Cautionary Notice Regarding Forward-Looking Information

The statements contained in this quarterly report on Form 10-Q for the quarter ended June 30, 2009, that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). In addition, from time to time, we or our representatives have made or may make forward looking statements, orally or in writing, and in press releases. The Private Securities Litigation Reform Act of 1995 contains certain safe harbors for forward-looking statements. Certain of the forward-looking statements include management's expectations, intentions, beliefs and strategies regarding the growth of our company and our future operations, the character and development of the dialysis industry, anticipated revenues, our need for and sources of funding for expansion opportunities and construction, expenditures, costs and income, our business strategies and plans for future operations, potential business combinations, and similar expressions concerning matters that are not considered historical facts. Forward-looking statements also include our statements regarding liquidity, anticipated cash needs and availability, and anticipated expense levels in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," commonly known as MD&A. Words such as "anticipate," "estimate," "expect," "project," "intend," "plan" and "belief," and words and terms of similar substance used in connection with any discussions of future operating or financial performance identify forward-looking statements. Such forward-looking statements, like all statements about expected future events, are based on assumptions and are subject to substantial risks and uncertainties that could cause actual results to materially differ from those expressed in the statements, including the general economic and market conditions which substantially deteriorated over the last 18 months, and continue in a global economic decline to date, business opportunities pursued or not pursued, competition, changes in federal and state laws or regulations affecting the company and our operations, and other factors discussed periodically in our filings. Many of the foregoing factors are beyond our control. Among the factors that could cause actual results to differ materially are the factors detailed in the risks discussed in Item 1A, "Risk Factors," beginning on page 20 of our Annual Report on Form 10-K for the year ended December 31, 2008. If any of such events occur or circumstances arise that we have not assessed, they could have a material adverse effect upon our revenues, earnings, financial condition and business, as well as the trading price of our common stock, which could adversely affect your investment in our company. Accordingly, readers are cautioned not to place too much reliance on such forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report. You should read this quarterly report on Form 10-Q, with any of the exhibits attached and the documents incorporated by reference, completely and with the understanding that the company's actual results may be materially different from what we expect.

The forward-looking statements speak only as of the date of this quarterly report, and except as required by law, we undertake no obligation to rewrite or update such statements to reflect subsequent events.

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 (unaudited), including the notes, included elsewhere in this report on Form 10-Q.

Overview

We provide dialysis services, primarily kidney dialysis treatments through 35 outpatient dialysis centers, 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 also 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.

Kt/V is a formula that measures the amount of dialysis delivered to the patient, based on the removal of urea, an end product of protein metabolism. Kt/V provides a means to determine an individual dialysis prescription and to monitor the effectiveness or adequacy of the dialysis treatment as delivered to the patient. We believe it is critical to achieve a Kt/V level of greater than 1.2 for as many patients as possible. Approximately 98% of our patients had a Kt/V level greater than 1.2 for the second quarter ended June 30, 2009, compared to approximately 97% for the first quarter ended March 31, 2009.

Anemia is a shortage of oxygen-carrying red blood cells. Because red blood cells bring oxygen to all the cells in the body, untreated anemia can cause severe fatigue, heart disorders, difficulty concentrating, reduced immune function, and other problems. Anemia is common among renal patients, caused by insufficient erythropoietin, iron deficiency, repeated blood losses, and other factors. Anemia can be detected with a blood test for hemoglobin or hematocrit. It is ideal to have as many patients as possible with hemoglobin levels above 11. Approximately 81% of our patients had a hemoglobin level greater than 11 for the second quarter ended June 30, 2009, and for the first quarter ended March 31, 2009.

Vascular access is the site on a patient's body where blood is removed and returned during dialysis. The Center for Medicare and Medicaid Services, CMS has indicated that fistulas are the "gold standard" for establishing access to a patient's circulatory system in order to provide life sustaining dialysis. Approximately 60% of our patients were dialyzed with a fistula during the second quarter ended June 30, 2009, compared to approximately 57% for the first quarter ended March 31, 2009.

Patient Treatments

The following table shows the number of in-center, home and peritoneal and acute
inpatient treatments performed by us through the dialysis centers we operate,
and in those hospitals and medical centers with which we have inpatient acute
service agreements for the periods presented:

                                  Three Months Ended           Six Months Ended
                                       June 30,                    June 30,
                                   2009          2008         2009          2008
          In center                 68,308       61,783       134,445       120,535
          Home and peritoneal        4,127        3,987         7,985         7,695
          Acute                      1,492        2,251         2,987         5,112
                                    73,927       68,021       145,417       133,342

Same Center Growth

We endeavor to increase same center growth by adding quality staff and management and attracting new patients to our existing facilities. We seek to accomplish this objective by rendering high caliber patient care in convenient, safe and pleasant conditions. We believe that we have adequate space and stations within our facilities to accommodate greater patient volume and maximize our treatment potential. We experienced approximately a 2% increase in dialysis treatments for the first half of 2009 at centers that were operable during the entire first half of the preceding year compared to a 6% increase for the first half of 2008.

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. We currently have two dialysis facilities under development. 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 three months and six months ended June 30, 2009, we incurred an aggregate of approximately $133,000 and $194,000 in pre-tax losses for start-up centers compared to $62,000 and $238,000 for the same period of 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 a bio-engineered protein that stimulates the production of red blood cells. A deteriorating kidney loses its ability to regulate the red blood cell counts, which typically results in anemia. EPO is currently available from only one manufacturer. 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 55% of our medical services revenues for the first half of 2009 were derived from Medicare and Medicaid reimbursement with rates established by CMS, and which rates are subject to legislative changes. 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 breakdown of our revenues by type of payor and the breakdown of our medical services revenues (in thousands) derived from our primary revenue sources and the percentage of total medical services revenue represented by each source for the periods presented are provided in Note 1 to "Notes to Consolidated Financial Statements."

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. 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. Our Compliance Program also relates to claims submission, cost report preparation, initial audit and human resources.

Results of Operations

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

                                                   Three Months Ended           Six Months Ended
                                                        June 30                     June 30,
                                                   2009          2008          2009          2008
Medical service revenue                         $   24,461     $  20,519     $  47,629     $  40,714
Product sales                                          252           317           541           607
Total sales                                         24,713        20,836        48,170        41,321

Cost of medical services                            15,093        12,662        29,524        25,020
Cost of product sales                                  155           173           315           334
Total cost of sales                                 15,248        12,835        29,839        25,354
Corporate selling, general and administrative        2,896         2,447         5,886         4,835
Facility selling, general and administrative         3,478         2,999         7,079         6,081
Total, selling, general and administrative           6,374         5,446        12,965        10,916
Stock compensation expense                              62            81           147           156
Depreciation and amortization                          756           680         1,482         1,342
Provision for doubtful accounts                        543           649         1,214         1,079
Total operating costs and expenses                  22,983        19,691        45,647        38,847

Operating income                                     1,730         1,145         2,523         2,474

Other (expense) income, net                            (11 )          13           (25 )         (29 )

Income before income taxes                           1,719         1,158         2,498         2,445

Income tax provision                                   658           305           900           685

Net income                                           1,061           853         1,598         1,760

Less: net income attributable to
noncontrolling interests                               352           190           710           648

Net income attributable to the company          $      709     $     663     $     888     $   1,112

Medical services revenue increased approximately $3,942,000 (19%) and $6,915,000 (17%) for the three months and six months ended June 30, 2009 compared to the same periods of the preceding year. Medical services revenue for the three months and six months ended June 30, 2009 includes approximately $3 of amounts previously included in excess insurance liability that was determined to be non-refundable compared to approximately $17,000 and $108,000 during the same periods of the preceding year. Dialysis treatments performed increased from 68,021 during the second quarter of 2008 to 73,927 during the second quarter of 2009, a 9% increase and from 133,342 during the first half of 2008 to 145,417 during the first half of 2009, a 9% increase. Approximately $1,498,000 and $2,676,000 of the increase in medical service revenues and 4,721 and 9,386 of the increase in treatments for the three months and six months ended June 30, 2009 compared to the same periods of the preceding year are attributable to the Maryland dialysis center we acquired December 31, 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. Based on historical data we do not anticipate that a change in estimates would have a significant impact on our financial condition, results of operations or cash flows.

Operating income increased approximately $585,000 (51%) and $50,000 (2%) for the three months and six months ended June 30, 2009 compared to the same periods of the preceding year. First quarter 2009 results included our 2009 grant obligation of $265,000 to the University of Cincinnati, College of Medicine pursuant to our three year grant agreement to support basic and clinical research and education relating to kidney disease. Operating income has been negatively impacted primarily during the first quarter of 2009 by transitional costs associated with the Maryland center we acquired December 31, 2008. Start-up costs associated with our new centers was approximately $133,000 and $194,000 for the three months ended June 30, 2009 compared to $62,000 and $238,000 for the same periods of the preceding year.

Cost of medical services sales as a percentage of sales amounted to 62% for the three months and six months ended June 30, 2009 compared to 62% and 61% for the same periods of the preceding year, which includes an increase in supply costs as a percentage of medical service sales that was largely offset by decreased payroll costs as a percentage of sales revenues.

Approximately 31% and 30% of our medical services revenue for the three months and six months ended June 30, 2009 and 27% for the same periods of the preceding year derived from the administration of EPO to our dialysis patients.

Our medical products operation represents a minor portion of our operations with operating revenues of $252,000 and $541,000 for the three months and six months ended June 30, 2009 and $317,000 and $607,000 for the same periods of the preceding year (1.0% and 1.1% of operating revenues for the three months and six months ended June 30, 2009 compared to 1.5% for the same periods of the preceding year). Operating income for the medical products operation was $16,000 and $69,000 for the three months and six months ended June 30, 2009 compared to $69,000 and $114,000 for the same periods of the preceding year (.9% and2.7% of operating income for the three months and six months ended June 30, 2009 compared to 6.0% and 4.6% for the same periods of the preceding year).

Cost of sales for our medical products operation amounted to 62% and 58% of sales for the three months and six months ended June 30, 2009 compared to 55% for the same periods of the preceding year. 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 $928,000 (17%) for the three months and 2,048,000 (19%) for the six months ended June 30, 2009 compared to the same periods of the preceding year. This increase includes the Maryland dialysis center we acquired December 31, 2008, the $265,000 University of Cincinnati, College of Medicine grant during the first quarter of 2009, increased support activities resulting from expanded operations, ongoing investments in our infrastructure, and the cost of development activities. Selling, general and administrative expenses as a percentage of medical services revenue amounted to approximately 26% and 27% for the three months and six months ended June 30, 2009, and 26% for the same periods of the preceding year.

Provision for doubtful accounts decreased approximately $106,000 for the three months ended June 30, 2009 and increased approximately $134,000 for the six months ended June 30, 2009, compared to the same periods of the preceding year, which includes an increase in the commercial patient portion of our payor mix and a reduction in Medicare bad debt recoveries for the three months and six months ended June 30, 2009 compared to the same periods of the preceding year. The provision amounted to 2% and 3% of medical services revenue for the three months and six months ended June 30, 2009 and 3% for the same periods of preceding year. Medicare bad debt recoveries of $167,000 and $222,000 were recorded during the three months and six months ended June 30, 2009, compared to approximately $48,000 and $162,000 for the same periods of the preceding year. Without the effect of the Medicare bad debt recoveries, the provision for doubtful accounts would have amounted to 3% of medical services revenue for the three months and six months ended June 30, 2009 and for the same periods of 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 80 as of June 30, 2009, compared to 84 as of December 31, 2008. Days' sales outstanding are impacted by the expected and typical slower receivable turnover at our new centers opened 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 his 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.

Non-operating expense amounted to approximately $11,000 and $25,000 for the three months and six months ended June 30, 2009 compared to non-operating income of $13,000 for the three months ended June 30, 2008 and non-operating expense of $29,000 for the six months ended June 30, 2008 which included an increase in rental income of $2,000 and $3,000, a decrease in interest income of $11,000 and $25,000 from lower interest rates on invested funds and lower average invested funds, a decrease in interest expense of $31,000 and $84,000 resulting from lower interest rates on borrowed funds and a decrease in miscellaneous other income of $45,000 and $58,000 for the three months and six months ended June 30, 2009 compared to the same periods of the preceding year.

Although operations of additional centers result in additional revenues, while these centers are in the start-up stage, their operating results adversely impact our overall results of operations until they achieve a patient count sufficient to sustain profitable operations. We had one center in the start-up stage during the first half of 2009.

Noncontrolling interests represents the proportionate equity interests of noncontrolling owners in our subsidiaries whose financial results are included in our consolidated results.

Liquidity and Capital Resources

Working capital totaled approximately $17,551,000 at June 30, 2009, which reflected a decrease of $2,715,000 during the six months ended June 30, 2009. Included in the changes in components of working capital was a decrease in cash and cash equivalents of $1,178,000, which included net cash provided by operating activities of $4,762,000; net cash used in investing activities of $1,021,000 (consisting primarily of additions to property and equipment); and net cash used in financing activities of $4,919,000 (including repayments of $4,000,000 on our line of credit, other debt payments of $38,000, and distributions to noncontrolling interests of $887,000).

Net cash provided by operating activities consists of net income attributable to the company before non-cash items which for the first half of 2009 consisted of depreciation and amortization of $1,482,000, provision for doubtful accounts of $1,214,000, income applicable to noncontrolling interests of $710,000, and non-cash stock and stock option compensation expense of $147,000, as adjusted for changes in components of working capital. Significant changes in components of working capital, in addition to the $1,178,000 decrease in cash, included an increase in accounts receivable of $126,000, a decrease in inventories of $321,000, a decrease in prepaid expenses and other current assets of $1,150,000, including a reduction of approximately $650,000 in prepaid income taxes as a result of application of tax prepayments to tax liabilities and a decrease of approximately $150,000 in estimated medicare bad debt recoveries, a decrease in accounts payable of $319,000, and an increase in accrued expenses of 209,000. The major uses of cash in operating activities are supply costs, payroll, independent contractor costs, and costs for our leased facilities.

Our Easton, Maryland building has a mortgage to secure a subsidiary development loan. This loan had a remaining principal balance of $479,000 at June 30, 2009 and $495,000 at December 31, 2008. Our mortgage on our building in Valdosta, . . .