================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
    1934 [FEE REQUIRED]

For the fiscal year ended DECEMBER 31, 1998

                                       OR

[ ] TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
    OF 1934 [NO FEE REQUIRED]

For the transition period from             to 
                              ------------    ----------

Commission file number 0-8527
                       ------

                         DIALYSIS CORPORATION OF AMERICA
                  ---------------------------------------------
                 (Name of small business issuer in its charter)

           FLORIDA                                      59-1757642       
-------------------------------                     -------------------
(State or other jurisdiction of                      (I.R.S. Employer
 incorporation or organization)                     Identification No.)

27 MILLER AVENUE, LEMOYNE, PENNSYLVANIA                                17043 
----------------------------------------                             -----------
(Address of principal executive offices)                             (Zip Code)

                    Issuer's telephone number (717) 730-6164
                                              --------------

              Securities registered under Section 12(b) of the Act:
                                      None

                  Securities registered under Section 12(g) of
                               the Exchange Act:

                               TITLE OF EACH CLASS
                         -------------------------------
                          Common Stock, $.01 par value
                         Common Stock Purchase Warrants

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant  computed by reference to the closing price at which the stock
was sold on March 11, 1999 was approximately $1,542,333.

         As of March 11, 1999, the Company had 3,546,344  outstanding  shares of
its common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Registrant's  Registration  Statement  on Form SB-2 dated  December 22,
1995,  as  amended  February  9,  1996,  April  2,  1996  and  April  15,  1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.

         Registrant's  Annual Report, Form 10-K for the years ended December 31,
1996 and 1997.

         Annual Reports for Registrant's Parent,  Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits.
================================================================================
<PAGE>

                                 DIALYSIS CORPORATION OF AMERICA

                               Index to Annual Report on Form 10-K
                                  Year Ended December 31, 1998

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----

                                             PART I
<S>        <C>                                                                                <C>
Item 1.    Business..........................................................................  1

Item 2.    Properties........................................................................ 17

Item 3.    Legal Proceedings................................................................. 19

Item 4.    Submission of Matters to a Vote of Security Holders............................... 19

                                             PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters......... 19

Item 6.    Selected Financial Data........................................................... 20

Item 7.    Management's Discussion and Analysis of Financial Condition and Results
             of Operations................................................................... 21

Item 7A.   Quantitative and Qualitative Disclosure About Market Risk......................... 26

Item 8.    Financial Statements and Supplementary Data....................................... 27

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure...................................................................... 27

                                            PART III

Item 10.   Directors and Executive Officers of the Registrant................................ 28

Item 11.   Executive Compensation............................................................ 28

Item 12.   Security Ownership of Certain Beneficial Owners and Management.................... 28

Item 13.   Certain Relationships and Related Transactions.................................... 28

                                             PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 29
</TABLE>

<PAGE>


                                     PART I

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION

         The  statements  contained in this Annual  Report on Form 10-K that are
not historical are forward-looking  statements within the meaning of Section 27A
of the  Securities  Act of  1933  ("Securities  Act"),  and  Section  21E of the
Securities  Exchange Act of the 1934. The Private  Securities  Litigation Reform
Act of 1995 (the "Reform Act") contains certain safe harbors for forward-looking
statements.  Certain  of the  forward-looking  statements  include  management's
expectations,  intentions,  beliefs and  strategies  regarding the future of the
Company's  growth and operations,  the character and development of the dialysis
industry,  anticipated revenues,  the Company's needs for and sources of funding
for expansion opportunities and construction, expenditures, costs and income and
similar expressions concerning matters that are not considered historical facts.
Forward-looking  statements  also  include the  Company's  statements  regarding
liquidity,  anticipated  cash needs and  availability,  and anticipated  expense
levels in Item 7, "Management's  Discussion and Analysis of Financial  Condition
and  Results of  Operations."  Such  forward-looking  statements  are subject to
substantial  risks  and  uncertainties   that  could  cause  actual  results  to
materially differ from those expressed in the statements,  including the general
economic,  market and business conditions,  opportunities pursued or not pursued
by the Company,  competition,  changes in federal and state laws or  regulations
affecting the Company, and other factors discussed periodically in the Company's
filings.  Many of the  foregoing  factors are beyond the control of the Company.
Among the factors that could cause actual  results to differ  materially are the
factors  detailed in the risks discussed in the "Risk Factors"  section included
in the Company's  Registration Statement Form SB-2, as filed with the Securities
and  Exchange   Commission   ("Commission")   (effective  on  April  17,  1996).
Accordingly,  readers  are  cautioned  not  to  place  undue  reliance  on  such
forward-looking  statements,  which speak only as of the date made and which the
Company  undertakes  no  obligation  to revise to reflect  events after the date
made.


ITEM 1.  BUSINESS

HISTORICAL

         Dialysis  Corporation  of America ("DCA" or the  "Company"),  a Florida
corporation  organized in 1976, develops and operates outpatient kidney dialysis
centers  that  provide  quality  dialysis  and  ancillary  services  to patients
suffering from chronic kidney failure,  generally referred to as end stage renal
disease  ("ESRD").  The Company became a public company in 1977, went private in
1979,  selling  all but one of its  centers  through  1989.  The  Company  began
construction  of new  centers in 1995,  and in 1996 once  again  became a public
company.  In 1997,  the Company  sold its  Florida  dialysis  operations,  which
included an acute care  inpatient  dialysis  services  agreement  with a Florida
hospital. DCA currently operates five outpatient dialysis facilities in Lemoyne,
Wellsboro,  Carlisle and  Chambersburg,  Pennsylvania,  through its wholly owned
subsidiaries,  Dialysis  Services  of Pa.,  Inc.  - Lemoyne  ("DSPL"),  Dialysis
Services of Pa.,  Inc. - Wellsboro  ("DSPW"),  Dialysis  Services of Pa., Inc. -
Carlisle ("DSPC"), and Dialysis Services of Pa., Inc. - Chambersburg  ("DSPCh"),
respectively,  and  operates a dialysis  facility in New Jersey  through its 80%
owned Dialysis Services of NJ., Inc. - Manahawkin ("DSNJ-M"). The Company treats
Method II homecare patients in Pennsylvania through its subsidiary,  DCA Medical
Services, Inc. ("DCAMS").  Additional new facilities are anticipated,  currently
through  construction  and  development  of new  dialysis  centers as opposed to
acquisition.

<PAGE>


GENERAL

         Management  believes the Company  distinguishes  itself on the basis of
quality  patient  care.  The  Company  currently  provides  outpatient  dialysis
services  through its five modern  outpatient  facilities to  approximately  112
patients in Pennsylvania  and New Jersey.  For the year ended December 31, 1998,
the  Company  performed  approximately  16,750  dialysis  treatments,  of  which
approximately  13,160  were  outpatient  treatments,  approximately  2,190  were
homecare  patients,  and  approximately  1,400  represented  inpatient  dialysis
treatments.  The Company's  facilities are designed for a maximum of 71 stations
to render outpatient dialysis treatment and training of home dialysis patients.

         DCA's inpatient  dialysis  treatments are conducted  under  contractual
relationships  currently with three hospitals located in areas serviced by three
of the Company's outpatient dialysis subsidiaries.  Homecare, sometimes referred
to as  Method  II home  patient  treatment,  requires  the  Company  to  provide
equipment and supplies, training, patient monitoring and follow-up assistance to
patients who are able to perform their treatments at home.

         DCA's future growth depends  primarily on the  availability of suitable
dialysis  centers for  acquisition or development in appropriate  and acceptable
areas, and its ability to develop these new potential  dialysis centers at costs
within the budget of the Company while competing with larger companies,  some of
which are public  companies or divisions of public  companies  with much greater
personnel and financial resources who have a significant  advantage in acquiring
and/or  developing  facilities in areas targeted by the Company.  DCA opened its
center in Carlisle,  Pennsylvania in 1997, its fourth center in Manahawkin,  New
Jersey in 1998, its fifth center in Chambersburg, Pennsylvania the January, 1999
and is in the planning  stage of  development of its sixth center in Toms River,
New Jersey.  However, there is no assurance that the Toms River facility will be
completed.  Additionally,  there is intense  competition for retaining qualified
nephrologists,  who normally are a substantial if not the sole source of patient
referrals and are responsible for the supervision of the dialysis  centers,  and
assist in finding nursing and technical staff at reasonable rates.

         The Company's net revenues are derived primarily from four sources: (i)
outpatient hemodialysis services; (ii) home dialysis services,  including Method
II  services;  (iii)  inpatient  hemodialysis  services  for acute  patient care
provided through  agreements with hospitals and other healthcare  entities;  and
(iv) ancillary services associated with dialysis  treatments,  primarily certain
tests and the administration of erythropoietin ("EPO"), a bio-engineered protein
that stimulates the production of red blood cells, since a deteriorating  kidney
looses  its  ability to  regulate  red blood cell  count,  resulting  in anemia.
Dialysis is an ongoing and necessary therapy to sustain life for kidney dialysis
patients and utilization of the Company's services is substantially predictable.
ESRD  patients  normally  receive 156 dialysis treatments each year. For each of
the  two  years  ended  December  31,  1997  and  1998, approximately 74% of the
Company's  revenues  were  derived  from  Medicare  reimbursement.  Average  net
revenue per treatment,  which includes all sources of payments,  governmental or
private,  for the Company's  in-center and home  patients,  including  ancillary
services,  was  approximately  $205 for the year ended  December  31,  1998,  as
compared to $206 for the year ended December 31, 1997.

         Essential  to the  operations  and income of the  Company  is  Medicare
reimbursement  which is a fixed rate  determined  by the Health  Care  Financing
Administration  ("HCFA") of the Department of Health and Human Services ("HHS").
The level of DCA's  revenues  and  profitability  may be  adversely  affected by
future legislation that could result in rate cuts.  Additionally,  the Company's
operating  costs  tend  to  increase  over  the  years  without  any  comparable
increases,  if any, in the prescribed  dialysis  treatment rates,  which usually
remain fixed and have decreased over the years.  There also may be 

                                       2
<PAGE>


reductions in commercial  third-party  reimbursement  rates.  See  "Operations -
Medicare  Reimbursement." The inpatient dialysis service agreements for treating
acute kidney disease are not subject to government  fixed rates,  but rather are
negotiated  with the  hospitals,  and  typically  the rates are  higher on a per
treatment  basis.  The  Company's   inpatient   treatments  have  accounted  for
approximately 16% and 11% of the Company's revenues for the years ended December
31, 1997 and 1998, respectively.

DIALYSIS INDUSTRY

         Kidneys  generally  act as a filter  removing  harmful  substances  and
excess water from the blood,  enabling  the body to maintain  proper and healthy
balances of chemicals  and water.  Chronic  kidney  failure,  or End Stage Renal
Disease  ("ESRD")  which  results from  chemical  imbalance and buildup of toxic
chemicals,  is a state of kidney disease  characterized by advanced irreversible
renal impairment.  ESRD is a likely consequence of complications  resulting from
diabetes,  hypertension,  advanced  age,  and  specific  hereditary,  cystic and
urological diseases.  ESRD patients,  in order to survive,  must obtain a kidney
transplant, which procedure is limited due to lack of suitable kidney donors and
ESRD patients and the incidence of rejection of transplanted  organs,  or obtain
regular dialysis treatment for the rest of their lives.

         Based upon  information  published by HCFA, the  approximate  number of
ESRD  patients  requiring  dialysis  treatments  in the United States grew 9% to
approximately  284,000  at the end of 1996,  the latest  year in which  there is
complete and compiled  information by HCFA, due to the fact that HCFA statistics
are gathered from Medicare billing records,  which take  approximately two years
to be  compiled.  The  growth in the  number of ESRD  patients  is  attributable
primarily  to the aging of the  population  and greater  patient  longevity as a
result of improved dialysis technology.  HCFA reported in the 1998 United States
Renal Data System  ("USRDS")  Annual Report that total direct public and private
medical payments for ESRD patients were approximately $14.55 billion in 1996, of
which  approximately $9.6 billion was paid by the federal government through the
Medicare  program.  The overall ESRD program costs  increased 11.4% from 1995 to
1996.

         According to estimated  statistics of HCFA, at June,  1998,  there were
approximately  3,470  Medicare-certified  facilities,  which number includes all
freestanding  and  hospital  based  centers and  transplant  centers.  Of those,
approximately  70% are  freestanding  facilities  and  approximately  65% of the
independent dialysis facilities are non-hospital for-profit facilities.

         ESRD TREATMENT OPTIONS

         Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient  facility,  or (ii) inpatient hospital facility,  or
(iii) the patient's home; (2) peritoneal dialysis,  either continuous ambulatory
peritoneal dialysis ("CAPD") or continuous cycling peritoneal dialysis ("CCPD"),
usually  performed at the  patient's  home;  and/or (3) kidney  transplant.  The
significant  portion of ESRD patients receive  treatments at non-hospital  owned
outpatient dialysis  facilities  (approximately 83%) with the remaining patients
treated at home through hemodialysis or peritoneal dialysis. Patients treated at
home are monitored by a designated outpatient facility.

         The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer,  to perform
the function of removing toxins and excess fluids from the bloodstream.  This is
accomplished  with a dialysis  machine,  a complex blood filtering  device which
takes the place of  certain  functions  of the  kidney  and which  machine  also
controls  external blood flow and monitors the toxic and fluid removal  process.
The dialyzer has two separate chambers divided 

                                       3
<PAGE>


by a semi-permeable  membrane, and at the same time the blood circulates through
one chamber,  a dialyzer  fluid is  circulated  through the other  chamber.  The
toxins and excess fluid pass through the membrane  into the dialysis  fluid.  On
the  average,  patients  usually  receive  three  treatments  per week with each
treatment taking three to five hours. Dialysis treatments are performed by teams
of licensed  nurses and trained  technicians  pursuant to the staff  physician's
instructions.

         Home  hemodialysis  treatment  requires  the  patient  to be  medically
suitable  and  have  a  qualified  assistant.  Additionally,  home  hemodialysis
requires  training for both the patient and the  assistant,  which usually takes
four to  eight  weeks.  Such  training  is  provided  by  each of the  Company's
facilities.  The use of  conventional  home  hemodialysis  has  declined  and is
minimal  due to the  patient's  suitability  and  lifestyle,  the  need  for the
presence of a partner  and a dialysis  machine at home,  and the higher  expense
involved over CAPD.

         A second home treatment for ESRD patients is peritoneal dialysis. There
are several  variations of peritoneal  dialysis,  the most common being CAPD and
CCPD. All forms of peritoneal dialysis use the patient's peritoneal  (abdominal)
cavity to eliminate  fluid and toxins from the patient.  CAPD utilizes  dialysis
solution installed manually into the patient's peritoneal cavity, which does not
require the use of a  mechanical  device or an  assistant.  The  patient  uses a
sterile   dialysis   solution   which  is  fed  into  the   cavity   through   a
surgically-placed  catheter.  The solution is allowed to remain in the abdominal
cavity for a three to five hour  period and is then  drained.  The cycle is then
repeated.  CCPD is  performed  in a manner  similar  to  CAPD,  but  utilizes  a
mechanical  device to cycle  dialysis  solution  while the patient is  sleeping.
Peritoneal  dialysis  is the third most common  form of ESRD  therapy  following
center hemodialysis and renal transplant.

         The third  modality for patients  with ESRD is kidney  transplantation.
While this is the most desirable form of therapeutic intervention,  the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.

BUSINESS STRATEGY

         DCA,  having  22  years  experience  in  successfully   developing  and
operating  dialysis  treatment  facilities,  plans  to use such  experience  and
expertise to expand its dialysis  operations,  including  provision of ancillary
services to patients.  The first priority is top quality  patient care. In June,
1998, there were approximately  3,470 Medicare approved ESRD facilities of which
approximately  65% were independent  for-profit  dialysis centers  (non-hospital
centers).  A  substantial  number  of these  freestanding  centers  are owned by
physicians  or major  corporations,  certain  of  which  are  public  companies.
Management  intends to continue  to  establish  alliances  with  physicians  and
hospitals and to initiate  dialysis service  arrangements with nursing homes and
managed  care  organizations,  and to continue  to  emphasize  its high  quality
patient  care,  its  smaller  size  which  allows it to focus on each  patient's
individual  needs while  remaining  sensitive  to the  physicians'  professional
concerns.

         A new Vice  President was added to the Company's  management in 1998 to
direct and supervise the development and acquisition of new dialysis facilities.
Under his  direction,  the Company is  actively  seeking  and  negotiating  with
several  physicians to establish new outpatient  dialysis  facilities at several
locations.  While the Company is continually  pursuing new opportunities,  there
are no firm  agreements  to acquire or develop any  additional  facilities or to
provide  inpatient  dialysis  treatment,  and no assurance can be given that any
such agreements will be made.

                                       4
<PAGE>


         SAME CENTER GROWTH

         The Company  endeavors to increase same center growth by adding quality
staff and management and attracting new patients to its existing facilities. DCA
seeks to accomplish  this  objective by rendering  high caliber  patient care in
convenient,  safe and serene  conditions  for  everyone  involved.  The  Company
believes that it has existing  adequate space and stations within its facilities
to accommodate  greater patient volume and maximize its treatment  potential and
is working to achieve such increase,  to lower its fixed costs, and operate at a
greater efficiency level.

         ACQUISITION AND DEVELOPMENT OF FACILITIES

         One of the primary  elements in acquiring or  developing  facilities is
locating an area with an existing patient base under the current  treatment of a
local  nephrologist,  since  the  facility  is  primarily  going to  serve  such
patients.   Other   considerations  in  evaluating  a  proposed  acquisition  or
development of a dialysis  facility are the  availability  and cost of qualified
and skilled  personnel,  particularly  nursing and technical staff, the size and
condition of the facility and its  equipment,  the  atmosphere for the patients,
the area's  demographics and population  growth  estimates,  state regulation of
dialysis and healthcare services,  and the existence of competitive factors such
as hospital or proprietary  non-hospital owned and existing  outpatient dialysis
facilities within reasonable proximity to the proposed center.

         Expansion of the  Company's  operations is being  approached  presently
through the development of its own dialysis facilities.  Acquisition of existing
outpatient  dialysis  centers,  which the Company has not done in the past, is a
faster but much more costly means of growth.  The primary reason for the sale of
independently  owned  centers  by  physicians  is  typically  the  avoidance  of
administrative and financial  responsibilities,  freeing their time to devote to
their professional  practice.  Other motivating forces are the physician-owner's
desire to be part of a larger  public  organization  allowing  for  economies of
scale and the ability to realize a return on their investment.

         To construct and develop a new facility  ready for  operations may take
an  average  of four to six  months,  and  approximately  12 months or longer to
generate  income,  all of which are subject to  location,  size and  competitive
elements.  Construction of a 12 station facility may cost in a range of $600,000
to $750,000  depending on location,  size and related services to be provided by
the proposed facility. Acquisition of existing facilities may range from $40,000
to $70,000 per patient.  Therefore,  a facility with 30 patients could cost from
$1,200,000 to $2,100,000  subject to location,  competition,  nature of facility
and  negotiation.  Any significant  expansion,  whether  through  acquisition or
development  of new  facilities,  is dependent  upon existing funds or financing
from other  sources.  To date,  no  acquisitions  have been made and should such
acquisition  opportunities  arise,  there is no assurance that the Company would
have available or be able to raise the necessary financing to pursue or complete
such an acquisition.

         INPATIENT SERVICES

         Management is also seeking to increase  acute  dialysis care  contracts
with hospitals for inpatient dialysis services.  These contracts are sought with
hospitals in areas  serviced by its  facilities.  Hospitals are willing to enter
into such inpatient care arrangements to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining  dialysis equipment,  supplies and personnel.  It is simpler for the
hospital to engage an  independent  party with the expertise and the  knowledge,
such as DCA, to provide the  inpatient  dialysis  treatments.  DCA believes that
these  arrangements  are  beneficial  to the  Company's  operations,  since  the
contract rates are 

                                       5
<PAGE>


individually  negotiated  with each  hospital  and are not  fixed by  government
regulation  as is the case with  Medicare  reimbursement  fees for ESRD  patient
treatment.

         Management  continues to consult and negotiate with  nephrologists  for
the  acquisition  or  development  of new dialysis  facilities,  as well as with
hospitals and other healthcare  maintenance  entities for inpatient  agreements.
Several agreements for acute inpatient services with several hospitals,  nursing
homes and managed care  facilities in the areas  surrounding  present and future
facilities  are  under   negotiation   but  there  is  no  assurance  that  such
negotiations  will  result  in an  agreement  or  that  any  agreement  will  be
completed. There is no certainty as to when any new centers or service contracts
will be implemented,  or the number of stations,  or patient treatments such may
involve,  or if such will  ultimately be profitable.  There is no assurance that
the Company will be able to enter into favorable  relationships  with physicians
who would become medical directors of such proposed dialysis facilities, or that
the Company will be able to acquire or develop any new dialysis centers within a
favorable  geographic  area.  Newly  established   dialysis  centers,   although
contributing to increased revenues,  also adversely affect results of operations
due to start-up costs and expenses with a smaller  developing  patient base. See
"Business Strategy",  "Operations" and "Competition" of Item 1, "Business",  and
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

OPERATIONS

         LOCATION, CAPACITY AND USE OF FACILITIES

         The Company currently operates five outpatient  dialysis  facilities in
Pennsylvania  and New  Jersey  with a total  designed  capacity  of 71  licensed
stations.  The Company owns and operates those centers through its subsidiaries,
DSPL, DSPW, DSPC, DSPCh and DSNJ-M. The Lemoyne,  Pennsylvania dialysis facility
is located on  property  owned by the  Company  and leased to DSPL.  See Item 2,
"Properties."

         The Company also provides  acute care  inpatient  dialysis  services to
three  hospitals  in areas  serviced  by three of the  Company's  five  dialysis
facilities  and is in the process of  negotiating  additional  contracts  in the
areas  surrounding its other facilities and in tandem with development of future
proposed sites. Each of its dialysis facilities provides training,  supplies and
on-call support services for home peritoneal  patients.  See "Dialysis Industry"
above. DSPL commenced  operations in June, 1995 and for the years ended December
31, 1997 and 1998, provided  approximately 7,241 and 7,468 dialysis  treatments,
respectively.  DSPW  commenced  operations in September,  1995 and for the years
ended December 31, 1997 and 1998, provided 2,298 and 3,602 dialysis  treatments,
respectively.  DSPC commenced operations in the third quarter of 1997, providing
1,346 treatments at year end and for the year ended December 31, 1998,  provided
3,483  treatments.  From July,  1998 to December 31, 1998,  DSNJ-M  provided 247
treatments. DSPCh just commenced operations in January, 1999.

         The Company  estimates  that on average its centers  were  operating at
approximately  56% of capacity as of December 31, 1998,  based on the assumption
that a  dialysis  center is able to  provide  up to three  treatments  a day per
station,  six days a week.  The Company  believes it may  increase the number of
dialysis   treatments  at  its  centers   without  making   additional   capital
expenditures.

         OPERATIONS OF DIALYSIS FACILITIES

         DCA's  dialysis  facilities  are designed  specifically  for outpatient
hemodialysis  and  generally   contain,   in  addition  to  space  for  dialysis
treatments,  a nurses'  station,  a patient  weigh-in area, a supply room, water
treatment  space  used to purify the water used in  hemodialysis  treatments,  a
dialyzer  

                                       6
<PAGE>


reprocessing room (where, with both the patient's and physician's  consent,  the
patient's  dialyzer is  sterilized  for reuse),  staff work area,  offices and a
staff lounge. The Company's  facilities also have a designated area for training
patients in home dialysis. Each facility also offers amenities for the patients,
such as a color  television with headsets for each dialysis  station,  to ensure
the patients are comfortable and relaxed.

         The Company maintains a team of expert dialysis  specialists to provide
for the  individual  needs of each  patient.  In accordance  with  participation
requirements  under the Medicare ESRD program,  each facility  retains a medical
director  qualified  and  experienced  in the  practice  of  nephrology  and the
administration  of a renal  dialysis  facility.  See  "Physician  Relationships"
below.  Each facility is overseen by a nurse  administrator  who  supervises the
daily operations and the staff,  which consists of registered  nurses,  licensed
practical nurses, patient care technicians,  a part-time social worker to assist
the patient and family to adjust to dialysis  treatment  and to provide  help in
financial assistance and planning,  and a part-time registered dietitian.  These
individuals supervise the patient's needs and treatments. See "Employees" below.
The Company must continue to attract and retain  skilled nurses and other staff,
competition for whom is intense.

         The  Company's   facilities  offer   high-efficiency  and  conventional
hemodialysis,  which,  in the  Company's  experience,  provides  the most viable
treatment for most patients.  The Company considers its dialysis equipment to be
both modern and  efficient,  providing  state of the art treatment in a safe and
comfortable  environment.  In 1998, the Company leased an additional 17 machines
which  are  more  advanced  and  include  better  safety  features  and  updated
technology.  The  addition of the  improved  equipment  enhances  the  Company's
ability to provide more efficient treatment in the opinion of management.

         The Company's  facilities also offer home dialysis,  primarily CAPD and
CCPD.  Training programs for CAPD or CCPD generally encompass two to three weeks
at each facility, and such training is conducted by the facility's home training
nurse. After the patient completes training,  they are able to perform treatment
at home with equipment and supplies provided by the Company.

         INPATIENT DIALYSIS SERVICES

         The Company  presently  provides  inpatient  dialysis services to three
hospitals in Pennsylvania  under agreements with the Company's local subsidiary.
Each  agreement is for a one-year term with  automatic  one-year  renewal terms,
subject  to  termination  by notice  of either  party.  Inpatient  services  are
typically necessary for patients with acute kidney failure resulting from trauma
or similar  causes,  patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons.

         ANCILLARY SERVICES

         The Company's dialysis facilities provide certain ancillary services to
ESRD  patients,   including  the   administration  of  EPO  upon  a  physician's
prescription. EPO is a bio-engineered protein which stimulates the production of
red blood  cells and is used in  connection  with  dialysis to treat  anemia,  a
medical complication  frequently experienced by ESRD patients. EPO decreases the
necessity for blood transfusions in ESRD patients. Other ancillary services that
the  Company  provides  to its  patients  include  electrocardiograms  and blood
transfusions,  all of which are separately reimbursed by Medicare. See "Medicare
Reimbursement" below.

                                       7
<PAGE>


         PHYSICIAN RELATIONSHIPS

         An integral  element to the  success of a facility  is its  association
with area  nephrologists.  A dialysis  patient  generally  seeks  treatment at a
facility  near the  patient's  home and where such  patient's  nephrologist  has
established  its practice.  Consequently,  the Company  relies on its ability to
attract and satisfy the needs of  referring  nephrologists  to gain new patients
and to provide quality dialysis care through these physicians.

         The  conditions  of a facility's  participation  in the  Medicare  ESRD
program  mandate  that  treatment  at a dialysis  facility  be under the general
supervision  of a medical  director who is a physician.  The Company  retains by
written  agreement  qualified  physicians  or groups of qualified  physicians to
serve as medical  directors for each of its facilities.  Generally,  the medical
directors  are board  eligible  or board  certified  in  internal  medicine by a
professional board specializing in nephrology and have had at least 12 months of
experience or training in the care of dialysis patients at ESRD facilities.  The
Company's medical  directors are typically a significant  source of referrals to
the particular center served.

         Agreements with medical  directors are usually for a term of five years
or  more  with  renewal   provisions.   Each  agreement  specifies  the  duties,
responsibilities and compensation of the medical director. Usually,  physician's
fees for services  are billed to the  government  payment  authority on a direct
basis and paid directly to the physician or the professional  corporation  which
acts as the medical director for the facility. Under each agreement, the medical
director  or  professional  association  maintains  his,  her or its own medical
malpractice  insurance.  The agreements  also provide for  non-competition  in a
limited  geographic area surrounding that particular  dialysis center during the
term of the agreement and upon  termination for a limited period.  However,  the
agreements  do not  prohibit  physicians  providing  services  at the  Company's
facility from  providing  direct patient care services at other  locations;  and
consistent  with the federal  and state law,  such  agreements  do not require a
physician to refer patients to the Company's dialysis center.

         The Company's  ability to establish a dialysis facility in a particular
area is  significantly  geared to the  availability of a qualified  physician or
nephrologist  with an existing  patient base to serve as the  Company's  medical
director. The loss of a medical director who could not be readily replaced would
have a  material  adverse  effect on the  operations  of that  facility  and the
Company.  Compensation  of medical  directors is separately  negotiated for each
facility and generally depends on competitive  factors such as the local market,
the physician's qualifications and the size of the facility.

         QUALITY ASSURANCE

         The Company  implements  a quality  assurance  program to maintain  and
improve the quality of dialysis  treatment  and care it provides to its patients
in every facility.  Quality assurance activities involve the ongoing examination
of care  provided,  the  identification  of  deficiencies  in that  care and any
necessary  improvements  of the  quality  of care.  Specifically,  this  program
requires  each  center's  staff,  including  its medical  director  and/or nurse
administrator  to regularly  review quality  assurance data,  whether related to
dialysis   treatment   services,   equipment,    technical   and   environmental
improvements,  and staff-patient and personnel relationships.  These evaluations
are in addition to assuring regulatory compliance with HCFA and the Occupational
Safety and Health Administration  ("OSHA"). The Company's manager of compliance,
who is a registered  nurse,  oversees  this program in addition to ensuring that
the  Company  meets  federal  and state  compliance  requirements  for  dialysis
centers. See "Government Regulation" below.

                                       8
<PAGE>


         PATIENT REVENUES

         A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program  established by the federal  government  under the
Social  Security Act, and  administered in accordance with rates set by HCFA. It
has been  reported by HCFA that 92% of all  dialysis  patients  were  covered by
Medicare.  The  balance of the  outpatient  charges  are paid by private  payors
including  the patient's  medical  insurance,  private  funds or state  Medicaid
plans.  Pennsylvania  and New Jersey,  presently the states in which the Company
operates,  provide  Medicaid or comparable  benefits to qualified  recipients to
supplement their Medicare coverage.

         Under the ESRD Program,  payments for dialysis  services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients.  The maximum payments
vary based on the  geographic  location of the center.  The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's  personal  funds.  Medicare  and  Medicaid  programs  are  subject  to
regulatory changes,  statutory  limitations and government funding restrictions,
which  may  adversely  affect  the  Company's  revenues  and  dialysis  services
payments. See "Medicare Reimbursement" below.

         The inpatient  dialysis  services are paid for by the hospital pursuant
to  contractual  pre-determined  fees  for the  different  dialysis  treatments.
Inpatient  treatments  accounted for  approximately 16% and 11% of the Company's
revenues for the years ended December 31, 1997 and 1998, respectively.

         MEDICARE REIMBURSEMENT

         The Company is reimbursed  primarily from third party payors  including
Medicaid,  commercial insurance companies, but substantially by Medicare under a
prospective  reimbursement  system for chronic  dialysis  services.  Each of the
Company's  dialysis  facilities  is  certified  to  participate  in the Medicare
program.  Under  that  Medicare  system,  the  reimbursement  rates are fixed in
advance and limit the allowable  charge per treatment,  but provides the Company
with predictable and recurring per treatment  revenues and allows the Company to
retain any profit earned. An established  composite rate set by HCFA governs the
Medicare  reimbursement  available for a designated group of dialysis  services,
including  dialysis  treatments,  supplies  used  for such  treatments,  certain
laboratory tests and medications.  HCFA eliminated routine Medicare coverage for
such tests as nerve  conduction  studies,  electrocardiograms,  chest x-rays and
bone  density  measurements,  and will  only pay for such  tests  when  there is
documentation of medical  necessity.  The Medicare  composite rate is subject to
regional differences in wage earnings.

         The Company receives  reimbursement  for outpatient  dialysis  services
provided to Medicare-eligible  patients at rates that are currently between $122
and $124 per treatment,  depending upon regional wage  variations.  The Medicare
reimbursement  rate is subject to change by legislation and  recommendations  by
the Medicare Payment Advisory Commission  ("MedPAC"),  a new commission mandated
by the Balanced  Budget Act of 1997 and continuing  the work of the  Prospective
Payment   Assessment   Commission   ("PROPAC").   Congress  increased  the  ESRD
reimbursement  rate,  effective  January 1, 1991,  resulting  in an average ESRD
reimbursement rate of $126 per treatment for outpatient  dialysis services.  The
current maximum  composite  reimbursement  rate is $134 per treatment.  In 1990,
Congress required that HHS and PROPAC study dialysis costs and reimbursement and
make findings as to the  appropriateness of ESRD  reimbursement  rates. Any rate
increase by Congress  must be  considered  in the context of Medicare  budgetary
concerns.  In 1998,  MedPAC  recommended  a 2.7%  increase in the amount paid to
dialysis  facilities for  performance of services,  which if passed by Congress,
would constitute the second increase that has been approved for the ESRD program
since its inception.  

                                       9
<PAGE>


Congress is not required to implement such  recommendation  and could  otherwise
increase or decrease the Medicare reimbursement rate.

         Other   ancillary   services   and  items  are  eligible  for  separate
reimbursement  under Medicare and are not part of the composite rate,  including
certain drugs such as EPO, the allowable rate of which is currently $10 per 1000
units (proposed to be reduced to $9 per 1000 units), blood for amounts in excess
of three  units  per  patient  per year,  and  certain  physician-ordered  tests
provided to dialysis  patients.  These  ancillary  services are not  significant
sources of income to the Company compared to reimbursement for actual treatment.
However,  the proposal to reduce the  reimbursement  rate of EPO could adversely
impact the Company's income from EPO if the proposal is enacted by Congress. The
Company  routinely submits claims monthly and is usually paid by Medicare within
30 days of the submission.

         The Company is unable to predict what, if any, future changes may occur
in  the  rate  of  reimbursement.   Any  reduction  in  the  Medicare  composite
reimbursement  rate  could  have a  material  adverse  effect  on the  Company's
business, revenues and net earnings.

         MEDICAID REIMBURSEMENT

         Medicaid programs are state  administered  programs partially funded by
the federal  government.  These  programs are  intended to provide  coverage for
patients  whose  income and assets fall below state  defined  levels and who are
otherwise uninsured.  The programs also serve as supplemental insurance programs
for the Medicare  co-insurance portion and provide certain coverages (e.g., oral
medications)  that are not  covered by  Medicare.  State  regulations  generally
follow  Medicare  reimbursement  levels and coverages  without any  co-insurance
amounts.  Certain states, however,  require beneficiaries to pay a monthly share
of the cost based upon  levels of income or assets.  Pennsylvania  has a Medical
Assistance Program comparable to Medicaid,  as well as New Jersey,  with primary
and secondary insurance coverage to those who qualify. The Company is a licensed
ESRD  Medicaid  provider  in  Pennsylvania,  and has  applied to be an  approved
Medicaid provider in New Jersey.

POTENTIAL LIABILITY AND INSURANCE

         Participants  in the health care industry are subject to lawsuits based
upon alleged  negligence,  many of which  involve  large claims and  significant
defense  costs.  DCA,  although  involved in chronic and acute  kidney  dialysis
services for approximately 22 years, has never been subject to any suit relating
to its dialysis operations. The Company currently has in force general liability
insurance,  including professional and products liability,  with coverage limits
of $1 million  per  occurrence  and $3 million in the  aggregate  annually.  The
Company's  insurance  policies provide coverage on an "occurrence" basis and are
subject to annual renewal.  A successful  claim against the Company in excess of
the Company's  insurance  coverage could have a material adverse effect upon the
Company's business and results of operations.  The medical directors supervising
the  Company's  dialysis  operations  and  other  physicians  practicing  at the
facilities are required to maintain their own professional malpractice insurance
coverage.

GOVERNMENT REGULATION

         GENERAL

         Dialysis  treatment  centers must comply with various state and federal
health  laws  which are  generally  applicable  to  healthcare  facilities.  The
dialysis center must meet a variety of governmental  standards including but not
limited to  maintenance of equipment and proper  records,  personnel and 

                                       10
<PAGE>


quality assurance programs. Each of the dialysis facilities must be certified by
HCFA, and the Company must comply with certain rules and regulations established
by HCFA regarding charges, procedures and policies. Each dialysis center is also
subject to periodic  inspections  by federal and state  agencies to determine if
their operations meet the appropriate  regulatory standards.  These requirements
have been satisfied by each of the Company's dialysis facilities.

         Many states have  eliminated the  requirement  for dialysis  centers to
obtain a certificate of need, a condition for regulating the  establishment  and
expansion of dialysis centers.  There are no certificate of need requirements in
Pennsylvania  or New Jersey where the Company is operating.  In past years,  the
Company has always been able to comply with applicable certificate of need laws.

         DCA's record of compliance with federal,  state and local  governmental
laws and regulations  remains  excellent.  Regulation of healthcare  facilities,
including dialysis centers, is extensive with legislation  continually  proposed
relating  to  safety,   reimbursement  rates,   licensing  and  other  areas  of
operations. The Company is unable to predict the scope and effect of any changes
in government  regulations,  particularly any modifications in the reimbursement
rate for medical  services or  requirements to obtain  certification  from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions.

         The Company regularly reviews  legislative changes and developments and
will  restructure a business  arrangement  if management  determines  such might
place it in material  noncompliance with such law or regulation.  See "Fraud and
Abuse" and "Stark II" below. To date, none of DCA's business  arrangements  with
physicians,  patients or others have been the  subject of  investigation  by any
governmental  authority. No assurance can be given, however, that DCA's business
arrangements will not be the subject of a future investigation or prosecution by
a federal or state  governmental  authority  which could  result in civil and/or
criminal sanctions.

         FRAUD AND ABUSE

         The Social  Security  Act  provides  Medicare  coverage to most persons
regardless  of age or financial  condition  for dialysis  treatments  as well as
kidney transplants.  The Social Security Act further prohibits, as do many state
laws,  the payment of patient  referral fees for  treatments  that are otherwise
paid for by Medicare,  Medicaid or similar state programs under the Medicare and
Medicaid  Patient  and Program  Protection  Act of 1987,  or the  "Anti-kickback
Statute." The  Anti-kickback  Statute and similar state laws impose criminal and
civil sanctions on persons who knowingly and willfully solicit,  offer,  receive
or pay any remuneration,  directly or indirectly,  in return for, or to include,
the referral of a patient for  treatment,  among other  things.  Included in the
civil penalties is exclusion of the provider from  participation in the Medicare
and  Medicaid  programs.  The  language  of the  Anti-kickback  Statute has been
construed  broadly  by the  courts.  The  federal  government  in 1991  and 1992
published  regulations  that  established  exceptions,  "safe  harbors,"  to the
Anti-kickback Statute for certain business arrangements that would not be deemed
to violate the illegal  remuneration  provisions  of the  federal  statute.  All
conditions  of the safe  harbor must be  satisfied  to meet the  exception,  but
failure to satisfy all elements does not mean the business  arrangement violates
the illegal remuneration provision of the statute.

         As required by Medicare  regulations,  each of the  Company's  dialysis
centers is supervised by a medical director,  who is a licensed  nephrologist or
otherwise qualified physician. The medical directors are in private practice and
are one of the most important sources of the dialysis center's  business,  since
it is each  physician's  patients  that  primarily  utilize the  services of the
facility.  The  compensation  of the Company's  medical  directors is fixed by a
Medical Director Agreement and reflects  competitive factors 

                                       11
<PAGE>


in their respective  location,  and the size of the center,  and the physician's
professional qualifications.  The medical director's fee is fixed in advance for
periods  of one to five  years  and does not take  into  account  the  volume of
patient treatments or amounts of referrals to the Company's dialysis center. Two
of the  Company's  outpatient  dialysis  centers are owned  jointly  between the
Company and a group of physicians, who hold a minority position and who also act
as the medical  director for those  facilities.  DCA  attempts to structure  its
arrangements  with its  physicians  to comply  with the  Anti-Kickback  Statute.
However,  many of these physicians  refer patients to the Company's  facilities.
The Company  believes  that the value of the minority  interest  represented  by
stock of the Company's  subsidiaries  issued to physicians  has been  consistent
with the fair market value of assets  transferred  to, or services  performed by
such physicians for the Company,  and in certain cases,  monetary  compensation,
and there is no intent to induce  referrals  to the  Company's  facilities.  See
"Business - Physician  Relationships" above. DCA has never been challenged under
these statutes and believes its arrangements  with its medical  directors are in
material compliance with applicable law.

         Management believes that the illegal remuneration  provisions described
above are primarily  directed at abusive practices that increase the utilization
and cost of services covered by  governmentally  funded  programs.  The dialysis
services  provided by the Company  generally  cannot,  by their very nature,  be
over-utilized, since dialysis treatment is not elective and cannot be prescribed
unless there is temporary or permanent  kidney  failure.  There are safe harbors
for certain  arrangements.  However,  these  relationships with medical director
ownership of a minority  interest in a Company  facility does not satisfy all of
the  criteria  for the safe  harbor,  and there can be no  assurance  that these
relationships  will not subject the Company to  investigation  or prosecution by
enforcement agencies.

         With respect to the Company's inpatient dialysis services,  it provides
the hospital or similar  healthcare  entity with  dialysis  services,  including
qualified  nursing and technical  personnel,  supplies,  equipment and technical
services. In certain instances, medical directors of a Company facility who have
a minority  interest in that facility may refer patients to hospitals with which
the  Company  has  an  inpatient  dialysis  services  arrangement.  The  federal
Anti-kickback  Statute could apply, but the Company believes its acute inpatient
hospital services are in compliance with the law. See "Stark II" below.

         The Company  endeavors  in good faith to comply  with all  governmental
regulations.  However,  there can be no  assurance  that the Company will not be
required to change its  practices or experience a material  adverse  effect as a
result of any such potential  challenge.  The Company cannot predict the outcome
of the  rule-making  process or whether  changes in the safe  harbor  rules will
affect the Company's  position with respect to the  Anti-kickback  Statute,  but
does believe it will remain in compliance.

         STARK II

         The  Physician  Ownership and Referral Act ("Stark II") was adopted and
incorporated  into the  Omnibus  Budget  Reconciliation  Act of 1993 and  became
effective  January 1, 1995.  Stark II bans  physician  referrals,  with  certain
exceptions,  for certain  "designated health services" as defined in the statute
to entities in which a physician or an immediate  family member has a "financial
relationship"  which  includes an  ownership  or  investment  interest  in, or a
compensation  arrangement  between the  physician  and the  entity.  This ban is
subject  to  several  exceptions   including   personal  service   arrangements,
employment  relationships  and group practices meeting specific  conditions.  If
Stark II is found to be  applicable  to the  facility,  the entity is prohibited
from claiming payment for such services under the Medicare or Medicaid programs,
is liable for the refund of amounts received pursuant to prohibited  claims, can
be  imposed  with  civil  penalties  of up to $15,000  per  referral  and can be
excluded from  participation in the Medicare and Medicaid  programs.  Last year,
HCFA  released  proposed  rules 

                                       12
<PAGE>


that  interpret  the  provisions of Stark II and  Congress'  legislative  intent
behind their enactment ("Proposed Rules").

         For purposes of Stark II, "designated health services" includes,  among
others, clinical laboratory services, durable medical equipment,  parenteral and
enteral nutrients,  home health services,  and inpatient and outpatient hospital
services.  In the Proposed  Rules,  HCFA clarified the definitions of designated
health  services,  delineating  what  supplies  and  services are intended to be
included and excepted from each  category.  In particular,  dialysis  equipment,
supplies and services were specifically excepted from the definitions of durable
medical  equipment,  and inpatient and outpatient health services.  HCFA further
indicated that the purpose behind the Stark II prohibition on physician referral
is to prevent  Medicare  program  and  patient  abuse,  and that  dialysis  is a
necessary medical treatment for those with temporary or permanent kidney failure
that is not susceptible to that type of abuse.  HCFA  additionally  excluded EPO
(see "Business - Operations - Ancillary  Services" above) from the definition of
outpatient prescription drugs under the same reasoning.

         The Company  believes,  based upon the Proposed  Rules and the industry
practice,  that  Congress  did not intend to include  dialysis  services and the
services and items provided by the Company incident to dialysis  services within
the Stark II prohibitions.  There can be no assurance,  though, that final Stark
II regulations will adopt such a position. No final rules have been promulgated,
however, and are not expected to be published until the end of 1999 or beginning
of 2000.

         If the  provisions  of  Stark II were  found to apply to the  Company's
arrangements  however, the Company believes that it would be in compliance.  DCA
compensates  its  nephrologist-physicians  as medical  directors of its dialysis
centers pursuant to Medical Director Agreements, which the Company believes meet
the exception for personal service  arrangements under Stark II.  Non-affiliated
physicians  who send or treat their  patients at any of DCA's  facilities do not
receive any compensation from DCA.

         Medical  directors  of DCA's  facilities  in which they hold a minority
investment  interest may refer patients to hospitals with which DCA has an acute
inpatient dialysis service arrangement.  Stark II may be interpreted to apply to
these types of interests.  According to the Proposed Rules, however,  acute care
inpatient  hospital  arrangements  for dialysis  services are excluded  from the
prohibition  on  physician  referrals  based  upon  the fact  that the  services
provided under these arrangements are rendered under emergency circumstances and
are necessary treatments. The Company believes that its contractual arrangements
with hospitals for acute care inpatient dialysis services are in compliance with
this exception.

         If HCFA or any other government entity takes a contrary position in the
Stark  II final  regulations  or  otherwise,  the  Company  may be  required  to
restructure certain existing compensation agreements with its medical directors,
or, in the  alternative,  to refuse to accept  referrals for  designated  health
services from certain  physicians.  That legislation prohibits Medicare or Medi-
caid  reimbursement  of  items  or  services  provided  pursuant to a prohibited
referral, and  imposes  substantial civil monetary penalties on facilities which
submit claims for reimbursement.  If such were to be the case, the Company could
be required to repay amounts  reimbursed for drugs,  equipment and services that
HCFA determines to have been  furnished  in  violation  of Stark II, in addition
to  substantial  civil  monetary  penalties,  which  may  adversely  affect  the
Company's operations and future financial results.  The Company believes that if
Stark II is interpreted by HCFA or any other governmental entity to apply to the
Company's arrangements, it is possible  that  the  Company will  be permitted to
bring  its  financial relationships with referring physicians into material com-
pliance with the provisions of Stark II on a prospective basis.

                                       13
<PAGE>


However, prospective  compliance may  not eliminate the amounts or penalties, if
any, that might be determined  to  be owed for past conduct, and there can be no
assurance that such prospective  compliance, if permissible, would  not  have  a
material adverse effect on the Company.

         HEALTH INSURANCE REFORM ACT

         Congress has taken action in most recent legislative sessions to modify
the Medicare program for the purpose of reducing the amounts  otherwise  payable
from the program to healthcare providers,  but there are no significant proposed
cuts in dialysis  payments.  The ESRD  program  received a five year waiver from
reduction in Medicare outlays to allow for the results of the HCFA project.  See
"Medicare  Reimbursement" above. However,  future legislation or regulations may
be enacted that could  significantly  modify the ESRD  program or  substantially
reduce the amount  paid to the Company for its  services.  Further,  statutes or
regulations may be adopted which demand additional requirements in order for the
Company to be eligible to participate in the federal and state payment programs.
Any new legislation or regulations may adversely  affect the Company's  business
operations, as well as its competitors.

         In 1996, President Clinton signed the Health Insurance  Portability and
Accountability Act of 1996 ("HIPA"), a package of health insurance reforms which
include a variety of  provisions  important  to  healthcare  providers,  such as
significant  changes to the Medicare and Medicaid fraud and abuse laws.  Some of
the fraud and abuse provisions were effective January 1, 1997. While many of the
provisions were self-implementing, some required further rulemaking by HHS which
rules became  effective July 1, 1997.  HIPA  established  two programs that will
coordinate federal, state and local healthcare fraud and abuse activities, to be
known as the "Fraud  and Abuse  Control  Program"  and the  "Medicare  Integrity
Program." The Fraud and Abuse Control  Program will be conducted  jointly by HHS
and the Attorney General while the Medicare Integrity  Program,  which is funded
by the Medicare  Hospital  Insurance Trust Fund, will enable HHS, the Department
of Justice and the FBI to monitor and review specifically Medicare fraud.

         Under these  programs,  these  governmental  entities will  undertake a
variety of  monitoring  activities  which were  previously  left to providers to
conduct,  including  medical  utilization and fraud review,  cost report audits,
secondary  payor  determinations,  reports  of fraud and abuse  actions  against
providers will be shared as well as encouraged by rewarding  whistleblowers with
money  collected  from civil fines.  The  Incentive  Program for Fraud and Abuse
Information,  a new program from HIPA, began in January, 1999 rewarding Medicare
recipients 10% of the overpayment up to $1,000 for reporting  Medicare fraud and
abuse.  HIPA  further  extends  coverage  of the  fraud  and  abuse  laws to all
federally  funded  health care  programs and to private  health  plans;  but the
Anti-kickback Statute does not apply to private health plans.

         HIPA  also  sets  forth a  program  intended  to  assist  providers  in
understanding  the  requirements of the fraud and abuse laws. HIPA first permits
individuals to petition HHS for written advisory  opinions  regarding whether an
arrangement gives rise to prohibited  remuneration  under the federal anti-fraud
abuse laws,  constitutes  grounds for imposition of civil and criminal sanctions
under the federal  anti-fraud and abuse laws or satisfies the requirements of an
existing safe harbor.  These opinions are published by HHS. While these opinions
are  helpful to gain  insight  into what is  permissible  without  having a safe
harbor,  such opinions  will only be binding on HHS and the party  receiving the
opinion.

         HIPA  increases  significantly  the civil and  criminal  penalties  for
offenses  related to healthcare  fraud and abuse.  HIPA increased civil monetary
penalties from $2,000 plus twice the amount for each false claim to $10,000 plus
three  times the amount for each false  claim.  HIPA  expressly  prohibits  four

                                       14
<PAGE>


practices,  namely (1) submitting a claim that the person knows or has reason to
know is for medical  items or services  that are not  medically  necessary,  (2)
transferring  remuneration to Medicare and Medicaid beneficiaries that is likely
to  influence  such  beneficiary  to order or  receive  items or  services,  (3)
certifying  the need for home health  services  knowing that all of the coverage
requirements  have not been met,  and (4)  engaging  in a pattern or practice of
upcoding claims in order to obtain greater reimbursement.  However, HIPA creates
a tougher  burden of proof for the  government by requiring  that the government
establish  that the person  "knew or should  have  known" a false or  fraudulent
claim was  presented.  The "knew or should  have  known"  standard is defined to
require  "deliberate  ignorance or reckless disregard of the truth or falsity of
the  information,"  thus merely  negligent  conduct should not violate the Civil
False Claims Act.

         As  for  criminal   penalties,   HIPA  adds  healthcare  fraud,  theft,
embezzlement,  obstruction of investigations and false statements to the general
federal  criminal code with respect to federally  funded health  programs,  thus
subjecting such acts to criminal  penalties.  Persons  convicted of these crimes
face up to 10 years  imprisonment  and/or fines.  Moreover,  a court  imposing a
sentence  on a person  convicted  of federal  healthcare  offense  may order the
person  to  forfeit  all real or  personal  property  that is  derived  from the
criminal offense.  The Attorney General is also provided with a greatly expanded
subpoena power under HIPA to investigate  fraudulent  criminal  activities,  and
federal prosecutors may utilize asset freezes,  injunctive relief and forfeiture
of proceeds to limit fraud during such an investigation.

         Although the Company believes it substantially  complies with currently
applicable  state and federal laws and  regulations  and to date has not had any
difficulty   in   maintaining   its   licenses  or  its  Medicare  and  Medicaid
authorizations,  the  healthcare  service  industry  is and will  continue to be
subject to substantial  and continually  changing  regulation at the federal and
state  levels,  and the scope and effect of such and its impact on the Company's
operations  cannot be  predicted.  No assurance  can be given that the Company's
activities will not be reviewed or challenged by regulatory authorities.

         Any loss by the  Company of its  various  federal  certifications,  its
approval as a certified  provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental  authority from which
a  substantial  portion of its  revenues is derived or a change  resulting  from
healthcare  reform,  a reduction  of dialysis  reimbursement  or a reduction  or
complete  elimination  of coverage for dialysis  services  would have a material
adverse effect on the Company's business.

         ENVIRONMENTAL AND HEALTH REGULATIONS

         The Company's  dialysis centers are subject to hazardous waste laws and
non-hazardous  medical  waste  regulation.   Most  of  the  Company's  waste  is
non-hazardous. HCFA requires that all dialysis facilities have a contract with a
licensed medical waste handler for any hazardous waste. The Company also follows
OSHA's Hazardous Waste Communications Policy, which requires all employees to be
knowledgeable  of the  presence  of and  familiar  with the use and  disposal of
hazardous  chemicals in the facility.  Medical waste of each facility is handled
by  licensed  local  medical  waste   sanitation   agencies  who  are  primarily
responsible for compliance with such laws.

         There are a variety of regulations  promulgated  under OSHA relating to
employees exposed to blood and other potentially  infectious materials requiring
employers,  including  dialysis  centers,  to provide  protection.  The  Company
adheres to OSHA's protective  guidelines,  including regularly testing employees
and patients for exposure to hepatitis B and providing employees subject to such
exposure  with  hepatitis  B  vaccinations  on an  as-needed  basis,  protective
equipment, a written exposure control plan and training in infection control and
waste disposal.

                                       15
<PAGE>


OTHER REGULATION

         There  are  also  federal  and  state  laws  prohibiting   anyone  from
presenting  false  claims or  fraudulent  information  for payments by Medicare,
Medicaid and other third-party payors.  These laws provide for both criminal and
civil penalties,  exclusion from Medicare and Medicaid participation,  repayment
of previously  collected  amounts and other financial  penalties under the False
Claims Act. The  submission of Medicare cost reports and requests for payment by
dialysis  centers  are covered by these  laws.  The Company  believes it has the
proper  internal  controls and  procedures for issuance of accounts and complete
cost reports and payment  requests.  However,  there is no  assurance  that such
reports and requests are materially  accurate and complete and therefore subject
to a challenge under these laws.

         Certain  states have  anti-kickback  legislation  and laws dealing with
self-referral  provisions similar to the federal Anti-kickback Statute and Stark
II. The Company has no reason to believe that it is not in compliance  with such
state laws.

COMPETITION

         The  dialysis  industry  is  highly  competitive.  There  are  numerous
providers who have  facilities in the same areas as the Company.  Many are owned
by physicians or major corporations which operate dialysis facilities regionally
and  nationally.  The Company's  operations  are small in comparison  with those
corporations.  Some of these major companies are public, including Fresenius AG,
Renal Care Group, Inc., Total Renal Care Holdings,  Inc., and Everest Healthcare
Service Corp., and most of which have substantially greater financial resources,
many more centers, patients and services than the Company, and by virtue of such
have a significant advantage over the Company in competing for nephrologists and
acquisitions  of  dialysis  facilities  in areas and  markets  targeted  by DCA.
Competition  for  acquisitions  has  increased  the cost of  acquiring  existing
dialysis  facilities.  DCA also faces  competition  from  hospitals that provide
dialysis treatments.

         Competitive factors most important in dialysis treatment are quality of
care and service,  convenience of location and  pleasantness of the environment.
Another  significant  competitive  factor is the  ability to attract  and retain
qualified  nephrologists.  These physicians are a substantial source of patients
for the  dialysis  centers,  are  required as medical  directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for  the  supervision  and  operations  of the  center.  The  Company's  medical
directors  usually  are  subject to  non-compete  restrictions  within a limited
geographic area from the center they administer.  Additionally,  there is always
substantial competition for obtaining qualified,  competent nurses and technical
staff at reasonable labor costs.

         Based upon  advances in surgical  techniques,  immune  suppression  and
computerized  tissue  typing,  cross-matching  of donor  cells and  donor  organ
availability,   renal   transplantation  in  lieu  of  dialysis  is  becoming  a
competitive  factor.  It is presently  the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations,  currently the most
limiting  factor,  renal   transplantations  could  become  a  more  significant
competitive  aspect to dialysis  treatments  provided by the  Company.  Although
kidney transplant is a preferred  treatment for ESRD,  certain patients who have
undergone such transplants  have lost their transplant  function and must return
to dialysis treatments.

EMPLOYEES

         As of March 10, 1999, DCA had 42 full time  employees,  including nurse
administrators,  clinical  registered nurse managers,  registered nurses,  chief
technician,  technical  specialists,  patient  care  technicians,  and  clerical
employees.  DCA retains  sixteen part time  employees  consisting  of registered
nurses, patient care 

                                       16
<PAGE>


technicians and clerical  employees.  Occasionally,  DCA utilizes employees on a
"per diem" basis to supplement staffing.

         DCA retains  nine  part-time  independent  contractors  who include the
social  workers and  dietitians at each  facility.  These are in addition to the
medical  directors,  who are independent  contractors and who supervise  patient
treatment at each facility.

         DCA believes its relationship with its employees is good and it has not
suffered any strikes or work  stoppages.  None of DCA's employees is represented
by any labor union. DCA is an equal opportunity employer.


ITEM 2.  PROPERTIES

         DCA owns two properties,  one located in Lemoyne,  Pennsylvania and the
second in Easton,  Maryland.  The Maryland  property  consists of  approximately
7,400  square  feet which is leased to the  purchaser  (in 1989) of one of DCA's
dialysis  centers  and a  competitor  of  DCA.  The  lease  was  renewed  for an
additional  five years  through  March 31, 2003.  The lease is guaranteed by the
tenant's parent company.

         The Lemoyne property of  approximately  15,000 square feet houses DCA's
dialysis  center of  approximately  5,400 square feet,  approved for 13 dialysis
stations with space available for expansion. DCA uses approximately 2,500 square
feet for its executive  offices.  DSPL,  the Company's  subsidiary,  leases this
facility  from the Company under a five year lease that  commenced  December 23,
1998 at an annual rental of $43,088 per annum plus separately metered utilities,
insurance  and  additional   rent  of  $5,386  per  year  covering  common  area
maintenance  expenses,  with two renewals of five years each at escalating  base
rent for each renewal period.

         The Easton,  Maryland and Lemoyne,  Pennsylvania properties are subject
to mortgages from a Maryland banking  institution.  As of December 31, 1998, the
remaining  principal  amount  of  the  mortgage  on  the  Lemoyne  property  was
approximately  $160,000 and on the Easton property was  approximately  $200,000.
Each mortgage is under the same terms and extends through November,  2003, bears
interest at 1% over the prime rate,  and is secured by the real property and the
Company's  personal  property at each respective  location.  The bank also has a
lien on  rents  due  the  Company  and  security  deposits  from  leases  of the
properties, and each tenant is required to sign a tenant subordination agreement
as part of its lease with the Company.

         Written approval of the bank is required for all leases, assignments or
subletting,  alterations and improvements and sales of the properties.  See Item
7, "Management's  Discussions and Analysis of Financial Condition and Results of
Operations" and Note 2 to "Notes to Consolidated Financial Statements."

         As lessor, DCA also leases space at its Lemoyne,  Pennsylvania property
to one  other  unrelated  party for its own  business  activities  unrelated  to
dialysis services or to the Company.  The lease for  approximately  1,500 square
feet through December 31, 2002, at an aggregate rental of approximately  $13,500
per annum.

                                       17
<PAGE>


         The  dialysis   facility  in   Wellsboro,   Pennsylvania   consists  of
approximately 3,500 square feet, with 12 dialysis stations and is leased by DSPW
for five years through September,  27, 2000 at a rental of approximately $25,000
per annum with two renewals of five years each.

         The Carlisle,  Pennsylvania dialysis facility, which became operational
in July,  1997, is leased by DSPC under a five year lease through June 30, 2002,
with two renewals of five years each. The facility consists of 4,340 square feet
of space accommodating 12 dialysis stations at an annual rental of $32,550.

         DSNJ-M  signed a five  year  lease  for its new  dialysis  facility  in
Manahawkin,  New Jersey for approximately 3,700 square feet at an annual rate of
approximately  $34,760 per annum plus its proportionate share of the real estate
taxes and casualty insurance  premiums,  renewable for two consecutive five year
periods,  the  commencement  date for such lease  being  December  1,  1998.  An
Addendum to that lease which  commenced on the same date as the  original  lease
provides for an additional  940 square feet of space free of rent until June 30,
2000,  after  which time  DSNJ-M  will pay the  agreed per square  foot price as
stipulated  in the  original  lease.  The  facility is designed  for 12 dialysis
stations and the facility began treating patients in July, 1998 as a requirement
for and pending Medicare  regulatory  approval.  In December,  1998 the facility
received final  regulatory  approval from Medicare to treat patients and receive
reimbursement for such treatment.

         DCA opened its Chambersburg, Pennsylvania facility on January 14, 1999.
That  facility is designed for 18 dialysis  stations,  with initial  approval to
operate nine stations. The facility is leased by DSPCh for a five year term with
two  consecutive  renewal  periods  of five  years  each at an annual  rental of
$52,500  plus  utilities  and  additional  rent   representing   the  facility's
proportionate share of common area maintenance  expenses.  The term of the lease
commenced  January  1, 1999 and is for 7,000  square  feet of which the  Company
sublet approximately 1,800 square feet to physicians.

         The  Company's new  subsidiary,  DSNJ-TR,  signed a lease  agreement to
construct a new facility in Toms River, New Jersey for a term of five years with
two renewal  periods of five years each.  The lease  provided for a commencement
date of  October  18,  1998,  at which time  DSNJ-TR  paid 50% of the rent for a
period of 50 days. Payment of the full annual rental of $57,665 became effective
on December 8, 1998.  Development of the center is in progress,  but there is no
assurance when, if at all, this proposed center will become operational.

         The  Lemoyne  and  Wellsboro   facilities,   both  of  which  initiated
operations  in  1995,  are  currently  operating  at  approximately  72% and 68%
capacity,  respectively,  and  Carlisle  has  operated at 47% capacity for 1998.
Since DSNJ-M recently  commenced  operations and was only approved for treatment
reimbursement  in December,  1998, and an accurate  operational  capacity is not
presently known.

         The existing  dialysis  facilities  could  accommodate  greater patient
volume,  particularly  if the Company  increases  hours and/or days of operation
without  adding  additional   dialysis   stations  or  any  additional   capital
expenditures.  DCA has the ability and space at each of its facilities to expand
to  increase  patient  volume  subject  to  obtaining  appropriate  governmental
approval.

         DCA  is  actively  pursuing  the  additional  development  of  dialysis
facilities in Pennsylvania  and New Jersey as well as other areas of the country
which would  entail the  acquisition  or lease of  additional  property,  but no
additional contracts or leases have been entered into in any other areas.

         The dialysis stations are equipped with modern dialysis equipment under
a November,  1996  master-lease/purchase  agreement ("1996 Master Lease") with a
$1.00  purchase  option at the end of the term. The Company leased new equipment
for  its  Manahawkin,  New  Jersey  and  Chambersburg,  

                                       18
<PAGE>


Pennsylvania facilities beginning May and November,  1998,  respectively,  under
the 1996 Master Lease in addition to the leases commenced in June and July, 1997
for equipment at the Lemoyne and Carlisle, Pennsylvania facilities.

         DCA maintains executive offices at 27 Miller Street,  Suite 2, Lemoyne,
Pennsylvania  17043  as well as with its  parent,  Medicore  ("Medicore"  or the
"Parent"), at 2337 West 76th Street, Hialeah, Florida.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is not involved in or subject to any material pending legal
actions.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  during the  fourth  quarter of the  Company's
fiscal year to a vote of security holders through the solicitation of proxies or
otherwise.  Since Medicore owns 68% of DCA,  proxies are not solicited,  but DCA
has in the past  provided  and  continues  to provide its  shareholders  with an
Information  Statement and an Annual Report. The Information  Statement provides
similar  information to shareholders as does a proxy statement,  except there is
no solicitation of proxies.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company  commenced  trading on the Nasdaq  SmallCap Market on April
17, 1996,  under the symbol  "DCAI." The table below  indicates the high and low
bid prices for the four quarters for the years ended  December 31, 1997 and 1998
as reported by Nasdaq.

                                                 BID PRICE
                                             ---------------
                  1997                        HIGH      LOW
                  ----                       ------   ------
         1st Quarter...................      $ 4.63   $ 3.00
         2nd Quarter...................        3.86     2.00
         3rd Quarter...................        3.63     1.13
         4th Quarter...................        3.88     1.94

                                                 BID PRICE
                                             ---------------
                  1998                        HIGH      LOW
                  ----                       ------   ------
         1st Quarter...................      $ 2.56   $ 1.31
         2nd Quarter...................        1.94     1.25
         3rd Quarter...................        1.94     0.88
         4th Quarter...................        1.25     0.56

         At March 11, 1999, the high and low sales price of DCA common stock was
the same, $1.50. The common stock has not traded actively for the last year.

         Bid and asked  prices are  without  adjustments  for  retail  mark-ups,
mark-downs  or   commissions,   and  may  not   necessarily   represent   actual
transactions.

                                       19
<PAGE>


         At March 11, 1999,  the Company had 97  shareholders  of record and has
approximately 640 beneficial owners of its common stock.

         The  Company  does not  anticipate  that it will pay  dividends  in the
foreseeable  future. The board of directors intends to retain earnings,  if any,
for use in the business. Future dividend policy will be at the discretion of the
board  of  directors,  and  will  depend  on  the  Company's  earnings,  capital
requirements, financial condition and other similar relevant factors.


ITEM 6.  SELECTED FINANCIAL DATA

         The following selected financial data for the five years ended December
31, 1998 is derived from the audited  consolidated  financial  statements of the
Company. The data should be read in conjunction with the consolidated  financial
statements, related notes and other financial information included herein.


<TABLE>
<CAPTION>
                                               CONSOLIDATED STATEMENTS OF OPERATIONS DATA
                                                (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                          Years Ended December 31,           
                                             -----------------------------------------------
                                              1998     1997(1)     1996      1995      1994
                                             -------   -------   -------   -------   -------
<S>                                          <C>       <C>       <C>       <C>       <C>    
Revenues .................................   $ 4,004   $ 9,221   $ 4,137   $ 2,668   $ 2,201
Net (loss) income ........................      (204)    1,993       (23)     (167)       75
(Loss) earnings per share.................
  Basic ..................................      (.06)      .56      (.01)     (.07)      .03
  Diluted ................................      (.06)      .55      (.01)     (.07)      .03
</TABLE>


<TABLE>
<CAPTION>
                                                    CONSOLIDATED BALANCE SHEET DATA
                                                             (IN THOUSANDS)
                                                               December 31,                    
                                             -----------------------------------------------
                                              1998     1997(1)     1996      1995      1994
                                             -------   -------   -------   -------   -------
<S>                                          <C>       <C>       <C>       <C>       <C>    
Working capital ..........................   $ 5,115   $ 7,062   $ 4,529   $   651   $   187
Total assets .............................     9,349    11,638     7,522     3,972     6,847
Intercompany receivable from
  Medicore (non-current portion)(2) ......                                             3,134
Long term debt, net of current portion(3)        633       693       585       152
Stockholders' equity .....................     7,771     8,049     6,000     2,569     5,899
</TABLE>

-------------------------

(1)      Reflects  the  sale of  substantially  all the  assets  of its  Florida
subsidiary,  Dialysis  Services of Florida,  Inc.  Fort Walton Beach ("DSF") and
related  Florida  dialysis  operations,  including  the homecare  operations  of
another  subsidiary,  Dialysis Medical,  Inc. ("DMI"), to Renal Care Group, Inc.
and its affiliates ("RCG") for $5,065,000 of which consideration  $4,585,000 was
cash with the balance consisting of 13,873 shares of RCG common stock. DCA owned
80% of DSF and DMI and on February 20, 1998 the 20% interest of DSF owned by its
former  medical  director  and  his  20%  interest  in  DMI  were  redeemed  for
approximately  $625,000  of which sum  included  6,936  shares of the RCG common
stock  valued at $240,000  with the balance in cash.  See Item 7,  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
Note 9 to "Notes to Consolidated Financial Statements."

                                       20

<PAGE>

(2)      $1,000,000  repaid  by  Medicore  on  October  4,  1995;  approximately
$3,134,000  reduction  effected  through  $1.30 per share  dividend in November,
1995. See Note. (1) above and Item 7,  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

(3)      Includes advances from Parent.

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

RESULTS OF OPERATIONS

1998 COMPARED TO 1997

         Medical service revenues decreased approximately $823,000 (19%) for the
year ended  December 31, 1998  compared to the  preceding  year.  This  decrease
reflects the loss of revenues,  which amounted to  approximately  $1,663,000 for
the preceding year, from the sale of the Company's  Florida dialysis  operations
on October 31, 1997,  which was offset to some degree by  increased  revenues of
the Company's  Pennsylvania dialysis centers of approximately $782,000 including
increased  revenues of approximately  $510,000 at the Company's  dialysis center
located in Carlisle,  Pennsylvania,  which commenced operations in July 1997 and
$58,000  from  a  new  dialysis  center located in Manahawkin, New Jersey, which
received  regulatory  approval  in  December, 1998.   Although the operations of
these  centers  have  resulted in additional  revenues, they are in the develop-
mental stage and, accordingly, their operating results will adversely affect the
Company's results of operations until they achieve a sufficient patient count to
cover fixed operating costs.

         Interest and other income  increased by  approximately  $37,000 for the
year ended  December 31, 1998 compared to the preceding  year.  This increase is
largely due to interest  earned on proceeds  invested from the October 1997 sale
of the Company's Florida dialysis operations.

         Revenues for 1997 included a gain of approximately  $4,431,000 upon the
sale of substantially all of the assets of the Company's Florida subsidiary, and
its related operations.

         Cost of medical services sales increased to 71% in 1998 compared to 62%
in 1997  reflecting  increases  in  healthcare  salaries  and supply  costs as a
percentage of sales,  including the  operations of the Company's two new centers
in Carlisle,  Pennsylvania  and Manahawkin,  New Jersey which are still in their
developmental  stage.  The preceding  year included  higher  hospital  treatment
revenues,  which have a  substantially  lower cost of sales,  with the Company's
Florida hospital operations having been sold on October 31, 1997.

         Selling, general and administrative expenses decreased by approximately
$308,000 (14%) for 1998 compared to the preceding year. This decrease included a
decrease  resulting from the sale of the Florida dialysis  operations  offset by
increases in expenses at the dialysis  center in Carlisle,  Pennsylvania,  which
commenced  operations in July, 1997,  expenses in connection with the startup of
the new  dialysis  center in  Manahawkin,  New  Jersey and the start up of a new
center in  Chambersburg,  Pennsylvania,  which commenced  operations in January,
1999, and another  center  presently  under  construction  in New Jersey.  Also,
contributing  to the  decrease  was the fact that 1997  included  an expense for
stock compensation of approximately  $322,000 in conjunction with forgiveness of
notes from option exercises.

         Interest expense  decreased by approximately $5,000 during the compara-
ble periods largely as a result of reduced average outstanding borrowings.

                                       21
<PAGE>

1997 COMPARED TO 1996

         Medical service revenues increased approximately $544,000 (14%) for the
year ended  December 31, 1997  compared to the preceding  year.  This growth was
largely  attributable  to increased  revenues of  approximately  $533,000 at the
Company's Lemoyne,  Pennsylvania  facility,  which commenced  operations in June
1995 and approximately  $329,000 from a new dialysis center located in Carlisle,
Pennsylvania,  which commenced operations in July 1997. These increased revenues
were  offset by  approximately  $312,000 of lost  revenues  from the sale of the
Company's  Florida  dialysis  operations  on  October  31,  1997.  Although  the
operations  of the new  Carlisle  center have  resulted in  additional  revenues
during 1997, it is in the developmental  stage and,  accordingly,  its operating
results will likely adversely  affect the Company's  results of operations until
they achieve a sufficient patient count to cover fixed operating costs.

         Interest and other income increased by  approximately  $109,000 for the
year ended  December 31, 1997 compared to the preceding  year.  This increase is
largely due to  investment  earnings  derived from proceeds of the (i) Company's
public  offering  completed in the second  quarter of 1996 and (ii) the October,
1997 sale of its Florida dialysis operations.

         1997 revenues  included a gain of approximately  $4,431,000 on the sale
of substantially all of the assets of Dialysis Services of Florida,  Inc. - Fort
Walton Beach, and its related operations.

         Cost of medical services  increased by approximately  $204,000 (8%) for
the year ended  December 31, 1997  compared to the  preceding  year with the net
increase  mainly  attributable  to the  increase  in revenues  for the  Lemoyne,
Pennsylvania  facility and the  commencement  of  operations at the new dialysis
center located in Carlisle,  Pennsylvania offset by the cost decreases resulting
from  the sale of the Fort  Walton  Beach,  Florida  facility.  Cost of  medical
services as a percentage of sales  decreased to 62% for the year ended  December
31, 1997  compared to 65% for the  preceding  year.  This decline was  primarily
attributable to diminuated supply costs as a percentage of sales.

         Selling, general and administrative expenses increased by approximately
$578,000  (37%) for 1997 compared to the preceding  year.  Selling,  general and
administrative expenses as a percentage of medical services revenues amounted to
49% compared to 41% in the  preceding  year.  This  increase  included  expenses
involved in the opening of the Company's  new  Pennsylvania  dialysis  center in
Carlisle  and   expansion  of  the   operations  of  its  facility  in  Lemoyne,
Pennsylvania  offset by decreases  resulting  from the sale of Florida  dialysis
operations.  Also,  included in this  increase  was stock  compensation  expense
during the fourth quarter of 1997 of approximately  $322,000 in conjunction with
forgiveness of notes from option exercises.

         Interest  expense showed no significant  increases or decreases  during
the comparable periods.

         For fiscal  1998,  the Company will adopt the  provisions  of Financial
Accounting Standards Board Statements No. 130, "Reporting  Comprehensive Income"
and  No.  131,   "Disclosure   About  Segments  of  an  Enterprise  and  Related
Information,"  which it is  anticipated  will not have a material  effect on its
consolidated  financial statements or significantly change its segment reporting
disclosures. See Note 1 to "Notes to Consolidated Financial Statements."

                                       22
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Working capital totaled  $5,115,000 at December 1998, which reflected a
decrease of approximately  $1,947,000  during the current year.  Included in the
changes  in  components  of  working  capital  was a  decrease  in cash and cash
equivalents of $2,736,000,  which included net cash used in operating activities
of  $1,161,000  (including  a decrease  in income  taxes  payable of  $1,423,000
primarily  resulting  from tax  payments  on the gain on the sale of the Florida
dialysis  operations),  net cash  used in  investing  activities  of  $1,065,000
(including  additions to property and equipment of $905,000 primarily related to
new centers,  funds used for redemption of minority  interest in subsidiaries of
$385,000 and proceeds  from a sale of  securities of $253,000) and net cash used
in financing  activities of $511,000  (including a decrease in the advances from
the Parent of  $250,000,  repurchase  of stock of $109,000  and debt  payment of
$152,000).

         The  Company  has  mortgages  on  its  two  buildings,  one in Lemoyne,
Pennsylvania  and  the  other  in Easton,  Maryland,  with a combined balance of
$360,000 at December 31, 1998.  In 1998, the  Company  was in default of certain
covenants relating to these mortgages. The covenants principally related to debt
service  ratio  requirements for which the lender  has waived compliance through
December 31, 1998.

         The  debt  service  ratio  requirement is tested on an annual basis and
thus, is  effectively  waived  through  December 31, 1999 as compliance with the
covenant will not be determined  until  final  results for 1999 are available in
early 2000.

         The bank has liens on the real and  personal  property of the  Company,
including a lien on all rents due and security deposits from the rental of these
properties.  Through November 30, 1997, the loans contained a provision allowing
the bank mandatory repayment upon 90 days written notice after five years, which
resulted  in  the  unpaid  principal,  balances  being  reflected  as a  current
liability.  The loans  were  modified  effective  December  1, 1997 and the call
provision was removed  thereby  eliminating the necessity of carrying the entire
debt balance as current. An unaffiliated  Maryland dialysis center,  competitive
with the Company, continues to lease space from the Company in its building. The
Pennsylvania  center relocated  during 1995 and the Company  constructed its own
dialysis  facility at the property that  commenced  treatments in June 1995. See
Note 2 to "Notes to Consolidated Financial Statements."

         The Company has an equipment  financing  agreement for kidney  dialysis
machines for its facilities.  There was additional  financing of $245,000 during
1998 pursuant to this agreement.  There was an  outstanding  balance of $449,000
at  December  31, 1998 and  $285,000 at December 31, 1997.  See Note 2 to "Notes
to Consolidated Financial Statements."

         During 1998, the Company  repurchased 105,000 shares of its outstanding
common stock for approximately  $109,000.  See Note 10 to "Notes to Consolidated
Financial Statements."

         In February,  1998, the Company  redeemed the 20% minority  interest in
two of its  subsidiaries  whose  assets were  included  in the Florida  dialysis
operations sale for a total  consideration of $625,000,  including $385,000 cash
and one-half of the  purchaser's  securities  valued at $240,000  with the total
value  of  $480,000  for  securities  received  having  been  guaranteed  by the
purchaser.

         The  Company  opened its fourth  center in  Manahawkin,  New Jersey and
received regulatory approval as a Medicare provider during the fourth quarter of
1998 and opened its fifth center in

                                       23
<PAGE>

Chambersburg,  Pennsylvania during the first quarter of 1999 and  is  developing
another dialysis center in New Jersey.

         Capital is needed primarily for the development of outpatient  dialysis
centers.  The construction of a 10 station  facility,  typically the size of the
Company's dialysis facilities, costs in the range of  $600,000  to  $750,000 de-
pending on location, size and related  services to be provided,  which  includes
equipment and initial working capital requirements.   Acquisition of an existing
dialysis facility may range from $40,000 to $70,000 per patient, and, therefore,
is more expensive than construction, although  acquisition  provides the Company
with an immediate ongoing operation, which  most  likely would be generating in-
come.  Development of a dialysis facility to initiate  operations  takes four to
six months and usually 12 months or longer to generate income.  The  Company has
entered  into  agreements  with  medical directors,  and  intends  to  establish
additional facilities in the New Jersey and Pennsylvania area.

         The Company,  having operated on a larger scale in the past, is seeking
to expand its outpatient  dialysis  treatment  facilities and inpatient dialysis
care. Such expansion,  whether through  acquisitions of existing  centers or the
development of its own dialysis  centers requires  capital,  which was the basis
for the  Company's  security  offering in 1996 and sale of its Florida  dialysis
operations  in  1997.  No  assurance  can be  given  that  the  Company  will be
successful  in  implementing  its  growth  strategy  or that the funds  from its
securities  offering and Florida  dialysis  operations  sale will be adequate to
finance such expansion.  See Item 1, "Business - Business  Strategy" and Notes 7
and 9 to "Notes to Consolidated Financial Statements."

         The Company believes that current levels of working capital,  including
the proceeds of its  securities  offering  and the sale of its Florida  dialysis
operations,  will enable it to  successfully  meet its liquidity  demands for at
least the next  twelve  months as well as expand  its  dialysis  facilities  and
thereby its patient base.

YEAR 2000 READINESS

         The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized  information
systems  to  properly  recognize  date  sensitive  information,  with which many
companies,  public and private,  are faced to ensure continued proper operations
and  reporting  of financial  condition.  Failure to correct and comply with the
Year 2000  change  may cause  systems  that  cannot  recognize  the new date and
millenium  information  to  generate  erroneous  data  or to  fail  to  operate.
Management is fully aware of the Year 2000 issues,  has made its assessments and
has basically evaluated its computerized systems and equipment, and communicated
with its major  vendors,  and has made the  operations  of the Company Year 2000
compliant.

         One of the most  significant  risks in the  Company's  operations  with
respect to the upcoming  millenium change relates to billing and collection from
third-party  payors,  and,  in  particular,   Medicare.   The  Company  receives
approximately  74% of its  revenues  from  Medicare  for  treatment  of dialysis
patients  and  related  services.  Although  recent  reports  from  the  federal
government have indicated the potential for certain agencies and commissions not
to be Year 2000  compliant by January 1, 2000,  HCFA,  through whom the Medicare
program and payments are  effected,  has  indicated it has done and continues to
accomplish  all it can to insure the Medicare ESRD program  continues  operating
smoothly and that dialysis providers,  like the Company,  may continue to timely
bill  electronically  for patient  services  with  Medicare  payments to be made
timely.  In fact,  in 1998,  the  Company  installed  a new  electronic  billing
software  program  that  was  developed   according  to  Medicare's   compliance
guidelines,  which  guidelines  require  not  only  system  but also  Year  2000
compatibility.  The software  designer has successfully  tested the software for
Year 2000 compliance and the Company  initiated its electronic

                                       24
<PAGE>

Medicare  billing  in  January, 1999  without  any  problems.  Other third-party
payors, such as insurance  companies,  are  presently  and  will  continue to be
billed  with  hard  copy.  The  costs  of  the  software modifications have been
minimal, approximately $1,000,  and the  Company  does not  anticipate  that any
costs involved in any future Year 2000 compliance  will be material or that they
will have a material adverse effect on its business.

         With respect to  non-information  technology  systems,  which typically
include embedded technology, such as microcontrollers,  the major equipment used
in patient  dialysis  treatment  is not date  sensitive  and should not pose any
threat of a system breakdown due to the Year 2000 issue. Most of the Company's 
dialysis equipment is new. See Item 1, "Business - Operations of Dialysis 
Facilities" and Item 2, "Properties." The Company retains technicians who test 
and  maintain  dialysis  operations  equipment.

         In addition to addressing its own internal software system, the Company
has communicated  with all its suppliers,  service providers and other key third
parties,  including  payroll system  providers,  banks,  hospitals and insurance
companies  with  whom it deals to  determine  the  extent  of  their  Year  2000
compliance,  what actions they are taking to assess and address that issue,  and
whether  they will be  compliant  by the end of 1999.  To the extent  such third
parties  are  materially  adversely  affected  by  the Year 2000 issue and their
problem  has  not  been  timely  corrected,  the  Company's  operations could be
affected.  The  Company has received written assurance from  many of these third
parties indicating that  they  are  Year 2000 compliant or are working on it and
expect to be by the end of 1999, and that the crucial supplies and services that
are necessary to the Company's operation and  patient  treatment  including drug
and chemical supplies, utilities, cable, waste removal, water and sewer services
will not be affected by the millenium change.

         The Company's  current  bookkeeping,  financial records and statements,
and accounting are  accomplished  through  certain common officers and personnel
and facilities with Medicore,  its parent.  See Item 13, "Certain  Relationships
and Related  Transactions."  The system  covering  these  programs  was recently
installed by Medicore's other public subsidiary,  Techdyne, Inc., which utilizes
the Visual  Manufacturing System for other purposes as well, including inventory
maintenance,  manufacturing and for overall operations. Management is evaluating
new, Year 2000 compliant  accounting  packages,  which would provide the Company
with its own independent system of bookkeeping, accounting and financial records
and reduce its dependence on its parent's  personnel and facilities.  Management
anticipates such new, Year 2000 compliant  accounting and bookkeeping  system to
be  ready  mid-1999.  The cost of such  new  accounting system is estimated in a
range of approximately $10,000 to $20,000.

         Another area that could significantly  impact the Company's  operations
in providing  dialysis  treatment to patients relates to third-party  providers,
specifically,  the utility  companies  providing  water, an extremely  necessary
resource for dialysis treatments, and electricity.  These providers and services
are beyond the control of the Company,  and the Company does not have a separate
generator  for  electricity  nor other  sources  for water.  Should any of these
utilities fail to provide  services,  such would seriously  adversely impact the
Company,  its patients,  as well as the Company's  competitors  in such affected
areas.

         There can be no assurance,  however, that the Year 2000 issues, whether
internal and believed to have been  addressed,  or from third parties,  although
the  Company  has  checked  and been  assured  that its  third-party  payors and
suppliers are Year 2000 compliant or will be prior to the end of 1999,  will not
have a material adverse effect on the Company's business,  results of operations
or financial condition.

                                       25
<PAGE>

OTHER MATTERS

         The Company does not consider its exposure to market risks, principally
changes in interest rates, to be significant.

         Sensitivity  of  results  of  operations to interest rate  risks on the
Company's  investments  is  managed by conservatively  investing liquid funds in
short-term  government  securities  of  which  the  Company  held  approximately
$5,000,000 at December 31, 1998.

         Interest  rate  risk  on  debt is managed by negotiation of appropriate
rates for equipment financing obligations  based on current market rates.  There
is an interest rate  risk  associated  with the Company's variable rate mortgage
obligations which totaled $360,000 at December 31, 1998.

         The Company has exposure to both rising and falling  interest rates.  A
1/2% decrease in rates on its year-end investments in government  securities and
a 1% increase in rates on its year-end mortgage debt would  result in a negative
impact of approximately $18,000 on its result of operations.

         The Company does not utilize financial instruments for trading or spec-
ulative purposes and does not currently use interest rate derivatives.

NEW ACCOUNTING PRONOUNCEMENTS

         In June, 1998, the Financial  Accounting  Standards Board issued Finan-
cial Accounting  Standards  Board  Statement No. 133, "Accounting for Derivative
Instruments and Hedging  Activities" (FAS 133).  FAS 133 is effective for fiscal
quarters of fiscal  years  beginning  after  June 15, 1999.  FAS 133 establishes
accounting  and  reporting  standards for derivative instruments and for hedging
activities and requires, among  other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial  position and that
those  instruments be measured at fair  value.  The Company is in the process of
determining  the  impact  that  the  adoption  of  FAS 133 will have on its con-
solidated financial statements.

IMPACT OF INFLATION

         Inflationary factors have not had a significant effect on the Company's
operations.  A  substantial  portion  of the  Company's  revenue  is  subject to
reimbursement rates established and regulated by the federal  government.  These
rates do not automatically adjust for inflation.  Any rate adjustments relate to
legislation and executive and Congressional  budget demands,  and have little to
do  with  the  actual  cost  of  doing  business.  See  "Operations  -  Medicare
Reimbursement" and "Government Regulation" under Item 1, "Business."  Therefore,
dialysis  services  revenues  cannot  be  voluntary increased  to keep pace with
increases in nursing and other  patient care costs.  Increased  operating  costs
without  a  corresponding  increase in reimbursement  rates may adversely affect
the Company's earnings in the future.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         This discussion is presented under the heading "Other Matters" within
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and incorporated herein by reference.

                                       26
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The response to this item is  submitted  as a separate  section to this
Annual Report.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.

                                       27
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive  officers of the Company  are  appointed each year by the
board  of  directors at its first meeting following the Annual Meeting of Share-
holders, to serve during the ensuing year.   The following information indicates
their positions with the Company and age of the executive  officers at March 15,
1999. There are no family  relationships  between any of the executive  officers
and directors of the Company.

Name                    Age   Position                          Held Since
----                    ---   --------                          ----------
Thomas K. Langbein      53    Chairman of the Board and            1980
                              Chief Executive Officer              1986

Bart Pelstring          58    President                            1986
                              and Director                         1985

Daniel R. Ouzts         53    Vice President (Finance)
                              and Treasurer                        1996

         For more detailed information about executive  officers  and  directors
of the Company you are referred to the caption  "Information About Directors and
Executive  Officers"  of  the  Company's  Information  Statement relating to the
Annual Meeting of Shareholders to be held on June 9, 1999, which is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         Information  on  executive  compensation is included  under the caption
"Executive Compensation" of the Company's Information  Statement relating to the
Annual  Meeting of Shareholders to be held on June 9, 1999, incorporated  herein
by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information on beneficial  ownership of the Company's voting securities
by  each director and all officers and directors as a group, and for each of the
named executive officers disclosed in the Summary Compensation Table (see "Exec-
utive Compensation"  of  the  Company's  Information  Statement  relating to the
Annual  Meeting of Shareholders to be held on  June 9, 1999, incorporated herein
by reference), and  by  any person known to beneficially own more than 5% of any
class  of  voting  security of the Company, is included under the caption "Bene-
ficial  Ownership  of  the  Company's Securities"  of  the Company's Information
Statement relating  to  the Annual Meeting of Shareholders to be held on June 9,
1999, incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  on certain  relationships and related  transactions is in-
cluded under the caption "Certain Relationships and Related Transactions" of the
Company's  Information  Statement relating to the Annual Meeting of Shareholders
to be held on June 9, 1999, incorporated herein by reference.

                                       28
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      The following is a list of documents filed as part of this report.

         1. All  financial  statements  - See  Index to  Consolidated  Financial
            Statements.

         2. Financial statement schedules - See Index to Consolidated  Financial
            Statements.

         3. Refer to subparagraph (c) below.

(b)      Reports on Form 8-K

         None

(c)      Exhibits +

         (3) (i)  Articles of Incorporation ++

            (ii)  By-Laws of the Company ++

         (4) (i)  Form of Common Stock Certificate of the Company ++

            (ii)  Form of Redeemable Common Stock Purchase Warrant ++

           (iii)  Form of Underwriters' Options ++

            (iv)  Form of Warrant  Agreement  between the  Company,  Continental
                  Stock Transfer & Trust Co. and Joseph Dillon & Co., Inc. ++

             (v)  Amendment  No. 1 to  Warrant  Agreement  between  the Company,
                  Continental  Stock  Transfer & Trust  Co. and  Joseph Dillon &
                  Co.,  Inc.  dated  March 9, 1999 (incorporated by reference to
                  the Company's  Current Report on Form 8-K dated March 9, 1999,
                  Item 7(c)(4)(i)).

(10)     Material Contracts

             (i)  Lease  between  Dialysis  Services  of  Pennsylvania,  Inc.  -
                  Wellsboro(1) and James and Roger Stager dated January 15, 1995
                  (incorporated  by  reference  to  Medicore,  Inc.'s(2)  Annual
                  Report  on Form  10-K for the year  ended  December  31,  1994
                  ("1994   Medicore   Form   10-K"),   Part  IV,  Item  14(a)  3
                  (10)(lxii)).

            (ii)  Lease   between   the  Company   and   Dialysis   Services  of
                  Pennsylvania, Inc. - Lemoyne(1) dated December 1, 1998.

           (iii)  Loan Agreement between the Company and Mercantile-Safe Deposit
                  and Trust Company dated November 30, 1988(3)  (incorporated by
                  reference to the Company's  Quarterly  Report on Form 10-Q for
                  the quarter  ended March 31, 1998  ("March,  1998 Form 10-Q"),
                  Part II, Item 6(a), Part II, Item 10(iii)).

                                       29
<PAGE>

            (iv)  First  Amendment  to Loan  Agreement  between  the Company and
                  Mercantile-Safe  Deposit and Trust Company  dated  December 1,
                  1997(3)  (incorporated  by reference to the  Company's  Annual
                  Report on Form 10-K for the period  ended  December  31,  1997
                  ("1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).

             (v)  Promissory Note to  Mercantile-Safe  Deposit and Trust Company
                  dated November 30, 1988(3)  (incorporated  by reference to the
                  March,  1998 Form  10-Q,  Part II,  Item 6(a),  Part II,  Item
                  10(ii)).

            (vi)  First  Amendment  and   Modification  to  Promissory  Note  to
                  Mercantile-Safe Deposit and Trust Company(3)  (incorporated by
                  reference to the 1997 Form 10-K, Part IV, Item 14(c)(xxix)).

           (vii)  Medical  Director   Agreement  between  Dialysis  Services  of
                  Pennsylvania,  Inc. -  Wellsboro(2)  and George Dy, M.D. dated
                  September 29, 1994 [*] (incorporated by reference to Medicore,
                  Inc.'s(2)  Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1994 as amended January, 1995 ("September,  1994
                  Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).

          (viii)  Medical  Director   Agreement  between  Dialysis  Services  of
                  Pennsylvania,  Inc. - Lemoyne(1)  and Herbert I. Soller,  M.D.
                  dated January 30, 1995 [*]  (incorporated  by reference to the
                  1994 Medicore(2) Form 10-K, Part IV, Item 14(a)(3)(10)(lx)).

            (ix)  Agreement for In-Hospital  Dialysis  Services between Dialysis
                  Services of  Pennsylvania,  Inc. - Wellsboro(1) and Soldiers &
                  Sailors  Memorial   Hospital  dated  September  28,  1994  [*]
                  (incorporated by reference to September, 1994 Medicore(2) Form
                  10-Q, Part II, Item 6(a)(10)(ii)).

             (x)  Agreement for In-Hospital  Dialysis  Services between Dialysis
                  Services  of  Pennsylvania,  Inc. -  Lemoyne(1)  and  Pinnacle
                  Health  Hospitals  dated  June 1,  1997 [*]  (incorporated  by
                  reference to the  Company's  Current  Report on Form 8-K dated
                  June 19, 1997, Item 7(c)(10)(i)).

            (xi)  1995 Stock Option Plan of the Company (November 10, 1995). ++

           (xii)  Form of Stock Option  Certificate under 1995 Stock Option Plan
                  (November 10, 1995).++

          (xiii)  Form  of   Non-Qualified   Stock  Option  granted  to  Medical
                  Directors  (incorporated  by reference to the Company's Annual
                  Report  on Form  10-K for the year  ended  December  31,  1996
                  ("1996 Form 10-K"), Part IV, Item 14(a) 3 (10)(xxi)).

           (xiv)  Lease between Dialysis Services of PA., Inc. - Carlisle(1) and
                  Lester  P.  Burkholder,  Jr.  and  Kirby K.  Burkholder  dated
                  November 1, 1996  (incorporated  by reference to the Company's
                  1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).

             [*]  Confidential  portions omitted have been filed separately with
                  the Securities and Exchange Commission.

                                        30
<PAGE>

            (xv)  Lease between  Dialysis  Services of NJ., Inc. - Manahawkin(4)
                  and William P. Thomas dated January 30, 1997  (incorporated by
                  reference to the Company's 1996 Form 10-K, Part IV, Item 14(a)
                  3 (10)(xxiv)).

           (xvi)  Addendum  to Lease  Agreement  between  William P.  Thomas and
                  Dialysis  Services of NJ., Inc. - Manahawkin(4)  dated June 4,
                  1997  (incorporated  by reference to the 1997 Form 10-K,  Part
                  IV, Item 14(c)(xviii)).

          (xvii)  Medical Director  Agreement  between Dialysis Services of PA.,
                  Inc.-Carlisle(1)  and  Herb  Soller,  M.D.  dated  October  1,
                  1996(5)  [*]  (incorporated  by  reference  to  the  Company's
                  September 30, 1996 Quarterly Report on Form 10-Q  ("September,
                  1996 Form 10-Q"), Part II, Item 6(a), Part II, Item 10(ii)).

         (xviii)  Equipment  Master Lease  Agreement  BC-105 between the Company
                  and  B.  Braun   Medical,   Inc.   dated   November  22,  1996
                  (incorporated  by reference to the  Company's  1996 Form 10-K,
                  Part IV, Item 14(a) 3 (10)(xxvii)).

           (xix)  Schedule of Leased  Equipment 0597  commencing June 1, 1997 to
                  Master  Lease  BC-105   (incorporated   by  reference  to  the
                  Company's  Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1997 ("June,  1997 10-Q"),  Part II, Item 6(a),  Part
                  II, Item 10(i)).(6)

            (xx)  Agreement for In-Hospital  Dialysis  Services between Dialysis
                  Services of  Pennsylvania,  Inc. -  Carlisle(1)  and  Carlisle
                  Hospital dated August 15, 1997 [*]  (incorporated by reference
                  to the Company's  Current  Report on Form 8-K dated August 29,
                  1997, Item 7(c)(10)(i)).

           (xxi)  Asset  Purchase  Agreement by and among the Company,  Dialysis
                  Services of Florida, Inc. - Fort Walton Beach(7),  DCA Medical
                  Services,  Inc.(1),  Dialysis  Medical,  Inc.(7),  Renal  Care
                  Group, Inc., Renal Care Group of the Southeast, Inc. and Henry
                  M.  Haire,  M.D.  dated  October  31,  1997  (incorporated  by
                  reference to the  Company's  Current  Report on Form 8-K dated
                  November 12, 1997, Part II, Item 7(c)(2.1)).

          (xxii)  Medical Director  Agreement  between Dialysis  Services of NJ,
                  Inc. - Manahawkin(4) and Atlantic Nephrology Group, Inc. dated
                  January 21,  1998(8)(9) [*]  (incorporated by reference to the
                  Company's September,  1996 Form 10-Q, Part II, Item 6(a), Part
                  II, Item 10(i)).

         (xxiii)  Stock  Purchase  Agreement  between the  Company and  Atlantic
                  Nephrology  Group,  Inc.  (incorporated  by  reference  to the
                  Company's  Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1998, Part II, Item 6(a), Part II, Item 10(i)).

          (xxiv)  Lease between Dialysis Services of Pa., Inc. - Chambersburg(1)
                  and BPS Development  Group dated April 13, 1998  (incorporated
                  by reference to the Company's March,  1998 Form 10-Q, Part II,
                  Item 6(a), Part II, Item 10(i)).

           [*]    Confidential  portions omitted have been filed separately with
                  the Securities and Exchange Commission.

                                       31
<PAGE>

           (xxv)  Lease  between  Dialysis  Services of NJ, Inc. - Toms River(4)
                  and Lotano Development, Inc. dated July 1, 1998.

          (xxvi)  Lease between the Company and Wirehead  Networking  Solutions,
                  Inc. dated December 1, 1998.

       (21)   Subsidiaries of the Company.

       (27)   Financial Data Schedule (for SEC use only).

-------------------------

+        Documents incorporated by reference not included in Exhibit Volume.

++       Incorporated  by reference to the Company's  Registration  Statement on
         Form SB-2 dated December 22, 1995 as amended February 9, 1996, April 2,
         1996 and April 15, 1996, Registration No. 33-80877-A, Part II, Item 27.

(1)      Wholly-owned subsidiary.

(2)      Parent  of the  Company  owning  approximately  68%  of  the  Company's
         outstanding  common  stock.   Medicore  is  subject  to  Section  13(a)
         reporting  requirements  of the  Exchange  Act,  with its common  stock
         listed for trading on the Nasdaq National Market.

(3)      Dialysis  Corporation  of America  has two loans with  Mercantile  Safe
         Deposit and Trust Company and such loan documents and promissory  notes
         conform to the exhibit filed but for the amount of each loan.

(4)      80% owned facility with Atlantic Nephrology Group, Inc.

(5)      There are two Medical Director  Agreements with Herbert I. Soller, M.D.
         and such agreements  conform to the exhibit filed but for the facility,
         the other being is located in Chambersburg, Pennsylvania.

(6)      Dialysis  equipment  is leased from time to time and a new  schedule is
         added to the Master  Lease;  other than the nature of the equipment and
         the length of the lease, the Schedules conform to the exhibit filed and
         the terms of the Master Lease remain the same.

(7)      100% owned subsidiary, assets sold; now inactive.

(8)      Previously  filed  with  the  same  Medical  Director  under  the  name
         Oceanview Medical Group, P.A.

(9)      There are two Medical  Director  Agreements  with  Atlantic  Nephrology
         Group, Inc. and such Medical Director Agreements conform to the exhibit
         filed but for the compensation  and facility.

                                       32
<PAGE>

(d)  Schedule II - Valuation and Qualifying Accounts
     Dialysis Corporation of America, Inc. and Subsidiaries
     December 31, 1998
<TABLE>
<CAPTION>
------------------------------------------   ---------  -----------------------   ------------   ---------
COL. A                                        COL. B            COL. C               COL. D        COL. E
------------------------------------------   ---------  -----------------------   ------------   ---------
                                                          Additions
                                                        (Deductions) Additions       Other
                                                          Charged     Charged       Changes
                                             Balance at  (Credited)   to Other        Add         Balance
                                             Beginning  to Cost and   Accounts      (Deduct)     at End of
Classification                               of Period    Expenses    Describe      Describe       Period
------------------------------------------   ---------  -----------------------   ------------   ---------
<S>                                           <C>         <C>                     <C>             <C>
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
 from asset accounts:
  Allowance for uncollectable accounts        $  52,000   $ 101,000               $  (9,000)(1)   $ 144,000
  Valuation allowance for deferred tax asset        ---      80,000                     ---          80,000
                                              ---------   ---------   ---------   ---------       ---------
                                              $  52,000   $ 181,000   $       0   $  (9,000)      $ 224,000
                                              =========   =========   =========   =========       =========

YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
 from asset accounts:
  Allowance for uncollectable accounts        $ 154,000   $  37,000               $ (93,000)(1)   $  52,000
                                                                                    (46,000)(2)
  Valuation allowance for deferred tax asset     17,000     (17,000)                    ---             ---
                                              ---------   ---------   ---------   ---------       ---------
                                              $ 171,000   $  20,000   $       0   $(139,000)      $  52,000
                                              =========   =========   =========   =========       =========

YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
 from asset accounts:
  Allowance for uncollectable accounts        $ 128,000   $ 140,000               $(114,000)(1)   $ 154,000
  Valuation allowance for deferred tax asset    247,000    (230,000)                    ---          17,000
                                              ---------   ---------   ---------   ---------       ---------
                                              $ 375,000   $ (90,000)  $       0   $(114,000)      $ 171,000
                                              =========   =========   =========   =========       =========

(1) Uncollectable accounts written off, net of recoveries.
(2) Sale of subsidiaries' assets.

<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                     DIALYSIS CORPORATION OF AMERICA



                                     By:  /s/ THOMAS K. LANGBEIN
                                          --------------------------------------
                                              Thomas K. Langbein
                                              CHAIRMAN OF THE BOARD OF DIRECTORS
March 22, 1999

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


</TABLE>
<TABLE>
<CAPTION>
         Signature                              Title                               Date
         ---------                              -----                               ----

<S>                                 <C>                                         <C> 
  /s/ THOMAS K. LANGBEIN            Chairman of the Board of Directors          March 22, 1999
---------------------------
      Thomas K. Langbein

  /s/ BART PELSTRING                President and Director                      March 22, 1999
---------------------------
      Bart Pelstring

  /s/ DANIEL R. OUZTS               Vice President, Treasurer, Chief            March 22, 1999
---------------------------         Financial Officer and Controller
      Daniel R. Ouzts               

  /s/ STEPHEN EVERETT               Vice President                              March 22, 1999
---------------------------
      Stephen Everett

  /s/ ROBERT W. TRAUSE              Director                                    March 22, 1999
---------------------------
      Robert W. Trause

  /s/ DR. HERBERT I. SOLLER         Director                                    March 22, 1999
---------------------------
      Dr. Herbert I. Soller
</TABLE>

                                       
<PAGE>


                           ANNUAL REPORT ON FORM 10-K
                   ITEM I, ITEM 14(A) (1) AND (2), (C) AND (D)
         LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
                   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
                                CERTAIN EXHIBITS
                          FINANCIAL STATEMENT SCHEDULES
                          YEAR ENDED DECEMBER 31, 1998
                         DIALYSIS CORPORATION OF AMERICA
                                HIALEAH, FLORIDA

<PAGE>

                        FORM 10-K--ITEM 14(a)(1) AND (2)

                         DIALYSIS CORPORATION OF AMERICA

                          LIST OF FINANCIAL STATEMENTS



The  following  consolidated  financial  statements of Dialysis  Corporation  of
America and subsidiaries are included in Item 8:

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                            <C>
    Consolidated Balance Sheets as of December 31, 1998 and 1997.                            F-3

    Consolidated Statements of Operations - Years ended December 31, 1998,
        1997, and 1996.                                                                      F-4

    Consolidated  Statements of Stockholders'  Equity - Years ended December 31,
        1998, 1997 and 1996.                                                                 F-5

    Consolidated  Statements of Cash Flows - Years ended December 31, 1998, 1997
        and 1996.                                                                            F-6

    Notes to Consolidated Financial Statements - December 31, 1998.                          F-7
</TABLE>


The following  financial  statement schedule of Dialysis  Corporation of America
and subsidiaries is included in Item 14(d):

    Schedule II - Valuation and qualifying accounts.

    All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange  Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

                                      F-1
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Shareholders and Board of Directors
Dialysis Corporation of America


We have  audited  the  accompanying  consolidated  balance  sheets  of  Dialysis
Corporation  of America and  subsidiaries  as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended  December  31,  1998.  Our
audits also included the  financial  statement  schedule  listed in the Index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Dialysis  Corporation of America and subsidiaries at December 31, 1998 and 1997,
and the  consolidated  results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1998,  in  conformity  with
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.


                                                    /s/ ERNST & YOUNG LLP

March 22, 1999
Miami, Florida


                                      F-2
<PAGE>


<TABLE>
<CAPTION>
                         DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

                                    CONSOLIDATED BALANCE SHEETS

                                                                 DECEMBER 31,    DECEMBER 31,
                                                                     1998            1997
                                                                 ------------    ------------
<S>                                                              <C>             <C>         
                         ASSETS
Current assets:
  Cash and cash equivalents                                      $  5,366,837    $  8,102,920
  Marketable securities                                                    --         443,936
  Accounts receivable, less allowance
   of $144,000 at December 31, 1998;
   $52,000 at December 31, 1997                                       460,786         494,163
  Inventories                                                         179,189         113,815
  Prepaid expenses and other current assets                            52,934         156,823
                                                                 ------------    ------------
             Total current assets                                   6,059,746       9,311,657

Property and equipment:
  Land                                                                168,358         168,358
  Buildings and improvements                                        1,404,573       1,402,319
  Machinery and equipment                                           1,381,460         949,749
  Leasehold improvements                                            1,149,300         442,464
                                                                 ------------    ------------
                                                                    4,103,691       2,962,890
  Less accumulated depreciation and amortization                    1,003,995         679,870
                                                                 ------------    ------------
                                                                    3,099,696       2,283,020
Advances to parent                                                    120,865              --
Deferred expenses and other assets                                     68,617          43,088
                                                                 ------------    ------------
                                                                 $  9,348,924    $ 11,637,765
                                                                 ============    ============

                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                               $    243,968    $     72,531
  Accrued expenses                                                    292,594         370,099
  Current portion of long-term debt                                   175,902         151,844
  Income taxes payable                                                232,306       1,655,164
                                                                 ------------    ------------
           Total current liabilities                                  944,770       2,249,638

Long-term debt, less current portion                                  632,664         564,673
Advances from parent                                                       --         128,727
Minority interest in subsidiaries                                          --         645,809

Commitments

Stockholders' equity:
  Common stock, $.01 par value, authorized
   20,000,000 shares; 3,751,344 shares issued:
   3,546,344 shares outstanding in 1998;
   3,651,344 shares outstanding in 1997                                37,513          37,513
  Capital in excess of par value                                    4,044,154       4,008,720
  Retained earnings                                                 4,004,763       4,208,935
  Treasury stock at cost; 205,000 shares at December 31, 1998;
    100,000 shares at December 31, 1997                              (314,940)       (206,250)
                                                                 ------------    ------------
           Total stockholders' equity                               7,771,490       8,048,918
                                                                 ------------    ------------
                                                                 $  9,348,924    $ 11,637,765
                                                                 ============    ============

                 See notes to consolidated financial statements.
</TABLE>

                                      F-3
<PAGE>


<TABLE>
<CAPTION>
                         DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                   YEAR ENDED DECEMBER 31,
                                                          ----------------------------------------
                                                             1998           1997           1996
                                                          -----------    -----------   -----------
<S>                                                       <C>            <C>           <C>        
Revenues:
  Medical service revenue                                 $ 3,552,279    $ 4,375,165   $ 3,830,809
  Gain on sale of subsidiaries' assets                             --      4,430,663            --
  Interest and other income                                   451,656        414,970       305,706
                                                          -----------    -----------   -----------
                                                            4,003,935      9,220,798     4,136,515
Cost and expenses:
  Cost of medical services                                  2,516,239      2,712,527     2,508,323
  Selling, general and administrative expenses              1,847,175      2,155,459     1,577,487
  Interest expense                                             81,531         86,129        86,694
                                                          -----------    -----------   -----------
                                                            4,444,945      4,954,115     4,172,504
                                                          -----------    -----------   -----------

(Loss) income before income taxes and minority interest      (441,010)     4,266,683       (35,989)

Income tax (benefit) provision                               (236,838)     1,699,000            --
                                                          -----------    -----------   -----------

(Loss) income before minority interest                       (204,172)     2,567,683       (35,989)

Minority interest in income (loss)
  of consolidated subsidiaries                                     --        574,303       (13,028)
                                                          -----------    -----------   -----------

            Net (loss) income                             $  (204,172)   $ 1,993,380   $   (22,961)
                                                          ===========    ===========   ===========

(Loss) earnings per share:
   Basic                                                  $      (.06)   $       .56   $      (.01)
                                                          ===========    ===========   ===========
   Diluted                                                $      (.06)   $       .55   $      (.01)
                                                          ===========    ===========   ===========

</TABLE>

                          See notes to consolidated financial statements.

                                      F-4
<PAGE>


<TABLE>
<CAPTION>
                                       DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                                                                   CAPITAL IN
                                                     COMMON        EXCESS OF       RETAINED       TREASURY
                                                     STOCK         PAR VALUE       EARNINGS        STOCK            TOTAL 
                                                   ---------     ------------     -----------    ----------      -----------
<S>                                                <C>           <C>              <C>             <C>            <C>         
Balance at January 1, 1996                         $  24,328     $    305,997     $ 2,238,516                    $  2,568,841

         Net loss                                                                     (22,961)                        (22,961)

         Net proceeds from security
           offering with issuance of 1,150,000
           common shares                              11,500        3,433,658                                       3,445,158

         Exercise of stock options                        60            8,940                                           9,000
                                                   ---------     ------------     -----------    ----------       -----------

Balance at December 31, 1996                          35,888        3,748,595       2,215,555                       6,000,038

         Net income                                                                 1,993,380                       1,993,380

         Repurchase of 100,000 shares                                                            $ (206,250)         (206,250)

         Exercise of stock options                     1,625          260,125                                         261,750
                                                   ---------     ------------     -----------    ----------       -----------

Balance at December 31, 1997                          37,513        4,008,720       4,208,935      (206,250)        8,048,918

         Net loss                                                                    (204,172)                       (204,172)

         Repurchase of 105,000 shares                                                              (108,690)         (108,690)

         Redemption of minority interest in
           subsidiaries                                                35,434                                          35,434
                                                   ---------     ------------     -----------    ----------       -----------

Balance at December 31, 1998                       $  37,513     $  4,044,154     $ 4,004,763    $ (314,940)      $ 7,771,490
                                                   =========     ============     ===========    ==========       ===========

                                       See notes to consolidated financial statements.
</TABLE>


                                                             F-5
<PAGE>


<TABLE>
<CAPTION>
                               DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                            YEAR ENDED DECEMBER 31,
                                                                   -----------------------------------------
                                                                      1998           1997            1996 
                                                                   -----------    -----------    -----------
<S>                                                                <C>            <C>            <C>         
Operating activities:
  Net (loss) income                                                $  (204,172)   $ 1,993,380    $   (22,961)
  Adjustments to reconcile net (loss) income to net cash
  (used in) provided by operating activities:
      Gain on sale of subsidiaries' assets                                  --     (4,430,663)            --
      Depreciation                                                     332,697        278,761        199,315
      Amortization                                                       1,690         11,116         11,235
      Bad debt expense                                                 100,856         36,726        139,802
      Deferred income taxes                                             24,000             --             --
      Gain on sale of securities                                       (12,780)            --             --
      Minority interest                                                     --        574,303        (13,028)
      Stock compensation expense                                            --        322,125             --
      Increase (decrease) relating to operating activities from:
        Accounts receivable                                            (67,479)      (357,280)       (97,487)
        Inventories                                                    (65,374)        (5,223)       (68,325)
        Prepaid expenses and other current assets                       43,825        (12,087)       (64,257)
        Accounts payable                                               171,437        (76,129)      (177,505)
        Accrued expenses                                               (62,505)        58,341        (36,966)
        Income taxes payable                                        (1,422,858)     1,649,164             --
                                                                   -----------    -----------    -----------
          Net cash (used in) provided by operating activities       (1,160,663)        42,534       (130,177)

Investing activities:
  Proceeds from sale of subsidiaries' assets                                --      4,583,662             --
  Redemption of minority interest in subsidiaries                     (385,375)            --
  Additions to property and equipment, net of minor disposals         (904,873)      (631,103)      (159,180)
  Proceeds from sale of securities                                     252,780             --             --
  Deferred expenses and other assets                                   (27,219)       (23,429)       110,904
                                                                   -----------    -----------    -----------
          Net cash (used in) provided by investing activities       (1,064,687)     3,929,130        (48,276)

Financing activities:
  Net proceeds of securities offering                                       --             --      3,445,158
  Advances (to) from parent                                           (249,592)      (240,820)       369,547
  Repurchase of stock                                                 (108,690)      (206,250)            --
  Payments on long-term debt                                          (152,451)      (136,502)      (113,856)
  Exercise of stock options                                                 --          1,625          9,000
  Dividend payments to minority shareholders                                --         (3,966)        (7,467)
                                                                   -----------    -----------    -----------
          Net cash (used in) provided by financing activities         (510,733)      (585,913)     3,702,382
                                                                   -----------    -----------    -----------

(Decrease) increase in cash and cash equivalents                    (2,736,083)     3,385,751      3,523,929

Cash and cash equivalents at beginning of year                       8,102,920      4,717,169      1,193,240
                                                                   -----------    -----------    -----------

Cash and cash equivalents at end of period                         $ 5,366,837    $ 8,102,920    $ 4,717,169
                                                                   ===========    ===========    ===========

                               See notes to consolidated financial statements.
</TABLE>

                                                     F-6
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

         The Company is in one business segment, kidney dialysis operations, and
operates five kidney dialysis  centers,  four located in Pennsylvania and one in
New Jersey, has agreements to provide inpatient  dialysis  treatments to various
hospitals and provides supplies and equipment for dialysis home patients.

CONSOLIDATION

         The consolidated  financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company".  All material  intercompany  accounts and transactions  have been
eliminated  in  consolidation.  The  Company  is a  68.0%  owned  subsidiary  of
Medicore, Inc.
(the "Parent").

ESTIMATES

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

GOVERNMENT REGULATION

         A substantial  portion of the Company's  revenues are  attributable  to
payments  received  under  Medicare,   which  is  supplemented  by  Medicaid  or
comparable  benefits in the state in which the Company  operates.  Reimbursement
rates under these  programs are subject to regulatory  changes and  governmental
funding  restrictions.  Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that it
is in compliance  with all applicable  laws and  regulations and is not aware of
any pending or  threatened  investigations  involving  allegations  of potential
wrongdoing.  While no such regulatory inquiries have been made,  compliance with
such laws and  regulations  can be  subject  to  future  government  review  and
interpretations  as well  as  significant  regulatory  action  including  fines,
penalties, and exclusions from the Medicare and Medicaid programs.

CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid  investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash  equivalents  approximate  their
fair  values.  The credit  risk  associated  with cash and cash  equivalents  is
considered  low due to the high quality of the financial  institutions  in which
these assets are invested.

MARKETABLE SECURITIES

         The Company follows Financial  Accounting Standards Board Statement No.
115,  "Accounting for Certain Investments in Debt and Equity Securities".  Under
this  Statement,  the  Company is required to  classify  its  marketable  equity
securities  as either  trading  or  available  for sale.  The  Company  does not
purchase equity securities for the purpose of short-term sales; accordingly, its
securities  are  classified as available  for sale.  Marketable  securities  are
recorded at fair value. The marketable  securities at December 31, 1997 resulted
from the sale of the Company's  Florida  operations  in October 1997.  Since the
value of these securities was guaranteed by the purchaser at their

                                      F-7
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

originally  recorded  valuation of $480,000,  the $36,064 difference between the
market  value of  $443,936 at December  31,  1997 and the  guaranteed  value was
recorded as a receivable  and included in other  current  assets at December 31,
1997.  One-half of these securities were included in the consideration to redeem
the 20% minority  interest in two of the subsidiaries  whose assets were sold in
October 1997 and the remaining one-half were sold in 1998.

INVENTORIES

         Inventories,  which  consist  primarily  of  supplies  used in dialysis
treatments,  are  valued at the lower of cost  (first-in,  first-out  method) or
market value.

PROPERTY AND EQUIPMENT

         Property and equipment is stated on the basis of cost.  Depreciation is
computed by the  straight-line  method over the  estimated  useful  lives of the
assets, which range from 5  to  34 years for buildings and improvements; 4 to 10
years for machinery, computer and  office  equipment, and furniture; and 5 to 10
years for leasehold improvements.  Replacements  and betterments that extend the
lives  of  assets  are capitalized.  Maintenance  and  repairs  are  expensed as
incurred upon the sale or retirement of assets, the related cost and accumulated
depreciation are removed and any gain on loss is recognized.

LONG-LIVED ASSET IMPAIRMENT

         Pursuant to Financial  Accounting  Standards  Board  Statement No. 121,
"Accounting  for  the  Impairment  of  Long-Lived  Assets  to be  Disposed  of",
impairment of long-lived assets,  including  intangibles related to such assets,
is  recognized  whenever  events or changes in  circumstances  indicate that the
carrying  amount of the  asset,  or related  groups of assets,  may not be fully
recoverable  from estimated  future cash flows and the fair value of the related
assets  is less  than  their  carrying  value.  The  Company,  based on  current
circumstances, does not believe any indicators of impairment are present.

DEFERRED EXPENSES

         Deferred expenses, except for deferred loan costs, are amortized on the
straight-line  method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.

INCOME TAXES

         Deferred  income  taxes are  determined  by applying  enacted tax rates
applicable  to future  periods  in which the  taxes are  expected  to be paid or
recovered to differences  between  financial  accounting and tax basis of assets
and liabilities.

STOCK-BASED COMPENSATION

         The  Company  follows  Accounting  Principles  Board  Opinion  No.  25,
"Accounting for Stock Issued to Employees"  (APB25) and related  Interpretations
in accounting  for its employee stock options.  Financial  Accounting  Standards
Board Statement No. 123,  "Accounting for  Stock-Based  Compensation"  permits a
company to elect to follow the  accounting  provisions of APB 25 rather than the
alternative fair value accounting  provided under FAS 123 but requires pro forma
net  income  and  earnings  per  share  disclosures  as  well as  various  other
disclosures not required under APB 25 for companies following APB 25.

                                      F-8
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

EARNINGS  PER SHARE

         Diluted earning per share gives effect to potential  common shares that
were  dilutive  and  outstanding  during the period,  such as stock  options and
warrants, calculated using the treasury stock method and average market price.

         Following is a reconciliation  of amounts used in the basic and diluted
computations:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                                ----------------------------------------
                                                                                   1998           1997          1996
                                                                                -----------    -----------   -----------
<S>                                                                             <C>            <C>           <C>         
         Net (loss) income                                                      $  (204,172)   $ 1,993,380   $   (22,961)
                                                                                ===========    ===========   ===========

         Weighted average shares-denominator basic computation                    3,626,330      3,531,584     3,237,243
         Effect of dilutive stock options:
         Stock options granted November 1995                                             --         86,539            --
                                                                                -----------    -----------   -----------
         Weighted average shares, as adjusted-denominator diluted computation     3,626,330      3,618,123     3,237,243
                                                                                ===========    ===========   ===========

         Earnings (loss) per share:
         Basic                                                                  $      (.06)   $       .56   $      (.01)
                                                                                ===========    ===========   ===========
         Diluted                                                                $      (.06)   $       .55   $      (.01)
                                                                                ===========    ===========   ===========
</TABLE>

         In   addition  to  the   dilutive   stock   options   included  in  the
reconciliation  above,  which have an exercise  price of $1.50 per share,  there
were 10,000 medical director  options,  2,300,000 common stock purchase warrants
and underwriter options to purchase 100,000 shares of common of common stock and
200,000  common  stock  purchase  warrants  which have not been  included in the
earnings per share computation since they are anti-dilutive.

INTEREST AND OTHER INCOME

         Interest and other income is comprised as follows:

                                      YEAR ENDED DECEMBER 31,
                              -----------------------------------
                                1998         1997         1996
                              ---------    ---------    ---------
         Rental income        $ 121,835    $ 119,792    $ 101,161
         Interest income        296,943      227,789      168,950
         Other                   32,878       67,389       35,595
                              ---------    ---------    ---------
                              $ 451,656    $ 414,970    $ 305,706
                              =========    =========    =========

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  carrying  value  of  cash,  accounts  receivable  and  debt in the
accompanying  financial  statements  approximate their fair value because of the
short-term  maturity of these instruments,  and in the case of debt because such
instruments bear variable interest rates which approximate market.

                                      F-9
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

RECLASSIFICATIONS

    Certain  reclassifications  have  been  made to the 1997 and 1996  financial
statements to conform to the 1998 presentation.

NEW PRONOUNCEMENTS

    In June, 1998, the Financial  Accounting  Standards  Board  issued Financial
Accounting  Standards  Board  Statement  No. 133, "Accounting for Derivative In-
struments  and  hedging  Activities" (FAS 133).  FAS 133 is effective for fiscal
quarters of fiscal  years  beginning  after  June 15, 1999.  FAS 133 establishes
accounting  and  reporting  standards for derivative instruments and for hedging
activities and requires, among other things, that all  derivatives be recognized
as either assets or liabilities in the statement of financial  position and that
those instruments be measured at fair value.  The Company  is  in the process of
determining  the impact that the adoption of  FAS 133  will have on its consoli-
dated financial statements.

NOTE 2--LONG-TERM DEBT

    Long-term debt is as follows:

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                                 1998              1997
                                                                               ---------        ---------
<S>                                                                              <C>              <C>    
    Mortgage note  secured  by land and  building  with a net book value of
      $414,000 at December 31, 1998.  Monthly principal  payments of
      $3,333 plus interest at 1% over the prime rate through November 2003.    $ 200,040        $ 240,036

    Mortgage note  secured  by land and  building  with a net book value of
      $706,000 at December 31, 1998.  Monthly principal  payments of
      $2,667 plus interest at 1% over the prime rate through November 2003.      159,960          191,963

    Equipment financing agreement secured by equipment with a net book
      value of $487,000 at December  31,  1998.  Monthly  payments
      totaling  $8,582 as of December  31, 1998 as  described  below
      pursuant  to,  various  schedules,   including  principal  and
      interest, with interest at rates ranging from 5.47% to 11.84%.             448,566          284,518
                                                                               ---------        ---------
                                                                                 808,566          716,517
      Less current portion                                                       175,902          151,844
                                                                               ---------        ---------
                                                                               $ 632,664        $ 564,673
                                                                               =========        =========
</TABLE>

                                      F-10
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 2--LONG-TERM DEBT--CONTINUED

    The equipment  financing  agreement  provides  financing for kidney dialysis
machines for the  Company's  facilities in  Pennsylvania  and New Jersey and was
amended in 1996 to include  equipment for the Company's  Florida  facility.  The
initial  principal  balance was  approximately  $195,000.  Additional  financing
totaled  approximately  $124,000 in 1996, $190,000 in 1997 and $245,000 in 1998.
In  conjunction  with the Company's sale of its Florida  dialysis  operations on
October  31,  1997,  the  purchaser  assumed  approximately  $112,000  of  these
financing  obligations.   Payments  under  the agreement are pursuant to various
schedules  extending  through  October  2003.   Financing  under  the  equipment
purchase  agreement  is  a noncash financing  activity  which is a  supplemental
disclosure  required  by  Financial  Accounting Standards Board Statement No 95,
"Statement of Cash Flows".

    The prime rate was 7.75% as of  December  31,  1998 and 8.50% as of December
31, 1997.

    Scheduled  maturities of long-term debt outstanding at December 31, 1998 are
approximately:   1999-$176,000;   2000-$197,000;  2001-$177,000;  2002-$153,000;
2003-$106,000;.  Interest  payments on the above debt amounted to  approximately
$64,000 in 1998, $77,000 in 1997, and $73,000 in 1996, respectively.

    The Company's various debt agreements contain certain restrictive  covenants
that, among other things,  restrict the payment of dividends,  rent commitments,
additional indebtedness and prohibit issuance or redemption of capital stock and
require  maintenance  of  certain financial ratios.  In 1998, the Company was in
default  of  certain  covenants  relating  to  its  mortgage agreements totaling
$360,000.  The covenants principally  related to debt service ratio requirements
for which the lender has waived compliance through December 31, 1998.

NOTE 3--INCOME TAXES

    Subsequent to the completion of the Company's public offering in April 1996,
the  Company  files  separate  federal  and state  income tax  returns.  The net
operating  loss  carryforwards  that were  available  at December  31, 1995 were
utilized  prior to the  completion of its public  offering.  The Company had net
operating loss carryforwards of approximately  $6,000 at December 31, 1996 which
were fully utilized in 1997.

    Deferred  income taxes  reflect the net tax effect of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

                                                       DECEMBER 31, 
                                                    ------------------
                                                     1998       1997
                                                    -------    -------
    Deferred tax liabilities:
      Depreciation                                  $    --    $27,000
                                                    -------    -------
          Total deferred tax liabilities                 --     27,000
    Deferred tax assets:
      Depreciation                                    3,000         --
      Amortization                                    8,000     18,000
      Accrued expenses                               15,000     13,000
      Bad debt allowance                             54,000     20,000
                                                    -------    -------
          Total deferred tax assets                  80,000     51,000
      Valuation allowance for deferred tax assets   (80,000)        --
                                                    -------    -------
      Net deferred tax asset                        $    --    $24,000
                                                    =======    =======

    A valuation allowance has been provided that fully  offsets the deferred tax
asset  recorded  at  December  31,  1998  as management believes that it is more
likely than not that,  based  on  the  weight  of  the  available  evidence, the
deferred tax asset will not be realized.

                                      F-11
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 3--INCOME TAXES--CONTINUED

    Significant components of the income tax provision (benefit) are as follows:

                            1998               1997
                         -----------       -----------
        Current:
          Federal        $  (301,000)      $ 1,488,000
          State               40,162           235,000
                         -----------       -----------
                            (260,838)        1,723,000

        Deferred              24,000           (24,000)
                         -----------       -----------
                         $  (236,838)      $ 1,699,000
                         ===========       ===========

    The reconciliation of income tax attributable to income (loss) before income
taxes  computed  at the  U.S.  federal  statutory  rate to  income  tax  expense
(benefit) is:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,    
                                                            -----------------------------------------
                                                               1998           1997            1996
                                                            -----------    -----------    -----------
        <S>                                                 <C>            <C>            <C>         
        Statutory tax rate (34%) applied to income (loss)
          before income taxes                               $  (149,943)   $ 1,450,700    $   (12,200)
        Adjustments due to:
          State taxes, net of federal benefit                    25,049        155,200         (1,300)
          Change in valuation allowance                          80,000        (17,300)       230,000
          Benefits of net operating losses                           --             --       (213,000)
          Non-deductible items                                    2,973          2,900             --
          Prior year tax return accrual adjustment             (194,917)       107,500         (3,500)
                                                            -----------    -----------    -----------
                                                            $  (236,838)   $ 1,699,000    $        --
                                                            ===========    ===========    ===========
</TABLE>

         Income tax payments were  approximately  $1,162,000 in 1998, $50,000 in
1997 with no payments in 1996.

NOTE 4--TRANSACTIONS WITH PARENT

    The Parent provides certain administrative services to the Company including
office space and general  accounting  assistance.  These  expenses and all other
central  operating  costs  are  charged  on the  basis  of  direct  usage,  when
identifiable,  or on the basis of time spent. In the opinion of management, this
method of  allocation  is  reasonable.  The amount of expenses  allocated by the
Parent totaled  approximately  $240,000 for each of the years ended December 31,
1998, 1997 and 1996.

    As of December 31, 1998, the Company had an intercompany  advance receivable
from the  Parent of  approximately  $121,000  and at  December  31,  1997 had an
intercompany   advance  payable  to  the  Parent  of   approximately   $129,000,
respectively  both of which bore interest at the short-term  Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approximately
$1,000  for the year ended  December  31,  1998.  Interest  on the  intercompany
advance payable amounted to approximately  $6,000 and $7,000 for the years ended
December 31, 1998 and December 31, 1997,  respectively.  Interest is included in
the  intercompany  advance  balance.  The  Company  has  agreed  not to  require
repayment  of the  intercompany  advance  receivable  from the  Parent  prior to
January 1, 2000, and therefore,  the advance has been classified as long-term at
December 31, 1998.

                                      F-12
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 5--OTHER RELATED PARTY TRANSACTIONS

    For the years ended  December 31,  1998,  1997 and 1996,  respectively,  the
Company  paid  premiums  of  approximately  $124,000,  $87,000  and  $80,000 for
insurance  obtained  through two persons,  one a director of the Company and the
Parent,  and the other a relative of an officer and  director of the Company and
the Parent.

    For the years ended December 31, 1998,  1997 and 1996,  respectively,  legal
fees of $80,000 ,  $61,000  and  $63,000  were paid to an  attorney  who acts as
counsel and Secretary for the Company and the Parent.

NOTE 6--STOCK OPTIONS

    The Company has elected to follow  Accounting  Principles  Board Opinion No.
25,   "Accounting   for  Stock  Issued  to  Employees"   (APB  25)  and  related
Interpretations  in accounting  for its employee  stock options  because,  as is
discussed  below,  the  alternative  fair value  accounting  provided  for under
Financial   Accounting   Standard  Board   Statement  No.  123  "Accounting  for
Stock-Based Compensation", requires use of option valuation models that were not
developed for use in valuing  employee stock options.  Under APB 25, because the
exercise  price of the Company's  stock  options  equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.

    In November, 1995, the Company adopted a stock option plan for up to 250,000
options.  Pursuant  to this plan,  in  November,  1995,  the board of  directors
granted 210,000 options to certain of its officers, directors, and employees and
consultants of which 4,500 options were  outstanding at December 31, 1998. These
options  vested  immediately  and are  exercisable  for a period  of five  years
through  November  9, 2000 at $1.50 per share.  On June 10,  1998,  the board of
directors  granted an option under the 1995 plan to a new board member for 5,000
shares exercisable at $2.25 per share through June 9, 2003. On December 31, 1997
162,500  options were exercised by officers for which the Company  received cash
payments of the par value and the Company forgave the remaining  balance due and
recorded compensation expense of approximately $322,000.

    In August 1996, the board of directors  granted options to medical directors
of its kidney  dialysis  centers,  of which 10,000  options were  outstanding at
December  31,  1998.  These  options  vested  immediately  and  were  originally
exercisable  for a period of three  years  through  August 18, 1999 at $4.75 per
share,  except the  exercise  price of 5,000 of the options was reduced to $2.25
per share, the fair market value on June 10, 1998.

    Pro  forma  information  regarding  net  income  and  earnings  per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee  stock options under the fair value method of that  Statement.  The
fair  value  for  these  options  was  estimated  at the date of  grant  using a
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions  for options  granted/modified  during 1998 and the options  granted
during  1996,  respectively:  risk-free  interest  rates of 5.55% and 5.75%;  no
dividend yield;  volatility factor of the expected market price of the Company's
common  stock of .93 for the 1998  options and .50 for the 1996  options;  and a
weighted-average  expected  life  of  the  options  of  2.0  years  for  options
granted/modified in 1998 and 1.5 years for the 1996 options.

                                      F-13
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 6 --STOCK OPTIONS--CONTINUED

    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded  options  which have no  vesting  restrictions  and are
fully  transferable.  In addition,  option valuation models require the input of
highly  subjective  input   assumptions   including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

    For purposes of pro forma  disclosures,  the estimated fair value of options
is amortized to expense over the options' vesting period,  and since the options
vested immediately,  the Company's pro forma disclosure  recognizes expense upon
issuance of the  options.  No pro forma  information  is provided for 1997 as no
options were granted. The Company's pro forma information follows:

                                            1998                1996
                                         ----------          ---------
    Pro forma net loss                   $ (209,039)         $ (35,051)
                                         ==========          =========
    Pro forma loss per share             $     (.06)         $    (.01)
                                         ==========          =========

     A summary of the Company's stock option activity,  and related  information
for the options issued in 1998, 1996 and 1995 follows:

<TABLE>
<CAPTION>
                                                      1998                        1997                       1996
                                            ------------------------   -------------------------- ---------------------------
                                                    WEIGHTED-AVERAGE             WEIGHTED-AVERAGE            WEIGHTED-AVERAGE
                                            OPTIONS  EXERCISE PRICE    OPTIONS    EXERCISE PRICE  OPTIONS     EXERCISE PRICE
                                            ------- ----------------   -------   ---------------- -------    ----------------
<S>                                          <C>          <C>          <C>             <C>        <C>             <C>
Outstanding-beginning of year                29,000                    209,000                    210,000
Granted                                      10,000       $2.25             --                     15,000         $4.75
Cancellations                                (5,000)       4.75             --                         --
Exercised                                        --                   (162,500)        $1.50       (6,000)         1.50
Forfeited                                        --                         --                         --
Expired                                     (14,500)       1.50        (17,500)         2.43      (10,000)         1.50
                                            -------                   --------                    -------
Outstanding-end of year                      19,500                     29,000                    209,000
                                            =======                   ========                    =======

Outstanding and exercisable
   at end of year
   November 1995 options                      4,500        1.50         19,000          1.50      194,000          1.50
   August 1996 and June 1998 options         10,000        2.25         10,000          4.75       15,000          4.75
   August 1996 options                        5,000        4.75             --                         --
                                            -------                   --------                    -------
                                             19,500                     29,000                    209,000
                                            =======                   ========                    =======
Weighted-average fair value of options
granted during the year                     $   .79                                               $  1.30
                                            =======                                               =======
</TABLE>

    The remaining  contractual  life at December 31, 1998 is 4.4 years, .6 years
and 1.9 years for the  options  issued in June 1998,  August  1996 and  November
1995, respectively.

    The Company has 2,619,500 shares reserved  for  future  issuance, including:
2,300,000 shares for Warrants;  9,500  shares under the 1995 plan; 10,000 shares
for 1996 options; and 300,000 shares for underwriter options.

                                      F-14
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 7--COMMON STOCK

    The Company  completed a public offering of common stock and warrants during
the second  quarter of 1996,  providing  it with net  proceeds of  approximately
$3,445,000.

    Pursuant  to the  offering  1,150,000  shares of common  stock were  issued,
including 150,000 shares from exercise of the underwriters overallotment option,
and there are 2,300,000  redeemable  common stock  purchase  warrants  issued to
purchase one common share each at an exercise  price of $4.50  exercisable  from
April 17, 1997 through October 16, 1999,  pursuant to an extension in March 1999
of the original  expiration  date of April 16, 1999. The  underwriters  received
options to purchase  100,000 units each  consisting of one share of common stock
and two common stock purchase warrants,  for a total of 100,000 shares of common
stock and 200,000 common stock purchase warrants,  with the options  exercisable
at $4.50 per unit from April 17, 1997 through April 16, 2001 with the underlying
warrants being  substantially  identical to the public warrants except that they
are exercisable at $5.40 per share.

NOTE 8--COMMITMENTS

    The Company has leases on facilities  housing its dialysis  operations.  The
aggregate   lease   commitments   at  December   31,  1998  are   approximately:
1999-$202,000 ; 2000-$182,000 ;  2001-$188,000 ; 2002-$174,000 ;  2003-$143,000.
Total rent expense was approximately $49,000,  $73,000 and $65,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.

    Effective  January 1, 1997,  the Company  established a 401(k)  savings plan
(salary  deferral plan) with an  eligibility  requirement of one year of service
and 21 year old age  requirement.  The Company has made no  contributions  under
this plan as of December 31, 1998.

NOTE 9--SALE OF SUBSIDIARIES' ASSETS

    On October 31, 1997, the Company  concluded a sale ("Sale") of substantially
all of the assets of two of its 80% owned  subsidiaries,  Dialysis  Services  of
Florida,  Inc. - Ft. Walton Beach  ("DSF")  (dialysis  operations)  and Dialysis
Medical,  Inc.  ("DMI")  (Florida  Method  2 home  patient  operations),  and an
in-patient hospital service agreement of its 100% owned subsidiary,  DCA Medical
Services,  Inc. pursuant to an Asset Purchase  Agreement.  Consideration for the
assets sold was $5,065,000  consisting of $4,585,000 in cash and $480,000 of the
purchaser's  common stock which the purchaser has agreed to register  within one
year.  Provided  that the shares are sold within 30 days of their  registration,
the purchaser  agreed to make up any difference by which the sales proceeds were
less than $480,000 in cash or additional  registered  shares of the purchaser at
its discretion. These shares were carried at their market value of approximately
$444,000 at December 31, 1997 with the difference  between the guaranteed  value
and the market value reflected as a receivable  from the purchaser.  In February
1998, the Company acquired,  in a transaction  accounted for as a purchase,  the
remaining 20% minority  interests in two of the  subsidiaries  whose assets were
sold. The purchase  price,  totaled  $625,000,  which  included  one-half of the
common shares originally  received as part of the consideration of the Sale. The
remaining  shares  were  sold  in  September  1998  for  approximately  $253,000
resulting in a gain of approximately $13,000.

    The pro forma consolidated  condensed financial  information presented below
reflects the Sale as if it had occurred on January 1, 1997.  For purposes of pro
forma  statement of operations  information,  no  assumption  has been made that
expenses  have  been  eliminated  which  were  included  in  corporate   expense
allocations by the Company and its Parent,  to the business  operations sold and
which were included in the actual  results of  operations  of these  businesses.
Such expenses amounted to approximately $125,000 for the year ended December 31,
1997. No assumption has been

                                      F-15
<PAGE>

                DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                                DECEMBER 31, 1998

NOTE 9--SALE OF SUBSIDIARIES' ASSETS--CONTINUED

included in the pro forma  information  as to  investment  income to be realized
from investment of the proceeds of the sale.

    The summary pro  forma financial information, which excludes the gain on the
Sale, is  not necessarily representative of what the Company's results of opera-
tions would have been if the Sale had actually occurred  as  of  January 1, 1996
and may not be indicative of the Company's  operating  results  for  any  future
periods.

                                              SUMMARY PRO FORMA INFORMATION
                                                  YEAR ENDED DECEMBER 31,
                                                  1997                1996
                                              -----------         -----------
                  Total revenue               $ 3,079,000         $ 2,102,000
                  Net loss                    $  (530,000)        $  (422,000)
                                              ===========         ===========

                  Loss per share:
                  Basic                       $      (.15)        $      (.13)
                                              ===========         ===========
                  Diluted                     $      (.15)        $      (.13)
                                              ===========         ===========

    The  Company  recorded  a gain  on the  Sale  of  approximately  $2,747,000,
representing  a pre-tax gain of  $4,431,000,  net of  estimated  income taxes of
approximately  $1,684,000,  of which approximately $537,000 of the net after tax
gain  relates to the 20%  minority  interest  in two of the  subsidiaries  whose
assets were sold. This gain is not reflected in the above pro forma information.

NOTE 10--REPURCHASE OF COMMON STOCK

    In September  1998, the Company  announced its intent to repurchase up to an
additional  300,000  shares of its common stock at current  market  prices after
having  acquired  100,000 shares in June 1997 for  approximately  $206,000.  The
Company repurchased 105,000 shares for approximately $109,000 during 1998.

NOTE 11--CAPITAL EXPENDITURES

    Capital expenditures were as follows:

                     1998               1997             1996
                  ----------         ----------       ----------
                  $1,149,372         $  825,427       $  386,502
                  ==========         ==========       ==========

                                      F-16