we do not anticipate that a change in estimates would have a significant impact on our financial conditions or results of operations.

Operating income increased approximately $147,000 (3%) for the year ended December 31, 2007, compared to the preceding year, including in start-up costs associated with our new centers of $608,000 in 2007 compared to $1,423,000 in the preceding year.

Other operating income, representing management fee income pursuant to management services agreements with our Toledo, Ohio facility (until its consolidation effective August 1, 2006) and a Georgia center in which we acquired an 80% interest effective January 1, 2008, decreased approximately $144,000 during 2007 compared to the preceding year. This decrease largely resulted from the consolidation of our Toledo facility effective August 1, 2006 whereas that facility had previously been accounted for on the equity method with no revenue elimination in our consolidated financial statements.

Cost of medical services sales as a percentage of sales was stable and amounted to 60% for the year ended December 31, 2007 and for the preceding year.

Approximately 27% of our medical services revenue for the year ended December 31, 2007 derived from the administration of EPO to our dialysis patients compared to 28% for the preceding year. Beginning in 2006, Medicare reimburses dialysis providers for the top ten most utilized ESRD drugs at an amount equal to the cost of such drugs as determined by the Inspector General of HHS, with complementary increases in the composite rate. We believe these changes have had little impact on our average Medicare revenue per treatment. See Item 1, "Business - Operations - Medicare Reimbursement."

Our medical products operation was acquired pursuant to our merger with our former parent company in September, 2005. The medical products operation is included in our operating results subsequent to the merger. This operation represents a minor portion of our operations with operating revenues of $1,078,000 during 2007, and $891,000 during 2006 (1.4% of total 2007 and 2006 operating

revenues). Operating income for the medical products operation was $186,000 for 2007 and $69,000 for 2006 (3.1% of total 2007 operating income and 1.2% of total 2006 operating income).

Cost of sales for our medical products operation amounted to 56% of sales for the year ended December 31, 2007 and 62% of sales for the year ended December 31, 2006. Cost of sales for this operation is largely related to product mix.

Selling, general and administrative expenses, those corporate and facility costs not directly related to the care of patients, including, among others, administration, accounting and billing, increased by approximately $3,892,000 (25%) for the year ended December 31, 2007, compared to the preceding year. This increase reflects operations of our new dialysis centers and increased support activities resulting from expanded operations. Included are expenses of new centers incurred prior to Medicare approval for which there were no corresponding medical services revenue. Selling, general and administrative expenses as a percentage of medical services revenue amounted to approximately 26% for the year ended December 31, 2007 compared to 25% for the preceding year.

Provision for doubtful accounts increased approximately $466,000 for year ended December 31, 2007, compared to the preceding year. The provision amounted to 2% of sales for the year ended December 31, 2007 and for the preceding year. Medicare bad debt recoveries of $253,000 were recorded during the year ended December 31, 2007, compared to approximately $537,000 for the preceding year. Without the effect of the Medicare bad debt recoveries, the provision would have amounted to 3% of sales for the year ended December 31, 2007 and for the preceding year. The provision for doubtful accounts reflects our collection experience with the impact of that experience included in accounts receivable presently reserved, plus recovery of accounts previously considered uncollectible from our Medicare cost report filings. The provision for doubtful accounts is determined under a variety of criteria, primarily aging of the receivables and payor mix. Accounts receivable are estimated to be uncollectible based upon various criteria including the age of the receivable, historical collection trends and our understanding of the nature and collectibility of the receivables, and are reserved for in the allowance for doubtful accounts until they are written off.

Days sales outstanding were 93 as of December 31, 2007 compared to 82 as of December 31, 2006. Days sales outstanding are impacted by the expected and . . .