Fresenius Medical Care - 20-F annual report

(Mark One)

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

(Jurisdiction of incorporation or organization)

(Address of principal executive offices)

         Preference Shares, no par value: 27,762,179

         Ordinary Shares, no par value: 70,000,000

Yes þ    No o

Yes o    No þ

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Item 17 o    Item 18 þ

Yes o    No þ

      This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on current estimates and assumptions made to the best of our knowledge. By their nature, such forward-looking statements involve risks, uncertainties, assumptions and other factors which could cause actual results, including our financial condition and profitability, to differ materially and be more negative than the results expressly or implicitly described in or suggested by these statements. Moreover, forward-looking estimates or predictions derived from third parties’ studies or information may prove to be inaccurate. Consequently, we cannot give any assurance regarding the future accuracy of the opinions set forth in this prospectus or the actual occurrence of the predicted developments. In addition, even if our future results meet the expectations expressed here, those results may not be indicative of our performance in future periods. These risks, uncertainties, assumptions, and other factors include, among others, the following:

      When used in this report, the words “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates” and similar expressions are generally intended to identify forward looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements contained elsewhere in this report. Important factors that could contribute to such differences are noted in this report under the Risk Factors section, “Business Overview” in “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 8.A.7. Legal Proceedings.” These risks and uncertainties include: general economic, currency exchange and other market conditions, litigation and regulatory compliance risks, changes in government reimbursement for our dialysis care and pharmaceuticals, the investigation by the Department of Justice, Eastern District of New York, and changes to pharmaceutical utilization patterns.

      This report contains patient and other statistical data related to end-stage renal disease and treatment modalities, including estimates regarding the size of the patient population and growth in that population. These data have been included in reports published by organizations such as the Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services, the Japanese Society for Dialysis Therapy and the German non-profit entity Quasi-Niere gGmbH and the journal Nephrology News & Issues. While we believe these surveys and statistical publications to be reliable, we have not independently verified the data or any assumptions on which the estimates they contain are based. All information not attributed to a source is derived from our internal documents or publicly available information such as annual reports of other companies in the healthcare industry and is unaudited. Market data not attributed to a specific source are our estimates.

      Our business is also subject to other risks and uncertainties that we describe from time to time in our public filings. Developments in any of these areas could cause our results to differ materially from the results that we or others have projected or may project.

      On February 10, 2006, we completed a transformation of our legal form under German law from a stock corporation (“Aktiengesellschaft” or “AG”) having the name Fresenius Medical Care AG(“FMC-AG”) to a partnership limited by shares (“Kommanditgesellschaft auf Aktien”, or “KGaA”) having the name Fresenius Medical Care AG & Co. KGaA(“FMC-AG & Co. KGaA”). Under German law, the Company is the same legal entity with a different form of organization, and continues to exist in its new legal form. The Company holds the same assets and is subject to the same liabilities as before the transformation, and its contractual relationships with third parties are unchanged. Upon effectiveness of the transformation of legal form, the share capital ofFMC-AG became the share capital of FMC-AG & Co. KGaA, and persons who were shareholders ofFMC-AG became shareholders of our company in its new legal form. For additional information with respect to the transformation, see Item 4.A., “Information on the Company — History and Development of the Company.” For information regarding the management and governance ofFMC-AG & Co. KGaA, see Item 6.C., “Directors, Senior Management and Employees — Board Practices.” In this Annual Report, (i) “the Company” and “our Company” refer toFMC-AG before the transformation of legal form and toFMC-AG & Co. KGaA after the transformation, and (ii) “we,” “us” and “our” refer either to the Company or the Company and its subsidiaries on a consolidated basis both before and after the transformation, as the context requires.

      Not applicable

      Not applicable

      The following table summarizes the consolidated financial information for our business for each of the years 2001 through 2005. We derived the selected financial information from our consolidated financial statements. We prepared our financial statements in accordance with accounting principles generally accepted in the United States of America and KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, an independent registered public accounting firm, audited these financial statements. You should read this information together with our consolidated financial statements and the notes to those statements appearing elsewhere in this document and the information under “Item 5. Operating and Financial Review and Prospects”.

      Our operations in both our provider business and our products business are subject to extensive governmental regulation in virtually every country in which we operate. We are also subject to other laws of general applicability, including antitrust laws. The applicable regulations, which differ from country to country, cover areas that include:

      If we fail to comply with one or more of these laws or regulations, this may give rise to a number of legal consequences. These include, in particular, monetary and administrative penalties, increased costs for compliance with government orders or a complete or partial exclusion from government reimbursement programs or complete or partial curtailment of our authority to conduct business. Any of these consequences could have a material adverse impact on our business, financial condition and results of operations.

      Fresenius Medical Care Holdings, Inc. (“FMCH”), our principal North American subsidiary, is party to a corporate integrity agreement with the U.S. government. This agreement, which was signed on January 18, 2000 in conjunction with a settlement of claims previously asserted against FMCH, requires that FMCH maintain a comprehensive compliance program, including a staff of sufficient compliance personnel, a written code of conduct, training programs, regulatory compliance policies and procedures, annual audits and periodic reporting to the government. The corporate integrity agreement permits the U.S. government to exclude FMCH and its subsidiaries from participation in U.S. federal health care programs (in particular, Medicare and Medicaid) if there is a material breach of the agreement that FMCH does not cure within thirty days after FMCH receives written notice of the breach. We derive approximately 36% of our consolidated revenue from U.S. federal health care benefit programs. Consequently, if FMCH commits a material breach of the corporate integrity agreement that results in the exclusion of FMCH or its subsidiaries from continued participation in those programs, it would significantly decrease our revenue and have a material adverse effect on our business, financial condition and results of operations.

      We rely upon our management structure, regulatory and legal resources and the effective operation of our compliance programs to direct, manage and monitor our operations to comply with government regulations and the corporate integrity agreement. If employees were to deliberately or inadvertently fail to adhere to these regulations, then our authority to conduct business could be terminated and our operations could be significantly curtailed. Such actions could also lead to claims for repayment or other sanctions. Any such terminations or reductions could materially reduce our sales, with a resulting material adverse effect on our business, financial condition and results of operations.

      In October 2004, FMCH and its Spectra Renal Management subsidiary received subpoenas from the U.S. Department of Justice, Eastern District of New York, in connection with a civil and criminal investigation, which requires production of a broad range of documents relating to our operations, with specific attention to documents relating to laboratory testing for parathyroid hormone (“PTH”) levels and vitamin D therapies. We are cooperating with the government’s requests for information. While we believe that we have complied with applicable laws relating to PTH testing and use of vitamin D therapies, an adverse determination in this investigation could have a material adverse effect on our business, financial condition, and results of operations.

      On April 1, 2005, FMCH was served with a subpoena from the office of the United States Attorney for the Eastern District of Missouri in connection with a joint civil and criminal investigation of our company. The subpoena requires production of a broad range of documents relating to our operations, including documents related to, among other things, clinical quality programs, business development activities, medical director compensation and physician relations, joint ventures and our anemia management program. The subpoena covers the period from December 1, 1996 through the present. We are unable to predict whether proceedings might be initiated against us, when the investigation might be concluded or what the impact of this joint investigation might be on our business, financial condition and results of operations.

      For the twelve months ended December 31, 2005, approximately 36% of our consolidated revenues resulted from Medicare and Medicaid reimbursement. Legislative changes or changes in government reimbursement practice may affect the reimbursement rates for the services we provide, as well as the scope of Medicare and Medicaid coverage. A decrease in Medicare or Medicaid reimbursement rates or covered services could have a material adverse effect on our business, financial condition and results of operations. In December 2003, the Medicare Prescription Drug Modernization and Improvement Act was enacted. For information regarding the effects of this legislation on reimbursement rates, see Item 4.B, “Information on the Company — Business Overview Regulatory and Legal Matters — Reimbursement.”

      Reimbursement and revenue from the administration of erythropoietin, or EPO, accounted for approximately 21% of total revenue in our North America segment for the year ended December 31, 2005. EPO is produced by a single source manufacturer, Amgen Inc. Our new contract with Amgen USA, Inc., a subsidiary of Amgen, Inc. covers the period from January 1, 2006 to December 31, 2007. Pricing is based on Amgen’s list price and is subject to change. An increase in Amgen price for EPO without a corresponding and timely increase in CMS’s reimbursement for EPO, a reduction of the current overfill amount in EPO vials which we currently use (liquid medications, such as EPO, typically include a small overfill amount to ensure that the fill volume can be extracted from the vial as administered to the patient), an interruption of supply or our inability to obtain satisfactory purchase terms for EPO after our current contract expires could reduce our revenues from, or increase our costs in connection with, the administration of EPO, which could materially adversely affect our business, financial condition and results of operations.

      On April 1, 2006, the Centers for Medicare and Medical Services (“CMS”) will implement a new national policy for claims for EPO and Aranesp administered to ESRD patients in renal dialysis facilities. Specifically, CMS will expect a 25% reduction in the dose administered to an ESRD patient whose hematocrit level exceeds 39.0 (or hemoglobin of 13.0). If the dose is not reduced by 25%, CMS will pay the claim as if the dose reduction had occurred. See “Item 4.B, “Information on the Company — Business Overview Regulatory and Legal Matters — Reimbursement.” A decrease in EPO reimbursement or a change in EPO utilization, caused, for example, by CMS’ new anemia monitoring policy, could have a material adverse effect on our business, financial condition, and results of operations.

      We were formed in 1996 as a result of a series of transactions with W.R. Grace & Co. that we refer to as the merger. At the time of the merger, a W.R. Grace & Co. subsidiary known as W.R. Grace & Co.-Conn. had, and continues to have, significant liabilities arising out of product-liability related litigation (including asbestos), pre-merger tax claims and other claims unrelated to its dialysis business. In connection with the merger, W.R. Grace & Co.-Conn.and other Grace entities agreed to indemnify the Company and its subsidiaries against all liabilities of W.R. Grace & Co., whether relating to events occurring before or after the merger, other than liabilities arising from or relating to the operations of National Medical Care, a subsidiary of W.R. Grace & Co. which became our subsidiary in the merger. W.R. Grace & Co. and certain of its subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Grace Chapter 11 Proceedings”) on April 2, 2001.

      Pre-merger tax claims or tax claims that would arise if events were to violate the tax-free nature of the merger could ultimately be our obligation. In particular, W.R. Grace & Co. has disclosed in its filings with the SEC that: its tax returns for the 1993 to 1996 tax years are under audit by the Internal Revenue Service (the “Service”); W.R. Grace & Co. has received the Service’s examination report on tax periods 1993 to 1996 and that during those years W.R. Grace & Co. deducted approximately $122 million in interest attributable to corporate owned life insurance (“COLI”) policy loans. W.R. Grace & Co. has already paid $21 million in tax and interest related to COLI deductions made in tax years prior to 1993.

      In October 2004, W.R. Grace & Co. obtained bankruptcy court approval to settle its COLI claims with the Service. In January 2005, W.R. Grace & Co., FMCH and Sealed Air Corporation executed a settlement agreement with respect to the Service’s COLI related claims and other tax claims. On April 14, 2005, W.R. Grace & Co. paid the Service approximately $90 million in connection with taxes owed for the tax periods 1993 to 1996 pursuant to a bankruptcy court order directing W.R. Grace & Co. to make such payment. Subject to certain representations made by W.R. Grace & Co., Fresenius Medical Care AG and Fresenius AG, W.R. Grace & Co. and certain of its affiliates agreed to indemnify us against this and other pre-merger and merger-related tax liabilities.

      Prior to and after the commencement of the Grace Chapter 11 Proceedings, class action complaints were filed against W.R. Grace & Co. and FMCH by plaintiffs claiming to be creditors of W.R. Grace & Co.-Conn., and by the asbestos creditors’ committees on behalf of the W.R. Grace & Co. bankruptcy estate in the Grace Chapter 11 Proceedings, alleging among other things that the merger was a fraudulent conveyance, violated the uniform fraudulent transfer act and constituted a conspiracy. All such cases have been stayed and transferred to or are pending before the U.S. District Court as part of the Grace Chapter 11 Proceedings.

      In 2003, we reached an agreement with the asbestos creditors’ committees and W.R. Grace & Co. in the Grace Chapter 11 Proceedings to settle all fraudulent conveyance and tax claims related to us that arise out of the Grace Chapter 11 Proceedings. The settlement agreement has been approved by the U.S. District Court. The proposed settlement is subject to confirmation of a final plan of reorganization of W.R. Grace & Co. that meets the requirements of the settlement agreement or is otherwise satisfactory to us. At December 31, 2005 our provision for special charges for legal matters was $118 million, including a provision for payment of $115 million pursuant to the settlement agreement. If the proposed settlement with the asbestos creditors’ committees and W.R. Grace & Co. is not confirmed in such a final plan of reorganization, the claims could be reinstated. If the claims are reinstated and the merger is determined to be a fraudulent transfer and if material damages are proved by the plaintiffs and we are not able to collect, in whole or in part, on the indemnity from any of our indemnitors, a judgment could have a material adverse effect on our business, financial condition and results of operations. For additional information concerning the Grace Chapter 11 Proceedings and the settlement agreement see Item 8.A.7, “Financial Information — Legal Proceedings.”

      We obtain a significant portion of our revenues from reimbursement provided by non-governmental third-party payors, such as private medical insurers. Although non-governmental payors generally pay at higher reimbursement rates than governmental payors, managed care plans generally negotiate lower reimbursement rates than indemnity insurance plans. Some managed care plans and indemnity plans also utilize a capitated fee structure or limit reimbursement for ancillary services.

      The increasing consolidation in the commercial insurance sector in the United States has put us under increasing pressure to reduce the prices for our services and products. If managed care plans in the United States reduce reimbursements, our sales could decrease. This could have a material adverse effect on our financial condition and results of operations.

      The U.S. federal and certain U.S. state governments have been considering proposals to modify their current health care systems to improve access to health care and control costs. See Item 4.B, “Information on the Company — Business Overview Regulatory and Legal Matters — Reimbursement — U.S.” for a discussion of the Medicare Prescription Drug Modernization and Improvement Act of 2003. Other countries, especially those in Western Europe, are also considering health care reform proposals that could materially alter their government-sponsored health care programs by reducing reimbursement payments. Any reduction could affect the pricing of our products and the profitability of our services, especially as we intend to expand our international business. We cannot predict whether and when these reform proposals will be adopted in countries in which we operate or what impact they might have on us. Any decrease in spending or other significant changes in state funding in countries in which we operate, particularly significant changes in the U.S. Medicare and Medicaid programs, could reduce our sales and profitability and have a material adverse effect on our business, financial condition and results of operations.

      We are engaged in both manufacturing dialysis products and providing dialysis services. We compete in the dialysis services business with many customers of our products business. As a result, independent dialysis clinics,

those operated by other chains and dialysis centers acquired by other products manufacturers may elect to limit or terminate their purchases of our dialysis products so as to avoid purchasing products manufactured by a competitor. In addition, as consolidation in the dialysis services business continues and other vertically integrated dialysis companies expand, the external market for our dialysis products could be reduced. Possible purchase reductions could decrease our product revenues, with a material adverse effect on our business, financial condition and results of operations.

      On October 5, 2005, DaVita Inc. (“DaVita”), the second largest provider of dialysis services in the U.S. and one of the largest customers of our North America Products Division, completed its acquisition of Gambro Healthcare, Inc. (“Gambro Healthcare”), the third largest provider of dialysis services in the U.S., and agreed to purchase a substantial portion of its dialysis product supply requirements from Gambro Renal Products, Inc. during the next seven years. The long-term product supply contract between Davita and Gambro could result in substantial future reductions in DaVita’s purchases of our dialysis products. Any such reduction in DaVita’s purchases will decrease our product revenues and could result in a material adverse effect on our business, financial condition and results of operations. Any further consolidation involving dialysis service providers and dialysis product manufacturers would likely have similar effects.

      On May 3, 2005, we entered into a definitive merger agreement for the acquisition of Renal Care Group, Inc., or RCG, for an all cash purchase price of approximately $3.5 billion. The acquisition is subject to certain conditions, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other regulatory approvals. Item 4.B., “Information on the Company — Business Overview — Proposed Acquisition of Renal Care Group, Inc.” and Item 5.B, “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Proposed Acquisition.” The RCG merger and other potential future acquisitions present challenges for the financing and management of our business. Following an acquisition, the infrastructure of an acquired company (including its management information systems) must be integrated into our own infrastructure; legal issues (including regulatory issues and contractual matters) arising from the acquisition must be resolved; marketing, patient services and logistical procedures must be harmonized; and, in some cases, divergent corporate and management cultures need to be reconciled. There is also the risk that key managers may leave the company during the integration process. These departures could affect the company’s day-to-day business and relations with customers and employees. The integration process could also turn out to be more difficult, time-consuming and costly than expected. If there are delays in the receipt of required governmental approvals for an acquisition, it may not be possible to consummate the acquisition and to recover costs that have been incurred in connection with the acquisition. In addition, difficulties regarding the acquisition or the newly acquired company’s business activities that we may have failed to identify could materialize or that we had regarded as immaterial could turn out to be material in the end. In addition, potential benefits of an acquisition may fail to materialize or may not materialize as anticipated. If we are unable to successfully meet the challenges associated with one or more of our acquisitions, particularly, the acquisitions of RCG, this could have an adverse effect on our business, financial condition and results of operations.

      On October 25, 2004, RCG received a subpoena from the office of the United States Attorney for the Eastern District of New York. The subpoena requires the production of documents related to numerous aspects of their business and operations, including those of RenaLab, Inc., their laboratory. The subpoena includes specific requests for documents related to testing for parathyroid hormone (PTH) levels and vitamin D therapies. RCG has announced that it intends to cooperate with the government’s investigation.

      On August 9, 2005, RCG received a subpoena from the office of the United States Attorney for the Eastern District of Missouri in connection with a joint civil and criminal investigation. The subpoena requires the production of documents related to numerous aspects of RCG’s business and operations. The areas covered by the subpoena include RCG’s supply company, pharmaceutical and other services that RCG provides to patients, RCG’s relationships to pharmaceutical companies, RCG’s relationships with physicians, medical director

compensation and joint ventures with physicians and its purchase of dialysis equipment from us. RCG has announced that it intends to cooperate with the government’s investigation.

      Upon the closing of the proposed acquisition, the Company will assume RCG’s obligations to comply with these subpoenas.

      The health care industry has experienced significant consolidation in recent years, particularly in the dialysis services sector. Our ability to make future acquisitions depends, in part, on our available financial resources or could be limited by restrictions imposed in North America by the federal government or under our credit agreements. If we make future acquisitions, we may issue ordinary shares for non-cash consideration without first offering the shares to our existing shareholders, which could dilute the holdings of these shareholders. We may also need to borrow additional debt, assume significant liabilities or create additional expenses relating to intangible assets, any of which might reduce our reported earnings or our earnings per share and cause our stock price to decline. In addition, any financing that we might need for future acquisitions might be available to us only on terms that restrict our business. Acquisitions that we complete are also subject to the risk that we might not successfully integrate the acquired businesses or that we might not realize anticipated synergies from the combination. If we are not able to effect acquisitions on reasonable terms, there could be an adverse effect on our business, financial condition and results of operations.

      We also compete with other dialysis products and services companies in seeking suitable acquisition targets. If we are not able to continue to effect acquisitions on reasonable terms, especially in the international area, this could have an adverse effect on our business, financial condition and results of operations.

      We face numerous competitors in both our dialysis services business and our dialysis products business, some of which may possess substantial financial, marketing or research and development resources. Competition could materially adversely affect the future pricing and sale of our products and services. In particular, technological innovation has historically been a significant competitive factor in the dialysis products business. The introduction of new products by competitors could render one or more of our products less competitive or even obsolete.

      Health care companies are subject to claims alleging negligence, products liability, breach of warranty, malpractice and other legal theories that may involve large claims and significant defense costs whether or not liability is ultimately imposed. Health care products may also be subject to recalls and patent infringement claims. We cannot assure you that significant claims will not be asserted against us, that significant adverse verdicts will not be reached against us for patent infringements or that large scale recalls of our products will not become necessary. In addition, the laws of some of the countries in which we operate provide legal rights to users of pharmaceutical products that could increase the risk of product liability claims. Product liability and patent infringement claims, other actions for negligence or breach of contract and product recalls or related sanctions could result in significant costs. These costs could have a material adverse effect on our business, financial condition and results of operations. See Item 8.A.7, “Financial Information — Legal Proceedings.”

      While we have been able to obtain liability insurance in the past, to cover our business risks, we cannot assure you that such insurance will be available in the future either on acceptable terms or at all. A successful claim in excess of the limits of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition. Liability claims, regardless of their merit or eventual outcome, also may have a material adverse effect on our business and reputation, which could in turn reduce our sales and profitability.

      Our dialysis services business is dependent upon patients choosing our clinics as the location for their treatments. Patients may select a clinic based, in whole or in part, on the recommendation of their physician. We believe that physicians and other clinicians typically consider a number of factors when recommending a particular dialysis facility to an end-stage renal disease patient, including, but not limited to, the quality of care at a clinic, the competency of a clinic’s staff, convenient scheduling, and a clinic’s location and physical condition. Physicians may change their facility recommendations at any time, which may result in the movement of our existing patients to competing clinics, including clinics established by the physicians themselves. At most of our clinics, a relatively small number of physicians account for the referral of all or a significant portion of the patient base. Our dialysis care business also depends on recommendations by hospitals, managed care plans and other health care institutions. If a significant number of physicians, hospitals or other health care institutions cease referring their patients to our clinics, this would reduce our dialysis care revenue and could materially adversely affect our overall operations.

      The decision to purchase our dialysis products and other services or competing dialysis products and other services will be made in some instances by medical directors and other referring physicians at our dialysis clinics and by the managing medical personnel and referring physicians at other dialysis clinics, subject to applicable regulatory requirements. A decline in physician recommendations or recommendations from other sources or purchases of our products or ancillary services would reduce our dialysis product and other services revenue, and could materially adversely affect our business, financial condition and results of operations.

      Our continued growth in the provider business will depend upon our ability to attract and retain skilled employees, such as highly skilled nurses and other medical personnel. Competition for those employees is intense and the current nursing shortage in North America has increased our personnel and recruiting costs. Moreover, we believe that future success in the provider business will be significantly dependent on our ability to attract and retain qualified physicians to serve as medical directors of our dialysis clinics. If we are unable to achieve that goal or if doing so requires us to bear increased costs this could adversely impact our growth and results of operations.

      Our dialysis products business depends on the development of new products, technologies and treatment concepts to be competitive. Competition is also intense for skilled engineers and other technical research and development personnel. If we are unable to obtain and retain the services of key personnel, the ability of our officers and key employees to manage our growth would suffer and our operations could suffer in other respects. These factors could preclude us from integrating acquired companies into our operations, which could increase our costs and prevent us from realizing synergies from acquisitions. Lack of skilled research and development personnel could impair our technological development, which would increase our costs and impair our reputation for production of technologically advanced products.

      We operate dialysis clinics in 27 countries and sell a range of equipment, products and services to customers in over 100 countries. Our international operations are subject to a number of risks, including the following:

      Any one or more of these factors could increase our costs, reduce our revenues, or disrupt our operations, with possible material adverse effects on our business, financial condition and results of operations.

      We are subject to ongoing tax audits in the U.S., Germany and other jurisdictions. We have received notices of unfavorable adjustments and disallowances in connection with certain of these audits. We are contesting, and in some cases appealing certain of these unfavorable determinations. We may be subject to additional unfavorable adjustments and disallowances in connection with ongoing audits. If our objections and any final audit appeals are unsuccessful, we could be required to make additional tax payments. We are not currently able to determine the timing of these potential additional tax payments. If all potential additional tax payments were to become due contemporaneously, it could have a material adverse impact on our operating cash flow in the relevant reporting period.

      Our preference shares and our ordinary shares are listed on the Frankfurt Stock Exchange and ADSs representing such shares are listed on the New York Stock Exchange. However, we are presently aware of only a few companies organized in KGaA form in Germany whose shares are publicly traded, and no such other company’s shares are listed on any national stock exchange in the United States or quoted in the Nasdaq Stock Market. We completed our transformation of legal form without any interruption in stock market trading of our shares, but additional time could be required until capital markets are fully familiar with the KGaA form. We cannot give any assurances as to the prices at which our shares or ADSs representing our shares will trade.

      Our preference shares are listed on the Frankfurt Stock Exchange and ADSs representing the preference shares are listed on the New York Stock Exchange (“NYSE”). However, as a result of the conversion and transformation, the number of our preference shares outstanding has been reduced from 27,762,179 to 1,132,757. As a result, the public market for our preference shares is limited and highly illiquid. At February 10, 2006, upon registration of the conversion and the transformation in the commercial register in Germany, the number of preference shares outstanding included 63,891 preference shares in the form of 191,673 American Depositary Shares. We have been advised by the NYSE that if the number of publicly-held FMC-AG & Co. KGaA preference share ADSs falls below 100,000, the preference share ADSs are likely to be delisted from the NYSE. Without a New York Stock Exchange or a Nasdaq Stock Market listing, the market for our preference share ADSs would be further reduced or eliminated.

      We have a substantial amount of debt. At December 31, 2005, we have consolidated debt of $2.19 billion, including $1.19 billion of our trust preferred securities, and consolidated total shareholders’ equity of $3.97 billion, resulting in a ratio of total debt to equity of .55. After the completion of the RCG acquisition (see Item 5.B, “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Proposed Acquisition”), our debt will increase (on a pro forma basis as of December 31, 2005) to approximately $6.40 billion and our pro forma total shareholders’ equity will be approximately $3.97 billion, resulting in a pro

forma ratio of total debt to equity of 1.61. Our substantial level of debt and the higher level of debt to be incurred in connection with the RCG acquisition present the risk that we might not generate sufficient cash to service our indebtedness or that our leveraged capital structure could limit our ability to finance acquisitions and develop additional projects, to compete effectively or to operate successfully under adverse economic conditions.

      Our 2003 Senior Credit Agreement and the indentures relating to our trust preferred securities include, and the new senior credit agreements that we will enter into in connection with the acquisition of RCG will include, covenants that require us to maintain certain financial ratios or meet other financial tests. Under our senior credit agreement, we are obligated to maintain a minimum consolidated net worth and a minimum consolidated interest coverage ratio (ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated net interest expense) and a certain consolidated leverage ratio (ratio of consolidated funded debt to EBITDA).

      Our 2003 Senior Credit Agreement and our indentures include, and the new senior credit agreements that we will enter into in connection with the acquisition of RCG will include other covenants which, among other things, restrict or have the effect of restricting our ability to dispose of assets, incur debt, pay dividends, create liens or make capital expenditures, investments or acquisitions. These covenants may otherwise limit our activities. The breach of any of the covenants could result in a default and acceleration of the indebtedness under the credit agreement or the indentures, which could, in turn, create additional defaults and acceleration of the indebtedness under the agreements relating to our other long-term indebtedness which would have an adverse effect on our business, financial condition and results of operations.

      Prior to the transformation of legal form and the conversion, Fresenius AG held approximately 50.8% of our voting securities. As a result, Fresenius AG had the ability to elect the members of the supervisory board (Aufsichtsrat) of the Company and, through its voting power, to approve many actions requiring the vote of the shareholders of the Company. This controlling ownership had the effect of, among other things, preventing a change in control and precluding a declaration or payment of dividends without the consent of Fresenius AG. While the conversion and transformation have reduced Fresenius AG’s ownership of our voting ordinary shares to approximately 36.8%, Fresenius AG owns 100% of the outstanding shares of the general partner of the Company. As its sole shareholder, Fresenius AG has the sole right to elect the supervisory board of the general partner. Although our pooling agreement requires that one third of the members of the general partner’s supervisory board be persons with no significant business or professional relationship with us, Fresenius AG, or any of our affiliates. The general partner’s supervisory board elects the management board of the general partner, which is responsible for the management of the Company. Accordingly, through its ownership of the general partner, Fresenius AG is able to exercise substantially the same degree of control over the management and strategy of FMC-AG & Co. KGaA that it previously exercised as majority shareholder of FMC-AG, notwithstanding that it no longer owns a majority of our outstanding voting shares. Such control limits shareholder influence on management of the Company and precludes a takeover or change of control of the Company without Fresenius AG’s consent, either or both of which could adversely affect the prices of our shares.

      Under the pooling agreement that we have entered into for the benefit of minority holders of our ordinary shares and holders of our preference shares (including, in each case, holders of American Depositary Receipts representing beneficial ownership of such shares), we have agreed to file quarterly reports with the SEC, to prepare annual and quarterly financial statements in accordance with U.S. generally accepted accounting principles, and to file information with the SEC with respect to annual and general meetings of our shareholders. These pooling agreements also require that the supervisory board of Fresenius Medical Care Management AG, our general partner, include at least two members who do not have any substantial business or professional relationship with Fresenius AG, Fresenius Medical Care Management AG or FMC-AG & Co. KGaA and its

affiliates and requires the consent of those independent directors to certain transactions between us and Fresenius AG and its affiliates.

      We are a “foreign private issuer,” as defined in the SEC’s regulations, and consequently we are not subject to all of the same disclosure requirements applicable to domestic companies. We are exempt from the SEC’s proxy rules, and our annual reports contain less detailed disclosure than reports of domestic issuers regarding such matters as management, executive compensation and outstanding options, beneficial ownership of our securities and certain related party transactions. Also, our officers, directors and beneficial owners of more than 10% of our equity securities are exempt from the reporting requirements and short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934. We are also generally exempt from most of the governance rule revisions recently adopted by the New York Stock Exchange, other than the obligation to maintain an audit committee in accordance with Rule 10A-3 under the Securities Exchange Act of 1934, as amended. These limits on available information about our company and exemptions from many governance rules applicable to domestic issuers may adversely affect the market prices for our securities.

     Fresenius Medical Care AG & Co. KGaA (“FMC-AG & Co. KGaA” or the “Company”), is a German partnership limited by shares (Kommanditgesellschaft auf Aktien), formerly known as Fresenius Medical Care AG (“FMC-AG”), a German stock corporation (Aktiengesellschaft) organized under the laws of Germany.

      The Company was incorporated on August 5, 1996 as a stock corporation and transformed into the partnership limited by shares upon registration on February 10, 2006. FMC-AG & Co. KGaA is registered with the commercial register of the local court (Amtsgericht) of Hof an der Saale, Germany under the registration number HRB 4019. Our registered office (Sitz) is Hof an der Saale, Germany. Our business address is Else-Kröner-Strasse 1, 61352 Bad Homburg, Germany, telephone ++49-6172-609-0.

      The Company was originally created by the transformation of Sterilpharma GmbH (Gesellschaft mit beschränkter Haftung), a limited liability company under German law incorporated in 1975, into a stock corporation under German law (Aktiengesellschaft). A shareholder’s meeting on April 15, 1996 adopted the resolutions for this transformation and the commercial register registered the transformation on August 5, 1996.

      On September 30, 1996, we completed a series of transactions to consummate an Agreement and Plan of Reorganization entered into on February 4, 1996 by Fresenius AG and W.R. Grace which we refer to as the “Merger” elsewhere in this report. Pursuant to that agreement, Fresenius AG contributed Fresenius Worldwide Dialysis, its global dialysis business, including its controlling interest in Fresenius USA, Inc., in exchange for 35,210,000 FMC-AG Ordinary shares. Thereafter, we acquired:

      Effective October 1, 1996, we contributed all our shares in Fresenius USA, Inc., to Fresenius Medical Care Holdings, Inc., which conducts business under the trade name Fresenius Medical Care North America, and which is the managing company for all of our operations in the U.S., Canada and Mexico.

      On February 10, 2006, the Company completed the transformation of its legal form under German law as approved by its shareholders during the Extraordinary General Meeting (“EGM”) held on August 30, 2005. Upon registration of the transformation of legal form in the commercial register of the local court in Hof an der Saale, on February 10, 2006, Fresenius Medical Care AG’s legal form was changed from a stock corporation

(Aktiengesellschaft) to a partnership limited by shares (Kommanditgesellschaft auf Aktien) with the name Fresenius Medical Care AG & Co. KGaA (“FMC-AG & Co. KGaA”). The Company as a KGaA is the same legal entity under German law, rather than a successor to the stock corporation. Fresenius Medical Care Management AG (“Management AG”), a subsidiary of Fresenius AG, the majority voting shareholder ofFMC-AG prior to the transformation, is the general partner ofFMC-AG & Co. KGaA. Shareholders inFMC-AG & Co. KGaA participate in all economic respects, including profits and capital, to the same extent and (except as modified by the share conversion described below) with the same number of ordinary and preference shares inFMC-AG & Co. KGaA as they held in FMC-AG prior to the transformation. Upon effectiveness of the transformation of legal form, the share capital of FMC-AG became the share capital ofFMC-AG & Co. KGaA, and persons who were shareholders of FMC-AG became shareholders of the Company in its new legal form. In addition, the EGM approved the adjustment of the existing employee participation programs and agreed to the creation of a new level of authorized capital (Genehmigtes Kapital). As used in this report, (i) the “Company” refers to both FMC-AG prior to the transformation of legal form and FMC-AG & Co. KGaA after the transformation and (ii) “we,” “us,” and “our” refer to either the Company or the Company and its subsidiaries on a consolidated basis, as the context requires.

      Prior to the effectiveness of the transformation, and as approved by the EGM and by a separate vote of the Company’s preference shareholders during a separate meeting of the preference shareholders held immediately following the EGM, the Company offered holders of its non-voting preference shares (including preference shares represented by American Depositary Shares (ADSs)) the opportunity to convert their shares into ordinary shares at a conversion ratio of one preference share plus a conversion premium of€9.75 per ordinary share. Holders of a total of 26,629,422 preference shares accepted the offer, resulting in an increase of 26,629,422 ordinary shares of FMC-AG & Co. KGaA (including 2,099,847 ADSs representing 699,949 ordinary shares of FMC-AG & Co. KGaA) outstanding. Immediately after the conversion and transformation of legal form, there are 96,629,422 ordinary shares outstanding. Former holders of preference shares who elected to convert their shares now hold a number of ordinary shares of FMC-AG & Co. KGaA equal to the number of preference shares they elected to convert. The 1,132,757 preference shares that were not converted remained outstanding and became preference shares of FMC-AG & Co. KGaA in the transformation. As a result, preference shareholders who elected not to convert their shares into ordinary shares hold the same number of non-voting preference shares in FMC-AG & Co. KGaA as they held in FMC-AG prior to the transformation. Persons who held ordinary shares in FMC-AG prior to the transformation hold the same number of voting ordinary shares in FMC-AG & Co. KGaA.

      The market value of the Company’s shares on the close of business, May 3, 2005, the day before the conversion was announced, was€62.45 for the ordinary shares and€44.65 for the preference shares, a difference of€17.80. All preference shareholders were offered the opportunity, as approved by the EGM, to convert their preference share holdings by submitting their preference shares and paying a premium, initially set at€12.25 and subsequently reduced to€9.75 with each preference share submitted, in exchange for a like number of ordinary shares. Based on these market values the converting preference shareholders received a benefit of€8.05. The conversion is expected to have an impact on the earnings (or loss) per share available to the holders of our ordinary shares, under U.S. GAAP. As a result, the earnings per share calculation in the first quarter of 2006 may need to reflect the difference between (i) the market value of the ordinary shares less the conversion premium of€9.75 per preference share and (ii) the carrying amount of the preference shares at the conversion date, February 3, 2006, as a reduction of income available to ordinary shareholders and as a corresponding benefit to preference shareholders. The carrying amount of the preference shares consists of their historic investment and undistributed retained earnings allocated to the preference shares under the two-class method. The Company is continuing to analyze the need to reflect this reduction or benefit in our financial statements, but based on the market value of the Company’s ordinary shares on the close of business, February 3, 2006, the impact is approximately $0.9 billion or a reduction of $13.06 per ordinary share and a benefit of $34.32 per preference share. As this calculation compares the carrying amount of the preference shares which consists of the original investment by the preference shareholders plus any undistributed retained earnings the preference shares are entitled to with the market value of the ordinary shares at the date of closing, less the cash amount of €9.75 that the preference shareholders paid, it ignores the appreciation in value of our preference shares that had already occurred beyond the proportionate amount of undistributed retained earnings allocated to the preference shares. In addition, the measurement date of the exchange is February 3, 2006 and the charge would include all increases

in the fair value of the ordinary shares received by the preference shareholders as consideration subsequent to the announcement date which significantly exceed the earnings allocated to the preference shares during the period from the announcement of the offer to the conversion date.

      We invested, by business segment and geographical areas, the following amounts, excluding the RCG acquisition expected to close in the first quarter 2006, during the three fiscal years ended December 31, 2005, 2004, and 2003 (Mexico has been reclassified from International segment to North America segment in 2005 for management purposes. Prior years have been restated to reflect this reclassification.) and have budgeted the following amounts for the year 2006:

      During 2005, major areas of spending were for the maintenance of existing clinics and equipment for new clinics. In addition, expenditures were made for maintenance and expansion of production facilities in North America, Germany, France and Italy and for the capitalization of machines provided to customers primarily in Europe. We finance our capital expenditures through cash flow from operations or under existing or new credit facilities.

      In 2004, we acquired dialysis machines that were previously sold in sale-lease back transactions. The machines were acquired for approximately $29 million and were reflected as a capital expenditure in the Company’s cash flows.

      In 2003, the Company exercised an option to terminate an operating lease for certain manufacturing equipment in its Ogden, Utah, North American facility. The equipment was purchased for approximately $66,000 and is reflected as a capital expenditure in the accompanying consolidated statement of cash flows.

      For information regarding recent acquisitions, see Item 4 B. “Business Overview — Dialysis Care — Acquisitions.”

      We are the world’s largest kidney dialysis company, operating in both the field of dialysis products and the field of dialysis services. Based on publicly reported sales and number of patients treated, we are the largest dialysis company in the world. (Source: Nephrology News & Issues,July 2005; company data of significant competitors.) Our dialysis business is vertically integrated, providing dialysis treatment at our own dialysis clinics and supplying these clinics with a broad range of products. In addition, we sell dialysis products to other dialysis service providers. At December 31, 2005, we provided dialysis treatment to approximately 131,450 patients in 1,680 clinics worldwide located in 27 countries. In the U.S. we also perform clinical laboratory testing and provide inpatient dialysis services, therapeutic aphaeresis, hemoperfusion and other services under contract to hospitals. In 2005, we provided 19.7 million dialysis treatments, an increase of approximately 5% compared to 2004. We also develop and manufacture a full range of equipment, systems and disposable products, which we

sell to customers in over 100 countries. For the year ended December 31, 2005, we had net revenues of $6.8 billion, a 9% increase (8% in constant currency) over 2004 revenues. We derived 68% of our revenues in 2005 from our North America operations and 32% from our international operations. (Mexico has been reclassified from International segment to North America segment in 2005 for management purposes. Prior years have been restated to reflect this reclassification.)

      We use the insight we gain when treating patients in developing new and improved products. We believe that our size, our activities in both dialysis care and dialysis products and our concentration in specific geographic areas allow us to operate more cost-effectively than many of our competitors.

      The following table summarizes net revenues for our North America segment and our International segment as well as our major categories of activity for the three years ended December 31, 2005, 2004 and 2003 (Mexico has been reclassified from the International segment to the North America segment in 2005 for management purposes. Prior years have been restated to reflect this reclassification.)

      We offer life-maintaining and life-saving dialysis services and products in a market which is characterized by a favorable demographic development.

      End-stage renal disease (“ESRD”) is the stage of advanced chronic kidney disease that is characterized by the irreversible loss of kidney function and requires regular dialysis treatment or kidney transplantation to sustain life. A normally functioning human kidney removes waste products and excess water from the blood, which prevents toxin buildup, water overload and the eventual poisoning of the body. Most patients suffering from ESRD must rely on dialysis, which is the removal of toxic waste products and excess fluids from the body by artificial means. A number of conditions — diabetes, hypertension, glomerulonephritis and inherited diseases — can cause chronic kidney disease. The majority of all people with ESRD acquire the disease as a complication of one or more of these primary conditions.

      There are currently only two methods for treating ESRD: dialysis and kidney transplantation. Scarcity of compatible kidneys limits transplants. Therefore, most patients suffering from ESRD rely on dialysis. According to data published by the Centers for Medicare and Medicaid Services (“CMS”) (formerly the Health Care Financing Administration) of the U.S. Department of Health and Human Services, 15,589 patients of the ESRD patient population received kidney transplants in the U.S. during 2003, an increase of approximately 6% over 2002. Based on the total number of patients treated with dialysis in the U.S., only about 5% received a kidney transplant in 2003. In Germany, based on information published by “QuaSi-Niere gGmbH” only 4% of all patients treated with dialysis received a kidney transplant in 2004. In both countries less than 30% of all ESRD patients live with a functioning kidney transplant and more than 70% require dialysis (source: USRDS 2005 Annual Data Report; QuaSi-Niere gGmbH, Bericht 2004/2005). There are two major dialysis methods commonly used today, hemodialysis (“HD”) and peritoneal dialysis (“PD”). These are described below under “Dialysis Treatment Options for ESRD.” We estimate the global ESRD patient population to have reached almost

1.8 million at the end of 2004. Of these patients, we estimate that almost 1.4 million were undergoing dialysis treatment, and over 400,000 people were living with kidney transplants. Of the estimated 1.4 million dialysis patients treated in 2004 approximately 1.225 million received HD and almost 150,000 received PD. Generally, an ESRD patient’s physician, in consultation with the patient, chooses the patient treatment method, which is based on the patient’s medical conditions and needs. The number of dialysis patients grew by approximately 6% in 2004.

      Based on data published by the CMS in 2005, the number of patients in the U.S. who received dialysis for chronic ESRD grew from approximately 171,500 in 1993 to 310,100 in 2003, a compound annual rate of approximately 6%. We believe that worldwide growth will continue at 6% per year. According to our own market surveys, Japan is the second largest dialysis market in the world. According to data published by the Japanese Society for Dialysis Therapy, approximately 237,710 dialysis patients were being treated in Japan at the end of 2003. In the rest of the world, we estimate that at the end of 2004 there were approximately 324,000 dialysis patients in Europe, nearly 200,000 patients in Asia (excluding Japan) and almost 170,000 patients in Latin America (including Mexico).

      Patient growth rates are significantly different on a regional basis. A below average increase in the number of patients is experienced in economically highly developed countries, such as the U.S., Western and Central Europe where a substantial portion of patients with terminal kidney failure have access to treatment, usually dialysis. Contrary to this, growth rates in the economically weaker regions continue to be around 10% and were thus far higher than average levels. We estimate that around 24% of all patients are treated in the U.S., approximately 18% in Japan and about 18% in the 25 countries of the European Union. The remaining 40% of all dialysis patients are distributed throughout more than 90 countries in different geographical regions. The high patient growth rate in economically weaker regions indicates that access to treatment is gradually improving. If regional growth patterns persist, a change in the regional distribution of dialysis patients will eventually occur as dialysis treatment becomes available to a higher proportion of patients in Asia, Latin America, Eastern Europe, the Middle East and Africa which comprise 80% of the world’s population.

      We believe that the continuing growth in the number of dialysis patients is principally attributable to:

     Hemodialysis. Hemodialysis removes toxins and excess fluids from the blood in a process in which the blood flows outside the body through plastic tubes known as bloodlines into a specially designed filter, called a dialyzer. The dialyzer separates waste products and excess water from the blood. Dialysis solution flowing through the dialyzer carries away the waste products and excess water, and supplements the blood with solutes which must be added due to renal failure. The treated blood is returned to the patient. The hemodialysis machine pumps blood, adds anti-coagulants, regulates the purification process and controls the mixing of dialysis solution and the rate of its flow through the system. This machine can also monitor and record the patient’s vital signs.

      Hemodialysis patients generally receive treatment three times per week, typically for three to five hours per treatment. The majority of hemodialysis patients receive treatment at outpatient dialysis clinics, such as ours, where hemodialysis treatments are performed with the assistance of a nurse or dialysis technician under the general supervision of a physician.

      According to the most recent data available from the CMS, there were more than 4,500 Medicare-certified ESRD treatment clinics in the U.S. in 2004. Ownership of these clinics is characterized by a relatively small

number of chain providers owning 70-75% of the clinics, of which we are one of the largest, and a large number of providers each owning 10 or fewer clinics. We estimate that there were approximately 4,000 dialysis clinics in the European Union at the end of 2004, of which about 50% are government-owned, approximately 40% are privately owned, and nearly 10% are operated by health care organizations. In Latin America, privately owned clinics predominate, comprising over 70% of all clinics providing dialysis care.

      According to CMS, as of December 31, 2003, hemodialysis patients represented about 90% of all dialysis patients in the U.S. Japanese Society for Dialysis Therapy data indicate hemodialysis patients comprise approximately 95% of all dialysis patients in Japan, and, according to our most recent studies, hemodialysis patients comprise 90% in the European Union and 85% in the rest of the world. Hence, hemodialysis is the dominant therapy method worldwide.

     Peritoneal Dialysis. Peritoneal dialysis removes toxins from the blood using the peritoneum, the membrane lining covering the internal organs located in the abdominal area, as a filter. Most peritoneal dialysis patients administer their own treatments in their own homes and workplaces, either by a treatment known as continuous ambulatory peritoneal dialysis or CAPD, or by a treatment known as continuous cycling peritoneal dialysis or CCPD. In both of these treatments, a surgically implanted catheter provides access to the peritoneal cavity. Using this catheter, the patient introduces a sterile dialysis solution from a solution bag through a tube into the peritoneal cavity. The peritoneum operates as the filtering membrane and, after a specified dwell time, the solution is drained and disposed. A typical CAPD peritoneal dialysis program involves the introduction and disposal of dialysis solution four times a day. With CCPD a machine pumps or “cycles” solution to and from the patient’s peritoneal cavity while the patient sleeps. During the day, one and a half to two liters of dialysis solution remain in the abdominal cavity of the patient.

      Our objective is generating revenue growth that exceeds market growth of the dialysis industry, measured by growth in the patient population, while maintaining our leading position in the market and increasing earnings at a faster pace than revenues. Our dialysis care and product revenues have grown faster than the market over the past five years, and we believe that we are well positioned to meet our objectives by focusing on the following strategies:

      On May 3, 2005, we entered into a definitive merger agreement for the acquisition (the “Acquisition”) of Renal Care Group, Inc. (“RCG”), a Delaware corporation with principle offices in Nashville, Tennessee, for an all cash purchase price of approximately $3.5 billion. At December 31, 2005, RCG provided dialysis and ancillary services to over 32,360 patients through more than 450 owned outpatient dialysis centers in 34 states within the United States, in addition to providing acute dialysis services to more than 200 hospitals. Completion of the Acquisition, approved by RCG’s stockholders in a vote held on August 24, 2005, is subject to governmental approvals (including termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, the “Act”) and other third-party consents. On February 15, 2006, we announced that we and RCG had entered into a definitive agreement to sell approximately 100 dialysis centers serving on average approximately 60-65 patients per center to National Renal Institutes, Inc. (“NRI”), a wholly owned subsidiary of DSI Holding Company, Inc. The divestiture of these centers is an important step toward concluding the review by the United States Federal Trade Commission (“FTC”) of our acquisition of Renal Care Group. The purchase price for the divested centers is approximately $450 million to be paid in cash, subject to post-closing adjustments for working capital and other routine matters. The sale of the centers to NRI is expected to close shortly after the completion of our acquisition of RCG.

      The sale of the centers is subject to FTC and certain state approvals. See Item 5 B. “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Outlook — Proposed Acquisition”.

      We provide dialysis treatment and related laboratory and diagnostic services through our network of approximately 1,680 outpatient dialysis clinics, 1,155 of which are in the U.S. and 525 of which are in

26 countries outside of the U.S. Our operations outside the U.S. and Mexico generated 17% of our 2005 dialysis care revenue. Our International segment currently operates or manages dialysis clinics in Argentina, Australia, Brazil, China, Colombia, Chile, Czech Republic, Estonia, France, Germany, Hungary, Hong Kong, Italy, Singapore, Portugal, Poland, Romania, Slovakia, Slovenia, South Africa, Spain, Taiwan, Turkey, United Kingdom and Venezuela. Our dialysis clinics are generally concentrated in areas of high population density. In 2005, we acquired a total of 37 existing clinics, opened 65 new clinics and consolidated 32 clinics. The number of patients we treat at our clinics worldwide increased by about 6%, from approximately 124,400 at December 31, 2004 to approximately 131,450 at December 31, 2005. For 2005, dialysis services accounted for 72% of our total revenue.

      With our large patient population, we have developed proprietary patient statistical databases which enable us to improve dialysis treatment outcomes, and further improve the quality and effectiveness of dialysis products. We believe that local physicians, hospitals and managed care plans refer their ESRD patients to our clinics for treatment due to:

      At our clinics, we provide hemodialysis treatments at individual stations through the use of dialysis machines and disposable products. A nurse attaches the necessary tubing to the patient and the dialysis machine and monitors the dialysis equipment and the patient’s vital signs. The capacity of a clinic is a function of the number of stations and such factors as type of treatment, patient requirements, length of time per treatment, and local operating practices and ordinances regulating hours of operation.

      Each of our dialysis clinics is under the general supervision of a Medical Director or, in exceptional circumstances dictating the need for more than one medical director, all of whom are physicians. See “Patients, Physician and Other Relationships.” Each dialysis clinic also has an administrator or clinical manager who supervises the day-to-day operations of the facility and the staff. The staff typically consists of registered nurses, licensed practical nurses, patient care technicians, a social worker, a registered dietician, a unit clerk and biomedical technicians.

      As part of the dialysis therapy, we provide a variety of services to ESRD patients in the U.S. at our dialysis clinics. These services include administering EPO, a synthetic engineered hormone that stimulates the production of red blood cells. EPO is used to treat anemia, a medical complication that ESRD patients frequently experience, and we administer EPO to most of our patients in the U.S. Revenues from EPO accounted for approximately 21% of total revenue in our North America segment for the year ended December 31, 2005. We receive a substantial majority of this revenue as reimbursements through the Medicare and Medicaid programs. Amgen Inc. is the sole manufacturer of EPO in North America and any interruption of supply could materially adversely affect our business, financial condition and results of operations. Our current contract with Amgen covers the period from January 2006 to December 2007. See “— Regulatory and Legal Matters — Reimbursement — U.S. — Erythropoietan (EPO).”

      Our clinics also offer services for home dialysis patients, the majority of whom receive peritoneal dialysis treatment. For those patients, we provide materials, training and patient support services, including clinical monitoring, follow-up assistance and arranging for delivery of the supplies to the patient’s residence. See “— Regulatory and Legal Matters — Reimbursement — U.S.” for a discussion of billing for these products and services.

      We also provide dialysis services under contract to hospitals in the U.S. on an “as needed” basis for hospitalized ESRD patients and for patients suffering from acute kidney failure. Acute kidney failure can result from trauma or similar causes, and requires dialysis until the patient’s kidneys recover their normal function. We service these patients either at their bedside, using portable dialysis equipment, or at the hospital’s dialysis site.

Contracts with hospitals provide for payment at negotiated rates that are generally higher than the Medicare reimbursement rates for chronic in-clinic outpatient treatments.

      We employ a centralized approach with respect to certain administrative functions common to our operations. For example, each dialysis clinic uses our proprietary manuals containing our standardized operating and billing procedures. We believe that centralizing and standardizing these functions enhance our ability to perform services on a cost-effective basis.

      The manner in which each clinic conducts its business depends, in large part, upon applicable laws, rules and regulations of the jurisdiction in which the clinic is located, as well as our clinical policies. However, a patient’s attending physician, who may be the clinic’s Medical Director or an unaffiliated physician with staff privileges at the clinic, has medical discretion to prescribe the particular treatment modality and medications for that patient. Similarly, the attending physician has discretion in prescribing particular medical products, although the clinic typically purchases equipment, regardless of brand, in consultation with the Medical Director.

      The UltraCare^®program of our North America dialysis services group combines our latest product technology with our highly trained and skilled staff to offer our patients a superior level of care. The basis for this form of treatment is the Optiflux^®polysulfone single-use dialyzer. Optiflux^®dialyzers are combined with our 2008^tmHemodialysis Delivery System series, which has advanced online patient monitoring and Ultra Pure Dialysate, all of which we feel improve mortality rates and increase the quality of patient care. (A study published in 2004 (Lowrie/Li/Ofsthun/ Lazarus, Nephrology Dialysis Transplantation, August 17, 2004) comparing single use and re-use dialyzers concluded that the abandonment of dialyzer re-use practice could lead to lower mortality rates and to an increase in the quality of patient care). UltraCare^®program also utilizes several systems to allow the tailoring of treatment to meet individual patient needs. Among the other capabilities of this system, staff will be alerted if toxin clearance is less than the target prescribed for the patient, and treatment can be adjusted accordingly. All of our North American dialysis clinics have been certified for the UltraCare^®program.

      We provide laboratory testing and marketing services through Spectra Renal Management. Spectra Renal Management provides blood, urine and other bodily fluid testing services to determine the appropriate individual dialysis therapy for a patient and to assist physicians in determining whether a dialysis patient’s therapy regimen, diet and medicines remain optimal. Spectra Renal Management the leading clinical laboratory provider in North America, provides testing for dialysis related treatments in its two operating laboratories located in New Jersey and Northern California. During the year ended December 31, 2005, Spectra Renal Management performed nearly 42 million tests for approximately 125,000 dialysis patients in over 1,800 clinics across the U.S., including clinics that we own or operate.

      We also provide perfusion, autotransfusion and therapeutic apheresis services in the U.S. Perfusion maintains human heart and lung function during cardiovascular surgery. Autotransfusion is used during surgery to collect, filter and reinfuse a patient’s own blood as an alternative to using donor blood. Therapeutic apheresis is the process of separating or removing illness-causing substances from patient’s blood or plasma.

      A significant factor in the growth in our revenue and operating earnings in prior years has been our ability to acquire health care businesses, particularly dialysis clinics, on reasonable terms. Worldwide, physicians own many dialysis clinics that are potential acquisition candidates for us. In the U.S., doctors might determine to sell their clinics to obtain relief from day-to-day administrative responsibilities and changing governmental regulations, to focus on patient care and to realize a return on their investment. Outside of the U.S., doctors might

determine to sell to us and/or enter into joint ventures or other relationships with us to achieve the same goals and to gain a partner with extensive expertise in dialysis products and services.

      We paid aggregate cash consideration primarily for dialysis clinics of approximately $125 million in 2005 and approximately $104 million in 2004.

      In May 2005, we entered into a definitive merger agreement for the acquisition of Renal Care Group Inc. for approximately $3.5 billion in cash. See Item 5 B., “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Outlook — Proposed Acquisition”.

      We continued to enhance our presence outside the U.S. in 2005 by acquiring individual or small groups of dialysis clinics in selected markets, expanding existing clinics, and opening new clinics.

      Our quality management activities are primarily focused on comprehensive development and implementation of an Integrated Quality Management System (“IMS”). Our goals in this area include not only meeting quality requirements for our dialysis clinics and environmental concerns, but also managing the quality of our dialysis care. This approach results in an IMS structure that closely reflects existing corporate processes. We are also able to use the IMS to fulfill many legal and normative regulations covering service lines. In addition, the quality management system standard offers a highly flexible structure that allows us to adapt to future regulations. The most important of these include, among others, ISO 9001 and ISO 14001, which defines environmental management system requirements. The IMS fulfils the ISO-Norm 9001:2000 requirements for quality control systems and links it with the ISO-Norm 14001:1996 for environmental control systems. At the same time, it conforms to the medical devices requirements of ISO-Norm 13485:2003.

      Our dialysis clinics’ processes and documentation are continuously inspected by internal auditors and external parties. The underlying quality management system is certified and found to be in compliance with relevant regulations, requirements and company policies. Newly developed system evaluation methods, allowing simpler performance comparisons, are used to identify additional improvement possibilities. Certification of our dialysis clinics was focused in 2005 on Eastern European countries, particularly in Czech Republic, Poland, Turkey and Hungary.

      Our important quality assurance goals in 2006 are:

      At each of our North America dialysis clinics, a quality assurance committee is responsible for reviewing quality of care data, setting goals for quality enhancement and monitoring the progress of quality assurance initiatives. We believe that we enjoy a reputation of providing high quality care to dialysis patients. In 2005, the Company continued to develop and implement programs to assist in achieving our quality goals. Our Access Intervention Management Program detects and corrects arteriovenous access failure in hemodialysis treatment, which is the major cause of hospitalization and morbidity.

      The following table provides information for the years ended December 31, 2005, 2004 and 2003 regarding the percentage of our U.S. dialysis treatment services net revenues from (a) the Medicare ESRD program,

(b) private/ alternative payors, such as commercial insurance and private funds, (c) Medicaid and other government sources and (d) hospitals.

      Under the Medicare ESRD program, Medicare reimburses dialysis providers for the treatment of certain individuals who are diagnosed as having ESRD, regardless of age or financial circumstances. See “Regulatory and Legal Matters — Reimbursement.”

      We believe that our success in establishing and maintaining dialysis clinics, both in the U.S. and in other countries, depends significantly on our ability to obtain the acceptance of and referrals from local physicians, hospitals and managed care plans. A dialysis patient generally seeks treatment at a conveniently located clinic at which the patient’s nephrologist has staff privileges. In nearly all our dialysis clinics, local doctors, who specialize in the treatment of renal patients (nephrologists), act as practitioners. Our ability to provide high-quality dialysis care and to fulfil the requirements of patients and doctors depends significantly on our ability to enlist nephrologists for our dialysis clinics and receive referrals from general practitioners.

      Medicare ESRD program reimbursement regulations require that a Medical Director generally supervise treatment at a dialysis clinic. Generally, the Medical Director must be board certified or board eligible in internal medicine and have at least twelve months of training or experience in the care of patients at ESRD clinics. Our Medical Directors also maintain their own private practices. We have entered into written agreements with physicians who serve as medical directors in our clinics. In North America these agreements generally have an initial term between 5 to 10 years. The compensation of our medical directors and other contracted physicians is negotiated individually and depends in general on local factors such as competition, the professional qualification of the physician, their experience and their tasks as well as the size and the offered services of the clinic. The total annual compensation of the medical directors and the other contracted physicians is stipulated at least one year in advance and normally contains incentives in order to continue to improve efficiency and quality. We believe that the compensation of our medical directors is in line with the market.

      Almost all contracts we enter into with our medical directors in the United States as well as the typical contracts which we obtain when acquiring existing clinics, contain non-competition clauses concerning certain activities in defined areas for a defined period to time. These clauses do not enjoin the physicians from performing patient services directly at other locations/ areas. As prescribed by law we do not require physicians to send patients to us or to specific clinics or to purchase or use specific medical products or ancillary services.

     Dialysis Services. Our major competitors in the U.S. are DaVita, Inc., Dialysis Clinic Inc. and Renal Advantage Inc. and in our International segment are Gambro AB and B. Braun Melsungen AG. Ownership of dialysis clinics in the U.S. consists of a large number of providers each owning 10 or fewer clinics and a small number of larger multi-clinic providers. Over the last decade the dialysis industry has been characterized by ongoing consolidations. The Davita/Gambro and Fresenius Medical Care/RCG transactions have carried this consolidation process into 2005 and 2006. Davita, Inc. recently acquired all of Gambro AB’s dialysis service clinics in the United States and entered into a long-term supply agreement with Gambro. (See “Risk Factors — Our competitors’ recent combination could foreclose certain sales to an important customer.”). In May 2005, we entered into a definitive agreement to acquire RCG for approximately $3.5 billion in cash. See Item 5 B.

“Operating and Financial Review and Prospects — Liquidity and Capital Resources  — Outlook — Proposed Acquisition”.

      Many of our dialysis clinics are in urban areas, where there frequently are many competing clinics in proximity to our clinics. We experience direct competition from time to time from former Medical Directors, former employees or referring physicians who establish their own clinics. Furthermore, other health care providers or product manufacturers, some of who have significant operations, may decide to enter the dialysis business in the future.

      Because in the U.S. government programs are the primary source of reimbursement for services to the majority of patients, competition for patients in the U.S. is based primarily on quality and accessibility of service and the ability to obtain admissions from physicians with privileges at the facilities. However, the extension of periods during which commercial insurers are primarily responsible for reimbursement and the growth of managed care have placed greater emphasis on service costs for patients insured with private insurance.

      In most countries other than the U.S., we compete primarily against individual freestanding clinics and hospital-based clinics. In many of these countries, especially the developed countries, governments directly or indirectly regulate prices and the opening of new clinics. Providers compete in all countries primarily on the basis of quality and availability of service and the development and maintenance of relationships with referring physicians.

     Laboratory Services. Spectra Renal Management competes in the U.S. with large nationwide laboratories, dedicated dialysis laboratories and numerous local and regional laboratories, including hospital laboratories. In the laboratory services market, companies compete on the basis of performance, including quality of laboratory testing, timeliness of reporting test results and cost-effectiveness. We believe that our services are competitive in these areas.

      We are currently, based on internal estimates, publicly available market data and our data of significant competitors, the world’s largest manufacturer and distributor of equipment and related products for hemodialysis and the second largest manufacturer of peritoneal dialysis products, measured by publicly reported revenues. We sell our dialysis products directly and through distributors in over 100 countries. Most of our customers are dialysis clinics. For the year 2005, dialysis products accounted for 28% of our total revenue.

      We produce a wide range of machines and disposables for hemodialysis and for peritoneal dialysis:

      Our product business also includes adsorbers, which are specialized filters used in other extracorporeal therapies. In addition we sell products from other producers, including others dialyzers, specific instruments for vascular access, heparin (an anticoagulant as well as other supplies, such as bandages, clamps and injections.

      The following table shows the breakdown of our dialysis product revenues into sales of hemodialysis products, peritoneal dialysis products and our adsorber business.

      We offer a comprehensive hemodialysis product line. Products include HD machines, modular components for dialysis machines, polysulfon dialyzers, blood lines, solutions and concentrates, needles, connectors, machines for water treatment, data administration systems, dialysis chairs, equipment and accessories for the reuse of dialyzers and similar products. We continually strive to expand and improve the capabilities of our hemodialysis systems to offer an advanced treatment mode at reasonable cost.

     Dialysis Machines. We sell our 2008^tmSeries dialysis machines as 2008H and 2008K models in North America and 4008 Series models and recently introduced Series 5008 models in the rest of the world. The 2008/4008 series is the most widely sold machine for hemodialysis treatment. Overall, we have produced nearly 200,000 units to date. The 5008 series was launched in June 2005 and is intended to gradually follow the 4008 series in the coming years. The successor 5008 contains a number of newly developed technical components for revised and improved dialysis processes Significant advances in the field of electronics enables highly complex treatment procedures to be controlled and monitored safely and clearly through interfaces

      Our dialysis machines offer the following features and advantages:

     Dialyzers. We manufacture dialyzers using hollow fiber Fresenius Polysulfone^®and Helixone membranes, a synthetic material. We estimate that we are the leading worldwide producer of polysulfone dialyzers. We believe that polysulfone offers the following superior performance characteristics compared to other materials used in dialyzers:

      We manufacture and distribute arterial, venous, single needle and pediatric bloodlines. We produce both liquid and dry dialysate concentrates. Liquid dialysate concentrate is mixed with purified water by the hemodialysis machine to produce dialysis solution, which removes the toxins and excess water from the patient’s blood during dialysis. Dry concentrate, developed more recently, is less labor-intensive to use, requires less storage space and may be less prone to bacterial growth than liquid solutions. We also produce dialysis solutions in bags, including solutions for priming and rinsing hemodialysis bloodlines, as well as connection systems for central concentrate supplies and devices for mixing dialysis solutions and supplying them to hemodialysis machines. Other products include solutions for disinfecting and decalcifying hemodialysis machines, fistula needles, hemodialysis catheters, and products for acute renal treatment.

      We offer a full line of peritoneal dialysis systems and solutions which include both continuous ambulatory peritoneal dialysis (CAPD) and continuous cycling peritoneal dialysis (CCPD) also called automated peritoneal dialysis (APD).

      CAPD Therapy: We manufacture both systems and solutions for CAPD therapy. Our product range offers the following advantages for patients including:

     Fewer possibilities for touch contamination. Our unique PIN and DISC technology was designed to reduce the number of steps in the fluid exchange process and by doing so has lessened the risk of infection, particularly

in the disconnection step in which the patient connector is closed automatically without the need for manual intervention.

     APD Therapy: We have been at the forefront of the development of automated peritoneal dialysis machines since 1980. APD therapy differs from that of CAPD in that fluid is infused into the peritoneal cavity of patients while they sleep. The effectiveness of the therapy is dependant on the dwell times, the composition of the solution used, the volume of solution and the time of the treatment, usually 8-10 hours. APD offers a number of benefits to the patients:

      Our automated peritoneal dialysis equipment incorporates microprocessor technology. This offers physicians the opportunity to program specific prescriptions for individual patients. Our APD equipment product line includes:

     Patient Management Software: We have developed specific patient management software tools to support both CAPD and APD therapies in the different regions of the world. These include: PatientOnLine, Pack-PD^®and FITTness™. These tools can be used by physicians and nurses to design and monitor treatment protocols thus ensuring that therapy is optimized and that patient care is maximized.

      We sell most of our products to clinics, hospitals and specialized treatment clinics. With our comprehensive product line and years of experience in dialysis, we believe that we have been able to establish and maintain very close relationships with our clinic customer base on a global basis. Close interaction between our sales force and research and development personnel enables us to integrate concepts and ideas that originate in the field into product development. We maintain a direct sales force of trained salespersons engaged in the sale of both hemodialysis and peritoneal dialysis products. This sales force engages in direct promotional efforts, including visits to physicians, clinical specialists, hospitals, clinics and dialysis clinics, and represents us at industry trade shows. We also sponsor medical conferences and scientific symposia as a means for disseminating scientific or technical information. Our clinical nurses provide clinical support, training and assistance to customers and assist our sales force. We also use outside distributors to provide sales coverage in countries that our internal sales force does not service.

      In our basic distribution system, we ship products from factories to central warehouses which are frequently located near the factories. From this central warehouse, we distribute our dialysis products to regional warehouses. We then distribute peritoneal dialysis products to the patient at home, and ship hemodialysis products directly to dialysis clinics and other customers. Local sales forces, independent distributors, dealers and sales agents sell all our products.

      We offer customer service, training and education in the applicable local language, and technical support such as field service, repair shops, maintenance, and warranty regulation for each country in which we sell dialysis products. We provide training sessions on our equipment at our facilities in Schweinfurt, Germany, Chicago, Illinois and Walnut Creek, California and we also maintain regional service centers that are responsible for day-to-day international service support.

      We operate state-of-the-art production facilities worldwide to meet the demand for machines, cyclers, dialyzers, solutions, concentrates, mixes, bloodlines, and disposable tubing assemblies and equipment for water treatment in dialysis clinics. We have invested significantly in developing proprietary processes, technologies and manufacturing equipment which we believe provide a competitive advantage in manufacturing our products. The decentralized structure helps to reduce transport costs. We are using our facilities in St. Wendel, Germany and Ogden, Utah as centers of competence for development and manufacturing.

      We produce and assemble hemodialysis machines and CCPD cyclers in our Schweinfurt, Germany and our Walnut Creek, California facilities. We also maintain facilities at our service and local distribution centers in Argentina, Egypt, France, Italy, The Netherlands, China, Brazil and Russia for testing and calibrating dialysis machines manufactured or assembled elsewhere, to meet local end user market needs. We manufacture and assemble dialyzers and polysulfone membranes in our St. Wendel, Germany, L’Arbresle, France and Inukai, Japan facilities and at production facilities of our joint ventures in Belarus, Saudi Arabia and Japan. At our Ogden, Utah facilities we manufacture and assemble dialyzers and polysulfone membranes and manufacture PD solutions. We manufacture hemodialysis concentrate at various facilities worldwide. We also produce PD products in Mexico and Japan. Our facilities are inspected on a regular basis by national and/or international authorities.

      During 2005, we primarily invested in the modernization and expansion of production facilities in North America, Germany, France and Italy. See “History and Development of the Company — Capital Expenditures.”

      We operate a comprehensive quality management system in our production facilities. Raw materials delivered for the production of solutions are subjected to infra-red and ultra-violet testing as well as physical and chemical analysis to ensure their quality and consistency. During the production cycle, sampling and testing take place in accordance with applicable quality control measures to assure sterility, safety and effectiveness of the finished products. The pressure, temperature and time required for the various processes are monitored to ensure consistency of unfinished products during the production process. Through monitoring of environmental conditions, particle and bacterial content are kept below permittee limits. We provide regular ongoing training for our employees in the areas of quality control and proper production practice. See also Item 3. “Regulatory and Legal Matters — Facilities and Operational Regulations”.

      We have integrated environmental protection targets into our operations. To reach these goals, our Integrated Quality Management System (“IMS”) has been in use at our production facilities as well as at a number of dialysis clinics. IMS fulfils the requirements of quality management systems as well as environmental management. Our IMS fulfils the requirements of the ISO-Norm 14001:1996. Environmental targets are set, adhered to and monitored during all stages of the lives of our products, from their development to their disposal.

      In our dialysis facilities, we establish, depending on the facility and situation concerned, a priority environmental protection target on which our dialysis clinics concentrate for at least one year. Environmental performance in other dialysis facilities is used as the basis for comparisons and targets. Adjustments are

implemented on a site-by-site basis after evaluation of the site’s performance. In our North America dialysis clinics, we have been able to reduce fresh water consumption by one third by means of a new system of production of purified water and to reduce energy costs at the same time. Targeted environmental performance criterial in other locations include fresh water consumption and improved separation of waste.

      Our purchasing policy combines worldwide sourcing of high-quality materials with the establishment of long-term relationships with our suppliers. Additionally, we carefully assess the reliability of all materials purchased to ensure that they comply with the rigorous quality and safety standards required for our dialysis products. Our International Purchasing Consulting Center (PCC) ensures that we consistently maintain high standards by entering into global agreements. An interactive information system links all our global projects to ensure that they are standardized and constantly monitored.

      PCC focuses on further optimizing procurement logistics and reducing purchasing costs. Supplemental raw material contracts for all manufacturers of semi-finished goods will enable us to improve purchasing terms for our complete network. We also plan to intensify, where appropriate, our use of internet-based procurement tools by purchasing raw materials through special on-line auctions. Our sophisticated routing software enables us to distribute our supplies to best accommodate customer requests while maintaining operational efficiency.

      Research and development focuses strongly on the development of new products, technologies and treatment concepts to optimize treatment quality for dialysis patients, and on process technology for manufacturing our products. Research and development expenditures were $51 million in 2005, $51 million in 2004, and $50 million in 2003.

      New or enhanced products introduced in 2005 included the following:

      In 2005, we introduced a new series of dialysis systems — the 5008 series — to the market. The 5008 therapy system constitutes a significant new development in kidney replacement therapy. It includes a completely newly conceived dialysis machine. The system offers the patient extremely high therapy quality and a very high standard of safety, while providing clinical personnel maximum operating comfort and significant time savings, all at reduced operating costs for the operator of a dialysis unit. The 5008 therapy system thereby fulfils all the requirements placed by an ever growing, multi-symptomatic patient population on dialysis therapy while responding to increasing cost pressures in health services.

      As the owner of or licensee under patents and trademarks throughout the world, we hold rights under about 1,600 patents and patent applications relating to dialysis technology in major markets. Patented technologies that relate to dialyzers include our in-line sterilization method and sterile closures for in-line sterilized medical devices. The generation of DIASAFE^®filters and FX dialyzers are also the subject of patents and pending patent applications.

      The connector system for our biBag bicarbonate concentrate powder container for the 4008 Series dialysis equipment series has been patented in the United States, Norway and Finland, Japan and Europe.

      A number of pending patent applications relate to components of the new 5008 dialysis equipment series, including, for example, the pump technology, extracorporeal blood pressure measurement and the connector system for a modified biBag bicarbonate concentrate powder container.

      Among our more significant patents is the one for our polysulfone hollow fiber. This patent expired in 2005 in Germany and most other countries but the patent in the United States does not expire until the beginning of 2007. The in-line sterilization method patent will expire in 2010 in Germany, the United States, and other countries. The patent for the biBag connector expires in 2013, in Germany, the United States, and other countries. The dates given represent the maximum patent life of the corresponding patents. We believe that even after expiration of these patents, our proprietary know-how for the manufacture of these products and our continuous efforts in obtaining targeted patent protection for newly developed upgrade products will continue to constitute a competitive advantage.

      For peritoneal dialysis, we hold protective rights on our polyolefine film Biofine, which is suitable for packaging intravenous and peritoneal dialysis fluids. This film is currently used only in non-US markets. Patents have been granted in Australia, Brazil Germany, Europe, Japan, South Korea, Belarus and the United States. However, in Japan and Europe, proceedings opposing the registration of the patents are pending. A further pending patent family describes a special film for a peelable, non-PVC, multi chamber bag for peritoneal dialysis solutions. Patents have been granted in Brazil Europe, Japan, South Korea and the United States. However, proceedings against the registration of the patent are currently pending in Europe.

      We believe that our success will continue to depend significantly on our technology. As a standard practice, we obtain legal protections we believe are appropriate for our intellectual property. Nevertheless, we are in a position to successfully market a material number of products for which patent protection has lapsed or where only particular features have been patented. We cannot, however, assure that our intellectual property rights will not be infringed by third parties or that we will always be successful in prosecuting infringement claims. Registered patents may also be subject to infringement or invalidation claims by others either in whole or in part. In addition, technological developments could suddenly reduce the value of our existing intellectual property.

      Our principal trademarks are the name “Fresenius” and the “F” logo, for which we hold a perpetual, royalty-free license from Fresenius AG, formerly our majority stockholder and now sole stockholder of our general partner. See Item 7B — “Related Party Transactions — Trademarks”.

      The markets in which we sell our dialysis products are highly competitive. Our competitors in the sale of hemodialysis and peritoneal dialysis products include Gambro AB, Baxter International Inc., Asahi Kasei Medical Co. Ltd., Bellco S.p.A., a subsidiary of the Sorin group, B. Braun Melsungen AG, Nipro Corporation Ltd., Nikkiso Co., Ltd., Terumo Corporation and Toray Medical Co., Ltd.

      We have prepared guidelines for an extensive world-wide risk management program, aimed at assessing, analyzing, evaluating the spectrum of possible and actual developments and — if necessary — converting these into corrective measures.

      Our risk management system for monitoring industry risks and individual markets relies in part on supervisory systems in our individual regions. Our management board receives status reports from the responsible risk managers twice yearly and immediate information regarding anticipated risks as the information is developed. We monitor and evaluate economic conditions in markets which are particularly important for us and overall global political, legal and economic developments and specific country risks. Our system covers industry risks and those of our operative and non-operative business. Our risk management system functions as part of our overall management information system, based on group-wide controlling and an internal monitoring system,

which provides early recognition of risks. Financial reports provide monthly and quarterly information, including deviations from budgets and projections in a relatively short period, which also serve to identify potential risks.

      As a company required to file reports under the Securities Exchange Act of 1934, we are subject to the provisions of the Sarbanes-Oxley Act of 2002. Section 404 of that act requires that we maintain internal controls over financial reporting, which is a process designed by, or under the supervision of, our chief executive and chief financial officers, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. Since the beginning of 2003, a project team has been documenting and evaluating our world-wide internal auditing and controls to ensure that our internal controls and accounting comply with applicable rules and regulations. Our management’s report on its review of the effectiveness of our internal accounting controls as of December 31, 2005 has been filed as an exhibit to this report.

      The functional capacity and effectiveness of our risk management system was audited as part of the audit of our annual financial statements for 2005, as required by German law. No special risks were ascertained in relation to our business as a whole, our internal organization or the external environment.

      Our operations are subject to extensive governmental regulation by virtually every country in which we operate including, most notably, in the U.S., at the federal, state and local levels. Although these regulations differ from country to country, in general, non-U.S. regulations are designed to accomplish the same objectives as U.S. regulations regarding the operation of dialysis clinics, laboratories and manufacturing facilities, the provision of quality health care for patients, the maintenance of occupational, health, safety and environmental standards and the provision of accurate reporting and billing for governmental payments and/or reimbursement. In the U.S., some states restrict ownership of health care providers by certain multi-level for-profit corporate groups or establish other regulatory barriers to the establishment of new dialysis clinics. Outside the U.S., each country has its own payment and reimbursement rules and procedures, and some countries prohibit ownership of health care providers or establish other regulatory barriers to direct ownership by foreign companies. In all jurisdictions, we work within the framework of applicable laws to establish alternative contractual arrangements to provide services to those facilities.

      Any of the following matters could have a material adverse effect on our business, financial condition and results of operations:

      We must comply with all U.S., German and other legal and regulatory requirements under which we operate, including the U.S. federal Medicare and Medicaid Fraud and Abuse Amendments of 1977, as amended, generally referred to as the “anti-kickback statute”, the federal False Claims Act, the federal restrictions on certain physician referrals, commonly known as the “Stark Law”, U.S. federal rules under the Health Insurance Portability and Accountability Act of 1996 that protect the privacy of patient medical records and prohibit inducements to patients to select a particular health care provider (commonly known as “HIPAA”) and other fraud and abuse laws and similar state statutes, as well as similar laws in other countries. Moreover, there can be no assurance that applicable laws, or the regulations thereunder, will not be amended, or that enforcement

agencies or the courts will not make interpretations inconsistent with our own, any one of which could have a material adverse effect on our business, reputation, financial condition and results. Sanctions for violations of these statutes may include criminal or civil penalties, such as imprisonment, fines or forfeitures, denial of payments, and suspension or exclusion from the Medicare and Medicaid programs. In the U.S., some of these laws have been broadly interpreted by a number of courts, and significant government funds and personnel have been devoted to their enforcement because such enforcement has become a high priority for the federal government and some states. Our company, and the health care industry in general, will continue to be subject to extensive federal, state and foreign regulation, the full scope of which cannot be predicted. In addition, the U.S. Congress and federal and state regulatory agencies continue to consider modifications to federal health care laws that may create further restrictions.

      Fresenius Medical Care Holdings has entered into a corporate integrity agreement with the U.S. government, which requires that Fresenius Medical Care Holdings staff and maintain a comprehensive compliance program, including a written code of conduct, training programs and compliance policies and procedures. The corporate integrity agreement requires annual audits by an independent review organization and periodic reporting to the government. The corporate integrity agreement permits the U.S. government to exclude Fresenius Medical Care Holdings and its subsidiaries from participation in U.S. federal health care programs and impose fines if there is a material breach of the agreement that is not cured by Fresenius Medical Care Holdings within thirty days after Fresenius Medical Care Holdings receives written notice of the breach.

      In the U.S. numerous regulatory bodies, including the Food and Drug Administration (“FDA”) and comparable state regulatory agencies impose requirements on certain of our subsidiaries as a manufacturer and a seller of medical products and supplies under their jurisdiction. We are required to register with the FDA as a device manufacturer. As a result, we are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements and other regulations. These regulations require us to manufacture products in accordance with Good Manufacturing Practices (“GMP”) and that we comply with FDA requirements regarding the design, safety, advertising, labeling, record keeping and distribution of our products. Further, we are required to comply with various FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved indications.

      If the FDA believes that a company is not in compliance with applicable regulations, it can issue a warning letter, issue a recall order, institute proceedings to detain or seize products, impose operating restrictions, enjoin future violations and assess civil penalties against a company, its officers or its employees and can recommend criminal prosecution to the Department of Justice.

      We cannot assure that all necessary regulatory approvals, including approvals for new products or product improvements, will be granted on a timely basis, if at all. Delays in or failure to receive approval, product recalls or warnings and other regulatory actions and penalties can materially affect operating results.

      In addition, in order to clinically test, produce and market certain medical products and other disposables (including hemodialysis and peritoneal dialysis equipment and solutions, dialyzers, bloodlines and other disposables) for human use, we must satisfy mandatory procedures and safety and efficacy requirements established by the FDA or comparable state and foreign governmental agencies. After approval or clearance to market is given, the FDA, upon the occurrence of certain events, has the power to withdraw the clearance or require changes to a device, its manufacturing process, or its labeling or may require additional proof that regulatory requirements have been met. Such rules generally require that products be approved by the FDA as safe and effective for their intended use prior to being marketed. Our peritoneal dialysis solutions have been designated as drugs by the FDA and, as such, are subject to additional FDA regulation under the Food, Drug and Cosmetic Act of 1938, as amended.

      Most countries maintain different regulatory regimes for pharmaceutical products and for medical devices. In almost every country, there are rules regarding the quality, effectiveness, and safety of products and regulating their testing, production, and distribution. Treaties or other international law and standards and guidelines under treaties or laws may supplement or supersede individual country regulations.

     Drugs. Some of our products, such as peritoneal dialysis solutions, are considered pharmaceuticals and are, therefore subject to the specific drug law provisions in the various countries. The European Union has issued a directive on pharmaceuticals, No. 65/65/EWG (January 26, 1965), as amended. Each member of the European Union is responsible for conforming its law to comply with this directive. In Germany the German Drug Law (Arzneimittelgesetz) (“AMG”), which implements European Union requirements, is the primary regulation applicable to pharmaceutical products.

      The provisions of the German Drug Law are comparable with the legal standards in other European countries. As in many other countries, the AMG provides that in principle a medicinal product may only be placed on the market if it has been granted a corresponding marketing authorization. Such marketing authorization is granted by the competent licensing authorities only if the quality, efficacy and safety of the medicinal product has been scientifically proven. The medicinal products marketed on the basis of a corresponding marketing authorization are subject to ongoing control by the competent authorities. The marketing authorization may also be subsequently restricted or made subject to specific requirements. It may be withdrawn or revoked if there was a reason for the refusal of the marketing authorization upon its grant or such a reason arises subsequently, or if the medicinal product is not an effective therapy or its therapeutic effect has been insufficiently proven according to the relevant state of scientific knowledge. Such a reason for refusal is, inter alia, found to exist if there is the well-founded suspicion that the medicinal product has not been sufficiently examined in accordance with the current state of scientific knowledge, that the medicinal product does not show the appropriate quality, or that there is the well-founded suspicion that the medicinal product, when properly used as intended, produces detrimental effects going beyond the extent justifiable according to the current state of knowledge of medicinal science. The marketing authorization can also be withdrawn or revoked in the case of incorrect or incomplete information supplied in the authorization documents, if the quality checks prescribed for the medicinal product were insufficient or have not been sufficiently carried out, or if the withdrawal or revocation is required to comply with a decision made by the European Commission or the Council of the European Union. Instead of a withdrawal or revocation, it is also possible to order the suspension of the marketing authorization for a limited period.

      The provisions of the AMG also contain special requirements for the manufacture of medicinal products. The production of medicinal products requires a corresponding manufacturing license which is granted by the competent authorities of the relevant Member State for a specific manufacturing facility and for specific medicinal products and forms of medicinal products. The manufacturing license is granted only if the manufacturing facility, production techniques and production processes comply with the principles and guidelines of good manufacturing practice (“GMP”) as well as the terms of the particular marketing authorization. A manufacturer of medicinal products must, inter alia, employ pharmacists, chemists, biologists, or physicians responsible for the quality, safety and efficacy of the medicinal products. The manufacturer must name several responsible persons: a Qualified Person possessing the expert knowledge specified by the AMG, a head of production, a head of quality control, and, if the manufacturer markets the medicinal products itself, a commissioner for the so-called graduated plan (Stufenplanbeauftragter) and an information officer. It is the responsibility of the Qualified Person to ensure that each batch of the medicinal products is produced and examined in compliance with the statutory provisions of the AMG. The commissioner for the graduated plan must, among other things, collect and assess any reported risks associated with the medicinal products and coordinate any necessary measures. The information officer is in charge of the scientific information relating to the medicinal products. All these persons may be held personally liable under German criminal law for any breach of the AMG.

      International guidelines also govern the manufacture of medicinal products and, in many cases, overlap with national requirements. In particular, the Pharmaceutical Inspection Convention (“PIC”) an international treaty,

contains rules binding most countries in which medicinal products are manufactured. Among other things, the PIC establishes requirements for GMP which are then adopted at the national level. Another international standard, which is non-binding for medicinal products, is the ISO 9000-9004 system for assuring quality management system requirements. This system has a broader platform than GMPs, which are more detailed. Compliance with the ISO Code entitles the manufacturer to utilize the CE certification of quality control. This system is primarily acknowledged outside the field of medicinal products, for example with respect to medical devices.

     Medical Devices. In the past, medical devices were subject to less stringent regulation than medicinal products in some countries. In the last decade, however, statutory requirements have been increased. In the European Union, the requirements to be satisfied by medical devices are laid down in three European directives to be observed by all EU Member States, all Member States of the European Economic Area (EEA), as well as all future accession states: (1) Directive 90/385/EEC of 20 June 1990 relating to active implantable medical devices (“AIMDs”), as last amended (“AIMD Directive”), (2) Directive 93/42/EEC of 14 June 1993 relating to medical devices, as last amended (“MD Directive”), (3) Directive 98/79/EC of 27 October 1998 relating to in vitro diagnostic medical devices as last amended (“IVD Directive”). In addition, Directive 2001/95/EC of 3 December 2001, as last amended, concerning product safety should be noted. With regard to Directive 93/42/EEC, the Commission submitted a consultation draft on 5 April 2005. The Commission’s opinion on the consultations is supposed to be published in late 2005. The amendments are intended to achieve improvements, for instance in the following areas: clinical assessment by specification of the requirements in more detail; monitoring of the devices after their placing on the market; and decision making by enabling the Commission to make binding decisions in case of contradictory opinions of states regarding the classification of a product as a medical device.

      According to the directives relating to medical devices, the so-called CE mark (the abbreviation of Conformité Européenne signifying that the device complies with all applicable requirements of the European Union) shall serve as a general product passport for all Member States of the EU and the EEA. Upon receipt of a European Union certificate for the quality management system for a particular facility, we are able to mark products produced or developed in that facility as being in compliance with the EU requirements. A manufacturer having a European Union-certified full quality management system has to declare and document conformity of its products to the harmonized European directive. If able to do so, the manufacturer may put a “CE” mark on the products. Products subject to these provisions that do not bear the “CE” mark cannot be imported, sold or distributed within the European Union.

      The right to affix the CE mark is granted to any manufacturer who has observed the conformity assessment procedure prescribed for the relevant medical device and submitted the EU conformity declaration before placing the medical device on the market. The conformity assessment procedures were standardized by Council Decision 93/465/EEC of 22 July 1993, which established modules for the various phases of the conformity assessment procedures intended to be used in the technical harmonization directives and the rules for the affixing and use of the CE conformity mark. The conformity assessment modules to be used differ depending on the class or type of the medical device to be placed on the market. The classification rules for medical devices are, as a general rule, based upon the potential risk of causing injury to the human body. Annex IX to the MD Directive (making a distinction between four product classes I, IIa, IIb, and III) and Annex II to the IVD Directive (including a list of the products from lists A and B) contain classification criteria for products and product lists that are, in turn, assigned to specific conformity assessment modules. AIMDs represent a product class of their own and are subject to the separate AIMD Directive. Special rules apply, for example, to custom-made medical devices, medical devices manufactured in-house, medical devices intended for clinical investigation or in vitro diagnostic medical devices intended for performance evaluation, as well as for diagnostic medical devices for in-house use, combination devices and products related to medical devices.

      The conformity assessment procedures for Class I devices with a low degree of invasiveness in the human body (e.g. devices without a measuring function that are not subject to any sterilization requirements), can be made under the sole responsibility of the manufacturer by submitting a EU conformity declaration (a so-called self-certification, or self-declaration). For Class IIa devices, the participation of a so-called “Notified Body” is binding for the production phase. Devices of classes IIb and III involving a high risk potential are subject to inspection by the Notified Body not only in relation to their manufacture (as for class IIa devices), but also in

relation to their specifications. Class III is reserved for the most critical devices the marketing of which is subject to an explicit prior authorization with regard to their conformity. In this risk category, the manufacturer can make use of several different conformity assessment modules.

      To maintain the high quality standards and performance of our operations, we have subjected our entire European business to the most comprehensive procedural module, which is also the fastest way to launch a new product in the European Union. This module requires the certification of a full quality management system by a Notified Body charged with supervising the quality management system.

      Our Series 4008, 4008B, 4008E dialysis machines and their therapy modifications, our PD-NIGHT cycler, and our other active medical devices distributed in the European market, as well as our dialysis filters and dialysis tubing systems and accessories, all bear the “CE” mark. We expect to continue to obtain additional certificates for newly developed products or product groups.

      The Company uses substances regulated under U.S. environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify, we believe the ongoing impact of compliance with environmental protection laws and regulations will not have a material impact on the Company’s financial position or results of operations.

      The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) subjects virtually all clinical laboratory testing facilities, including ours, to the jurisdiction of the Department of Health and Human Services. CLIA establishes national standards for assuring the quality of laboratories based upon the complexity of testing performed by a laboratory. Certain of our operations are also subject to federal laws governing the repackaging and dispensing of drugs and the maintenance and tracking of certain life sustaining and life-supporting equipment.

      Our operations are subject to various U.S. Department of Transportation, Nuclear Regulatory Commission and Environmental Protection Agency requirements and other federal, state and local hazardous and medical waste disposal laws. As currently in effect, laws governing the disposal of hazardous waste do not classify most of the waste produced in connection with the provision of dialysis, or laboratory services as hazardous, although disposal of nonhazardous medical waste is subject to specific state regulation. Our operations are also subject to various air emission and wastewater discharge regulations.

      Federal, state and local regulations require us to meet various standards relating to, among other things, the management of facilities, personnel qualifications and licensing, maintenance of proper records, equipment, quality assurance programs, the operation of pharmacies, and dispensing of controlled substances. All of our operations in the U.S. are subject to periodic inspection by federal and state agencies and other governmental authorities to determine if the operations, premises, equipment, personnel and patient care meet applicable standards. To receive Medicare reimbursement, our dialysis centers, renal diagnostic support business and laboratories must be certified by the Centers for Medicare and Medicaid Services (“CMS”). All of our dialysis centers, and laboratories that furnish Medicare services have the required certification.

      Certain of our facilities and certain of their employees are also subject to state licensing statutes and regulations. These statutes and regulations are in addition to federal and state rules and standards that must be met to qualify for payments under Medicare, Medicaid and other government reimbursement programs. Licenses and approvals to operate these centers and conduct certain professional activities are customarily subject to periodic renewal and to revocation upon failure to comply with the conditions under which they were granted.

      Occupational Safety and Health Administration (“OSHA”) regulations require employers to provide employees who work with blood or other potentially infectious materials with prescribed protections against blood-borne and air-borne pathogens. The regulatory requirements apply to all health care facilities, including

dialysis centers and laboratories, and require employers to make a determination as to which employees may be exposed to blood or other potentially infectious materials and to have in effect a written exposure control plan. In addition, employers are required to provide hepatitis B vaccinations, personal protective equipment, blood-borne pathogens training, post-exposure evaluation and follow-up, waste disposal techniques and procedures, engineering and work practice controls and other OSHA-mandated programs for blood-borne and air-borne pathogens.

      Some states in which we operate have certificate of need (“CON”) laws that require any person or entity seeking to establish a new health care service or to expand an existing service to apply for and receive an administrative determination that the service is needed. We currently operate in 13 states, as well as the District of Columbia and Puerto Rico that have CON laws applicable to dialysis centers. These requirements could, as a result of a state’s internal determination of its dialysis services needs, prevent entry to new companies seeking to provide services in these states, and could constrain our ability to expand our operations in these states.

      Most countries outside of the U.S. regulate operating conditions of dialysis clinics and hospitals and the manufacturing of dialysis products, medicinal products and medical devices.

      We are subject to a broad spectrum of regulation in almost all countries. Our operations must comply with various environmental and transportation regulations in the various countries in which we operate. Our manufacturing facilities and dialysis clinics are also subject to various standards relating to, among other things, facilities, management, personnel qualifications and licensing, maintenance of proper records, equipment, quality assurance programs, the operation of pharmacies, the protection of workers from blood-borne diseases and the dispensing of controlled substances. All of our operations are subject to periodic inspection by various governmental authorities to determine if the operations, premises, equipment, personnel and patient care meet applicable standards. Our dialysis clinic operations and our related activities generally require licenses, which are subject to periodic renewal and may be revoked for violation of applicable regulatory requirements.

      In addition, many countries impose various investment restrictions on foreign companies. For instance, government approval may be required to enter into a joint venture with a local partner. Some countries do not permit foreign investors to own a majority interest in local companies or require that companies organized under their laws have at least one local shareholder. Investment restrictions therefore affect the corporate structure, operating procedures and other characteristics of our subsidiaries and joint ventures in these and other countries.

      We believe our facilities are currently in compliance in all material respects with the applicable national and local requirements in the jurisdictions in which they operate.

      As a global dialysis care provider and supplier of dialysis and products, we are represented in more than 100 countries throughout the world facing the challenge of meeting the needs of patients in very different economic environments and health care systems.

      The health care systems and rules for the reimbursement of the treatment of patients suffering from ESRD vary in the individual countries. In general, the government, frequently in coordination with private insurers, is responsible for the health care system by financing payments by taxes and other sources of income, social security contributions or a combination of such sources.

      However, in a large number of developing countries, the government or charitable institutions grant only minor aid so that dialysis patients must bear all or a large part of their treatment expenses themselves. In some countries, dialysis patients do not receive treatment on a regular basis, but only if and to the extent available funds so allow.

     Dialysis Services. Our dialysis centers provide outpatient hemodialysis treatment and related services for ESRD patients. In addition, some of the Company’s centers offer services for the provision of peritoneal dialysis and hemodialysis treatment at home, and dialysis for hospitalized patients.

      The Medicare program is the primary source of Dialysis Services revenues from dialysis treatment. For example, in 2004, approximately 58% of Dialysis Services revenues resulted from Medicare’s ESRD program. As described below, Dialysis Services is reimbursed by the Medicare program in accordance with the Composite Rate for certain products and services rendered at our dialysis centers. As described hereinafter, other payment methodologies apply to Medicare reimbursement for other products and services provided at our dialysis centers and for products (such as those sold by us) and support services furnished to ESRD patients receiving dialysis treatment at home (such as those of Dialysis Products). Medicare reimbursement rates are fixed in advance and are subject to adjustment from time to time by the U.S. Congress. Although this form of reimbursement limits the allowable charge per treatment, it provides us with predictable per treatment revenues.

      Certain items and services that we furnish at our dialysis centers are not included in the Composite Rate and are eligible for separate Medicare reimbursement, typically on the basis of established fee schedule amounts. Such items are principally drugs such as EPO vitamin D and iron.

      Medicare payments are subject to change by legislation, regulations and pursuant to deficit reduction measures. The Composite Rate was unchanged from commencement of the ESRD program in 1972 until 1983. From 1983 through December 1990, numerous congressional actions resulted in a net reduction of the average reimbursement rate from $138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress increased the ESRD reimbursement rate, effective January 1, 1991, to an average rate of $126 per treatment. Effective January 1, 2000, the reimbursement rate was increased by 1.2%. In December 2000 an additional increase of 2.4% was approved for the year 2001. Accordingly, there was a 1.2% reimbursement increase on January 1, 2001. A second increase was delayed until April 1, 2001, when rates were increased 1.6% to make up for the delay.

      On December 8, 2003, the Medicare Prescription Drug, Modernization and Improvement Act of 2003 was enacted (the “Medicare Modernization Act”). This law makes several significant changes to U.S. government payment for dialysis services and pharmaceuticals. First, it increased the composite rate for renal dialysis facilities by 1.6% on January 1, 2005. Second, effective January 1, 2005, payments for ten separately billable dialysis-related medications were based on average acquisition cost (as determined by the OIG and updated by Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services (“CMS”) and payments for the remaining separately billable dialysis-related medications were based on average sales price (“ASP”) plus 6% (ASP is defined in the law as a manufacturer’s ASP to all purchasers in a calendar quarter per unit of each drug and biological sold in that same calendar quarter, excluding sales exempt from best price and nominal price sales and including all discounts, chargebacks and rebates). Third, the difference between the determined acquisition cost-based reimbursement and what would have been received under the current average wholesale price-based (“AWP-based”) reimbursement methodology was added to the composite rate. Fourth, effective April 1, 2005, providers received higher composite rate payments for certain patients based on their age, body mass index and body surface area. Fifth, beginning in 2006, the Secretary of the Department of Health and Human Services (the “Secretary”) was authorized to set payment for all separately billed drugs and biologicals at either acquisition cost or average sales price. Lastly, the Secretary was required to establish a three-year demonstration project to test the use of a fully case-mix adjusted payment system for ESRD services, beginning January 1, 2006. Under this project, separately billable drugs and biologicals and related clinical laboratory tests would be bundled into the facility composite rate. Participating facilities would receive an additional 1.6% composite rate increase.

      On November 2, 2005 CMS released the final physician fee schedule for calendar year (“CY”) 2006. The key provisions affecting ESRD facilities include revisions to the pricing methodology for separately billable drugs, revisions to the drug add-on payment methodology and calculation of the drug add-on for CY 2006, and revisions to the geographic adjustment to the composite rate. In addition, CMS has decided to maintain the case-mix adjustments finalized in last year’s rule, as well as the base composite rate. For CY 2006, CMS has decided

to pay for separately billable drugs and biologicals provided by both hospital-based and independent dialysis facilities using the average sales price plus six percent methodology (“ASP+6%”). According to CMS, the drug add-on adjustment for 2006 will be 14.7%. CMS is also implementing several changes to the ESRD wage index. First, over a four-year transition period, CMS will apply the Office of Management and Budget’s revised core-based statistical area(CBSA)-baseddefinitions as the basis for revising the urban/ rural locales and corresponding wage index values reflected in the composite rate. Since the Medicare Modernization Act requires that any revisions to the ESRD composite rate payment system be budget neutral, CMS will apply the budget neutrality adjustment factor directly to the revised ESRD wage index values (rather than the base composite payment rates). CMS estimates the overall impact of the changes to be a 1.9% increase for independent facilities. The Company’s estimates of the impact of such changes on its business are consistent with the CMS calculations.

      The Deficit Reduction Act (“DRA”) of February 1, 2006, further increased the composite rate by an additional 1.6% effective January 1, 2006. To account for this increase to the composite rate and to preserve the originally intended economic impact of the Medicare Modernization Act, the drug add on percentage was reduced to 14.5%.

      We are unable to predict what, if any, future changes may occur in the rate of Medicare reimbursement. Any significant decreases in the Medicare reimbursement rates could have a material adverse effect on our provider business and, because the demand for products is affected by Medicare reimbursement, on our products business. Increases in operating costs that are affected by inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, also may adversely affect our business and results of operations.

      For Medicare-primary patients, Medicare is responsible for payment of 80% of the Composite Rate set by CMS for dialysis treatments and the patient or third-party insurance payors, including employer-sponsored health insurance plans, commercial insurance carriers and the Medicaid program, are responsible for paying any co-payment amounts for approved services not paid by Medicare (typically the annual deductible and 20% co-insurance), subject to the specific coverage policies of such payors. Each third-party payor, including Medicaid, makes payment under contractual or regulatory reimbursement provisions which may or may not cover the full 20% co-payment or annual deductible. Where the patient has no third-party insurance or the third party insurance does not cover the co-payment or deductible, the patient is responsible for paying the co-payments or the deductible, which we frequently do not fully collect despite reasonable collection efforts. Under an advisory opinion from the Office of the Inspector General, subject to specified conditions, we and other similarly situated providers may make contributions to a non-profit organization that has agreed to make premium payments for supplemental medical insurance and/or medigap insurance on behalf of indigent ESRD patients, including some of our patients.

     Laboratory Tests. Spectra Renal Management obtains a substantial portion of its net revenue from Medicare, which pays for clinical laboratory services provided to dialysis patients in two ways.

      First, payment for certain routine tests is included in the Composite Rate paid to our dialysis centers. As to such services, the dialysis centers obtain the services from a laboratory and pay the laboratory for such services. In accordance with industry practice, Spectra Renal Management usually provides such testing services under capitation agreements with its customers pursuant to which it bills a fixed amount per patient per month to cover the laboratory tests included in the Composite Rate at the designated frequencies. In addition, in compliance with our Corporate Integrity Agreement, we provide an annual report on the costs associated with the composite rate tests, and have established that our Composite Rate is above those costs.

      Second, laboratory tests performed by Spectra Renal Management for Medicare beneficiaries that are not included in the Composite Rate are separately billable directly to Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts, which are limited by national ceilings on payment rates, called National Limitation Amounts (“NLAs”). Congress has periodically reduced the fee schedule rates and the NLAs, with the most recent reductions in the NLAs occurring in January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a five-year freeze on the inflation updates based on the Consumer Price Index (CPI) for 2004-2008.

     Erythropoetin (EPO). EPO is used for anemia management of patients with renal disease. The administration of EPO is separately billable under the Medicare program, and accounts for a significant portion of our dialysis revenues.

      Anemia severity is commonly monitored by measuring a patient’s hematocrit, a simple blood test that measures the proportion of red blood cells in a patient’s whole blood. Anemia may also be measured by evaluating a patient’s hemoglobin level. The amount of EPO that a patient requires varies by the several factors, including the severity of a patient’s anemia.

      On November 9, 2005, CMS announced a new national monitoring policy for claims for Epogen and Aranesp for ESRD patients treated in renal dialysis facilities. Previously, claims for Epogen reimbursement were subject to focused CMS review when the ESRD patient’s hematocrit level reached 37.5 or more. In the new monitoring policy, CMS recognized that there is considerable natural variability in individual patient hematocrit levels which makes it difficult to maintain a hematocrit within an narrow range. Consequently, CMS will not initiate monitoring of claims until the patient’s hematocrit level reaches 39.0 (hemoglobin of 13.0). Under the new monitoring policy, for services furnished on or after April 1, 2006, CMS will expect a 25 percent reduction in the dosage of Epogen or Aranesp administered to ESRD patients whose hematocrit exceeds 39.0 (or hemoglobin exceeds 13.0). If the dosage is not reduced by 25 percent, payment will be made by CMS as if the dosage reduction had occurred. This payment reduction may be appealed under the normal appeal process. In addition, effective April 1, 2006, CMS will limit Epogen and Aranesp reimbursement to a maximum per patient per month aggregate dose of 500,000 IU for Epogen and 1500 mcg for Aranesp. CMS’s new Epogen and Aranesp monitoring policy is expected to have a slightly negative impact on our operating results.

      In addition, any of the following changes could adversely affect our business, and results of operations, possibly materially:

     Coordination of Benefits. Medicare entitlement begins for most patients in the fourth month after the initiation of chronic dialysis treatment at a dialysis center. During the first three months, considered to be a waiting period, the patient or patient’s insurance, Medicaid or a state renal program are responsible for payment.

      Patients who are covered by Medicare and are also covered by an employer group health plan (“EGHP”) are subject to a 30-month coordination period during which the EGHP is the primary payor and Medicare the secondary payor. During this coordination period the EGHP pays a negotiated rate or in the absence of such a rate, our standard rate or a rate defined by its plan documents. The EGHP payments are generally higher than the Medicare Composite Rate. EGHP insurance, when available, will therefore generally cover as the primary payor a total of 33 months, the 3-month waiting period plus the 30-month coordination period. The recent proposal included in the Bush administration budget to extend the coordination period to five years would generally be favorable to us and other dialysis providers since it would extend the period during which providers would receive the generally higher payments by EGHPs prior to the commencement of primary Medicare coverage for dialysis treatment. However, the proposal in the same budget to eliminate Medicare bad-debt recoveries if adopted as proposed, would have a material adverse impact on our operating results. There can be no assurance, however, that either proposal will be adopted as proposed, or at all.

     Possible Changes in Medicare. Legislation or regulations may be enacted in the future that could substantially modify or reduce the amounts paid for services and products offered by us and our subsidiaries. It is also possible that statutes may be adopted or regulations may be promulgated in the future that impose additional eligibility requirements for participation in the federal and state health care programs. Such new legislation or

regulations could, depending upon the final form of such regulation, have a positive or adverse affect our businesses and results of operations, possibly materially.

      As a global company delivering dialysis care and dialysis products in more than 100 countries worldwide, we face the challenge of addressing the needs of dialysis patients in widely varying economic and health care environments.

      Health care systems and reimbursement structures for ESRD treatment vary by country. In general, the government pays for health care and finances its payments through taxes and other sources of government income, from social contributions, or a combination of those sources. However, not all health care systems provide for dialysis treatment. In many developing countries, only limited subsidies from government or charitable institutions are available, and dialysis patients must finance all or substantially all of the cost of their treatment. In some countries patients in need of dialysis do not receive treatment on a regular basis but rather when the financial resources allow it.

      In the major European and British Commonwealth countries, health care systems are generally based on one of two models. The German model is based on mandatory employer and employee contributions dedicated to health care financing. The British model provides a national health care system funded by taxes. Within these systems, provision for the treatment of dialysis has been made either through allocation of a national budget or a billing system reimbursing on a fee-for-service basis. The health care systems of countries such as Japan, France, Belgium, Austria and the Netherlands are based on the German model. Countries like Canada, Denmark, Sweden and Italy established their national health services using the British model.

      Ownership of health care providers and, more specifically dialysis care providers, varies within the different systems and from country-to-country. In Europe almost 60% of the clinics providing dialysis care and services are publicly owned, more than 30% are privately owned and approximately 10% belong to a health care organization. It should be noted that health care organizations treating a significant patient population operate only in Germany and France. Publicly operated clinics care for almost 100% of the dialysis populations in Canada and more than 85% in Australia. Within Europe, nearly 100% of the dialysis population is treated in public clinics in the Netherlands, Finland and Belgium and to more than 80% in the United Kingdom while the majority of dialysis clinics are privately owned in Spain, Hungary and Portugal.

      In Latin America privately owned clinics predominate, constituting more than 70% of all clinics providing dialysis care while in Asia, with the exception of Japan, publicly owned clinics are predominant. In the U.S., less than 5% of all dialysis clinics are publicly operated and in Japan only approximately 15%. Unlike the U.S., however, Japan has a premium-based, mandatory social insurance system, and the structure of its health care system is more closely comparable to the German system.

      Financing policies for ESRD treatment also differ from country-to-country. In countries with a health care system that includes provisions for ESRD patient care, treatment is generally financed through a government budget allocation or on a fee-for-service basis. A few European countries have introduced payment systems based on fixed fees charged according to the disease related group, an arrangement similar to capitation. This basis for payment was adopted from the United States, where it was implemented as a method to curtail costs. Germany has introduced a payment system that, depending on the patient’s age, provides for a weekly fixed lump-sum payment independent of treatment modality.

      Treatment components included in the cost of dialysis may vary from country-to-country or even within countries, depending on the structure and cost allocation principles. Where treatment is reimbursed on a fee-for-service basis, reimbursement rates are sometimes allocated in accordance with the type of treatment performed. We believe that it is not appropriate to calculate a global reimbursement amount, because the services and costs for which reimbursement is provided in any such global amount would be likely to bear little relation to the actual reimbursement system in any one country. Generally, in countries with established dialysis programs, reimbursements range from $100 to more than $300 per treatment. However, a comparison from country to

country would not be meaningful if made in the absence of a detailed analysis of the cost components reimbursed, services rendered and the structure of the dialysis clinic in each country being compared.

      Health care expenditures are consuming an ever-increasing portion of gross domestic product worldwide. In the developed economies of Europe, Asia and Latin America, health care spending is in the range of 5%-14% of gross domestic product. In many countries, dialysis costs consume a disproportionately high amount of health care spending and these costs may be considered a target for implementation of cost containment measures. Today, there is increasing awareness of the correlation between the quality of care delivered in the dialysis unit and the total health care expenses incurred by the dialysis patient. Accordingly, developments in reimbursement policies might include higher reimbursement rates for practices which are believed to improve the overall state of health of the ESRD patient and reduce the need for additional medical treatment.

      Some of our operations are subject to federal and state statutes and regulations governing financial relationships between health care providers and potential referral sources and reimbursement for services and items provided to Medicare and Medicaid patients. Such laws include the anti-kickback statute, health care fraud statutes, the False Claims Act, the Stark Law, other federal fraud and abuse laws and similar state laws. These laws apply because our Medical Directors and other physicians with whom we have financial relationships refer patients to, and order diagnostic and therapeutic services from, our dialysis centers and other operations. As is generally true in the dialysis industry, at each dialysis facility a small number of physicians account for all or a significant portion of the patient referral base. An ESRD patient generally seeks treatment at a center that is convenient to the patient and at which the patient’s nephrologist has staff privileges.

      The U.S. Government, many individual States and private third-party risk insurers have declared the struggle against waste, misuse and fraud in the health care sector to be one of their primary tasks by making more and more resources available for this purpose. Therefore, the Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services and other enforcement agencies increasingly review agreements between physicians and service providers with regard to potential breaches of the Federal fraud abuse laws.

      The federal anti-kickback statute establishes criminal prohibitions against and civil penalties for the knowing and willful solicitation, receipt, offer or payment of any remuneration, whether direct or indirect, in return for or to induce the referral of patients or the ordering or purchasing of items or services payable in whole or in part under Medicare, Medicaid or other federal health care programs. Sanctions for violations of the anti-kickback statute include criminal and civil penalties, such as imprisonment or criminal fines of up to $25,000 per violation, and civil penalties of up to $50,000 per violation, and exclusion from the Medicare or Medicaid programs and other federal programs. In addition, certain provisions of federal criminal law that may be applicable provide that if a corporation is found guilty of a criminal offense it may be fined no more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense.

      Some states also have enacted statutes similar to the anti-kickback statute, which may include criminal penalties, applicable to referrals of patients regardless of payor source, and may contain exceptions different from state to state and from those contained in the federal anti-kickback statute.

      The federal False Claims Act (the “False Claims Act”) imposes civil penalties for knowingly making or causing to be made false claims with respect to governmental programs, such as Medicare and Medicaid, for services billed but not rendered, or for misrepresenting actual services rendered, in order to obtain higher reimbursement. Moreover, private individuals may bring qui tam or “whistle blower” suits against providers under the False Claims Act, which authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. A few federal district courts have interpreted the False Claims Act as applying to claims for reimbursement that

violate the anti-kickback statute or federal physician self-referral law under certain circumstances. The False Claims Act generally provides for the imposition of civil penalties of $5,500 to $11,000 per claim and for treble damages, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed to be a separate violation of the False Claims Act. Criminal provisions that are similar to the False Claims Act provide that if a corporation is convicted of presenting a claim or making a statement that it knows to be false, fictitious or fraudulent to any federal agency it may be fined not more than twice any pecuniary gain to the corporation, or, in the alternative, no more than $500,000 per offense. Some states also have enacted statutes similar to the False Claims Act which may include criminal penalties, substantial fines, and treble damages.

      HIPAA was enacted in August 1996 and expanded federal fraud and abuse laws by increasing their reach to all federal health care programs, establishing new bases for exclusions and mandating minimum exclusion terms, creating an additional exception to the anti-kickback penalties for risk-sharing arrangements, requiring the Secretary of Health and Human Services to issue advisory opinions, increasing civil money penalties to $10,000 (formerly $2,000) per item or service and assessments to three times (formerly twice) the amount claimed, creating a specific health care fraud offense and related health fraud crimes, and expanding investigative authority and sanctions applicable to health care fraud. It also prohibits a provider from offering anything of value which the provider knows or should know would be likely to induce the patient to select or continue with the provider.

      HIPAA included a health care fraud provision which prohibits knowingly and willfully executing a scheme or artifice to defraud any “health care benefit program,” which includes any public or private plan or contract affecting commerce under which any medical benefit, item, or service is provided to any individual, and includes any individual or entity who is providing a medical benefit, item, or service for which payment may be made under the plan or contract. Penalties for violating this statute include freezing of assets and forfeiture of property traceable to commission of a health care fraud.

      HIPAA regulations establish national standards for certain electronic health care transactions, the use and disclosure of certain individually identifiable patient health information, and the security of the electronic systems maintaining this information. These are commonly known as the HIPAA transaction and code set standards, privacy standards, and security standards. Health insurance payers and healthcare providers like us must comply with the HIPAA standards. Violations of these HIPAA standards may include civil money penalties and potential criminal sanctions.

      The Balanced Budget Act of 1997 (the “BBA”) contained material adjustments to both the Medicare and Medicaid programs, as well as further expansion of the federal fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for violations of the federal anti-kickback statute whereby violations will result in damages equal to three times the amount involved as well as a penalty of $50,000 per violation. In addition, the new provisions expanded the exclusion requirements so that any person or entity convicted of three health care offenses is automatically excluded from federally funded health care programs for life. Individuals or entities convicted of two offenses are subject to mandatory exclusion of 10 years, while any provider or supplier convicted of any felony may be denied entry into the Medicare program by the Secretary of HHS if deemed to be detrimental to the best interests of the Medicare program or its beneficiaries.

      The BBA also provides that any person or entity that arranges or contracts with an individual or entity that has been excluded from a federally funded health care program will be subject to civil monetary penalties if the individual or entity “knows or should have known” of the sanction.

      The original Stark Law, known as “Stark I” and enacted as part of the Omnibus Budget Reconciliation Act (“OBRA”) of 1989, prohibits a physician from referring Medicare patients for clinical laboratory services to

entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies.

      Sanctions for violations of the Stark Law may include denial of payment, refund obligations, civil monetary penalties and exclusion of the provider from the Medicare and Medicaid programs. The Stark Law prohibits the entity receiving the referral from filing a claim or billing for services arising out of the prohibited referral.

      Provisions of OBRA 93, known as “Stark II,” amended Stark I to revise and expand upon various statutory exceptions, to expand the services regulated by the statute to a list of “Designated Health Services,” and expanded the reach of the statute to the Medicaid program. The provisions of Stark II generally became effective on January 1, 1995, with the first phase of Stark II regulations finalized on January 4, 2001. Most portions of the first phase regulations became effective in 2002. The additional Designated Health Services include: physical therapy, occupational therapy and speech language pathology services; radiology and certain other imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The first phase of the final regulations implementing the Stark Law contains an exception for EPO and certain other dialysis-related outpatient prescription drugs furnished in or by an ESRD facility under many circumstances. In addition, the regulations made clear that services reimbursed by Medicare to a dialysis facility under the ESRD composite rate do not implicate the Stark Law. Further, the final Phase I regulations also adopted a definition of durable medical equipment which effectively excludes ESRD equipment and supplies from the category of Designated Health Services. Phase II of the final regulations to the Stark Law was released on March 26, 2004, and became effective on July 26, 2004. This phase of the regulations finalized all of the compensation exceptions to the Stark Law, including those for “personal services arrangements” and “indirect compensation arrangements.” In addition, Phase II revised the exception for EPO and certain other dialysis-related outpatient prescription drugs furnished in or by an ESRD facility to include certain additional drugs.

      Several states in which we operate have enacted self-referral statutes similar to the Stark Law. Such state self-referral laws may apply to referrals of patients regardless of payor source and may contain exceptions different from each other and from those contained in the Stark Law.

      Our operations are also subject to a variety of other federal and state fraud and abuse laws, principally designed to ensure that claims for payment to be made with public funds are complete, accurate and fully comply with all applicable program rules.

      The civil monetary penalty provisions are triggered by violations of numerous rules under the Medicare statute, including the filing of a false or fraudulent claim and billing in excess of the amount permitted to be charged for a particular item or service. Violations may also result in suspension of payments, exclusion from the Medicare and Medicaid programs, as well as other federal health care benefit programs, or forfeiture of assets.

      In addition to the statutes described above, other criminal statutes may be applicable to conduct that is found to violate any of the statutes described above.

      Health care reform is considered by many countries to be a national priority. In the U.S., members of Congress from both parties and officials from the executive branch continue to consider many health care proposals, some of which are comprehensive and far-reaching in nature. Several states are also currently considering health care proposals. We cannot predict what additional action, if any, the federal government or any state may ultimately take with respect to health care reform or when any such action will be taken. Health care reform may bring radical changes in the financing and regulation of the health care industry, which could have a material adverse effect on our business and the results of our operations.

      The following chart shows our organizational structure and our significant subsidiaries. Fresenius Medical Care Holdings, Inc. conducts its business as “Fresenius Medical Care North America.”

      The table below describes our principal facilities. We do not own the land and buildings comprising our principal facilities in Germany. Rather, we lease those facilities on a long-term basis from Fresenius AG or one of its affiliates. This lease is described under “Item 7.B. Related Party Transactions — Real Property Lease.”

      We lease most of our dialysis clinics, manufacturing, laboratory, warehousing and distribution and administrative and sales facilities in the U.S. and foreign countries on terms which we believe are customary in the industry. We own those dialysis clinics and manufacturing facilities that we do not lease.

      For information regarding plans to expand our facilities and related capital expenditures, see “Item 4.A. History and Development of the Company — Capital Expenditures.”

      Not applicable.

      You should read the following discussion and analysis of the results of operations of Fresenius Medical Care AG & Co. KGaA and its subsidiaries in conjunction with our historical consolidated financial statements and related notes contained elsewhere in this report. Some of the statements contained below, including those concerning future revenue, costs and capital expenditures and possible changes in our industry and competitive and financial conditions include forward-looking statements. We made these forward-looking statements based on our management’s expectations and beliefs concerning future events which may affect us, but we cannot assure that such events will occur or that the results will be as anticipated. Because such statements involve risks and uncertainties, actual results may differ materially from the results which the forward-looking statements express or imply. Such statements include the matters that we described in the discussion in this report entitled “Forward-Looking Statements.”

      Our business is also subject to other risks and uncertainties that we describe from time to time in our public filings. Developments in any of these areas could cause our results to differ materially from the results that we or others have projected or may project.

      The Company’s reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that are the basis for our financial statements. The critical accounting policies, the judgments made in the creation and application of these policies, and the sensitivities of reported results to changes in accounting policies, assumptions and estimates are factors to be considered along with the Company’s financial statements, and the discussion in “Results of Operations”.

      The growth of our business through acquisitions has created a significant amount of intangible assets, including goodwill, trade names and management contracts. At December 31, 2005, the carrying amount of goodwill amounted to $3,457 million and non-amortizable intangible assets amounted to $439 million representing in total approximately 49% of our total assets.

      In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 Goodwill and Other Intangible Assets, we perform an impairment test of goodwill and non-amortizable intangible assets at least once a year for each reporting unit, or if we become aware of events that occur or if circumstances change that would indicate the carrying value might be impaired (See also Note 1g) in our consolidated financial statements.

      To comply with the provisions of SFAS No. 142, the fair value of the reporting unit is compared to the reporting unit’s carrying amount. We estimate the fair value of each reporting unit using estimated future cash flows for the unit discounted by a weighted average cost of capital specific to that unit. Estimated cash flows are based on our budgets for the next three years, and projections for the following years based on an expected growth rate. The growth rate is based on industry and internal projections. The discount rates reflect any inflation in local cash flows and risks inherent to each reporting unit.

      If the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the fair value of the reporting unit’s goodwill to the carrying value of its goodwill. If the fair value of the goodwill is less than its carrying value, the difference is recorded as an impairment.

      A prolonged downturn in the healthcare industry with lower than expected increases in reimbursement rates and/or higher than expected costs for providing healthcare services and for procuring and selling products could adversely affect our estimated future cashflows. Future adverse changes in a reporting unit’s economic environment could affect the discount rate. A decrease in our estimated future cash flows and/or a decline in the

reporting units economic environment could result in impairment charges to goodwill and other intangible assets which could materially and adversely affect our future financial position and operating results.

      We are party to litigation and subject to investigations relating to a number of matters as described in Note 18 “Legal Proceedings” in our Consolidated Financial Statements. The outcome of these matters may have a material effect on our financial position, results of operations or cash flows.

      We regularly analyze current information including, as applicable, our defenses and we provide accruals for probable contingent losses including the estimated legal expenses to resolve the matters. We use the resources of our internal legal department as well as external lawyers for the assessment. In making the decision regarding the need for loss accrual, we consider the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss.

      The filing of a suit or formal assertion of a claim or assessment, or the disclosure of any such suit or assertion, does not automatically indicate that accrual of a loss may be appropriate.

      Trade accounts receivable are a significant asset of ours and the allowance for doubtful accounts is a significant estimate made by management. Trade accounts receivable were $1,470 million and $1,463 million at December 31, 2005 and 2004, respectively, net of allowances. The allowance for doubtful accounts was $177 million and $180 million at December 31, 2005 and 2004, respectively. The majority of our receivables relates to our dialysis service business in North America.

      Dialysis care revenues are recognized and billed at amounts estimated to be receivable under reimbursement arrangements with third party payors. Medicare and Medicaid programs are billed at pre-determined net realizable rates per treatment that are established by statute or regulation. Revenues for non-governmental payors where we have contracts or letters of agreement in place are recognized at the prevailing contract rates. The remaining non-governmental payors are billed at our standard rates for services and, in our North America segment, a contractual adjustment is recorded to recognize revenues based on historic reimbursement experience with those payors for which contracted rates are not predetermined. The contractual adjustment and the allowance for doubtful accounts are reviewed quarterly for their adequacy. No material changes in estimates were recorded for the contractual allowance in the periods presented.

      The allowance for doubtful accounts is based on local payment and collection experience. We sell dialysis products directly or through distributors in over 100 countries and dialysis services in 27 countries through owned or managed clinics. Most payors are government institutions or government-sponsored programs with significant variations between the countries and even between payors within one country in local payment and collection practices. Specifically, public health institutions in a number of countries outside the U.S. require a significant amount of time until payment is made. Payment differences are mainly due to the timing of the funding by the local, state or federal government to the agency that is sponsoring the program that purchases our services or products. The collection of accounts receivable from product sales to third party distributors or dialysis clinics is affected by the same underlying causes, since these buyers of the products are reimbursed as well by government institutions or government sponsored programs.

      In our U.S. operations, the collection process is usually initiated 30 days after service is provided or upon the expiration of the time provided by contract. For Medicare and Medicaid, once the services are approved for payment, the collection process begins upon the expiration of a period of time based upon experience with Medicare and Medicaid. In all cases where co-payment is required the collection process usually begins within 30 days after service has been provided. In those cases where claims are approved for amounts less than anticipated or if claims are denied, the collection process usually begins upon notice of approval of the lesser amounts or upon denial of the claim. The collection process can be confined to internal efforts, including the accounting and sales staffs and, where appropriate, local management staff. If appropriate, external collection agencies may be engaged.

      For our international operations, a significant number of payors are government entities whose payments are often determined by local laws and regulations. Depending on local facts and circumstances, the period of time to collect can be quite lengthy. In those instances where there are non-public payors, the same type of collection process is initiated as in the US.

      Due to the number of subsidiaries and different countries that we operate in, our policy of determining when a valuation allowance is required considers the appropriate local facts and circumstances that apply to an account.

While payment and collection practices vary significantly between countries and even agencies within one country, government payors usually represent low credit risks. Accordingly, the length of time to collect does not, in and of itself, indicate an increased credit risk and it is our policy to determine when receivables should be classified as bad debt on a local basis taking into account local practices. In all instances, local review of accounts receivable is performed on a regular basis, generally monthly. When all efforts to collect a receivable, including the use of outside sources where required and allowed, have been exhausted, and after appropriate management review, a receivable deemed to be uncollectible is considered a bad debt and written off.

      Estimates for the allowances for doubtful accounts receivable from the dialysis service business are mainly based on local payment and past collection history. Specifically, the allowances for the North American operations are based on an analysis of collection experience, recognizing the differences between payors and aging of accounts receivable. From time to time, accounts receivable are reviewed for changes from the historic collection experience to ensure the appropriateness of the allowances. The allowances in the International segment and the products business are also based on estimates and consider various factors, including aging, creditor and past collection history. Write offs are taken on a claim by claim basis when the collection efforts are exhausted. A significant change in our collection experience, a deterioration in the aging of receivables and collection difficulties could require that we increase our estimate of the allowance for doubtful accounts. Any such additional bad debt charges could materially and adversely affect our future operating results.

      If, in addition to our existing allowances, 1% of the gross amount of our trade accounts receivable as of December 31, 2005 were uncollectible through either a change in our estimated contractual adjustment or as bad debt, our operating income for 2005 would have been reduced by approximately 2%.

      The following table shows the portion of major debtors or debtor groups of trade accounts receivable as at December 31, 2005. No single debtor other than U.S. Medicaid and Medicare accounted for more than 5% of total trade accounts receivable. Trade accounts receivable in the International segment are for a large part due from government or government-sponsored organizations that are established in the various countries within which we operate.

      FMCH, our largest subsidiary, is partially self-insured for professional, product and general liability, auto liability and worker’s compensation claims under which we assume responsibility for incurred claims up to predetermined amounts above which third party insurance applies. Reported balances for the year include estimates of the anticipated expense for claims incurred (both reported and incurred but not reported) based on historical experience and existing claim activity. This experience includes both the rate of claims incidence (number) and claim severity (cost) and is combined with individual claim expectations to estimate the reported amounts.

      We are engaged primarily in providing dialysis services and manufacturing and distributing products and equipment for the treatment of end-stage renal disease. In the U.S., we also perform clinical laboratory testing. We estimate that providing dialysis services and distributing dialysis products and equipment represents an over $40 billion worldwide market with expected annual patient growth of 6%. Patient growth results from factors such as the aging population; increasing incidence of diabetes and hypertension, which frequently precedes the onset of ESRD; improvements in treatment quality, which prolong patient life; and improving standards of living in developing countries, which make life saving dialysis treatment available. Key to continued growth in revenue is our ability to attract new patients in order to increase the number of treatments performed each year. For that reason, we believe the number of treatments performed each year is a strong indicator of continued revenue growth and success. In addition, the reimbursement and ancillary services utilization environment significantly influences our business. In the past we experienced and also expect in the future generally stable reimbursements for dialysis services. This includes the balancing of unfavorable reimbursement changes in certain countries with favorable changes in other countries. The majority of treatments are paid for by governmental institutions such as Medicare in the United States. As a consequence of the pressure to decrease health care costs, reimbursement rate increases have been limited. Our ability to influence the pricing of our services is limited. Profitability depends on our ability to manage rising labor, drug and supply costs.

      On December 8, 2003, the Medicare Prescription Drug, Modernization and Improvement Act of 2003 was enacted (the “Medicare Modernization Act”). This law makes several significant changes to U.S. government payment for dialysis services and pharmaceuticals. First, it increased the composite rate for renal dialysis facilities by 1.6% on January 1, 2005. Second, effective January 1, 2005, payments for ten separately billable dialysis-related medications are based on average acquisition cost (as determined by the Office of the Inspector General (“OIG”) and updated by Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services (“CMS”)) and payments for the remaining separately billable dialysis-related medications are based on average sales price (“ASP”) plus 6% (ASP is defined in the law as a manufacturer’s ASP to all purchasers in a calendar quarter per unit of each drug and biological sold in that same calendar quarter, excluding sales exempt from best price and nominal price sales and including all discounts, chargebacks and rebates). Third, the difference between the determined acquisition cost-based reimbursement and what would have been received under the prior average wholesale price-based (“AWP-based”) reimbursement methodology was added to the composite rate. Fourth, effective April 1, 2005, providers received higher composite rate payments for certain patients based on their age, body mass index and body surface area. Fifth, beginning in 2006, the Secretary of the Department of Health and Human Services (the “Secretary”) was authorized to set payment for all separately billed drugs and biologicals at either acquisition cost or average sales price. Lastly, the Secretary was required to establish a three-year demonstration project to test the use of a fully case-mix adjusted payment system for ESRD services, beginning January 1, 2006. Under this project, separately billable drugs and biologicals and related clinical laboratory tests would be bundled into the facility composite rate. Participating facilities would receive an additional 1.6% composite rate increase.

      On November 2, 2005, CMS released the final physician fee schedule for calendar year (“CY”) 2006. The key provisions affecting ESRD facilities include revisions to the pricing methodology for separately billable drugs, revisions to the drug add-on payment methodology and calculation of the drug add-on for CY 2006, and revisions to the geographic adjustment to the composite rate. In addition, CMS has decided to maintain the case-mix adjustments finalized in last year’s rule, as well as the base composite rate. For CY 2006, CMS has decided to pay for separately billable drugs and biologicals provided byboth hospital-based and independent dialysis facilities using the average sales price plus six percent methodology (“ASP+6%”). According to CMS, the drug add-on adjustment for 2006 will be 14.7%. CMS is also implementing several changes to the ESRD wage index. First, over a four-year transition period, CMS will apply the Office of Management and Budget’s revised core-based statistical area (CBSA) -baseddefinitions as the basis for revising the urban/ rural locales and corresponding wage index values reflected in the composite rate. Since the Medicare Modernization Act requires that any revisions to the ESRD composite rate payment system be budget neutral, CMS will apply the budget neutrality adjustment factor directly to the revised ESRD wage index values (rather than the base composite payment rates).

CMS estimates the overall impact of the changes to be a 1.9% increase for independent facilities. The Company’s estimates of the impact of such changes on its business are consistent with the CMS calculations. For a discussion of the composite rate for reimbursement of dialysis treatments, see Item 4B, “Business Overview — Regulatory and Legal Matters — Reimbursement”.

      The Deficit Reduction Act (“DRA”) of February 1, 2006, further increased the composite rate by an additional 1.6% effective January 1, 2006. To account for this increase to the composite rate and to preserve the originally intended economic impact of the Medicare Modernization Act, the drug add on percentage was reduced to 14.5%.

      On November 9, 2005, CMS announced a new national monitoring policy for claims for Epogen and Aranesp for ESRD patients treated in renal dialysis facilities. Previously, claims for Epogen reimbursement were subject to focused CMS review when the ESRD patient’s hematocrit level reached 37.5 or more. In the new monitoring policy, CMS recognized that there is considerable natural variability in individual patient hematocrit levels which makes it difficult to maintain a hematocrit level within an narrow range. Consequently, CMS will not initiate monitoring of claims until the patient’s hematocrit level reaches 39.0 (hemoglobin of 13.0). Under the new monitoring policy, for services furnished on or after April 1, 2006, CMS will expect a 25 percent reduction in the dosage of Epogen or Aranesp administered to ESRD patients whose hematocrit exceeds 39.0 (or hemoglobin exceeds 13.0). If the dosage is not reduced by 25 percent, payment will be made by CMS as if the dosage reduction had occurred. This payment reduction may be appealed under the normal appeal process. In addition, effective April 1, 2006, CMS will limit Epogen and Aranesp reimbursement to a maximum per patient per month aggregate dose of 500,000 IU for Epogen and 1500 mcg for Aranesp. CMS’s new Epogen and Aranesp monitoring policy is expected to have a slightly negative impact on our operating results.

      The recent proposal included in the Bush administration budget to extend the Medicare coordination of benefits period to five years would generally be favorable to us and other dialysis providers since it would extend the period during which providers would receive the generally higher payments by employer group health plans prior to the commencement of primary Medicare coverage for dialysis treatment. However, the proposal in the same budget to eliminate Medicare bad-debt recoveries, if adopted as proposed, would have a material adverse impact on our operating results. See Item 4B, “Information on the Company — Business Overview — Regulatory and Legal Matters — Reimbursement”. There can be no assurance, however, that either proposal will be adopted as proposed, or at all.

      Our operations are geographically organized and accordingly we have identified three operating segments, North America, International, and Asia Pacific. For management purposes, the Company reclassified its Mexico operations from its International segment to its North American segment beginning January 1, 2005 and reclassified the operations and assets for the comparative years 2003 and 2004. For reporting purposes, we have aggregated the International and Asia Pacific segments as “International.” We aggregated these segments due to their similar economic characteristics. These characteristics include same services provided and same products sold, same type patient population, similar methods of distribution of products and services and similar economic environments. Our Management Board member responsible for the profitability and cash flow of each segment’s various businesses supervises the management of each operating segment. The accounting policies of the operating segments are the same as those we apply in preparing our consolidated financial statements under accounting principles generally accepted in the United States (“U.S. GAAP”). Our management evaluates each segment using a measure that reflects all of the segment’s controllable revenues and expenses.

      With respect to the performance of our business operations, our management believes the most appropriate measure in this regard is operating income which measures our source of earnings. Financing is a corporate function which segments do not control. Therefore, we do not include interest expense relating to financing as a segment measurement. We also regard income taxes to be outside the segments’ control. Accordingly, these items are not included in our analysis of segment results but are discussed separately below under the heading “Corporate”.

      The following tables summarize our financial performance and certain operating results by principal business segment for the periods indicated. Inter-segment sales primarily reflect sales of medical equipment and supplies from the International segment to the North America segment. We prepared the information using a management approach, consistent with the basis and manner in which our management internally disaggregates financial information to assist in making internal operating decisions and evaluating management performance.

      Earnings margins increased in both segments in 2005 resulting in a 0.5% increase in operating income margin which was partially offset by the one time effect of the $22 million of costs associated with the transformation of our legal form and the settlement and related legal fees of the shareholder suit.

      Cash flow provided from operations in 2005 decreased by approximately $158 million as compared to 2004 primarily as a result of income tax payments for prior periods of approximately $119 million made in Germany and the U.S. in 2005 and the effects of the difference in the reduction of days sales outstanding (“DSO”). There was a reduction of 2 DSO in 2005 versus 2004 as compared to 5 DSO reduction in 2004 versus 2003.

      The tax payments were the result of a $78 million payment in Germany on a disputed tax assessment relating to deductions of write-downs taken in prior years and a $41 million payment in the US resulting from a tax assessment relating to the deductibility of payments made pursuant to the 2000 OIG settlement.

      Net revenue increased by 9% for the year ended December 31, 2005 over the comparable period in 2004 due to growth in revenue in both dialysis care and dialysis products. The 9% increase represents 7% organic growth combined with 1% of growth from acquisitions and 1% increase attributable to exchange rate effects due to the continued strengthening of various local currencies against the dollar.

      Dialysis care revenue grew by 8% to $4,867 million (8% at constant exchange rates) mainly due to organic revenue growth resulting principally from 5% growth in same store treatments, 2% increase in revenue per treatment and 1% due to Acquisitions. Dialysis products revenue increased by 10% to $1,905 million (9% at constant exchange rates) driven by a volume increase and higher priced products.

      Gross profit margin improved to 34.4% in 2005 from 33.5% for 2004. The increase is primarily a result of higher revenue rates, production efficiencies, and the effects in 2004 of a one time discount provided to a distributor in Japan, partially offset by higher personnel expenses, higher facility costs and one less treatment day in North America. Depreciation and amortization expense for 2005 was $251 million compared to $233 million for 2004.

      Approximately 36% of the Company’s 2005 worldwide revenues, as compared to 38% in 2004, were paid by and subject to regulations under governmental health care programs, primarily Medicare and Medicaid, administered by the United States government.

      Selling, general and administrative costs increased from $1,182 million in 2004 to $1,343 million in 2005. Selling, general and administrative costs as a percentage of sales increased from 19.0% in 2004 to 19.8% in 2005. The increase is mainly due to one time costs of $22 million for the transformation of our legal form and the settlement and related legal fees of the shareholder suit, increased delivery costs due to higher fuel prices for Company-owned vehicles and higher transport and other third party commercial delivery, higher insurance costs, restructuring costs in Japan, and the favorable effects in 2004 of an indemnification payment received in 2004 related to a clinic in Asia Pacific. These effects were partially offset by foreign currency gains and a patent litigation settlement in the International segment as well as the one time impact of compensation for cancellation of a distribution contract in Japan.

      In 2005, 19.73 million treatments were provided. This represents an increase of 5.0% over 2004. Same store treatment growth was 4.6% with additional growth of 1.5% from acquisitions offset by the effects of sold and closed clinics (1.1%).

      At December 31, 2005 we owned, operated or managed approximately 1,680 clinics compared to 1,610 clinics at the end of 2004. During 2005, we acquired 37 clinics, opened 65 clinics and consolidated 32 clinics. The number of patients treated in clinics that we own, operate or manage increased to approximately 131,450 at December 31, 2005 from approximately 124,400 at December 31, 2004. Average revenue per

treatment for worldwide dialysis services increased to $247 from $240 mainly due to worldwide improved reimbursement.

     The following discussions pertain to our business segments and the measures we use to manage these segments.

      Net revenue for the North America segment for 2005 increased 8% as dialysis care revenue increased by 7% from $3,802 million to $4,054 million while dialysis products sales increased by 17%.

      The 7% increase in dialysis care revenue in 2005 was driven by approximately 4% increase in treatments, a revenue rate per treatment increase of approximately 2% and approximately 1% resulting from Fin46(R). The 4% increase in treatments was the result of same store treatment growth of 3% and 1% increase resulting from acquisitions. For 2005, the administration of EPO represented approximately 21% of North America total revenue as compared to 23% in the prior year.

      At the end of 2005, approximately 89,300 patients were being treated in the 1,155 clinics that we own, operate or manage in the North America segment, compared to approximately 86,350 patients treated in 1,135 clinics at the end of 2004. The average revenue per treatment increased from $288 in 2004 to $294 during 2005. In the U.S., average revenue per treatment increased from $289 in 2004 to $297 in 2005.

      Dialysis products revenues increased by 17% due to continued strong demand for our dialysis machines and dialyzers.

      DaVita

      On October 5, 2005, DaVita Inc. (“DaVita”), the second largest provider of dialysis services in the U. S. and an important customer of ours, completed its acquisition of Gambro Healthcare, Inc. (“Gambro Healthcare”), the third largest provider of dialysis services in the U.S., and agreed to purchase a substantial portion of its dialysis product supply requirements from Gambro Renal Products, Inc. during the next ten years. This product supply contract between our customer and our competitor could result in the future in substantial reductions of DaVita’s purchases of our dialysis products. Any such reduction in DaVita’s purchases will decrease our product revenues and could result in a material adverse effect on our business, financial condition and results of operations. The continuing consolidation of dialysis providers and combinations of dialysis providers with dialysis product manufacturers, could affect future growth of our product sales.

      Operating income margin increased from 13.8% in 2004 to 14.1% in 2005. The primary drivers of this margin improvement during 2005 are higher revenues per treatment partially offset by higher personnel expenses, increased delivery costs due to higher fuel prices, higher bad debt expense, higher insurance costs and other increased costs. Accordingly, cost per treatment increased from $250 in 2004 to $254 in 2005.

      The 11% increase in net revenues for the International segment resulted from increases in both dialysis care and dialysis products revenues. Organic growth during the period was 8% at constant exchange rates and acquisitions contributed approximately 1%. This increase was also attributable to a 2% exchange rate effect due to the continued strengthening of various local currencies against the dollar.

      Total dialysis care revenue increased during 2005 by 16% (14% at constant exchange rates) to $813 million in 2005 from $699 million for 2004. This increase is a result of organic growth of 13%, a 2% increase in contributions from acquisitions and was partially offset by the 1% effects of sold or closed clinics and increased by approximately 2% due to exchange rate fluctuations. The 13% organic growth was driven by same store treatment growth of 8% and pricing mix resulting from increased average revenue per treatment and growth in countries that have higher reimbursement rates.

      As of December 31, 2005, approximately 42,150 patients were being treated at 525 clinics that we own, operate or manage in the International segment compared to 38,050 patients treated at 475 clinics at December 31, 2004. In 2005, the average revenue per treatment increased from $121 to $130 ($127 at constant exchange rates) due to the strengthening of local currencies against the U.S. dollar and increased reimbursement rates partially offset by higher growth in countries with reimbursement rates below the average.

      Total dialysis products revenue for 2005 increased by 8% (7% at constant exchange rates) to $1,382 million mainly driven by organic growth.

      Including the effects of acquisitions, European region revenue increased 9% (9% at constant exchange rates), Latin America region revenue increased 27% (17% at constant exchange rates), and Asia Pacific region revenue increased 8% (5% at constant exchange rates).

      Our operating income increased from $300 million in 2004 to $362 million in 2005. The operating margin increased from 15.2% in 2004 to 16.5% in 2005. The increase in margin resulted mainly from production efficiencies in Europe, a reimbursement increase in Turkey, foreign exchange gains, lower bad debt expense, the one time effects of income associated with the cancellation of a distribution agreement in Japan, and settlement of a patent litigation, as well as the now favorable impact of a discount provided to a distributor in Japan in 2004. These effects were partially offset by restructuring costs in Japan and by the then favorable effects of an indemnification payment received in 2004 related to a clinic in Asia Pacific.

      The following discussions pertain to our total Company costs.

      We do not allocate “corporate costs” to our segments in calculating segment operating income as we believe that these costs are not within the control of the individual segments. These corporate costs primarily relate to certain headquarters overhead charges including accounting and finance, professional services, etc.

      Total corporate operating loss was $67 million in 2005 compared to $35 million in the same period of 2004. The increase in operating loss was mainly due to the one-time costs of $22 million related to the transformation of our legal form and the settlement and related legal fees of the shareholder suit that sought to set aside the resolutions approving the transformation. Legal fees related to the Baxter patent litigation also contributed to this increase.

      Interest expense for 2005 decreased 3% compared to the same period in 2004 due to a lower debt level resulting from the use of positive cash flows, and lower interest rates.

      The effective tax rate for 2005 was 40.3% compared to 39.7% in 2004.

      Like 2003, the earnings increase in 2004 is characterized by improving margins in the North American segment partially offset by a decline of margins in Asia Pacific. Cash flow provided from operations reached $828 million and exceeded the prior year’s cash flow from operations by $74 million. This favorable development is a result of our increased net income and focus on working capital management partially offset by a lower impact of liquidity provided by hedging of intercompany financings.

      Net revenue increased for the year ended December 31, 2004 over the comparable period in 2003 due to growth in revenue in both dialysis care and dialysis products.

      Dialysis care revenue grew by 13% to $4,501 million (12% at constant exchange rates) mainly due to higher treatment rates, acquisitions, as a result of an accounting change (implementation of Financial Accounting Standards Board Interpretation 46R (“FIN 46R”) issued December 2003 and effective March 31, 2004), and the effect of two additional treatment days in 2004. Same store treatment growth in 2004 declined from 2003 as a result of the loss of tenders in the International segment and the general market growth slow down in the North American segment. Dialysis product revenue increased by 11% to $1,727 million (5% at constant exchange rates) in the same period.

      Gross profit margin improved in 2004 to 33.5% from 33.1% for 2003. The increase is primarily a result of higher treatment rates, higher margins for ancillary services in North America, higher number of treatments as a result of two additional treatment days in North America, operating improvements in Latin America and growth in regions which have higher gross margins offset by higher personnel and recruiting costs due to the nursing shortage in North America, a one time discount provided to a distributor in Japan, and reimbursement related price pressure in Japan. Depreciation and amortization expense for the period was $233 million compared to $217 million for the same period in the prior year.

      Approximately 38% of the Company’s 2004 worldwide revenues, as compared to 40% in 2003, are paid by and subject to regulations under governmental health care programs, primarily Medicare and Medicaid, administered by the United States government.

      Selling, general and administrative costs increased from $1,022 million in 2003 to $1,182 million in 2004. Selling, general and administrative costs as a percentage of sales increased from 18.5% in 2003 to 19.0% in 2004. The increase is mainly due to increased personnel expenses in North America and growth in regions which have higher selling, general and administrative costs partially offset by receipt of a one time indemnification payment related to a clinic in the Asia Pacific region and reduced expenses due to cost efficiency control in Latin America. Net income for the period was $402 million compared to $331 million in 2003.

      In 2004, 18.79 million treatments were provided. This represents an increase of 5.4% over 2003. Same store treatment growth was 3.6% with additional growth of 1.8% from acquisitions.

      At December 31, 2004 we owned, operated or managed 1,610 clinics compared to 1,560 clinics at the end of 2003. During 2004, we acquired 29 clinics, opened 52 clinics and consolidated 31 clinics. The number of patients treated in clinics that we own, operate or manage increased to 124,400 at December 31, 2004 from approximately 119,250 at December 31, 2003. Average revenue per treatment for worldwide dialysis services increased to $240 from $223 mainly due to worldwide improved reimbursement rates and favorable currency developments.

     The following discussions pertain to our business segments and the measures we use to manage these segments.

      Net revenue for the North America segment for 2004 increased because dialysis care revenue increased by 11% from $3,435 million to $3,802 million. Dialysis product revenue increased by 1% from $443 to $446.

      The 11% increase in dialysis care revenue in 2004, was driven by organic revenue growth of 7%, 1% increase attributable to two extra dialysis days in 2004, 2% resulting from implementation of FIN 46R and 1% resulting from acquisitions. Organic revenue growth is a result of 3% same store treatment growth and a 4% revenue per treatment growth. Same store treatment growth in 2004 declined from 2003 as a result of the general market growth slow down in the North America. For 2004, the administration of EPO represented approximately 23% of total North America revenue.

      At the end of 2004, approximately 86,350 patients were being treated in the 1,135 clinics that we own, operate or manage in the North America segment, compared to approximately 83,000 patients treated in

1,115 clinics at the end of 2003. The average revenue per treatment, excluding laboratory-testing revenue, increased from $266 in 2003 to $277 in 2004. Including laboratory testing, the average revenue per treatment increased from $277 in 2003 to $288 during 2004.

      Dialysis product sales increased by 1% in 2005 compared to 2004 driven by the increased sales in Mexico. Dialysis Product sales in both 2004 and 2003 also include the sales of machines to third-party leasing companies which are leased back by our dialysis services division and sales to other vertically integrated dialysis companies. The volume of both these type transactions has been reduced in 2004 compared to 2003. In addition, the Company decided to focus sales efforts more on its internally produced products while decreasing emphasis on relatively low margin ancillary products manufactured by third-parties. These three factors resulted in a 1% increase in dialysis product revenue from $443 million in 2003 to $446 million in 2004. Our dialysis products division measures its external sales performance based on its sales to the “net available external market”.

      The Net available external market sales excludes machine sales to third parties, i.e., leasing companies, for machines utilized in our services division as well as sales to other vertically integrated dialysis companies and sales related to our adsorbers business. Net available external market sales were flat in 2004 over the comparable period for 2003. The detail is as follows:

      Operating income margin increased from 13.6% in 2003 to 13.8% in 2004. The primary drivers of this margin improvement during 2004 are increases in commercial payor rates, improved ancillary margins, and incremental profits provided by two additional dialysis days in 2004 partially offset by the implementation of FIN 46(R) (0.2%). Cost per treatment increased from $241 in 2003 to $250 in 2004, primarily due to increased personnel and benefit costs, higher ancillary costs, and other miscellaneous costs partially offset by improvements in medical supply costs and reduced depreciation and amortization expense, as a percentage of revenue, mainly as a result of completing the depreciation and amortization of patient relationships acquired in 1997.

      The increase in net revenues for the International segment resulted from increases in both dialysis care and dialysis product revenues. Acquisitions contributed approximately 3% while consolidations resulting from initial consolidation of entities as a result of an accounting change (implementation of FIN 46R) contributed approximately 2%. Organic growth during the period was 6% at constant exchange rates. Same store treatment growth in 2004 declined from 2003 as a result of the loss of tenders. The revenue increase was also attributable to a 9% exchange rate effect due to the continued strengthening of various local currencies against the dollar in 2004 and 2003.

      Total dialysis care revenue increased during 2004 by 29% (19% at constant exchange rates) to $699 million in 2004 from $544 million for 2003. This increase is a result of organic growth of 5%, a 7% increase in contributions from acquisitions, a 6% contribution from consolidations resulting from implementation of FIN 46R and approximately 10% due to exchange rate fluctuations.

      As of December 31, 2004, approximately 38,050 patients were being treated at 475 clinics that we own, operate or manage in the International segment compared to 36,250 patients treated at 445 clinics at December 31, 2003. In 2004, the average revenue per treatment increased from $101 to $121 ($111 at constant exchange rates) due to the strengthening of the local currencies against the U.S. dollar and increased reimbursement rates partially offset by higher growth in countries with reimbursement rates below the average.

      Total dialysis product revenue for 2004 increased by 16% (7% at constant exchange rates) to $1,281 million mainly driven by organic growth.

      Including the effects of the acquisitions, European region revenue increased 22% (11% at constant exchange rates), Latin America region revenue increased 28% (24% at constant exchange rates), and Asia Pacific region revenue increased 6% (1% at constant exchange rates).

      Our operating income margin decreased from 15.7% during 2003 to 15.2% in 2004. The main cause for the margin decrease was price pressure in Japan as a result of biannual reimbursement rate reductions, a one-time discount provided to a distributor in Japan, unfavorable foreign currency transaction effects related to the purchase of products from our European production sites coupled with the appreciation of the euro against local currencies and the effect of implementation of FIN 46(R) (0.2%) partially offset by a one-time indemnification payment received related to a clinic in the Asia Pacific region, operating improvements in Latin America such as a reimbursement rate increase in Venezuela and cost control improvements throughout Latin America.

      Our subsidiaries in Latin America contributed approximately 3% of our worldwide revenue and approximately 3% of our operating income in 2004. Our operations in Latin America were affected by the financial crisis and currency devaluations in some currencies in Latin America. Because of these issues, we continue to experience lower than anticipated reimbursement rates, margin pressure and foreign currency exchange losses.

      In 2004, sales in Latin America increased 28% (24% at constant exchange rates) and operating income increased 88% compared to 2003. The consolidation of dialysis clinics in accordance with FIN 46R contributed 14% of the revenue growth and had no significant impact on operating income. A worsening of the economic situation in Latin America, a further devaluation of the Latin American currencies against the U.S. dollar or other unfavorable economic developments in Latin America, could result in an impairment of long-lived assets and goodwill.

      We do not allocate “corporate costs” to our segments in calculating segment operating income as we believe that these costs are not within the control of the individual segments. These corporate costs primarily relate to certain headquarters overhead charges including accounting and finance, professional services, etc.

      Total corporate operating loss was $36 million in 2004 compared to $29 million in the same period of 2003.

      The following discussions pertain to our total Company costs.

      Interest expense for 2004 decreased 15% compared to the same period in 2003 due to a lower debt level resulting from the use of positive cash flows, lower interest rates, and the conversion of a portion of debt from fixed into variable interest rates.

      The effective tax rate for 2004 was 39.7% compared to 39.0% in 2003.

      Our primary sources of liquidity have historically been cash from operations, cash from short-term borrowings as well as from long-term debt from third parties and from related parties and cash from issuance of equity securities and trust preferred securities. Cash from operations is impacted by the profitability of our business and the development of our working capital, principally receivables. The profitability of our business depends significantly on reimbursement rates. Approximately 72% of our revenues are generated by providing dialysis treatment; a major portion of which is reimbursed by either public health care organizations or private insurers. For the year ended December 31, 2005, approximately 36% of our consolidated revenues resulted from U.S. federal health care benefit programs, such as Medicare and Medicaid reimbursement. Legislative changes could affect all Medicare reimbursement rates for the services we provide, as well as the scope of Medicare coverage. A decrease in reimbursement rates could have a material adverse effect on our business, financial condition and results of operations and thus on our capacity to generate cash flow. See “Overview”, above, for a discussion of recent Medicare reimbursement rate changes. Furthermore cash from operations depends on the collection of accounts receivable. We could face difficulties in enforcing and collecting accounts receivable under some countries’ legal systems. Some customers and governments may have longer payment cycles. Should this payment cycle lengthen, then this could have a material adverse effect on our capacity to generate cash flow. See “Critical Accounting Policies... Accounts Receivable and Allowance for Doubtful Accounts,” above.

      The accounts receivable balance at December 31, 2005 and 2004, net of valuation allowances, represented approximately 82 and 84 days of net revenue, respectively. This favorable development is mainly a result of our management effort to improve collection of receivables. The development of days sales outstanding by operating segment is shown in the table below.

      On February 21, 2003, we entered into an amended and restated bank agreement, (the “2003 Senior Credit Agreement”), with Bank of America N.A., Credit Suisse First Boston, Dresdner Bank AG New York, JPMorgan Chase Bank, The Bank of Nova Scotia and certain other lenders (collectively, the “Lenders”), pursuant to which

the Lenders made available to the Company and certain subsidiaries and affiliates an aggregate amount of up to $1.5 billion through three credit facilities.

      Through a series of amendments in 2003 and 2004, we voluntarily reduced the aggregate amount available to $1.2 billion while increasing the available amounts under the revolving credit portion and reducing the amounts available under the term loan portion. In addition, the amendments reduced the term loan interest rates by 25 basis points in 2003 and an additional 75 basis points in 2004 and the revolving credit interest rates by 62.5 basis points in 2004. The termination date was extended until February 28, 2010. Under the 2004 amendments, we can increase the amount of revolving credit by up to $200 million during the life of the 2003 Senior Credit Agreement.

      Cash from short-term borrowings is generated by selling interests in our accounts receivable (accounts receivable facility) and by borrowing from our parent Fresenius AG. Long-term financing is provided by the revolving portion and the term loan under our 2003 Senior Credit Agreement, our borrowings under the European Investment Bank (“EIB”) Agreement and has been provided through the issuance of our euro notes and trust preferred securities. We believe that our existing credit facilities, our new $5 billion credit facility described below, cash generated from operations and other current sources of financing are sufficient to meet our foreseeable needs (See “Outlook — Proposed Acquisition”).

      We entered into a credit agreement with the European Investment Bank (“EIB”) on July 13, 2005 in the total amount of $155 million consisting of a $106 million (€90 million) revolving credit line and a $49 million term loan. The facility has an 8-yearterm with the revolving line terminating on July 12, 2013 and the term loan maturing on September 13, 2013. Both loans bear variable interest rates that change quarterly and include options to convert into fixed rates. The EIB is a not-for-profit long-term, lending institution of the European Union that lends funds at favorable rates for the purpose of capital investment projects, normally for up to half of the funds required for such projects. The Company will use these funds to refinance certain R&D projects and investments in expansion and optimization of existing production facilities in Germany. The loans are secured by bank guarantees and have customary covenants. The term loan was drawn down on September 15, 2005. Average interest for the period ending December 31, 2005 was 3.89%. There were no drawdowns on the revolving credit facility as of December 31, 2005.

      On July 27, 2005, the Company issued new euro denominated notes (“Euro Notes”) totalling $236 million (€200 million) with a€126 million tranche at a fixed interest rate of 4.57% and a€74 million tranche with a floating rate at EURIBOR plus applicable margin, resulting in an average interest rate of 4.10% for the period ending December 31, 2005. The proceeds were used to liquidate $155 million (€128.5 million) of Euro Notes issued in 2001 that were due in July 2005 and for working capital. The Euro Notes mature on July 27, 2009.

      We had approximately $80 million in letters of credit outstanding at both December 31, 2005 and 2004, and approximately $624 million and $635 million, respectively, of unused borrowing capacity available under the revolving portion of our 2003 Senior Credit Agreement.

      In connection with the Renal Care Group (“RCG”) acquisition, we entered into a commitment letter pursuant to which Bank of America, N.A. (“BofA”) and Deutsche Bank AG (“DB”) have agreed, subject to certain conditions, to underwrite an aggregate $5 billion in principal amount of term and revolving loans to be syndicated to other financial institutions. The loans will consist of a5-year $1 billion revolving credit facility, a5-year $2 billion term loan A facility and a 7-year $ billion term loan B facility. The syndication of the revolving credit facility and the term loan A facility have already been completed. Funding is subject to customary closing conditions and BofA’s and DB’s acquiescence to any material modification to the merger agreement and any waiver of any material conditions precedent under that agreement. Interest on the new senior credit facilities will be at our option at a rate equal to either (i) LIBOR plus an applicable margin, or (ii) the higher of BofA’s prime rate or the Federal Funds rate plus 0.5% plus an applicable margin. The applicable margin is variable and depends on our consolidated leverage ratio (the “Margin”). The financing will be available to us, among other uses, to pay the purchase price and related expenses for the proposed acquisition of RCG, to refinance outstanding indebtedness under our existing 2003 Senior Credit Agreement and certain indebtedness of RCG, and for general corporate purposes. In conjunction with the forecasted utilization of the new senior credit facilities and the related variable rate based interest payments, we entered into forward starting interest rate swaps in the notional amount

of $2.5 billion. These instruments, designated as cash flow hedges, effectively convert forecasted Libor based interest payments into fixed rate based interest payments which fix the interest rate on $2.5 billion of the forecasted financing under the new senior credit facility at 4.32% plus the Margin. These swaps are denominated in U.S. dollars and expire at various dates between 2008 and 2012.

      Our amended 2003 Senior Credit Agreement, EIB agreement, Euro Notes and the indentures relating to our trust preferred securities include covenants that require us to maintain certain financial ratios or meet other financial tests. Under our 2003 Senior Credit Agreement, we are obligated to maintain a minimum consolidated net worth, a minimum consolidated interest coverage ratio (ratio of consolidated EBITDA to consolidated net interest expense as defined in the 2003 Senior Credit Agreement) and a maximum consolidated leverage ratio (ratio of consolidated funded debt to consolidated EBITDA as defined in the 2003 Senior Credit Agreement). Other covenants in one or more of each of these agreements restrict or have the effect of restricting our ability to dispose of assets, incur debt, pay dividends (limited to $200 million in 2006, dividends paid in 2005 were $137 million) and make other restricted payments, create liens or make capital expenditures, investments or acquisitions.

      The breach of any of the covenants could result in a default under the 2003 Senior Credit Agreement, the European Investment Bank Agreement, the Euro Notes or the notes underlying our trust preferred securities, which could, in turn, create additional defaults under the agreements relating to our other long-term indebtedness. In default, the outstanding balance under the amended 2003 Senior Credit Agreement becomes due at the option of the Lenders. As of December 31, 2005, we are in compliance with all financial covenants under the 2003 Senior Credit Agreement and our other financing agreements.

      We have an accounts receivable facility whereby certain receivables are sold to NMC Funding, a special purpose entity and a wholly-owned subsidiary. NMC Funding then assigns undivided ownership interests in the accounts receivable to certain bank investors. As we have the right to withdraw the then outstanding interests at any time, the receivables remain on our Consolidated Balance Sheet and the proceeds from the sale of undivided interests are recorded as short-term borrowings. The withdrawal of all transferred interests in the accounts receivable would result in the termination of the accounts receivable facility under the terms of the facility agreement. On October 20, 2005 the Company amended the accounts receivable facility to extend the maturity date to October 19, 2006.

      Our capacity to generate cash from the accounts receivable facility depends on the availability of sufficient accounts receivable that meet certain criteria defined in the agreement with the third party funding corporation. A lack of availability of such accounts receivable could have a material impact on our capacity to utilize the facility for our financial needs.

      The settlement agreement with the asbestos creditors committees on behalf of the W.R. Grace & Co. bankruptcy estate (see Item 8.A.7, “Financial Information — Legal Proceedings”) provides for payment by the Company of $115 million upon approval of the settlement agreement by the U.S. District Court, which has occurred, and confirmation of a W.R. Grace & Co. bankruptcy reorganization plan that includes the settlement. The $115 million obligation is included in the special charge we recorded in 2001 to address 1996 merger-related legal matters.

      We are subject to ongoing tax audits in the U.S., Germany and other jurisdictions. We have received notices of unfavorable adjustments and disallowances in connection with certain of the audits. We are contesting, including appealing certain of these unfavorable determinations. In conjunction with a disputed tax assessment in Germany, we made a $78 million payment to discontinue the accrual of additional non-tax deductible interest until the final resolution of the disputed assessment. We may be subject to additional unfavorable adjustments and disallowances in connection with ongoing audits. If our objections and any final audit appeals are unsuccessful, we could be required to make additional tax payments. With respect to adjustments and disallowances currently on appeal, we do not anticipate that an unfavorable ruling would have a material impact on our results of operations. We are not currently able to determine the timing of these potential additional tax payments. If all potential additional tax payments and the Grace Chapter 11 Proceedings settlement payment were to occur contemporaneously, there could be a material adverse impact on our operating cash flow in the relevant reporting

period. Nonetheless, we anticipate that cash from operations and, if required, our available liquidity will be sufficient to satisfy all such obligations if and when they come due.

      Consistent with prior years, we will continue to follow an earnings-driven dividend policy. Our general partner’s Management Board will propose to the shareholders at the Annual General Meeting a dividend, with respect to 2005 and payable in 2006, of €1.23 per ordinary share (2004:€1.12) and€1.29 per preference share (2004:€1.18) for shareholder approval at the annual general meeting on May 9, 2006. The total expected dividend payment is approximately€120 million and we paid approximately $137 (€109) million in 2005 for dividends with respect to 2004. Our 2003 Senior Credit Agreement limits disbursements for dividends and certain other transactions relating to our own equity type instruments during 2006 to $200 million in total.

      We generated cash from operating activities of $670 million in the year ended December 31, 2005 and $828 million in the comparable period in 2004, a decrease of about 19% over the prior year. Cash flows were primarily generated by increase in net income and working capital improvements. Cash flows were impacted principally by a $78 million payment in Germany made to halt the accrual of non-deductible interest on a disputed tax assessment relating to deductions of write-downs taken in prior years and a $41 million payment in the US resulting from a tax assessment relating to the deductibility of payments made pursuant to the 2000 OIG settlement. In addition, less cash was generated in 2005 due to the effects of reducing days sales outstanding by two days as compared to the cash generated in 2004 by a five day reduction in days sales outstanding. Cash flows were used mainly for investing (capital expenditures and acquisitions), for payment of dividends and to pay down debt.

      Cash used in investing activities increased from $365 million to $422 million mainly because of increased capital expenditures. In 2005, we paid approximately $125 million ($77 million for the North American segment and $48 million for the International segment) cash for acquisitions consisting primarily of dialysis clinics, the remaining 55% of shares outstanding of CardioVascular Resources (“CVR”) and direct costs relating to the Renal Care Group acquisition. In the same period in 2004, we paid approximately $104 million ($65 million for the North American segment and $39 million for the International segment) cash for acquisitions consisting primarily of dialysis clinics.

      In addition, capital expenditures for property, plant and equipment net of disposals were $297 million in 2005 and $261 million in 2004. In 2005, capital expenditures were $168 million in the North America segment and $129 million for the International segment. In 2004, capital expenditures were $160 million in the North America segment and $101 million for the International segment. The majority of our capital expenditures was used for the replacement of assets in our existing clinics, equipping new clinics, the modernization and expansion of production facilities in North America, Germany, France and Italy and for the capitalization of machines provided to customers primarily in Europe. Capital expenditures were approximately 4% of total revenue.

      Net cash used in financing was $220 million in 2005 compared to cash used in financing of $452 million in 2004. Reductions to our total external financing were less than the prior year due to lower cash from operating activities, higher capital expenditures and higher dividend payments partially offset by proceeds from exercises of stock options. Cash on hand was $85 million at December 31, 2005 compared to $59 million at December 31, 2004.

      At December 31, 2005, aggregate loans outstanding from Fresenius AG amounted to approximately $18.8 million and bore interest at market rates atyear-end. We had approximately $6 million in financing outstanding at December 31, 2004, from Fresenius AG including $3 million in loans and approximately $3 million due May 2005 representing the balance due on the Company’s purchase of the Fresenius AG’s adsorber business in 2003. These loans were paid in 2005.

      We generated cash from operating activities of $828 million in the year ended December 31, 2004 and $754 million in the comparable period in 2003, an increase of about 10% over the prior year. Cash flows were primarily generated by increase in net income and working capital improvements.

      Cash used in investing activities decreased from $369 million to $365 million mainly because of decreased capital expenditures but this decrease was offset by increased cash acquisition payments. In 2004, we paid approximately $104 million ($65 million for the North American segment and $39 million for the International segment) cash for acquisitions consisting primarily of dialysis clinics. In the same period in 2003, we paid approximately $92 million ($40 million for the North American segment and $52 million for the International segment) cash for acquisitions consisting primarily of dialysis clinics and the adsorber business acquired from Fresenius AG.

      In addition, capital expenditures for property, plant and equipment net of disposals were $261 million in 2004 and $276 million in 2003. In 2004, capital expenditures were $160 million in the North America segment and $101 million for the International segment. In 2003, capital expenditures were $175 million in the North America segment and $101 million for the International segment. The majority of our capital expenditures was used for the replacement of assets in our existing clinics, equipping new clinics, distribution activities in our products business and the expansion of production facilities in Germany, France, Italy and North America. Capital expenditures were approximately 4% of total revenue.

      Net cash used in financing was $452 million in 2004 compared to cash used in financing of $416 million in 2003. Although we increased our Accounts Receivable Facility, our total external financing needs decreased due to higher cash from operating activities partially offset by higher dividend payments. Cash on hand was $59 million at December 31, 2004 compared to $48 million at December 31, 2003.

      We had approximately $6 million in financing outstanding at December 31, 2004, from Fresenius AG including $3 million in loans and approximately $3 million due May 2005 representing the balance due on the Company’s purchase of the adsorber business from Fresenius AG in 2003. At December 31, 2003, the balance outstanding was $30 million from Fresenius AG.

      The following table summarizes, as of December 31, 2005, our obligations and commitments to make future payments under our long-term debt, trust preferred securities and other long-term obligations, and our commitments and obligations under lines of credit and letters of credit.