UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-K
 (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31,
      2008
  OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from  ____________ to
  __________Commission
      file number0-8527
 
 DIALYSIS CORPORATION OF
AMERICA
 (Exact
name of registrant as specified in its charter)
 
 FLORIDA
              
              59-1757642(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)1302 CONCOURSE DRIVE,
      SUITE 204, LINTHICUM, MARYLAND
              
              21090(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 Registrant’s
telephone number, including area code (410)
694-0500
 
 Securities
registered under Section 12(b) of the Act:
  Title of Each
      Class
              
              Name of Each Exchange
      on Which Registeredcommon
      stock, $.01 par value
              
              The
      NASDAQ Stock Market, LLC(NASDAQ
      Global Market)
 
 Securities
registered under Section 12(g) of the Exchange Act:
 None
  Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
 Yes o                                No
x
 
 Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
 Yes o                                No
x
 
 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
o
 
 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
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  (Check One)
 Large
      accelerated filer o
              Accelerated
      filer x
              Non-accelerated
      filer o
              Smaller
      reporting company o
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes o  No x
 
 As of June 30, 2008, the aggregate
market value of the common stock held by non-affiliates computed by reference to
the closing price of these shares of $7.28 on the Nasdaq Stock Market was
approximately $54,002,000.
 
 As of March 13, 2009, the Company
had 9,594,368 shares of its common stock outstanding.
 
 
  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,
incorporated in Part IV of this Annual Report.
 
 Registrant’s Annual Report, Form 10-K
for the years ended December 31, 1999 and 2005, Part IV, Exhibits, incorporated
in Part IV of this Annual Report.
 
 Portions of Registrant’s Definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with its 2009 Annual Meeting of Shareholders are incorporated into
Part III, Items 10-14 of this Annual Report.
 
  
 
 
  DIALYSIS
CORPORATION OF AMERICA
 
 Index to
Annual Report on Form 10-K
 Year
Ended December 31, 2008
 
 PagePART
      ICautionary
      Notice Regarding Forward-Looking Information
              1Item
      1.
              Business
              2Item
      1A.
              Risk
      Factors
              20Item
      1B.
              Unresolved
      Staff Comments
              29Item
      2.
              Properties
              29Item
      3.
              Legal
      Proceedings
              30Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              30PART
      IIItem
      5.
              Market
      for the Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              31Item
      6.
              Selected
      Financial Data
              33Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              34Item
      7A.
              Quantitative
      and Qualitative Disclosure About Market Risk
              46Item
      8.
              Financial
      Statements and Supplementary Data
              46Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              46Item
      9A.
              Controls
      and Procedures
              47Item
      9B.
              Other
      Information
              48
 
 i
 
 PagePART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              48Item
      11.
              Executive
      Compensation
              49Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              49Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              50Item
      14.
              Principal
      Accountant Fees and Services
              50PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              51Signatures
              
              56
 
 ii
  Part
I
  Cautionary
Notice Regarding Forward-Looking Information
 
 The statements contained in this annual
report on Form 10-K dated March 13, 2009 and the documents incorporated by
reference in this annual report that are not historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 as
amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934 (the “Exchange Act”).  In addition, from time to time, we or
our representatives have made or may make forward looking statements, orally or
in writing, and in press releases.  The Private Securities Litigation
Reform Act of 1995 contains certain safe harbors for forward-looking
statements.  Certain of the forward-looking statements include
management’s expectations, intentions, beliefs and strategies regarding the
growth of our company and our future operations, the character and development
of the dialysis industry, anticipated revenues, our need for and sources of
funding for expansion opportunities and construction, expenditures, costs and
income, our business strategies and plans for future operations, potential
business combinations, and similar expressions concerning matters that are not
considered historical facts.  Forward-looking statements also include
our statements regarding liquidity, anticipated cash needs and availability, and
anticipated expense levels in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”  Words such as
“anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans” and
“believes,” and words and terms of similar substance used in connection with any
discussions of future operating or financial performance identify
forward-looking statements.  Such forward-looking statements, like all
statements about expected future events, are based on assumptions and are
subject to substantial risks and uncertainties that could cause actual results
or transactions to materially differ from those expressed in the statements,
including general economic and market conditions which substantially
deteriorated in 2008, and continue in a global economic decline to date,
business opportunities pursued or not pursued, competition, changes in federal
and state laws or regulations affecting the company and our operations, and
other factors discussed periodically in our filings.  Many of the
foregoing factors are beyond our control.  Among the factors that
could cause actual results to differ materially are the factors detailed in the
risks discussed in Item 1A, “Risk Factors” section beginning on page 20 of this
annual report on Form 10-K.  If any of such events occur or
circumstances arise that we have not assessed, they could have a material
adverse effect upon our revenues, earnings, financial condition and business, as
well as the trading price of our common stock, which could adversely affect your
investment in our company.  Accordingly, readers are cautioned not to
place too much reliance on such forward-looking statements.  All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf, are expressly qualified in their entirety by the
cautionary statements contained in this annual report.  You should
read this annual report on Form 10-K, the exhibits attached and the documents
incorporated by reference completely and with the understanding that the
company’s actual results may be materially different from what we
expect.
 
 The forward-looking statements speak
only as of the date of this annual report on Form 10-K, and except as required
by law, we undertake no obligation to rewrite or update such statements to
reflect subsequent events.
 
 
 
 Item
      1.
              Business
 
 Historical
 
 Dialysis Corporation of America, a
Florida corporation organized in 1976, develops, owns, 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, or ESRD.  We also provide acute inpatient
dialysis treatments in hospitals, homecare services and dialysis center
management services.  We currently own 37 outpatient dialysis
facilities.  During 2008 we acquired the assets of two dialysis
facilities located in Georgia and Maryland, the Georgia facility having
previously been managed by us, and we opened a new facility in
Pennsylvania.  We also engage, on a limited basis, in medical product
sales.
 
 Our principal executive offices are
located at 1302 Concourse Drive, Suite 204, Linthicum, Maryland 21090, and you
may contact us as follows:
 
 Telephone: (410) 694-0500
 Fax: (410) 694-0596
 Email:
info@dialysiscorporation.com
 
 Our internet website can be found at
www.dialysiscorporation.com.  You
may obtain through our internet website, free of charge, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
amendments to those reports filed with the Securities and Exchange Commission,
referred to as the SEC, press releases, corporate profiles and corporate
governance materials.  We also make those documents available to
shareholders free of charge upon request.  The SEC maintains a website
at www.sec.gov
where our reports and other information about us may be obtained
 
 General
 
 Our company distinguishes itself on the
basis of quality patient care delivered by patient-focused, courteous, highly
trained professional staff.  In addition to outpatient facilities, we
provide acute inpatient dialysis treatments that are conducted under contractual
relationships with hospitals located in near proximity to certain of our
outpatient facilities.  Currently we have 11 such
relationships.  Our homecare services, primarily through the use of
peritoneal dialysis, requires us to provide equipment and supplies, training,
monitoring and follow-up assistance to patients who are able to perform their
treatments at home.
 
 Our medical services revenue is derived
primarily from four sources: (i) outpatient hemodialysis services (ii) home and
peritoneal dialysis services; (iii) inpatient hemodialysis services for acute
patient care provided through agreements with hospitals and medical centers; and
(iv) ancillary services associated with dialysis treatments, including the
administration of erythropoietin (“EPO”), a bio-engineered protein that
stimulates the production of red blood cells (a deteriorating kidney loses its
ability to regulate red blood cell count, resulting in
anemia).  Dialysis is an ongoing and necessary therapy to sustain life
for ESRD patients.  ESRD patients typically receive up to 156 dialysis
treatments each year.
  2
  Our
medical services revenue distribution among these sources of revenue is as
follows for 2008, 2007 and 2006:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Outpatient
      hemodialysis services
              
              
              54
              %
              
              
              55
              %
              
              
              54
              %Home
      and peritoneal dialysis services
              
              
              5
              
              
              
              5
              
              
              
              6Inpatient
      hemodialysis services
              
              
              4
              
              
              
              4
              
              
              
              3Ancillary
      services*
              
              
              37
              
              
              
              36
              
              
              
              37100
              %
              
              
              100
              %
              
              
              100
              %
  * EPO represents 27% of medical
services revenue for 2008 and 2007 and 28% for 2006.
 
 Essential to our operations and income
is Medicare reimbursement which is a fixed rate determined by the Center for
Medicare and Medicaid Services (“CMS”) of the Department of Health and Human
Services (“HHS”).  The level of our revenues and profitability may be
adversely affected by future legislation that could result in rate
cuts.  Further, our operating costs tend to increase over the years in
excess of increases in the prescribed dialysis treatment
rates.  Congress approved a 1.6% composite rate increase for each of
2005 and 2006, and a 1.6% increase that was effective April 1,
2007.  Also for 2007, the drug add-on adjustment to the composite rate
increased 0.5%.  In 2005, Medicare implemented an additional change in
the manner it reimburses dialysis treatments, which includes a pricing revision
to the current average wholesale price for separately billable drugs and
biologicals.  Effective January 1, 2006, payments for pharmaceuticals
(including EPO) were set at the pharmaceutical’s average sales price as
determined by the Inspector General of HHS, plus 6%, which remained the same for
2007 and 2008.  Effective April, 2006, CMS implemented a policy for
monitoring the dosage of EPO based upon the patient’s hematocrit level and for
limiting the quantity of EPO that can be administered in any one
month.  Effective January 1, 2008, CMS further decreased the quantity
of EPO that may be administered in any month.  Medicare has
implemented a case mix payment system, adjusting the composite rate for a
limited number of patient characteristics.  The increase in the
composite rate is intended to offset reductions in pharmaceutical
reimbursements.  In July, 2008, Congress passed legislation aimed at
establishing a broader “bundling” reimbursement system which is intended to take
effect incrementally beginning in 2011.  See under this Item 1,
“Operations – Medicare Reimbursement.”  Commercial third-party
reimbursement rates, which have increased as a percentage of our revenues over
the last two years, are also susceptible to reduction.  The inpatient
dialysis service agreements for treating acute kidney disease are not subject to
government fixed rates, but rather are negotiated with
hospitals.  Typically these rates are higher than the government fixed
rates on a per treatment basis.
 
 Dialysis
Industry
 
 Kidneys act as filters 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 ESRD, results from chemical imbalance and buildup of toxic chemicals, and 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 either
obtain a kidney transplant, which procedure is limited due to lack of suitable
kidney donors and the incidence of rejection of transplanted organs, or obtain
dialysis treatments for the rest of their lives.
 
 Based upon CMS information published in
the 2008 United States Renal Data System, the number of ESRD patients requiring
dialysis treatments in the United States in 2006 exceeded 350,000, with a growth
rate of approximately 3% to 4% a year.  This is thought to be
attributable primarily to the aging of
the population, greater patient longevity as a result of improved dialysis
technology, and better treatment and survival rates for illnesses that lead to
chronic kidney disease.  The statistics further reflect over 5,067
dialysis facilities, with a current annual cost for treating ESRD patients in
the United States of approximately $31 billion in 2006, of which Medicare
accounted for approximately $23 billion.
  3
  ESRD Treatment Options
 
 Treatment options for ESRD patients
include: (1) hemodialysis, performed either at (i) an outpatient facility, (ii)
inpatient hospital facility, or (iii) the patient’s home; (2) peritoneal
dialysis, either continuous ambulatory peritoneal dialysis or continuous cycling
peritoneal dialysis; or (3) kidney transplant.  A significant portion
of ESRD patients receive treatments at non-hospital owned outpatient dialysis
facilities (according to CMS, approximately 82%) with most of 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 also controls external blood flow and
monitors the toxic and fluid removal process.  The dialyzer has two
separate chambers divided by a semi-permeable
membrane.  Simultaneously with the blood circulating through one
chamber, 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 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 patient’s assistant, which usually encompasses four to eight
weeks.
 
 A second home treatment option for ESRD
patients is peritoneal dialysis.  The two most common forms of
peritoneal dialysis are continuous ambulatory peritoneal dialysis and continuous
cycling peritoneal dialysis.  All forms of peritoneal dialysis use the
patient’s peritoneal (abdominal) cavity to eliminate fluid and toxins from the
patient.  Continuous ambulatory peritoneal dialysis utilizes dialysis
solution infused manually into the patient’s peritoneal 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 process is then repeated.  Continuous cycling
peritoneal dialysis is performed in a manner similar to continuous ambulatory
peritoneal dialysis, but utilizes a mechanical device to cycle the dialysis
solution while the patient is sleeping.  Peritoneal dialysis is the
third most common form of ESRD therapy following center hemodialysis and renal
transplant.
 
 While kidney transplantation is
typically the most desirable form of therapeutic intervention, the scarcity of
suitable donors and possibility of donee rejection limits the availability of
this surgical procedure as a treatment option.
 
 Business
Strategy
 
 Dialysis Corporation of America has 33
years’ experience in developing and operating dialysis treatment
facilities.  Our priority is to provide quality patient
care.  We continue to establish alliances with physicians and
hospitals and attempt to initiate dialysis service arrangements with nursing
homes and managed care organizations.
  4
  We actively seek and negotiate with
physicians and others to establish new outpatient dialysis
facilities.  In 2008, we acquired two centers and opened one new
center.  We are in different phases of negotiations with physicians
for potential new facilities in a variety of states.
 
 Same
Center Growth
 
 We endeavor to increase same center
growth by adding quality staff and management and attracting new patients to our
existing facilities.  We seek to accomplish this objective by
rendering high caliber patient care in convenient, safe and pleasant
conditions.  We believe that we have adequate space and stations
within our facilities to accommodate greater patient volume and maximize our
treatment potential.  Same center growth relates to those centers that
were operable during the entire prior year.  During 2008, we
experienced approximately 5% increase in dialysis treatments for our facilities
that qualified to be included in same center growth compared to 6% during the
preceding year.
 
 Development
and Acquisition of Facilities
 
 One of the primary elements in
developing or acquiring facilities is locating an area with an existing patient
base under the current treatment of local nephrologists interested in working
with a dialysis center, since the proposed facility would primarily be serving
such patients.  Other considerations in evaluating development of a
dialysis facility or a proposed acquisition are the types of commercial
insurance in the area and the ESRD patient census they serve, 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 existing outpatient dialysis facilities within reasonable
proximity to the proposed center.
 
 Expansion is either through the
development of new dialysis facilities, or acquisition of existing outpatient
dialysis centers.  While acquisition of existing outpatient dialysis
centers is a faster means for achieving profitability, these transactions can be
more costly, and therefore, the company takes a selective approach to its
acquisition strategy.  The primary reason for physicians selling or
participating in the development of centers is the avoidance of administrative
and financial responsibilities, freeing their time to devote to their
professional practice.  Other motivating forces are the physician’s
desire to be part of a larger organization allowing for economies of scale and
the ability to realize a return on their investment if they have an interest in
the dialysis entity.
 
 To construct and develop a new facility
ready for operation takes an average of four to six months, and usually up to 12
months or longer to generate earnings, all of which are subject to variables
based on location, size and competitive elements.  Some of our centers
are in the developmental stage, since they have not reached the point where the
patient base is sufficient to generate and sustain earnings.  See Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”  Construction of a 15 station facility, typically the
size of our dialysis facilities, costs in a range of $1,000,000 to $1,500,000,
including equipment and initial working capital requirements, and is dependent
upon location, size and related services to be provided by the proposed
facility.  An acquisition of an existing facility is usually based
primarily upon the patient base and earnings, and to a lesser extent, location
and competition.  As a result, the costs associated with an
acquisition of a facility can be substantially greater than that of a
development; therefore, we selectively identify potential
acquisitions.  Any significant expansion, whether through acquisition
or development of new facilities, is dependent upon existing funds or financing
from other sources.  We have a revolving credit facility intended to
provide available funds for the development and acquisition of new dialysis
facilities and for other
  5
  general
working capital and corporate purposes.  See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
  Inpatient
Services
 
 We also provide acute dialysis
treatments through contracts with hospitals for inpatient dialysis
services.  These contracts are primarily sought with hospitals in
areas serviced by our 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.  We believe
that these arrangements are beneficial to our operations, since the contract
rates are individually negotiated with each hospital and are not fixed by
government regulation as is the case with Medicare reimbursement fees for ESRD
patient treatment.
 
 There is
no certainty as to when any additional centers or service contracts will be
implemented, or, to the extent implemented, the number of dialysis stations or
patient treatments these centers or service contracts may involve, or if they
will ultimately be profitable.  There is no assurance that we will be
able to continue to enter into favorable relationships with physicians who would
become medical directors of proposed dialysis facilities, or that we 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 their start-up costs and expenses and to their having a smaller and
slower developing patient base.  See “Business Strategy,” “Operations”
and “Competition” of this Item 1, and Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
 
 Operations
 
 Location, Capacity and Use of
Facilities
 
 We currently own 37 outpatient dialysis
facilities in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and
South Carolina.  These dialysis facilities have a total designed
capacity 573 licensed stations.
 
 Our 37
dialysis facilities are owned through subsidiaries as follows: 23 wholly-owned
subsidiaries, one of which owns two facilities, and 13 majority-owned
subsidiaries in conjunction with the medical directors of those centers who hold
minority interests.
 
 One of our Georgia subsidiaries
exercised a call option which resulted in the acquisition of the assets
(effective January 1, 2008) of the Georgia facility we previously
managed.  We hold an 80% interest in this facility and the former
owner holds the remaining 20% interest.
 
 The company provides acute care
inpatient dialysis services to 11 hospitals in areas serviced by certain of our
dialysis facilities.  Most of our dialysis facilities have the
capacity to provide training, supplies and on-call support services for home
peritoneal patients.  Dialysis Corporation of America provided
approximately 272,000 hemodialysis treatments in 2008, an increase of
approximately 20,000 treatments compared to fiscal 2007.
 
 We estimate that on average our centers
were operating at approximately 50% of capacity in December, 2008, based on the
assumption that a dialysis center is able to provide up to three treatments a
day per station, six days a week.  We believe we can increase the
number of dialysis treatments at most of our centers without making significant
additional capital expenditures.
  6
  Operations of Dialysis
Facilities
 
 Our 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, staff work area, offices, a staff lounge, and a dialyzer
reprocessing room in select facilities (where, with both the patient’s and
physician’s consent, the patient’s dialyzer is sterilized for
reuse).  Most of our facilities 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.
 
 Our facilities also offer home
dialysis, primarily continuous ambulatory peritoneal dialysis and continuous
cycling peritoneal dialysis.  Training programs for continuous
ambulatory peritoneal dialysis or continuous cycling peritoneal dialysis
generally encompass two to three weeks at the dialysis 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.
 
 We maintain a team of 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 physician 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 governing body comprised of an administrator, the
medical director of that facility and the company’s regional director for that
area.  The governing body supervises the facility’s daily operations,
patient care, services necessary for the operation of the facility, and staff,
which consists of registered nurses, licensed practical nurses, patient care
technicians, a social worker to assist the patient and family to adjust to
dialysis treatment and to provide help in financial assistance and planning, and
a registered dietitian.  See “Employees” below.  In
furtherance of our business strategy, we strive to attract and retain skilled
nurses and other staff, for whom competition is intense.
 
 We consider our dialysis equipment to
be both modern and efficient, providing state of the art treatment in a safe and
comfortable environment.
 
 Inpatient Dialysis
Services
 
 We presently provide inpatient dialysis
services to 11 hospitals in Georgia, Maryland, Ohio, Pennsylvania, and Virginia
under agreements either with us or with one of our subsidiaries in the
area.  The agreements are for terms ranging from one to five years,
some with automatic renewal terms.  Inpatient services are typically
necessary for patients with acute kidney failure resulting from trauma or
similar causes and ESRD patients who require hospitalization for other
reasons.
 
 Ancillary Services
 
 Our dialysis facilities provide
ancillary services to ESRD patients including the administration of certain
prescription drugs, such as 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.  Amgen is the only
manufacturer of EPO in the United States.  Although we have a good
relationship with this manufacturer and have not experienced any problems in
receipt of our supply of EPO, any loss or limitation of supply of EPO could have
a material adverse effect on patient treatments and our operating revenue and
income.
  7
  Amgen has developed an additional
product, darbepoetin alfa, known as Aranesp®.  Roche has also
developed a drug, Mircera®, used to treat anemia, although it is currently
unavailable to patients in the United States due to Amgen’s current patent on
EPO.  These drugs can be administered to patients less frequently than
EPO, which is generally administered to the patient with each dialysis
treatment.  Although we are unable to predict the impact of these
products on our operations, a significant increase in the development and use of
these alternatives to EPO could have an adverse effect on our revenues, earnings
and cash flow.
 
 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 in
proximity to where the patient’s nephrologist has an established
practice.  Consequently, we rely on our ability to develop
affiliations with area nephrologists.
 
 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.  We retain, by written agreement, qualified physicians or
groups of qualified physicians to serve as medical directors for each of our
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 in the care of dialysis
patients at ESRD facilities.  The medical directors are typically a
source of patients treated at the particular center served.  Our
dialysis centers are operated through subsidiaries, either corporations or
limited liability companies.  The medical directors of 13 of our
centers, through their affiliated entities, have a minority ownership interest
in the center they service.  We make every effort to comply with
federal and state regulations concerning our relationship with the physicians
and the medical directors treating patients at our facilities.  See
“Government Regulation” below.
 
 Agreements with medical directors
typically have terms ranging from five to ten years, with renewal provisions,
usually two renewal options each for five years. Each agreement specifies the
duties, responsibilities and compensation of the medical
director.  Under each agreement, the medical director or professional
association maintains their own medical malpractice insurance.  The
agreements also typically 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.  These
agreements, however, do not prohibit physicians providing services at our
facilities 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 our dialysis centers.  Customarily,
physician’s professional fees for services are billed directly to the patient or
to government payment authorities by the treating physician and paid directly to
the physician or the physician’s professional association.
 
 Our ability to establish and operate a
dialysis facility in a particular area is substantially dependent on the
availability of a qualified nephrologist to serve as the 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. In our 33 years of operation, we have not been unable to provide for
or replace a medical director.  Compensation of medical directors is
separately negotiated for each facility and generally depends on competitive
factors, the size of the facility, and the fair market value of the services to
be provided.
 
 Quality Assurance
 
 We have implemented a quality assurance
program to maintain and improve the quality of dialysis treatment and care we
provide to our patients in each facility.  Quality assurance
activities
  8
  involve
the ongoing examination of care provided, the identification of therapy
deficiencies, the need for any necessary improvements in the quality of care,
and evaluation of improved technology.  Specifically, this program
requires each center’s staff, including its medical director and nurse
administrator, to regularly review quality assurance data and initiate programs
for improvement, including dialysis treatment services, equipment, technical and
environmental improvements, and staff-patient and personnel
relationships.  These evaluations are in addition to assuring
regulatory compliance with CMS and the Occupational Safety and Health
Administration.  Our Vice President of Clinical Services, a certified
nephrology nurse, oversees this program in addition to ensuring that we meet
federal and state compliance requirements for our dialysis
centers.  See “Government Regulation” below.
 
 Quality Clinical Results
 
 Our goal is to provide consistent
quality clinical care to our patients from caring and qualified doctors, nurses,
patient care technicians, social workers and dieticians.  We have
demonstrated an unwavering commitment to quality renal care through our
continuous quality improvement initiatives.  We strive to maintain a
leadership position as a quality provider in the dialysis industry and often set
our goals higher than the national average standards.
 
 Kt/V is a formula that measures the
amount of dialysis delivered to the patient, based on the removal of urea, an
end product of protein metabolism.  Kt/V provides a means to determine
an individual dialysis prescription and to monitor the effectiveness or adequacy
of the dialysis treatment as delivered to the patient.  We believe it
is critical to achieve a Kt/V level of greater than 1.2 for as many patients as
possible.  Approximately, 97% of our patients had a Kt/V level greater
than 1.2 for the fourth quarter of 2008 compared to 95% for the fourth quarter
of 2007.
 
 Anemia is a shortage of oxygen-carrying
red blood cells.  Because red blood cells bring oxygen to all the
cells in the body, untreated anemia can cause severe fatigue, heart disorders,
difficulty concentrating, reduced immune function, and other
problems.  Anemia is common among renal patients, caused by
insufficient erythropoietin, iron deficiency, repeated blood losses, and other
factors.  Anemia can be detected with a blood test for hemoglobin or
hematocrit.It is
ideal to have as many patients as possible with hemoglobin levels above
11.  Approximately 82% of our patients had a hemoglobin level greater
than 11 for the fourth quarter of 2008 compared to 79% for the fourth quarter of
2007.
 
 Vascular access is the site on a
patient’s body where blood is removed and returned during
dialysis.  CMS has indicated that fistulas are the “gold standard” for
establishing access to a patient’s circulatory system in order to provide
life-sustaining dialysis.  Approximately 56% of our patients were
dialyzed with a fistula during the fourth quarter of 2008 compared to 53% for
the fourth quarter of 2007.
 
 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 CMS.  A majority of dialysis patients are
covered under Medicare.  The balance of the outpatient charges are
paid by private payors including the patient’s medical insurance, private funds
or state Medicaid plans.  The states in which we operate 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
  9
  personal
funds.  If there is no payor to cover the remaining 20%, Medicare may
reimburse us for part of that balance as part of our annual cost report
filings.  Medicare and Medicaid programs are subject to regulatory
changes, statutory limitations and government funding restrictions, which may
adversely affect dialysis services payments and, consequently, our
revenues.  See “Medicare Reimbursement” below.
 
 The inpatient dialysis services are
paid for by each contracted hospital pursuant to contractual pre-determined fees
for the different dialysis treatments.
 
 Medicare Reimbursement
 
 We are reimbursed primarily by Medicare
under a prospective reimbursement system for chronic dialysis services, and by
third party payors including Medicaid and commercial insurance
companies.  Our dialysis facilities are certified to participate in
the Medicare program.  Under the Medicare system, the reimbursement
rates are fixed in advance and limit the allowable charge per treatment, but
provide us with predictable and recurring per treatment revenues.  An
established composite rate set by CMS governs the Medicare reimbursement
available for a designated group of dialysis services, including dialysis
treatments, supplies used for such treatments, and certain laboratory tests and
drugs.
 
 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, and certain physician-ordered tests provided to dialysis
patients.  Approximately 27% of our medical services revenue in 2008
was derived from providing dialysis patients with EPO. Effective April, 2006,
and revised again in January, 2008, CMS implemented a policy for monitoring the
dosage of EPO based upon the patient’s hematocrit level and for limiting the
quantity of EPO that can be administered in any one month.  This
policy restricts payments based on EPO doses and hemoglobin levels for certain
patients.  Other ancillary services, mostly other drugs, account for
approximately 10% of our medical services revenue.  We submit claims
monthly and are usually paid by Medicare within 21 days of the
submission.
 
 There
have been a variety of proposals to Congress for Medicare
reform.  Congress approved a 1.6% composite rate increase for each of
2005 and 2006, a 1.6% increase which became effective April 1, 2007, and no
increase for 2008.  For 2008, the drug-add on adjustment to the
composite rate increased 0.6%.  Medicare reimburses dialysis providers
for the ten most utilized ESRD drugs at an amount equal to the cost of such
drugs, and for other ESRD drugs Medicare reimburses at an amount equal to the
average sale price of the drug as determined by the Inspector General of HHS,
plus 6%, and the composite rate has been increased by an amount estimated by HHS
to be the dialysis provider’s average profit for these drugs.  To make
this change budget-neutral, a drug add-on composite was included.  CMS
reimburses providers using a case mix formula.  CMS adjusted
reimbursements based on predefined patient parameters such as patient height,
weight and age.  Congress has mandated a budget neutrality factor
adjustment so that aggregate payments under the system equal payments that would
have been made without the case mix adjustments and the add-on composite for
reimbursement of the drugs.  Management believes there has been
minimal impact on its average Medicare revenue per treatment as a result of
these changes in Medicare reimbursement.  Our Medicare composite
payment rate for 2008 was between $127 and $151 per dialysis
treatment.
 
 In July, 2008, Congress passed the
Medicare Improvements for Patients and Providers Act, or MIPPA, which among
other things, provided for a 1% increase in the composite rate in years 2009 and
2010, while also mandating the implementation of a “bundled” payment system for
renal dialysis services effective January 1, 2011. The system also will take
into account certain case mix adjustments, including patient weight, body mass
index, comorbidities, length of time on dialysis, age, race, ethnicity and high
cost outliers.
  10
  The estimated total amount of payments
under the bundled payment system will be equal to 98% of the estimated total
amount of payments for dialysis services that would have been made with respect
to services furnished in 2011, using the lowest per patient utilization data
from 2007, 2008 and 2009 for estimation purposes.  Commencing in 2012,
there will be an increase in bundled payment amounts by an ESRD market basket
percentage increase factor that reflects changes over time in prices of an
appropriate mix of goods and services included in the delivery of renal dialysis
services, minus 1%.
 
 In addition, providers will be required
to meet certain quality measures that may include anemia management, patient
satisfaction, iron management, bone mineral metabolism and vascular access.
Commencing January 1, 2012, providers that fail to satisfy such measures will
receive a reduction in the bundled payment rate up to 2%.
 
 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 reimbursements 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 and New Jersey have Medical Assistance Programs
comparable to Medicaid, with primary and secondary insurance coverage to those
who qualify.
 
 Sources
of Medical Services Revenue
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Medicare
              
              
              46
              %
              
              
              49
              %
              
              
              52
              %Medicaid
      and Comparable Programs
              
              
              8
              
              
              
              8
              
              
              
              9Hospital
      inpatient dialysis services
              
              
              4
              
              
              
              4
              
              
              
              3Commercial
      and private payors
              
              
              42
              
              
              
              39
              
              
              
              36100
              %
              
              
              100
              %
              
              
              100
              %
  Management Services
 
 We have a management services agreement
with each of our subsidiaries to provide them with administrative and management
services, including, but not limited to, assisting in procuring capital
equipment, preparing budgets, general accounting, data processing, and other
corporate based information services, materials and human resource management,
billing and collection, and accounts receivable and payable
processing.  These services are provided for a percentage of net
revenues of each particular facility.
 
 Compliance
Program
 
 We have a Compliance Program to assure
we continue to achieve our goal of providing the highest level of care and
service in a professional and ethical manner consistent with applicable federal
and state laws and regulations.  This program is intended to (i)
reinforce our management’s, employees’ and professional affiliates’ awareness of
their responsibilities to comply with applicable laws in the increased and
complex regulatory environment relating to our operations, (ii) benefit the
overall care and services for our dialysis patients, and (iii) assure our
operations are in
  11
  compliance
with the law, which, in turn, should assist us in operating in a cost-effective
manner, and accordingly, benefit our shareholders.
 
 The Compliance Program also assists us
in compliance with fraud and abuse laws, enhance communication of information,
and provide a mechanism to quickly identify and correct any problems that may
arise.  This Program supplements and enhances our existing policies,
including those applicable to claims submission, cost report preparation,
internal audit and human resources.
 
 Our board of directors has established
an audit committee consisting of three independent members of the board who
oversee audits, accounting, financial reporting, and who have established
procedures for receipt, retention and resolution of complaints relating to those
areas, among other responsibilities.  The audit committee operates
under a charter providing for its detailed responsibilities.
 
 We also maintain disclosure controls
and procedures and internal controls over financial reporting to ensure the
accuracy of our disclosures in our filings and financial reporting and financial
statements filed under the federal securities laws.  Management
provides a report on, and our independent registered accountants audit,
management’s assessment of internal control over financial
reporting.  See Item 9A, “Controls and Procedures” and “Report of
Independent Registered Public Accounting Firm,” page F-2 of this annual report
on Form 10-K.
 
 Code of Ethics
 
 As part of our Compliance Program, we
have established a Code of Ethics and Business Conduct covering management and
all employees to assure all persons affiliated with our company and our
operations act in an ethical and lawful manner.  The Code of Ethics
and Business Conduct covers relationships among and between affiliated persons,
patients, payors, and relates to information processing, compliance, workplace
conduct, environmental practices, training, education and development, among
other areas.  In our commitment to delivering quality care to dialysis
patients, we have mandated rigorous standards of ethics and
integrity.
 
 Our Code of Ethics and Business Conduct
is designed to provide:
 
 ●
              commitment
      to the best interests of the company by officers, directors and
      employees●
              ethical
      handling of actual or apparent conflicts of interest between personal and
      professional relationships●
              full,
      fair, accurate, timely, and understandable disclosure in reports and
      documents we file with the SEC and in our other public
      communications●
              compliance
      with applicable governmental laws, rules and
regulations●
              prompt
      internal reporting of violations of the Code to an appropriate person
      identified in the Code●
              responsibilities
      of senior management with respect to related party
      transactions●
              accountability
      for adherence to the Code●
              non-waiver
      of policies and exception processes
 
 Our Code of Ethics and Business Conduct
is posted on our website at www.dialysiscorporation.com
under the caption “Investor Relations – Corporate Governance.”  We
will also provide the Code to any person without charge upon request to our
corporate Secretary and counsel, Joshua M. Jaffe, Esq., Jaffe & Falk, LLC,
at 777 Terrace Avenue, Hasbrouck Heights, New Jersey 07604, telephone (201)
288-8282, or email, jmj@jaffefalkllc.com.
  12
  The Compliance Program is reviewed and
upgraded from time to time, to provide a highly professional work environment
and lawful and efficient business operations to better serve our patients and
our shareholders.
 
 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.  We currently have
general and umbrella liability insurance, as well as professional and products
liability.  Our insurance policies provide coverage on an “occurrence”
basis and are subject to annual renewal.  A hypothetical successful
claim against us in excess of our insurance coverage could have a material
adverse effect upon our business and results of operations.  The
medical directors supervising our dialysis operations and other physicians
practicing at the facilities are required to maintain their own professional
malpractice insurance coverage.
 
 Government
Regulation
 
 General
 
 Regulation of healthcare facilities,
including dialysis facilities, is extensive, with legislation continually
proposed relating to safety, maintenance of equipment and records, quality
assurance programs, government payment programs and reimbursement rates,
confidentiality of medical records, licensing, patient care and other areas of
operations.  Each dialysis facility must be certified by CMS, and must
comply with certain rules and regulations established by CMS.  Each
dialysis facility is also subject to periodic inspections by federal and state
agencies to determine if their operations meet the appropriate regulatory
standards.  Our operations are also subject to the Occupational Safety
and Health Administration, known as OSHA, relating to workplace safety and
employee exposure to blood and other potentially infectious
material.
 
 Many states have eliminated the
requirement to obtain a certificate of need prior to the establishment or
expansion of a dialysis center.  There are no certificate of need
requirements in the states in which we are presently operating.
 
 Our record of compliance with federal,
state and local governmental laws and regulations remains
excellent.  Nevertheless, we are 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 CMS.  Enforcement, both privately and by the
government, has become more stringent, particularly in attempts to combat fraud
and waste.  Since our inception in 1976, we continue to maintain our
licenses, including our Medicare and Medicaid and equivalent
certifications.  The permanent loss of any licenses and certifications
would have a material adverse effect on our results of operations, financial
position and cash flows.
 
 We
regularly review legislative and regulatory changes and developments and will
restructure a business arrangement if we determine such might place our
operations in material noncompliance with applicable laws or
regulations.  See “Fraud and Abuse” and “Stark II”
below.  To date, none of our business arrangements have been the
subject of investigation by any governmental authority.  No assurance
can be given, however, that our business arrangements will not be the subject of
future investigation or prosecution by federal or state governmental authorities
which could result in civil and/or criminal sanctions.  Effective
October, 2008, CMS promulgated new regulations revising the conditions of
coverage for ESRD facilities like ours.  The regulations established
performance expectations for the dialysis facilities and staff, eliminate
certain procedural requirements, and promote continuous quality
  13
  improvement
and patient safety measures.  We have established new Operating
Policies and Procedures with auditing processes to monitor
compliance.
 
 Certification and
Reimbursement
 
 Our dialysis centers must meet certain
requirements, including, among others, those relating to patient care, patient
rights, medical records, the physical set-up of the center, and personnel, in
order to be certified by CMS, to be covered under the Medicare program and to
receive Medicare reimbursement.  See above under “Operations –
Medicare Reimbursement.”  Our dialysis centers are certified under the
Medicare program, and are certified under applicable state Medicaid
programs.
 
 Fraud and Abuse
 
 Our dialysis operations are subject to
federal and state laws governing financial relationships between health care
providers and referral sources and the accuracy of information submitted in
connection with reimbursement.  These laws, collectively referred to
as “fraud and abuse” laws, include the Anti-Kickback Statute, Stark II, other
federal fraud laws, and similar state laws.
 
 The fraud
and abuse laws apply because our medical directors have financial relationships
with the dialysis facilities and typically refer patients to those facilities
for items and services reimbursed by federal and state health care
programs.  Financial relationships with patients who are federal
program beneficiaries also involve the fraud and abuse laws.  Other
financial relationships which bear scrutiny under the fraud and abuse laws
include relationships with hospitals, nursing homes, and various
vendors.
 
 Anti-Kickback Statutes
 
 The
federal Anti-Kickback Statute prohibits the knowing and willful solicitation,
receipt, offer, or payment of any remuneration, directly or indirectly, in
return for or to induce the referral of patients or the ordering or purchasing
of items or services payable under the Medicare, Medicaid, or other federal
health care program.
 
 Sanctions for violations of the
Anti-Kickback Statute include criminal penalties, such as imprisonment and fines
of up to $25,000 per violation, and civil penalties of up to $50,000 per
violation, as well as mandatory exclusion from Medicare, Medicaid, and other
federal health care programs for a minimum of five years.  Under U.S.
Sentencing Guidelines, an individual may be fined up to $250,000 and an
organization may be fined up to $500,000 upon conviction of offenses described
in any federal statute.
 
 The
language of the Anti-kickback Statute has been construed broadly by the
courts.  Over the years, the federal government has published
regulations that established “safe harbors” to the Anti-Kickback
Statute.  An arrangement that meets all of the elements of the safe
harbor is immunized from prosecution under the Anti-Kickback
Statute.  The failure to satisfy all elements, however, does not
necessarily mean the arrangement violates the Anti-Kickback
Statute.
 
 Some states have enacted laws similar
to the Anti-Kickback Statute.  These laws may apply regardless of
payor source, may include criminal and civil penalties, and may contain
exceptions that differ from the safe harbors to the Anti-Kickback
Statute.
 
 As
required by Medicare regulations, each of our dialysis centers is supervised by
a medical director, who is a licensed nephrologist or otherwise qualified
physician.  The compensation of each of our medical directors, who are
independent contractors, is fixed by a medical director agreement
and
  14
  reflects
competitive factors in each respective location, the size of the center, the
anticipated workload for that particular center, and the physician’s
professional qualifications.  The medical director’s fee is fixed in
advance, typically for periods of one to five years and does not take into
account the volume or value of any referrals to the dialysis
center.  Thirteen of our outpatient dialysis centers are owned jointly
by us and physicians who hold a minority position through a professional
association.  These physicians act as the medical directors for those
facilities.  We attempt to structure our arrangements with our
physicians to comply with the Anti-Kickback Statute with the understanding that
many of these physicians’ patients are treated at our facilities.  We
believe that the fair market value of the minority interest in a subsidiary
acquired by the physician has been consistent with the cash consideration paid
and/or the assets transferred to the subsidiary, and there is no intent to
induce referrals to any of our centers.  See “Business – Physician
Relationships” above.  We lease space for six of our centers from
entities in which physicians hold ownership interests.  We sublease
space to seven of our medical directors at eight of our dialysis
centers.  These arrangements must be in compliance with the
Anti-Kickback Statute.  We believe our arrangements with our medical
directors are in compliance with applicable law.  Several states in
which we operate have laws prohibiting physicians from holding financial
interests in various types of medical facilities.  If these statutes
are interpreted to apply to relationships we have with our medical directors who
hold a percentage ownership in our dialysis facilities, we would restructure our
relationship with these physicians but could be subject to
penalties.
 
 We
believe that the Anti-Kickback Statute and other fraud and abuse laws are
primarily directed at abusive practices that increase the utilization and cost
of services covered by governmentally funded programs.  The dialysis
services we provide generally cannot, by their very nature, be over-utilized
since dialysis treatment is not elective, and is only indicated when there is
temporary or permanent kidney failure.  Medical necessity is capable
of being supported by objective documentation, drastically reducing the
possibility of over-utilization.  Additionally, there are safe harbors
for certain arrangements.  Nevertheless, while relationships created
by medical director ownership of minority interests in our facilities satisfy
many but not all of the criteria for the safe harbor, there can be no assurance
that these relationships will not subject us to investigation or prosecution by
enforcement agencies.  In an effort to further our compliance with the
law, we have adopted a corporate Compliance Program that addresses medical
necessity and medical chart audits to confirm medical necessity of
referrals.
 
 With respect to our inpatient dialysis
services, we provide hospitals with dialysis services, including qualified
nursing and technical personnel, supplies, equipment and technical
services.  In certain instances, the medical director of our dialysis
center who has a minority interest in that facility may refer patients to
hospitals with which we have an inpatient dialysis services
arrangement.  We believe our acute inpatient hospital services are in
compliance with the law.  See “Stark II” below.
 
 We
endeavor in good faith to comply with all governmental
regulations.  However, there can be no assurance that we will not be
required to change our practices or experience a material adverse effect as a
result of any such potential challenge.  We cannot predict the outcome
of the rule-making process, enforcement procedures, or whether changes in the
safe harbor rules will affect our position with respect to the Anti-Kickback
Statute, but we will continue to make every effort to remain in
compliance.
 
 Stark II
 
 The federal physician self referral
law, commonly known as Stark II, prohibits a physician who has a financial
relationship, or who has an immediate family member who has a financial
relationship, with entities providing “designated health services” from
referring Medicare or Medicaid patients to such entity for such services unless
an exception applies.  A “financial relationship” includes an
ownership or investment interest in, or a compensation arrangement between the
physician and the entity.  For purposes of Stark II, “designated
health services” include clinical laboratory services, durable medical
equipment,
  15
  parenteral
and enteral nutrients, home health services, and inpatient and outpatient
hospital services.  Dialysis treatments are not “designated health
services.”
 
 The
self-referral prohibition has numerous exceptions, including exceptions for
personal service arrangements, leases of space and equipment, employment
relationships and referrals within group practices.
 
 An entity
is prohibited from submitting Medicare or Medicaid claims for services furnished
pursuant to an unlawful referral and must refund amounts received pursuant to
prohibited referrals.  Violators are subject to civil monetary
penalties of up to $15,000 for each improper claim and may be excluded from
participation in the Medicare and Medicaid programs.  Unlike the
federal Anti-Kickback Statute, intent to violate the law is not
required.  Knowing violations of Stark II may also serve as the basis
for liability under the False Claims Act.  See “False Claims Act”
below.
 
 HHS regulations to Stark II became
effective in January, 2002.  CMS adopted Phase II of its regulations
under Stark II in March, 2004.  These regulations exclude from covered
designated health services and referral prohibitions, services included in the
ESRD composite rate and EPO and other drugs required as part of dialysis
treatments under certain conditions.  Also excluded from “inpatient
hospital services” are dialysis services provided by a hospital not certified by
CMS to provide outpatient dialysis services, which would exclude our inpatient
hospital services agreements from Stark II.  Equipment and supplies
used in connection with home dialysis are excluded from the Stark II definition
of “durable medical equipment.”
 
 Stark II regulations and the
legislative history of Stark II indicate that the purpose behind the Stark II
prohibition on physician referral is to prevent Medicare and Medicaid program
and patient abuse.  Since dialysis is a necessary medical treatment
for those with temporary or permanent kidney failure, it is not highly
susceptible to that type of abuse.  We believe, based upon current
rules and the industry practice, Congress did not intend to include dialysis
services and the services and items we provide that are incidental to dialysis
services within the Stark II prohibitions.
 
 If the
provisions of Stark II were found to apply to our arrangements however, we
believe that we would be in compliance.  We compensate our medical
directors pursuant to medical director agreements, which we believe meet the
exception for personal service arrangements under Stark II.  No other
physicians who send their patients to or treat their patients at any of our
facilities receive compensation from us.
 
 Medical directors of our dialysis
centers who hold a minority investment interest in the subsidiaries operating
those centers may refer patients to hospitals with which we have an acute
inpatient dialysis service arrangement.  Although the regulations of
Stark II may be interpreted to apply to these types of transactions, we believe
that our contractual arrangements with hospitals for acute care inpatient
dialysis services are in compliance with Stark II.
 
 A limited number of dialysis facilities
are leased from entities in which physicians hold ownership interests, and we
sublease space to seven of our medical directors.  Stark II provides
an exception for these types of affiliated physician lease agreements if
specific requirements are met.  The company believes these leases
satisfy the requirements for these exceptions.
 
 If CMS or any other government entity
otherwise interprets the Stark II regulations, we may be required to restructure
certain existing compensation or investment agreements with our medical
directors, or, in the alternative, refuse to accept referrals for designated
health services from certain physicians.  Stark II prohibits Medicare
or Medicaid reimbursement of items or services provided
  16
  pursuant
to a prohibited referral, and imposes substantial civil monetary penalties on
facilities which submit claims for reimbursement for such prohibited
referrals.  If such were to be the case, we could be required to repay
amounts reimbursed for drugs, equipment and services that CMS determines to have
been furnished in violation of Stark II, in addition to substantial civil
monetary penalties, which could adversely affect our operations and financial
results.  We believe that if Stark II is interpreted by CMS or any
other governmental entity to apply to our arrangements, it is possible that we
could be permitted to bring our financial relationships with referring
physicians into material compliance with the provisions of Stark II on a
prospective basis.  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 the costs and expenses associated
with such prospective compliance, if permissible, would not have a material
adverse effect on our results of operation, financial position or cash
flows.
 
 False
Claims Act
 
 The False
Claims Act is the federal government’s primary civil remedy for improper or
fraudulent claims.  It applies to all federal programs, including
Medicare and Medicaid.  The False Claims Act prohibits, among other
things, (1) knowingly presenting or causing to be presented a false or
fraudulent claim, (2) knowingly making or using, or causing to be made or used,
a false record or statement in order to have a false or fraudulent claim paid,
(3) conspiring to defraud the government by getting a false or fraudulent claim
allowed or paid, and (4) knowingly making or using, or causing to be made or
used, a false record or statement to conceal, avoid, or decrease an obligation
to pay the government.
 
 “Knowingly”
means that a person, with respect to information:  (1) has actual
knowledge of the information; (2) acts in deliberate ignorance of the truth or
falsity of the information; or (3) acts in reckless disregard of the truth or
falsity of the information.  No proof of specific intent to defraud is
required.
 
 Penalties
for violation of the False Claims Act include fines of $5,500 to $11,000 per
false claim, plus treble damages.  Prosecution under the False Claims
Act involves an extensive variety of alleged false claims and fraud allegedly
perpetrated against Medicare and state healthcare programs, including billing
for services not rendered, coding errors, the submission of false cost reports,
and billing for services at a higher payment rate than
appropriate.  The federal government can use other criminal federal
statutes to prosecute false claims.
 
 Our
Corporate Compliance Program is designed to address risks inherent in the
submission of claims and other information in connection with the Medicare and
Medicaid program and we are committed to ensuring the accuracy of all
claims.  There can be no assurance, however, that we will not be
subject to an investigation or audit regarding the accuracy of any claim or
other information submitted in connection with our operations.
 
 HIPAA
 
 The Health Insurance Portability and
Accountability Act of 1996, known as HIPAA, provided for health insurance
reforms which included a variety of provisions important to healthcare
providers, such as significant changes to the Medicare and Medicaid fraud and
abuse laws.  HIPAA established two programs that coordinate federal,
state and local healthcare fraud and abuse activities.  Under these
programs, these governmental entities undertake a variety of monitoring
activities, including medical utilization and fraud review, cost report audits
and secondary payor determinations.
  17
  As part of the administrative
simplification provisions of HIPAA, there are regulations governing electronic
transactions relating to healthcare information.  These regulations
require a party transmitting or receiving healthcare transactions electronically
to send and receive data in single format.  This regulation applies to
our submissions and processing of healthcare claims and also applies to many of
our payors.  We believe that we are in compliance with the
transactions standards rule.
 
 HIPAA also includes provisions relating
to the privacy of healthcare information.  HHS’ privacy rules cover
all individually identifiable healthcare information known as “protected health
information” and apply to healthcare providers, health plans, and healthcare
clearing houses, known as “covered entities.”  The regulations are
quite extensive and complex, but basically require companies to: (i) obtain
patient acknowledgement of receipt of a notice of privacy practices; (ii) obtain
patient authorization before certain uses and disclosures of protected health
information; (iii) respond to patient requests for access to their healthcare
information; and (iv) develop policies and procedures with respect to uses and
disclosures of protected health information.  We believe we are in
compliance with the HIPAA privacy rules.
 
 HIPAA has security regulations
governing the security of health information that is maintained or transmitted
electronically.  These regulations generally require implementation of
safeguards for ensuring the confidentiality of electronic health
information.  Management believes it is currently in compliance with
the HIPAA security standards.
 
 HIPAA
expressly prohibits four 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.
 
 As for
criminal penalties, HIPAA 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 HIPAA 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 we believe we substantially
comply with currently applicable state and federal laws and regulations and to
date have not had any difficulty in maintaining our licenses and 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 our operations
cannot be predicted.  No assurance can be given that our activities
will not be reviewed or challenged by regulatory authorities.  We
continue to work with our healthcare counsel in reviewing our policies and
procedures and make every effort to comply with HIPAA and other applicable
federal and state laws and regulations.
 
 Environmental and Health
Regulations
 
 Our dialysis centers are subject to
various federal, state and local hazardous waste laws and non-hazardous medical
waste disposal laws.  Most of our waste is
non-hazardous.  We also follow OSHA’s Hazardous Waste Communications
Policy, which requires all employees to be knowledgeable of the
  18
  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 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.  We adhere 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.
 
 Other
Regulation
 
 The company complies with the employee
education processes of the Deficit Reduction Act of 2005.
 
 Certain states have Anti-Kickback
legislation and laws dealing with self-referral provisions similar to the
federal Anti-Kickback Statute and Stark II.  We have no reason to
believe that we are not in compliance with such state laws.
 
 Our Compliance
Program is designed to assure compliance with fraud and abuse laws and
regulations.  See above under the caption “Compliance
Program.”  The establishment and implementation of our Compliance
Program, coupled with our existing policies and internal controls, could have
the effect of mitigating any civil or criminal penalties for potential
violations.  We will continue to use our best efforts to fully comply
with federal and state laws, regulations and requirements as applicable to our
operations and business.
 
 Medical
Products
 
 Subsequent to our merger in September,
2005, with our former parent company, Medicore, Inc., we became engaged in the
distribution of medical products, primarily disposables and diabetic supplies,
both domestically and internationally, to hospitals, blood banks, laboratories
and retail pharmacies.  We distribute blood lancets used to draw blood
for testing under the names Producers of Quality Medical DisposablesTM, Lady
LiteTM, our brand name Lite Touch, or under a private label if requested by the
customer.  Medical devices are required by the FDA, as a condition of
marketing, to secure a 510(k) premarket notification clearance or a Premarket
Approval Application.  A product will be cleared by the FDA under a
510(k) if it is found to be substantially equivalent in terms of safety,
effectiveness and intended use to another legally marketed
product.  We received 510(k) clearance for our blood lancet line and
insulin syringes.  Our medical products are subject to continuing FDA
oversight, including labeling, “good manufacturing practices,” as defined in FDA
regulations, and adverse event reporting, none of which adverse events have
occurred to date.  Marketing of our medical products is conducted by
our employees and independent manufacturer representatives.
 
 Competition
 
 The dialysis industry is highly
competitive.  There are numerous providers who have dialysis centers
in the same areas as our centers.  Many are owned by larger
corporations, which operate dialysis centers regionally, nationally and
internationally.  Our operations are small in comparison with those
corporations.  Two of our major competitors are significantly larger
public companies, Fresenius Medical Care, Inc., and DaVita,
Inc.  These companies have substantially greater financial resources,
significantly more centers, patients and services than we do, and by virtue of
such may have an advantage over us in
  19
  competing
for nephrologists and acquisitions of dialysis facilities in areas and markets
we target.  Moreover, competition for acquisitions has increased the
cost of acquiring existing dialysis centers.  Fresenius also
manufactures and sells dialysis equipment and supplies, which may provide it
with a greater competitive edge.  We also face competition from
hospitals and physicians that operate their own dialysis
facilities.
 
 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 required as medical directors of
the dialysis center for it to participate in the Medicare ESRD program, and are
responsible for the supervision of the medical operations of the
center.  Our medical directors usually are subject to non-compete
restrictions within a limited geographic area from the center they
administer.  They can be a substantial source of patients for the
centers.  Additionally, there is always substantial competition for
obtaining qualified, competent nurses and technical staff at reasonable labor
costs.  There can be no assurance that we will compete
effectively.
 
 The medical products industry is
extremely competitive and our medical products operations are not a significant
competitive factor in this area.
 
 Employees
 
 As of March 13, 2009, we had 550 full
time employees, including administrators, licensed practical nurses, registered
nurses, technical specialists, patient care technicians, clerical employees,
social workers, dietitians, corporate staff and four employees in the medical
products operations.  We retain 38 part-time employees consisting of
registered nurses, patient care technicians and clerical
employees.  We also utilize 149 per diem personnel to supplement
staffing.
 
 We retain nine independent contractors,
including social workers and dietitians at various of our dialysis
facilities.  These contractors are in addition to the medical
directors, who supervise patient treatment at each facility.
 
 We believe our relationships with our
employees are excellent and we have not suffered any strikes or work
stoppages.  None of our employees are represented by any labor
union.  We are an equal opportunity employer.
 
 Item
      1A.
              Risk
      Factors
 
 We have listed below certain of the
risk factors relating to us and our securities.  There may be other
risks and uncertainties that we may face and of which we are currently unaware
which could also adversely affect our business, operations and financial
condition.  If any of such risks or uncertainties arise, or the risks
listed below occur, our operations, earnings and financial condition could be
materially harmed, which, in turn, would most likely adversely affect the
trading price of our common stock.  Any such event could negatively
impact a shareholder’s investment in the company.
 
 Our
dialysis operations are subject to extensive government regulation
 
 Our dialysis operations are subject to
extensive federal and state government regulations, which include:
 
 ●
              licensing
      requirements for each dialysis center●
              government
      healthcare program participation
requirements
  20
  ●
              reimbursement
      for patient services●
              patient
      referral prohibitions; broad federal and state Anti-Kickback
      regulations●
              false
      claims prohibitions for health care reimbursement and other fraud and
      abuse regulations●
              record
      keeping requirements●
              health,
      safety and environmental compliance●
              expanded
      protection of the privacy and security of personal medical
      data●
              standards
      for the exchange of electronic health information; electronic transactions
      and code sets; unique identifiers for providers●
              medical
      waste disposal regulations
 
 Many of these laws and regulations are
complex and open to further judicial and legislative
interpretations.  If we are forced to change our method of operations
because of these regulations, our earnings, financial condition and business
could be adversely affected.  The imposition of additional licensing
and other regulatory requirements may, among other things, increase our cost of
doing business.  In addition, any violation of these governmental
regulations could involve substantial civil and criminal penalties and fines,
revocation of our licenses, closure of one or more of our centers, and our
exclusion from participating in Medicare and Medicaid programs.  Any
loss of federal or state certifications or licenses would materially adversely
impact our business.
 
 Our
arrangements with our physician medical directors do not meet the safe harbor
provisions of federal and state laws, and may subject us to greater governmental
scrutiny
 
 Neither our arrangements with the
medical directors of our facilities, typically retained by us as independent
contractors under a fixed fee medical director agreement, nor the minority
ownership interests of physicians in certain of our dialysis facilities meet all
of the requirements of safe harbors to the Anti-Kickback Statute and similar
state laws.  These laws impose civil and criminal sanctions on persons
who receive or make payments for referring a patient for treatment that is paid
for in whole or in part by Medicare, Medicaid or similar state
programs.  Transactions and arrangements involving physician minority
ownership that do not fall within a safe harbor may be subject to greater
scrutiny by enforcement agencies, and if determined to violate the Anti-Kickback
Statute or Stark II law could subject us to repayment of certain reimbursement
amounts, monetary penalties and exclusion from further participation in
government programs.  If we are unable to modify the arrangement to
satisfy the applicable laws and safe-harbor provisions, we would not be allowed
to accept patient referrals from the physician with whom we have the
arrangement.  In any of these circumstances, our financial position,
results of operations and cash flows would be adversely affected.
 
 Our
operations are subject to Medicare and Medicaid audits with concurrent potential
civil and criminal penalties for failure to comply
 
 We are subject to periodic audits by
the Medicare and Medicaid programs, which have various rights and remedies if
they assert that we have overcharged the programs or failed to comply with
program requirements.  Rights and remedies available under these
programs include repayment of any amounts alleged to be overpayments or in
violation of program requirements, or making deductions from future amounts due
to us.  These programs may also impose fines, criminal penalties or
program exclusions.
 
 In the ordinary course of our business,
we may receive notices of deficiencies for failure to comply with various
regulatory requirements.  We review such notices and take appropriate
corrective action.  In most cases, we and the reviewing agency will
agree upon the measures that will bring the
  21
  center or
services into compliance.  In some cases or upon repeat violations,
none of which we have experienced, the reviewing agency may take various adverse
actions against a provider, including but not limited to:
 
 ●
              the
      imposition of fines;●
              suspension
      of payments for new admissions to the center; and●
              in
      extreme circumstances, decertification from participation in the Medicare
      or Medicaid programs and revocation of a center’s
  license.
 
 Any such regulatory actions could
adversely affect a center’s ability to continue to operate, to provide certain
services, and/or its eligibility to participate in Medicare or Medicaid programs
or to receive payments from other payors.  Moreover, regulatory
actions against one center may subject our other centers, which may be deemed
under our common control or ownership, to similar adverse remedies.
 
 There
has been increased governmental focus and enforcement with respect to anti-fraud
initiatives as they relate to healthcare providers
 
 State and federal governments are
devoting increased attention and resources to anti-fraud initiatives against
healthcare providers.  Legislation has expanded the penalties for
healthcare fraud, including broader powers to exclude providers from the
Medicare and Medicaid programs.  We have established policies and
procedures that we believe are sufficient to ensure that our facilities will
operate in substantial compliance with these anti-fraud
requirements.  While we believe that our business practices are
consistent with Medicare and Medicaid criteria, those criteria are often vague
and subject to change and interpretation.  Anti-fraud actions could
have an adverse effect on our financial position, results of operations and cash
flows.
 
 Our
revenues and financial stability are dependent on fixed reimbursement rates
under Medicare and Medicaid
 
 During 2006, 2007 and 2008,
approximately 52%, 49% and 46%, respectively, of our patient revenues was
derived from Medicare reimbursement and 9%, 8% and 8%, respectively, of our
patient revenues was derived from Medicaid and equivalent
programs.  Federal and state governments seek to maintain, if not
reduce, costs including through:
 
 ●
              reductions
      in payments to us or government programs in which we
      participate●
              inclusion
      of those ancillary services which we currently bill separately in the flat
      composite rate for dialysis
treatments
 
 Changes
implemented by Congress in recent years, including modest percentage increases
in the Medicare composite rate (the fixed payment rate for a dialysis treatment
including related supplies, laboratory tests and pharmaceuticals) while at the
same time modifying the bases by which CMS reimburses for separately billable
services and pharmaceuticals, such as EPO, did not, in the aggregate,
significantly impact our cash flows, results of operations or financial
position.  Nevertheless, the government has continued to review the
processes for reimbursement of dialysis services and in July, 2008, Congress
passed the Medicare Improvements for Patients and Providers Act which, while
providing for marginal increases in the composite rate for 2009 and 2010,
establishes  “bundled”  payments for all goods and services
provided during the dialysis treatment beginning in 2011 at an initial rate set
at 2% below the payment rate that providers historically received under prior
methodologies.   From and after 2012, although the new single
bundled payment base rate will be adjusted annually for inflation
  22
  based
upon a market basket index less 1% of such index, the bundled payment rate will
be subject to the discretion of the Secretary of HHS based on the goods and
services being provided. Although we have not been materially impacted by prior
adjustments in reimbursement rates relative to our operating costs that are
subject to inflation, such as labor and supply costs, because the bundled rates
that will take effect in 2011 have not been set, we cannot predict the effect of
those future rates on our operating costs and expenses.  Changes in
the Medicare program, including the bundling of payments under the composite
rate for dialysis services, combined with possible negative adjustments in
reimbursement could adversely affect our cash flows, results of operation and
financial position.
 
 If
government agencies delay in providing certification and/or reimbursement for
our facilities we could experience reduced cash flows and adverse effects on our
earnings and operations
 
 In light of the current economic and
fiscal environments, the budgets of state governments are under significant
constraints.   Several states, albeit none in which we currently
operate or are seeking to develop or acquire additional centers, have already
advised that they are curtailing or delaying their ESRD certification processes
for the remainder of 2009 and possibly longer.  In order for a newly
developed or acquired dialysis center of the company to submit bills for
patients treated at that facility who are enrolled in a government based
program, that facility must be certified to participate in such government based
programs such as Medicare and Medicaid.  To the extent that additional
states, particularly ones in which the company operates or is seeking to develop
or acquire additional centers, experience certification delays or seek to delay
or reduce reimbursement payments, we could experience reduced cash flow as well
as adverse impacts on our earnings and results of operations.
 
 A
decline in the reimbursement payments from third-party, non-government payors as
well as a change in patient coverage from commercial to Medicare could adversely
affect our earnings
 
 The dialysis services industry is
experiencing a growing number of commercial payors seeking to reduce payment
rates as a result of several factors, including  a greater focus by
these payors on dialysis services and market conditions
generally.  Some of these commercial payors are increasingly
aggressive in attempting to negotiate lower contracted payment rates and
imposing limitations on out-of-network access and payment rates.  A
decline in the rates paid by commercial payors, hospitals and other
non-governmental third-party organizations would adversely affect our
business.  Additionally, any change in patient coverage, such as
Medicare eligibility as opposed to higher private insurance coverage, would
result in a reduction of revenue.  We estimate approximately 39%, 43%
and 46% of our patient revenues for 2006, 2007 and 2008, respectively, was
obtained from sources other than Medicare or Medicaid and equivalent
programs.  We generally charge non-governmental organizations for
dialysis treatment rates which exceed the fixed Medicare and Medicaid and
equivalent rates.  If commercial payors reduce their payments or we
experience a shift in revenue mix toward Medicare or Medicaid reimbursement,
then our results of operations, financial position or cash flows would be
adversely affected.
 
 Our
cash flow, earnings and financial condition could be adversely impacted to the
extent that the current economic and financial crises affecting the United
States continues for an extended period of time
 
 Our revenues and earnings are based
upon a payor mix balance that has reflected an increase in recent years of
revenues from commercial payor reimbursement.  To the extent, however,
that the current economic slowdown and financial crisis affecting the United
States persists for an extended period of time, we may face a number of
potential effects that could materially impact our revenues, earnings and
financial condition.  In particular, continued increases in job losses
could result in a decrease in the number of our patients covered by commercial
insurance, from which reimbursement payments generally exceed that of government
based programs.  Furthermore, employers facing operating cost
pressures may
  23
  seek out
alternative insurance plans that offer reduced reimbursement
rates.  Finally, both commercial payors themselves as well as federal
and state governments may engage in efforts to further reduce and/or delay
reimbursement payments for our services to the extent that economic conditions
continue to worsen.
 
 Any
decrease in the availability of or the reimbursement rate of EPO would reduce
our revenues and earnings
 
 EPO is currently available from a
single manufacturer, Amgen, Inc.  The available supply of EPO could be
delayed or reduced, whether by Amgen itself, through unforeseen circumstances,
or as a result of excessive demand.  In addition, Amgen could increase
the price of EPO.  This could adversely impact our revenues and
profitability, since approximately 28% of our medical services revenues in 2006,
27% in 2007 and 27% in 2008 were based upon the administration of EPO to our
dialysis patients.
 
 Most of our EPO reimbursement is from
government programs.  For 2008, 68% of total EPO revenue was derived
from Medicare and Medicaid reimbursement.  In recent years, CMS
revised its rules for reimbursement of pharmaceuticals, including EPO, which
resulted in a net reduction of average Medicare payment rates.  In
2006, reimbursement for EPO was at the average sales price plus 6%, which
resulted in lower reimbursement for pharmaceuticals, but was offset by the 1.6%
composite rate increase.  If government or commercial payors further
reduce reimbursement for EPO, then our revenues and earnings per treatment may
decline.
 
 Further
changes and rules intended to address EPO and other pharmaceuticals could
adversely affect our revenues and income.
 
 Changes in Medicare reimbursement
criteria have impacted EPO revenue.  CMS implemented a national
monitoring policy for EPO claims in April, 2006, which aimed to reduce
reimbursement for EPO utilization above a certain hemotacrit threshold in a
patient.  The policy also limited the quantity of EPO that could be
administered in a month, regardless of hematocrit levels.  We revised
our protocols on anemia management to address this policy and did not incur an
adverse impact on our results of operations.  Nevertheless, since the
latter part of 2006 a significant amount of government and media attention has
been paid to the management of anemia generally in all fields of medicine
resulting in congressional hearings and FDA required label changes to EPO and
Aranesp®
which have been and are continuing to be examined.  In January, 2008,
CMS put into effect additional changes to its EPO monitoring policy intended to
further limit reimbursement.  Commercial payors may also follow suit
as they direct greater scrutiny to their policies for EPO use as part of their
overall analysis of dialysis services reimbursement.  Further changes
in EPO administration policies that result in further restrictions on
utilization could result in a decline in our revenues and earnings per
treatment.
 
 New
drugs could affect use of EPO, adversely impacting our
profitability.
 
 Amgen is the sole manufacturer of EPO,
which is administered in conjunction with dialysis treatments to address a
patient’s anemia.  Amgen has developed the drug Aranesp®, and Roche
has developed Mircera®, each of which can be used to treat anemia, and which are
indicated to be effective for longer periods than EPO.  Based on their
longer lasting capabilities, potential margins on these alternative
pharmaceuticals could be significantly lower than on EPO, and furthermore, their
potential for being administered by a dialysis patient’s physician, could
further eliminate potential revenues from the treatment of anemia in our
dialysis patients.  The introduction and marketing of alternative
pharmaceuticals as an anemia treatment for dialysis patients, could adversely
impact our results of operations, financial position or cash
flows.  Currently, Mircera® is not available for use in the United
States due to a patent held by Amgen.
  24
 Disruptions
or inefficiencies in the supply chain, particularly with pharmaceuticals, could
negatively impact our earnings and financial condition
 
 Last year Baxter Healthcare Corporation
engaged in a recall of heparin, a pharmaceutical used in the provision of
dialysis services, and shortly thereafter ceased further sales of this
pharmaceutical altogether, leaving one supplier of heparin in the United
States.  The price for heparin has since increased nearly four-fold
and may continue to rise in the future.  While we do not believe,
given our historical utilization of heparin, that the current price will
materially affect our earnings, continued increases in the price, or limitations
on the availability of this pharmaceutical could negatively impact our
operations and earnings.  Similarly, while we rely on a number of
vendors for our dialysis supplies and pharmaceuticals, to the extent that such
supply were disrupted for an extended period of time, our inability to identify
and establish a cost-effective replacement could significantly impact our
operations, earnings and financial position.
 
 Our
ability to grow is subject to our resources and available locations
 
 Over the past several years we have
both built and acquired several dialysis centers, in some cases with partners
holding a minority interest.  We seek areas with qualified and
cost-effective nursing and technical personnel and a sufficient population to
sustain a dialysis center.  These opportunities are limited and we
compete with much larger dialysis companies for appropriate
locations.  Our growth strategy based on construction also involves
the risks of our ability to identify suitable locations to develop additional
centers.  Those we do develop may never achieve profitability, and
additional financing may not be available to finance future
development.
 
 Our inability to acquire or develop
dialysis centers in a cost-effective manner would adversely affect our ability
to expand our business and as a result, our profitability.
 
 Growth places significant demands on
our financial and management skills.  Inability on our behalf to meet
the challenges of expansion and to manage any such growth would have an adverse
effect on our results of operations, financial position or cash
flows.
 
 Our
attempt to expand through development or acquisition of dialysis centers which
are not currently identified entails risks which shareholders and investors will
not have a basis to evaluate
 
 We expand generally by seeking an
appropriate location for a dialysis center and by taking into consideration the
potential geographic patient base, types of commercial insurance in the area,
the availability of a physician nephrologist to be our medical director, and a
skilled work force.  Construction, equipment and initial working
capital costs for a new dialysis center with 15 stations, typically the size of
our dialysis facilities, range from $1,000,000 to $1,500,000.  While
and acquisition of existing outpatient dialysis centers is a faster means for
achieving profitability, these transactions can be more
costly.  Therefore, the company takes a selective approach to its
acquisition strategy.  We cannot assure you that we will be successful
in developing or acquiring dialysis facilities, or otherwise successfully
expanding our operations.  We are routinely negotiating with
nephrologists and others to establish new dialysis centers, but we cannot assure
you that these negotiations will result in the development of new
centers.  Furthermore, there is no basis for shareholders and
investors to evaluate the specific merits or risks of any potential development
or acquisition of dialysis facilities.
  25
 We
depend on physician referrals, and the limitation or cessation of such referrals
would adversely impact our revenues and earnings
 
 Most dialysis facilities, including
ours, are dependent upon referrals of ESRD patients for treatment by physicians,
primarily those physicians specializing in nephrology.  We retain by
written agreement qualified physicians or groups of qualified physicians to
serve as medical directors for each of our facilities. The medical directors are
typically a source of patients treated at the particular facility
served.  There is no requirement for these physicians to refer their
patients to us, and they are free to refer patients to any other dialysis
facility.  The loss of the patient base of the medical director or
other physicians in the area of our facilities could result in a decline in our
operations, revenues and earnings.  We may not be able to renew or
otherwise negotiate compensation under the medical director agreements with our
medical director physicians which could terminate the relationship, and without
a suitable medical director replacement could result in closure of the
facility.  Accordingly, the loss of these key physicians at a
particular facility could have a material adverse effect on the operations of
the facility and could adversely affect our revenues and
earnings.  Most of our medical director agreements range in terms of
from five to ten years with renewals, and we have had no difficulty in renewing
agreements as they have expired.  All the medical director agreements
provide for noncompetition restrictions.  We have never had to attempt
to enforce such restrictions, but there is no assurance that a particular
jurisdiction in which the agreement is applicable would uphold such
noncompetition agreement, which would increase the potential for competition
with affiliated dialysis centers and could adversely impact our revenues and
earnings.
 
 Some of our medical directors or the
medical groups with whom they are associated own minority interests in certain
of our subsidiaries which operate dialysis centers.  If these
interests are deemed to violate applicable federal or state law, these
physicians may be forced to dispose of their ownership interests.
 
 Industry
changes could adversely affect our business
 
 Healthcare organizations, public and
private, continue to change the manner in which they operate and pay for
services.  Our business is designed to function within the current
healthcare financing and reimbursement system.  In recent years, the
healthcare industry has been subject to increasing levels of government
regulation of reimbursement rates and capital expenditures, among other
things.  In addition, proposals to reform the healthcare system have
been considered by Congress, and still remain a priority issue.  Any
new legislative initiatives, if enacted, may (i) further increase government
regulation of or other involvement in healthcare, (ii) lower reimbursement
rates, and (iii) otherwise change the operating environment for healthcare
companies.  We cannot predict the likelihood of those events or what
impact they may have on our results of operation, financial position or cash
flows.
 
 Our
business is subject to substantial competition, and we must compete effectively,
otherwise our growth could slow
 
 We are operating in a highly
competitive environment in terms of the operation, development and acquisition
of dialysis centers.  Our competition comes from other dialysis
centers, many of which are owned by much larger companies, and from
hospitals.  We also compete with physicians who open their own
dialysis facilities.  The dialysis industry is rapidly consolidating,
resulting in several large dialysis companies competing for the acquisition of
existing dialysis centers and the development of relationships with referring
physicians.  Some of our competitors have significantly greater
financial resources, more dialysis facilities and a significantly larger patient
base.  Competition for acquiring existing centers has increased the
costs of acquiring such facilities.
  26
  Competition is also intense for
qualified nursing and technical staff as well as for nephrologists with an
adequate patient base.  Although we have exhibited growth over the
last several years, we can provide no assurance that we will be able to compete
effectively in the future.  Our failure to do so could impair our
continued growth and profitability.
 
 Interest
rate volatility could negatively impact our profitability and cash
flows
 
 We have successfully increased our
borrowing capabilities in order to pursue our near term growth
strategy.  As a result, our borrowings under our principal credit
facility have increased in recent periods.  The majority of the loans
under the credit facility are currently based on LIBOR-based variable
rates.  To the extent that these rates were to increase, our interest
expense relating to the variable rates would increase, impacting our debt
service and cash flows, and could negatively impact our
profitability.
 
 If
the enhancements that we are currently making to our billing and clinical
systems do not function effectively, we may experience adverse effects on our
cash flow and operating results
 
 We are in the process of establishing a
new company-wide clinical and billing system
that will significantly improve our efficiencies with respect to the
compilation, processing and distribution of billing and collection information
as well as our ability to monitor clinical information on our
patients.  In part, the system is intended to shift information
gathering and processing to real time electronic transmission from all of the
facilities and away from manual processing at the facility
level.  While we intend to perform all appropriate tests of the system
as it comes online at each facility, the potential exists for malfunctions or
integration issues to arise as the system becomes integrated with the operations
of the company.  To the extent that system malfunctions occur, we may
be delayed in processing our billing and collections at one or more
facilities.  If these delays continue our revenues, cash flows and
financial condition could be negatively impacted.
 
 We
could be subject to professional liability claims that may adversely affect
us
 
 Operation of dialysis centers and, in
particular, the provision of dialysis treatments to ESRD patients, entails
significant risks of liability, as is the case with most healthcare treatment
services.  Accordingly, we could be subject to various actions and
claims of professional liability alleging negligence in the performance of our
treatment and related services, as well as for the acts or omissions of our
employees.  As we grow and the number of our patients increases, so
too does our exposure increase to potential malpractice, professional
negligence, and other related legal theories and causes of
action.  These potential claims could seek substantial damages,
possibly beyond our insurance coverage, and could subject us to the incurrence
of significant fees and costs related to defending such potential
claims.  Such potential future claims for malpractice or professional
liability, including any judgments, settlements or costs associated with such
claims and actions, could have a material adverse effect on us.
 
 Our
insurance costs and deductibles have been substantially increasing over the last
several years, and may not be sufficient to cover claims and losses
 
 We maintain a program of insurance
coverage against a broad range of risks in our business, including, and of
primary importance, professional liability insurance, subject to certain
deductibles.  The premiums and deductibles under our insurance program
have been increasing over the last several years as a result of general business
rate increases coupled with our continued growth and development of dialysis
centers.  We are unable to predict further increases in premiums and
deductibles, but based on experience we anticipate further increases in this
area, which could adversely impact earnings.  The liability exposure
of operations in the healthcare services industry has increased, resulting not
only in increased premiums, but in limited liability on behalf of the insurance
carriers.  Our ability to obtain the
  27
  necessary
and sufficient insurance coverage for our operations upon expiration of our
insurance policies may be limited, and sufficient insurance may not be available
on favorable terms, if at all.  Such insurance may not be sufficient
to cover any judgments, settlements or costs relating to potential future
claims, complaints or law suits.  Our inability to obtain sufficient
insurance for our operations, or if we obtain insurance which is limited, any
future significant judgments, settlements and costs relating to future potential
actions, suits or claims, could have an adverse effect on our
company.
 
 Shares
eligible for future sale by restricted shareholders may adversely affect our
stock price
 
 Our officers and directors own
approximately 2,165,000 shares of our common stock and vested options
exercisable into an additional 40,000 shares of common stock, for an aggregate
of 2,205,000 shares or approximately 23% of our outstanding common
stock.  All of the shares held by these officers and directors, other
than the 40,000 shares obtainable upon exercise of their options, upon
satisfying the conditions of Rule 144 under the Securities Act, may be sold
without complying with the registration provisions of the Securities
Act.  Rule 144 conditions include:
 
 ●
              holding
      the shares for six months from acquisition;●
              volume
      limits of selling every three months an amount of shares which does not
      exceed the greater of 1% of the outstanding common stock, or the average
      weekly volume of trading as reported by Nasdaq during the four calendar
      weeks prior to the sale;●
              filing
      Form 144 with the SEC;●
              the
      company continuing to timely file its reports under the Exchange
      Act;
 
 Our
publicly tradable common stock, known as the float, is approximately 7,430,000
shares.  Our common stock owned by our officers and directors
represent approximately 29% of the float.  Accordingly, the sale by
such officers and directors under Rule 144 may have an adverse affect on the
market price of our common stock, and may inhibit our ability to manage
subsequent equity or debt financing.
 
 Over
the last year, our stock price has exhibited volatility, and any investment in
our common stock may, therefore, decline for reasons unrelated to our
performance
 
 Our common stock trades on the Nasdaq
Global Market under the symbol “DCAI.”  The market price of our common
stock has exhibited volatility.  For fiscal 2008, our per share price
range was $5.20 to $9.46.
 
 Other
than the continued growth of the company, there was no information known to
management that would cause significant fluctuation in the price of our common
stock, or in the trading volume.
 
 Other factors that could continue to
cause fluctuation in our common stock include:
 
 ●
              changes
      in government regulation, whether legislative, enforcement or
      reimbursement rates●
              third
      party reports relating to the dialysis industry and our company
      (unsolicited by management)●
              announcements
      by management relating to the company’s performance or other material
      events●
              actions
      and announcements by our competitors●
              the
      outlook for the healthcare industry, and the economic and market
      conditions generally
  28
  Investors should understand that in
general, stock prices may fluctuate for reasons unrelated to operating
results.  Any changes in the above discussed factors, or general
economic, political, global and market conditions, could result in a decline in
the market price and volume of trading in our common stock.
  Item
      1B.
              Unresolved
      Staff Comments
 
 None.
  Item
      2.
              Properties
 
 We own a
property in Easton, Maryland which consists of approximately 7,500 square feet,
most of which is leased to a competitor under a 10-year lease through June 30,
2009 with two renewals of five years each.  The lease is guaranteed by
the tenant’s parent company.
 
 Our
Easton, Maryland property has a mortgage to secure a development loan with an
original principal balance of $700,000 for which interest is at the prime rate,
maturing in May, 2026.  This loan had a remaining principal balance of
approximately $495,000 at December 31, 2008.  See Item 7,
“Management’s Discussions and Analysis of Financial Condition and Results of
Operations.”
 
 We own
property in Lemoyne, Pennsylvania which consists of approximately 15,000 square
feet and houses one of our dialysis centers, accounting for approximately 5,400
square feet, under a five year lease through December 22, 2013.  The
center is approved for 17 dialysis stations with space available for
expansion.  The remaining space is used for record storage and
training sessions.
 
 We acquired property in Valdosta,
Georgia in 2000, subject to a five year $788,000 mortgage obtained in April,
2001, subsequently refinanced in April, 2006, with interest at the prime rate,
with a minimum rate of 5.00% and a maximum rate of 7.50%, maturing in April,
2011.  This mortgage had a remaining principal balance of
approximately $555,000 at December 31, 2008.  See item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”  We constructed a dialysis center at this property
comprising approximately 6,000 square feet which we have leased to one of our
subsidiaries for $90,600 per year under a 10-year lease, with two additional
renewal periods of five years each.
 
 Our Barnwell, South Carolina dialysis
center, which became ESRD certified in 2008, is located in an approximately
6,000 square foot building owned by our subsidiary that operates from that
location.
 
 Our Cincinnati, Ohio dialysis center is
leased from a corporation owned by the medical director of that center who,
together with his wife, holds a minority interest in the subsidiary operating
that center.  Our Calhoun, Georgia dialysis center is leased from a
partnership comprised of local doctors who became the medical directors for that
facility in 2007.  Our Aiken, South Carolina dialysis center is leased
from an entity owned by the medical director of that center.  Our
York, Pennsylvania dialysis center is leased from a limited partnership in which
we have a 60% ownership interest with the remaining 40% owned by two doctors,
one of whom serves as the medical director for that facility.  These
doctors are also affiliated with the entity that owns a 40% minority ownership
in the subsidiary that operates that facility.  Our Hawkinsville,
Georgia dialysis center is leased from an entity owned by the medical director
of the center, with the medical director owing a minority interest in the
subsidiary operating that center.  Our Bedford, Pennsylvania center is
leased from a company owned by the medical director of that center.
  29
  We
presently own 28 dialysis centers, that lease their respective facilities from
unaffiliated third parties, most under five to ten year initial terms, usually
with two additional renewal periods of five years each, for space ranging from
approximately 3,000 to 7,000 square feet.
 
 We sublet
a minimal amount of space at eight of our dialysis centers to the physicians who
are our medical directors at those centers for their medical
offices.  The subleases are on a commercially reasonable basis and are
structured to comply with the safe harbor provisions of the “Anti-Kickback
Statute.”  See Item 1, “Business – Government Regulation – Fraud and
Abuse.”
 
 Pursuant
to the merger with our parent, Medicore, Inc., in 2005, we acquired land and
buildings in Hialeah, Florida.  Two properties have buildings
consisting of approximately 28,000 square feet and are leased through August 31,
2010 to a non-affiliated company.  The remaining land, aggregating
approximately 48,000 square feet, is comprised of two paved parking lots and
three parcels of vacant land.
 
 Most of
our dialysis facilities do not operate at full capacity.  See
“Business – Operations – Location, Capacity and Use of Facilities”
above.  The existing dialysis facilities could accommodate greater
patient volume, particularly if we increase hours and/or days of operation
without adding additional dialysis stations or any additional capital
expenditures.  We also have the ability and space at most of our
facilities to expand to increase patient volume subject to obtaining appropriate
governmental approval.
 
 We maintain executive offices at 1302
Concourse Drive, Suite 204, Linthicum, Maryland 21090, and 777 Terrace Avenue,
Hasbrouck Heights, New Jersey 07604, and administrative offices at 214 Senate
Avenue, Suite 300, Camp Hill, Pennsylvania 17011, and 2337 West 76th Street,
Hialeah, Florida 33016.  These offices aggregate approximately 25,000
square feet of space and are under leases expiring in 2009, except for the Camp
Hill lease, which expires in 2012.
  Item
      3.
              Legal
      Proceedings
 
 None.
  Item
      4.
              Submission
      of Matters to a Vote of Security
Holders
 
 No matter was submitted during the
fourth quarter of our fiscal year ended December 31, 2008 to a vote of security
holders through the solicitation of proxies or otherwise.
  30
  PART
II
 
 Item
      5.
              Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
 
 Price
Range
 
 Our common stock trades on the Global
Market of the Nasdaq Stock Market under the symbol “DCAI.”  The
following table indicates the high and low sales prices for our common stock for
each of the four quarters for the years ended December 31, 2007 and 2008 as
reported by Nasdaq.
 
 Sales Price2007
              
              High
              
              
              Low1st
      Quarter
              
              $
              14.16
              
              
              $
              12.332ndQuarter
              
              
              12.69
              
              
              
              8.613rdQuarter
              
              
              11.00
              
              
              
              9.024thQuarter
              
              
              9.83
              
              
              
              7.70
 
 Sales Price2008
              
              High
              
              
              Low1st
      Quarter
              
              $
              9.46
              
              
              $
              6.682ndQuarter
              
              
              7.95
              
              
              
              6.703rdQuarter
              
              
              8.34
              
              
              
              6.914thQuarter
              
              
              7.99
              
              
              
              5.20
 
 As of March 12, 2009, the last sales
price of our common stock was $5.29.
  Stockholders
 
 At March 11, 2009, we had 898
shareholders of record as reported by Continental Stock Transfer & Trust
Company, our transfer agent.  We have been advised by Broadridge
Financial Solutions, Inc., which organization holds securities for banks,
brokers and depositories, that there are approximately 2,450 beneficial owners
of our common stock.
  Dividend
Policy
 
 We have not declared or paid cash
dividends to our shareholders, and we do not anticipate paying dividends in the
foreseeable future.  The board of directors intends to retain earnings
to finance our growth strategy.  Future dividend policy will be at the
discretion of the board of directors, and will depend on our earnings, capital
requirements, financial condition and other similar relevant
factors.  Any determination to pay a dividend is also subject to the
covenants in the KeyBank National Association credit facility (see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” which precludes the payment of any dividends (other than stock
dividends), as does the mortgage on our Valdosta, Georgia property (see Item 2,
“Properties”) which restricts the payment of dividends above 25% of our net
worth.
 
 31
 
 Sale
of Securities Not Registered Under the Securities Act
 
 The only unregistered sales of our
equity securities during 2008 were (i) the grant of 13,500 stock awards to key
employees on January 10, 2008, and (ii) the vesting on December 31, 2008 of
6,500 shares of common stock pursuant to an aggregate grant of 64,000 stock
awards to certain officers and key employees in the second quarter of
2006.  The above transactions have been previously reported on a
current report on Form 8-K dated June 29, 2006, and in our quarterly reports on
Form 10-Q for the first three quarters of 2008.  Each of the stock
awards contains termination and acceleration provisions.  See Item 11,
“Executive Compensation.”
 
 The sales of our securities were exempt
from the registration requirements of Section 5 of the Securities Act under the
private placement exemptions of Section 4(2) and/or Regulation D of the
Securities Act, based on the limited number of persons, each of whom are
officers, directors and/or key employees knowledgeable concerning the affairs of
the company.  See Item 11, “Executive Compensation” and Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
 
 Stock
Repurchases
 
 There were no repurchases of our common
stock in 2008.
 
 Equity
Compensation Plan Information
 
 Information relating to compensation
plans under which equity securities of the company are authorized for issuance
is set forth in Part III, Item 12, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters” of this annual report on
Form 10-K, incorporated herein by reference.
  PERFORMANCE
GRAPH
 
 The following graph shows a five-year
comparison of cumulative total shareholder returns for the company, the Nasdaq
Market Index and the Dialysis Center Industry Index from December 31, 2003
through December 31, 2008.  The cumulative total shareholder returns
on our common stock was measured by dividing the difference between our share
price at the end and the beginning of the measurement period by the share price
at the beginning of the measurement period.  The total shareholder
return assumes $100 invested at the beginning of the period in our common stock,
in the Nasdaq Market Index and the Dialysis Center Industry Index.  We
did not pay dividends on our common stock during the measurement period and the
calculations of cumulative total shareholders return on the common stock did not
include dividends.  Our share price was adjusted to reflect a
two-for-one stock split on January 28, 2004.  This graph is presented
in accordance with SEC requirements.  You are cautioned against
drawing any conclusions from this information, as past results are not
necessarily indicative of future performance.  This graph in no way
reflects a forecast of future financial performance.
 
 32
 
 
 
 
 2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008Dialysis
      Corporation of America
              
              
              100.00
              
              
              
              729.25
              
              
              
              299.40
              
              
              
              379.40
              
              
              
              253.73
              
              
              
              208.96Dialysis
      Centers Industry
              
              
              100.00
              
              
              
              145.72
              
              
              
              181.62
              
              
              
              221.23
              
              
              
              250.22
              
              
              
              224.60NASDAQ
      Market Index
              
              
              100.00
              
              
              
              108.41
              
              
              
              110.79
              
              
              
              122.16
              
              
              
              134.29
              
              
              
              79.25
 
 The current composition of SIC Code
8092 – Dialysis Centers Industry – is as follows:
 
 DaVita Inc.*
 Dialysis Corporation of
America
 Fresenius Medical Care AG&CO.
KGaA.*
 
 * These
companies are significantly larger than our company.
 
 The performance graph is furnished, not
filed, and is not deemed to be soliciting material under the proxy rules or
incorporated by reference into any company filing.
 
 Item
      6.
              Selected
      Financial Data
 
 The following selected financial data
for the five years ended December 31, 2008 is derived from the audited
consolidated financial statements of the company and its
subsidiaries.  The consolidated financial statements and related notes
for the three years ended December 31, 2008, together with the related Reports
of Independent Certified Public Accountants, are included elsewhere in this
annual report on Form 10-K.  The data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein, and Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
  Consolidated
      Statements of Operations Data(in
      thousands except per share amounts)Years Ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Revenues*
              
              $
              86,837
              
              
              $
              74,535
              
              
              $
              62,460
              
              
              $
              45,392
              
              
              $
              40,986Net
      income
              
              
              2,844
              
              
              
              3,086
              
              
              
              3,049
              
              
              
              1,900
              
              
              
              2,214Earnings
      per shareBasic
              
              
              .30
              
              
              
              .32
              
              
              
              .32
              
              
              
              .22
              
              
              
              .27Diluted
              
              
              .30
              
              
              
              .32
              
              
              
              .32
              
              
              
              .20
              
              
              
              .25
 
 33
 
 Consolidated
      Balance Sheet Data(in
      thousands)December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Working
      capital
              
              $
              20,266
              
              
              $
              18,612
              
              
              $
              17,098
              
              
              $
              7,617
              
              
              $
              3,644Total
      assets
              
              
              71,079
              
              
              
              54,846
              
              
              
              49,856
              
              
              
              38,803
              
              
              
              26,490Long
      term debt, net of current portion
              
              
              14,276
              
              
              
              7,009
              
              
              
              8,618
              
              
              
              635
              
              
              
              1,586Stockholders’
      equity
              
              
              35,264
              
              
              
              32,006
              
              
              
              29,061
              
              
              
              25,613
              
              
              
              13,330
 _________________________
 
 *   Prior
year amounts have been reclassified to conform to current year
presentation.
 
 
 Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 Management’s Discussion and Analysis of
Financial Condition and Results of Operations, commonly known as MD&A, is
our attempt to provide a narrative explanation of our financial statements, and
to provide our shareholders and investors with the dynamics of our business as
seen through our eyes as management.  Generally, MD&A is intended
to cover expected effects of known or reasonably expected uncertainties,
expected effects of known trends on future operations, and prospective effects
of events that have had a material effect on past operating
results.  Our discussion of MD&A should be read in conjunction
with our consolidated financial statements, including the notes, included
elsewhere in this annual report on Form 10-K.  Please also review the
Cautionary Notice Regarding Forward-Looking Information on page one of this
annual report.
 
 Overview
 
 We provide dialysis services, primarily
kidney dialysis treatments through 37 outpatient dialysis centers, including one
center acquired on December 31, 2008, one center acquired effective January 1,
2008, and one new center opened during 2008, to patients with chronic kidney
failure, also known as end-stage renal disease or ESRD.  We provide
dialysis treatments to dialysis patients of 11 hospitals and medical centers
through acute inpatient dialysis services agreements with those
entities.  We provide homecare services, including home peritoneal
dialysis.  We engage in medical product sales, which is not a
significant part of our business.
 
 Quality
Clinical Results
 
 Our goal is to provide consistent
quality clinical care to our patients from caring and qualified doctors, nurses,
patient care technicians, social workers and dieticians.  We have
demonstrated an unwavering commitment to quality renal care through our
continuous quality improvement initiatives.  We strive to maintain a
leadership position as a quality provider in the dialysis industry and often set
our goals to exceed the national average standards.  See Item 1,
“Business – Operations – Quality Clinical Results.”
 
 Patient
Treatments
 
 The following table shows the number of
in-center, home peritoneal and acute inpatient treatments performed by us
through the dialysis centers we operate, including one center we managed until
January 1,
  34
  2008(1) and
one in which we had a 40% ownership interest until August 1, 2006(2), and
those hospitals and medical centers with which we have inpatient acute service
agreements for the periods presented:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006In
      center
              
              
              248,232
              
              
              
              228,456
              
              
              
              197,628Home
      and peritoneal
              
              
              15,980
              
              
              
              15,940
              
              
              
              16,115Acute
              
              
              8,240
              
              
              
              7,930
              
              
              
              6,350272,452
              
              
              
              252,326
              (3)
              
              
              220,093
              (3)
 
 (1)
              At
      that date we acquired the 80% controlling interest.(2)
              At
      that date this center was consolidated, in which center we subsequently
      acquired the other 60% interest in December, 2006, and sold 30% to that
      facility’s medical director in 2007.(3)
              Includes
      treatments by the Georgia center managed through December 31, 2007, and
      acquired effective January 1, 2008: in-center treatments of 10,631 and
      9,428, respectively, for 2007 and 2006, home and peritoneal treatments of
      506 and 297, respectively for 2007 and 2006, and no acute
      treatments.
 
 New
Business Development
 
 Our future growth depends primarily on
the availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and our ability to manage the development
costs for these potential dialysis centers while competing with larger
companies, some of which are public companies or divisions of public companies
with greater numbers of personnel and financial resources available for
acquiring and/or developing dialysis centers in areas targeted by
us.  Additionally, there is intense competition for qualified
nephrologists who would serve as medical directors of dialysis
facilities.  There is no assurance as to when any new dialysis centers
or inpatient service contracts with hospitals will be implemented, or the number
of stations, or patient treatments such center or service contract may involve,
or if such center or service contract will ultimately be
profitable.
 
 Start-up
Losses
 
 It has
been our experience that newly established dialysis centers, although
contributing to increased revenues, have adversely affected our results of
operations in the short term due to start-up costs and expenses and a smaller
patient base. These losses are typically a result of several months of
pre-opening costs, and six to eighteen months of post opening costs, in excess
of revenues. We consider new dialysis centers to be “start-up centers” through
their initial 12 months of operations, or when they achieve consistent
profitability, whichever is sooner. For the year ended December 31, 2008, we
incurred an aggregate of approximately $641,000 in pre-tax losses for start-up
centers compared to $608,000 for the preceding year.
 
 EPO
Utilization
 
 We also provide ancillary services
associated with dialysis treatments, including the administration of EPO for the
treatment of anemia in our dialysis patients.  EPO is currently
available from only one manufacturer, and no alternative drug has been available
to us for the treatment of anemia in our dialysis patients.  If our
available supply of EPO were reduced either by the manufacturer or due to
excessive demand, our revenues and net income would be adversely
affected.  The manufacturer of EPO could implement price increases
which would adversely affect our net income.
  35
  ESRD patients must either obtain a
kidney transplant or obtain regular dialysis treatments for the rest of their
lives.  Due to a lack of suitable donors and the possibility of
transplanted organ rejection, the most prevalent form of treatment for ESRD
patients is hemodialysis through a kidney dialysis
machine.  Hemodialysis patients usually receive three treatments each
week with each treatment lasting between three and five hours on an outpatient
basis.  Although not as common as hemodialysis in an outpatient
facility, home peritoneal dialysis is an available treatment option,
representing the third most common type of ESRD treatment after outpatient
hemodialysis and kidney transplantation.
 
 Reimbursement
 
 Approximately 54% of our medical
services revenue for 2008 was derived from Medicare and Medicaid reimbursement
with rates established by CMS, and which rates are subject to legislative
changes.  Congress approved a 1.6% composite rate increase for each of
2006 and 2007.  In 2007, Medicare changed the way it reimburses
dialysis providers, which includes revision of pricing for separately billable
drugs and biologics, with an add-on component to make the change
budget-neutral.  Medicare also implemented a case mix payment system
as an adjustment to the composite rate.  In 2008 Congress passed
legislation establishing the bundling of reimbursement payments for dialysis
services, intended to take effect in 2011.  See Item 1, “Business –
Operations – Medicare Reimbursement.”  Dialysis is typically
reimbursed at higher rates from private payors, such as a patient’s insurance
carrier, as well as higher payments received under negotiated contracts with
hospitals for acute inpatient dialysis services.
 
 The following table shows the breakdown
of our revenues by type of payor for the periods presented:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Medicare
              
              
              46
              %
              
              
              49
              %
              
              
              52
              %Medicaid
      and comparable programs
              
              
              8
              
              
              
              8
              
              
              
              9Hospital
      inpatient dialysis services
              
              
              4
              
              
              
              4
              
              
              
              3Commercial
      insurers and other private payors
              
              
              42
              
              
              
              39
              
              
              
              36100
              %
              
              
              100
              %
              
              
              100
              %
  Our medical services revenue is derived
primarily from four sources: outpatient hemodialysis services, home peritoneal
dialysis services, inpatient hemodialysis services and ancillary
services.  The following table shows the breakdown of our medical
services revenue (in thousands) derived from our primary revenue sources and the
percentage of total medical service revenue represented by each source for the
periods presented:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Outpatient
      hemodialysis services
              
              $
              46,348
              
              
              
              54
              %
              
              $
              39,880
              
              
              
              55
              %
              
              $
              32,856
              
              
              
              54
              %Home
      and peritoneal dialysis services
              
              
              4,189
              
              
              
              5
              
              
              
              3,736
              
              
              
              5
              
              
              
              3,625
              
              
              
              6Inpatient
      hemodialysis services
              
              
              3,109
              
              
              
              4
              
              
              
              2,897
              
              
              
              4
              
              
              
              2,191
              
              
              
              3Ancillary
      services
              
              
              32,030
              
              
              
              37
              
              
              
              26,658
              
              
              
              36
              
              
              
              22,467
              
              
              
              37$
              85,676
              
              
              
              100
              %
              
              $
              73,171
              
              
              
              100
              %
              
              $
              61,139
              
              
              
              100
              %
  Compliance
 
 The healthcare industry is subject to
extensive regulation by federal and state authorities.  There are a
variety of fraud and abuse measures to combat waste, including Anti-Kickback
regulations and extensive prohibitions relating to self-referrals, violations of
which are punishable by criminal or civil penalties, including exclusion from
Medicare and other governmental programs.  Unanticipated changes in
healthcare
  36
  programs
or laws could require us to restructure our business practices which, in turn,
could materially adversely affect our business, operations and financial
condition.  See Item 1, “Business – Government
Regulation.”  We have a Compliance Program to assure that we provide
the highest level of patient care and services in a professional and ethical
manner consistent with applicable federal and state laws and
regulations.  See Item 1, “Business – Compliance
Program.”
 
 Results
of Operations
 
 The following table shows our results
of operations (in thousands):
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Medical
      services revenue
              
              $
              85,676
              
              
              $
              73,171
              
              
              $
              61,139Product
      sales
              
              
              1,161
              
              
              
              1,078
              
              
              
              891Total
      sales
              
              
              86,837
              
              
              
              74,249
              
              
              
              62,030Other
      income
              
              
              ---
              
              
              
              286
              
              
              
              430Total
      operating revenues
              
              
              86,837
              
              
              
              74,535
              
              
              
              62,460Cost
      of medical services
              
              
              51,452
              
              
              
              44,248
              
              
              
              36,969Cost
      of product sales
              
              
              660
              
              
              
              598
              
              
              
              549Total
      cost of sales
              
              
              52,112
              
              
              
              44,846
              
              
              
              37,518Corporate
      selling, general and administrative expenses
              
              
              10,587
              
              
              
              7,917
              
              
              
              6,460Facility
      selling, general and administrative expenses
              
              
              12,851
              
              
              
              11,423
              
              
              
              8,988Total
      selling, general and administrative expense
              
              
              23,438
              
              
              
              19,340
              
              
              
              15,448Stock
      compensation expense
              
              
              221
              
              
              
              218
              
              
              
              276Depreciation
      and amortization
              
              
              2,784
              
              
              
              2,619
              
              
              
              2,319Provision
      for doubtful accounts
              
              
              2,089
              
              
              
              1,665
              
              
              
              1,199Total
      operating costs and expenses
              
              
              80,644
              
              
              
              68,688
              
              
              
              56,760Operating
      income
              
              
              6,193
              
              
              
              5,847
              
              
              
              5,700Other
      (expense) income
              
              
              (49
              )
              
              
              (40
              )
              
              
              101Income
      before income taxes, minority and otherEquity
      interests and equity in affiliate earnings
              
              
              6,144
              
              
              
              5,807
              
              
              
              5,801Income
      tax provision
              
              
              1,862
              
              
              
              1,615
              
              
              
              2,086Income
      before minority and other equity interestsand
      equity in affiliate earnings
              
              
              4,282
              
              
              
              4,192
              
              
              
              3,715Minority
      and other equity interests in income ofconsolidated
      subsidiaries
              
              
              (1,438
              )
              
              
              (1,106
              )
              
              
              (920
              )Equity
      in affiliate earnings
              
              
              ---
              
              
              
              ---
              
              
              
              254Net
      income
              
              $
              2,844
              
              
              $
              3,086
              
              
              $
              3,049
 
 37
 
 2008
Compared to 2007
 
 Medical services revenue increased
approximately $12,505,000 (17%) for the year ended December 31, 2008, compared
to the preceding year.  Medical services revenue for 2008 includes
approximately $553,000 of amounts previously included in excess insurance
liability that was determined to be non-refundable compared to approximately
$442,000 in the preceding year.  Dialysis treatments performed
increased from approximately 252,000 in 2007 to approximately 272,000 in 2008,
an 8% increase which includes treatments at a previously managed facility, in
which we acquired an 80% interest effective January 1, 2008.  The
increase in treatments includes a full year of treatments in 2008 at the two
centers acquired in the first quarter of 2007, treatments at two centers opened
at the end of 2007, and treatments at our new Pennsylvania center that opened in
the third quarter of 2008.  Some of our patients carry commercial
insurance which may require an out of pocket co-pay by the patient, which is
often uncollectible by us.  This co-pay is typically limited, and
therefore may lead to our under-recognition of revenue at the time of
service.  We routinely recognize these revenues as we become aware
that these limits have been met.
 
 We record contractual adjustments based
on fee schedules for a patient’s insurance plan except in circumstances where
the schedules are not readily determinable, in which case rates are estimated
based on similar insurance plans and subsequently adjusted when actual rates are
determined.  Out-of-network providers generally do not provide fee
schedules and coinsurance information and, consequently, represent the largest
portion of contractual adjustment changes.  Estimated contractual
adjustments for 2007 and prior years made during 2008 resulted in an increase of
approximately $1,480,000 in revenues in 2008.  Based on historical
data we do not anticipate that a change in estimates would have a significant
impact on our financial conditions or results of operations.
 
 Operating income increased
approximately $347,000 (6%) for the year ended December 31, 2008, compared to
the preceding year, including in start-up costs associated with our new centers
of $641,000 in 2008 compared to $608,000 in the preceding year.
 
 Management fee income in 2007 was
pursuant to a management services agreement with a Georgia center in which we
acquired an 80% interest effective January 1, 2008.
 
 Cost of medical services sales as a
percentage of sales was stable compared to the preceding year and amounted to
60% for the year ended December 31, 2008 and for the preceding
year.
 
 Approximately
27% of our medical services revenue for the year ended December 31, 2008 and for
the preceding year derived from the administration of EPO to our dialysis
patients.  Beginning in 2006, Medicare reimburses dialysis providers
for the top ten most utilized ESRD drugs at an amount equal to the cost of such
drugs as determined by the Inspector General of HHS, with complementary
increases in the composite rate.  We believe these changes have had
little impact on our average Medicare revenue per treatment.  See Item
1, “Business – Operations – Medicare Reimbursement.”
 
 Our medical products operation
represents a minor portion of our operations with operating revenues of
$1,161,000 during 2008, and $1,078,000 during 2007 (1.3% of total 2008 and 1.4%
of total 2007 operating revenues).  Operating income for the medical
products operation was $179,000 for 2008 and $186,000 for 2007 (2.9% of total
2008 operating income and 3.1% of total 2007 operating income).
 
 Cost of sales for our medical products
operation amounted to 57% of sales for the year ended December 31, 2008 and 56%
of sales for the year ended December 31, 2007.  Cost of sales for this
operation is largely related to product mix.
  38
  Selling, general and administrative
expenses, those corporate and facility costs not directly related to the care of
patients, including, among others, administration, accounting and billing,
increased by approximately $4,098,000 (21%) for the year ended December 31,
2008, compared to the preceding year.  This increase reflects
operations of our new dialysis centers and increased support activities
resulting from expanded operations.  Included are expenses of new
centers incurred prior to Medicare approval for which there were no
corresponding medical services revenue.  Selling, general and
administrative expenses as a percentage of medical services revenue amounted to
approximately 27% for the year ended December 31, 2008 compared to 26% for the
preceding year.
 
 Provision for doubtful accounts
increased approximately $423,000 for year ended December 31, 2008, compared to
the preceding year.  The provision amounted to 2% of sales for the
year ended December 31, 2008 and for the preceding year.  Medicare bad
debt recoveries of $549,000 were recorded during the year ended December 31,
2008, compared to approximately $253,000 for the preceding
year.  Without the effect of the Medicare bad debt recoveries, the
provision would have amounted to 3% of sales for the year ended December 31,
2008 and for the preceding year.  The provision for doubtful accounts
reflects our collection experience with the impact of that experience included
in accounts receivable presently reserved, plus recovery of accounts previously
considered uncollectible from our Medicare cost report filings.  The
provision for doubtful accounts is determined under a variety of criteria,
primarily aging of the receivables and payor mix.  Accounts receivable
are estimated to be uncollectible based upon various criteria including the age
of the receivable, historical collection trends and our understanding of the
nature and collectibility of the receivables, and are reserved for in the
allowance for doubtful accounts until they are written off.
 
 Days sales outstanding were 84 as of
December 31, 2008 compared to 93 as of December 31, 2007.  Days sales
outstanding are impacted by the expected and typical slower receivable turnover
at our new centers opened or acquired and by payor mix.  Based on our
collection experience with the different payor groups comprising our accounts
receivable, our analysis indicates that our allowance for doubtful accounts
reasonably estimates the amount of accounts receivable that we will ultimately
not collect.
 
 After a patient’s insurer has paid the
applicable coverage for the patient, the patient is billed for the applicable
co-payment or balance due.  If payment is not received from the
patient for its applicable portion, collection letters and billings are sent to
that patient until such time as the patient’s account is determined to be
uncollectible, at which time the account will be charged against the allowance
for doubtful accounts.  Patient accounts that remain outstanding four
months after initial collection efforts are generally considered
uncollectible.
 
 Other non-operating expense increased
approximately $9,000 for the year ended December 31, 2008, compared to the
preceding year.  This includes a decrease in interest income of
$135,000, largely resulting from lower interest rates earned on invested funds,
an increase in rental income of $15,000, a decrease in miscellaneous other
income of $57,010 and a decrease in interest expense to unrelated parties of
$168,000 resulting from reduced average borrowings and lower interest rates on
borrowed funds.
 
 Although operations of additional
centers have resulted in additional revenues, certain of these centers are still
in the start-up stage and, accordingly, their operating results will adversely
impact our overall results of operations until they achieve a patient count
sufficient to sustain profitable operations.
 
 Minority and other equity interests
represents the proportionate equity interests of minority owners of our
subsidiaries whose financial results are included in our consolidated
results.  Equity in affiliate earnings represents our proportionate
interest in the earnings of our Toledo, Ohio subsidiary until its consolidation
effective August 1, 2006, prior to which it was accounted for on the equity
method.
  39
 2007
Compared to 2006
 
 Medical services revenue increased
approximately $12,032,000 (20%) for the year ended December 31, 2007, compared
to the preceding year.  Medical services revenue for 2007 includes
approximately $442,000 of amounts previously included in excess insurance
liability that was determined to be non-refundable compared to approximately
$688,000 in the preceding year.  Dialysis treatments performed
increased from approximately 220,000 in 2006 to approximately 252,000 in 2007, a
15% increase which includes treatments at managed facilities, one for which we
acquired the 60% interest not already owned by the company in December,
2006.  The increase in treatments includes treatments at the three
centers acquired in the first quarter of 2006, three new centers opened during
2006, and two centers acquired in the first quarter of 2007.  Some of
our patients carry commercial insurance which may require an out of pocket
co-pay by the patient, which is often uncollectible by us.  This
co-pay is typically limited, and therefore may lead to our under-recognition of
revenue at the time of service.  We routinely recognize these revenues
as we become aware that these limits have been met.
 
 We record contractual adjustments based
on fee schedules for a patient’s insurance plan except in circumstances where
the schedules are not readily determinable, in which case rates are estimated
based on similar insurance plans and subsequently adjusted when actual rates are
determined.  Out-of-network providers generally do not provide fee
schedules and coinsurance information and, consequently, represent the largest
portion of contractual adjustment changes.  Estimated contractual
adjustments for 2006 and prior years made during 2007 resulted in approximately
a $381,000 reduction in revenues in 2007.  Based on historical data we
do not anticipate that a change in estimates would have a significant impact on
our financial conditions or results of operations.
 
 Operating income increased
approximately $147,000 (3%) for the year ended December 31, 2007, compared to
the preceding year, including in start-up costs associated with our new centers
of $608,000 in 2007 compared to $1,423,000 in the preceding year.
 
 Other operating income, representing
management fee income pursuant to management services agreements with our
Toledo, Ohio facility (until its consolidation effective August 1, 2006) and a
Georgia center in which we acquired an 80% interest effective January 1, 2008,
decreased approximately $144,000 during 2007 compared to the preceding
year.  This decrease largely resulted from the consolidation of our
Toledo facility effective August 1, 2006 whereas that facility had previously
been accounted for on the equity method with no revenue elimination in our
consolidated financial statements.
 
 Cost of medical services sales as a
percentage of sales was stable and amounted to 60% for the year ended December
31, 2007 and for the preceding year.
 
 Approximately
27% of our medical services revenue for the year ended December 31, 2007 derived
from the administration of EPO to our dialysis patients compared to 28% for the
preceding year.  Beginning in 2006, Medicare reimburses dialysis
providers for the top ten most utilized ESRD drugs at an amount equal to the
cost of such drugs as determined by the Inspector General of HHS, with
complementary increases in the composite rate.  We believe these
changes have had little impact on our average Medicare revenue per
treatment.  See Item 1, “Business – Operations – Medicare
Reimbursement.”
 
 Our medical products operation was
acquired pursuant to our merger with our former parent company in September,
2005.  The medical products operation is included in our operating
results subsequent to the merger.  This operation represents a minor
portion of our operations with operating revenues of $1,078,000 during 2007, and
$891,000 during 2006 (1.4% of total 2007 and 2006 operating
  40
  revenues).  Operating
income for the medical products operation was $186,000 for 2007 and $69,000 for
2006 (3.1% of total 2007 operating income and 1.2% of total 2006 operating
income).
 
 Cost of sales for our medical products
operation amounted to 56% of sales for the year ended December 31, 2007 and 62%
of sales for the year ended December 31, 2006.  Cost of sales for this
operation is largely related to product mix.
 
 Selling, general and administrative
expenses, those corporate and facility costs not directly related to the care of
patients, including, among others, administration, accounting and billing,
increased by approximately $3,892,000 (25%) for the year ended December 31,
2007, compared to the preceding year.  This increase reflects
operations of our new dialysis centers and increased support activities
resulting from expanded operations.  Included are expenses of new
centers incurred prior to Medicare approval for which there were no
corresponding medical services revenue.  Selling, general and
administrative expenses as a percentage of medical services revenue amounted to
approximately 26% for the year ended December 31, 2007 compared to 25% for the
preceding year.
 
 Provision for doubtful accounts
increased approximately $466,000for year ended
December 31, 2007, compared to the preceding year.  The provision
amounted to 2% of sales for the year ended December 31, 2007 and for the
preceding year.  Medicare bad debt recoveries of $253,000 were
recorded during the year ended December 31, 2007, compared to approximately
$537,000 for the preceding year.  Without the effect of the Medicare
bad debt recoveries, the provision would have amounted to 3% of sales for the
year ended December 31, 2007 and for the preceding year.  The
provision for doubtful accounts reflects our collection experience with the
impact of that experience included in accounts receivable presently reserved,
plus recovery of accounts previously considered uncollectible from our Medicare
cost report filings.  The provision for doubtful accounts is
determined under a variety of criteria, primarily aging of the receivables and
payor mix.  Accounts receivable are estimated to be uncollectible
based upon various criteria including the age of the receivable, historical
collection trends and our understanding of the nature and collectibility of the
receivables, and are reserved for in the allowance for doubtful accounts until
they are written off.
 
 Days sales outstanding were 93 as of
December 31, 2007 compared to 82 as of December 31, 2006.  Days sales
outstanding are impacted by the expected and typical slower receivable turnover
at our new centers opened and by payor mix.  Based on our collection
experience with the different payor groups comprising our accounts receivable,
our analysis indicates that our allowance for doubtful accounts reasonably
estimates the amount of accounts receivable that we will ultimately not
collect.
 
 After a patient’s insurer has paid the
applicable coverage for the patient, the patient is billed for the applicable
co-payment or balance due.  If payment is not received from the
patient for its applicable portion, collection letters and billings are sent to
that patient until such time as the patient’s account is determined to be
uncollectible, at which time the account will be charged against the allowance
for doubtful accounts.  Patient accounts that remain outstanding four
months after initial collection efforts are generally considered
uncollectible.
 
 Other non-operating income decreased
approximately $141,000 for the year ended December 31, 2007, compared to the
preceding year.  This includes an increase in interest income of
$29,000, an increase in rental income of $19,000, an increase in miscellaneous
other income of $73,000 and an increase in interest expense to unrelated parties
of $347,000 due to increased average non-inter-company borrowings and net
litigation settlement expense of $85,000 in 2006.  The prime rate was
7.25% at December 31, 2007, and 8.25% at December 31, 2006.
  41
  Although operations of additional
centers have resulted in additional revenues, certain of these centers are still
in the start-up stage and, accordingly, their operating results will adversely
impact our overall results of operations until they achieve a patient count
sufficient to sustain profitable operations.
 
 Minority and other equity interests
represent the proportionate equity interests of minority owners of our
subsidiaries whose financial results are included in our consolidated
results.  Equity in affiliate earnings represents our proportionate
interest in the earnings of our Toledo, Ohio subsidiary until its consolidation
effective August 1, 2006, prior to which it was accounted for on the equity
method.
 
 Liquidity
and Capital Resources
 
 Working capital totaled approximately
$20,266,000 at December 31, 2008, which reflected an increase of $1,654,000 (9%)
during the current year.  Included in the changes in components of
working capital was an increase in cash and cash equivalents of $4,095,000,
which included net cash provided by operating activities of $11,321,000; net
cash used in investing activities of $13,162,000 (including additions to
property and equipment of $4,333,000; and payments of $9,193,000 on dialysis
center acquisitions), and net cash provided by financing activities of
$5,937,000 (including borrowings of $12,000,000 under our line of credit,
repayments of $4,650,000 on our line of credit, other debt repayments of
$66,000, distributions to subsidiary minority members of $1,798,000, and capital
contributions of $450,000 by subsidiary minority members).
 
 Net cash provided by operating
activities consists of net income before non-cash items consisting of
depreciation and amortization of $2,784,000, bad debt expense of $2,088,000,
deferred income tax expense of $514,000, income applicable to minority interest
of $1,438,000, and non-cash stock and stock option compensation expense of
$221,000, as adjusted for changes in components of working
capital.  Significant changes in components of working capital, in
addition to the $4,095,000 increase in cash, included an increase in accounts
receivable of $1,334,000, an increase in inventories of $912,000, a decrease of
$335,000 in prepaid expenses and other current assets including application of
the $400,000 deposit on our self-insured health plan liability, and increases in
accounts payable of $3,170,000 and accrued expenses of
$1,324,000.  The major source of cash from operating activities is
medical service revenue.  The major uses of cash in operating
activities are supply costs, payroll, independent contractor costs, and costs
for our leased facilities.
 
 Our Easton, Maryland building has a
mortgage to secure a subsidiary development loan.  This loan had a
remaining principal balance of $495,000 at December 31, 2008, and $526,000 at
December 31, 2007.  In April, 2001, we obtained a $788,000 five-year
mortgage on our building in Valdosta, Georgia which we refinanced upon maturity
in April, 2006 for an additional five years with a new maturity of April, 2011.
This loan had an outstanding principal balance of approximately $555,000 at
December 31, 2008, and $589,000 at December 31, 2007.
 
 We
acquired an 80% interest in a Georgia center effective January 1, 2008, opened a
new Pennsylvania center during 2008, and acquired a Maryland center on December
31, 2008.
 
 Capital
is needed primarily for the development of outpatient dialysis centers. The
construction of a 15 station facility, typically the size of our dialysis
facilities, costs in the range of $1,000,000 to $1,500,000, depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would provide
us with an immediate ongoing operation, which most likely would be generating
income. Although our expansion strategy focuses primarily on construction of new
centers, we have expanded through acquisition of dialysis facilities and
continue to
 review
potential acquisitions.  Development of a dialysis facility to
initiate operations takes four to six months and usually up to 12 months or
longer to generate earnings.  We consider some of our centers to be in
the developmental stage since they have not developed a patient base sufficient
to generate and sustain earnings.
  42
  We are
seeking to expand our outpatient dialysis treatment facilities and inpatient
dialysis care and are presently in different phases of negotiations with
physicians and others for the development or acquisition of additional
outpatient centers.  Such expansion requires capital.  We
have been funding our expansion through internally generated cash flow and a
revolving line of credit with KeyBank National Association.  To assist
with our future expansion we entered into a $15,000,000, three year credit
agreement for a revolving line of credit with KeyBank National Association in
October, 2005, that we extended for one additional year.  On November
5, 2008, we increased the line of credit to $25,000,000 and extended the line to
November 4, 2011.  We have outstanding borrowings of $13,300,000 under
this credit facility as of December 31, 2008.  No assurance can be
given that we will be successful in implementing our growth strategy or that
available financing will be adequate to support our expansion.  See
Item 1, “Business-Business Strategy.”
 
 Aggregate
Contractual Obligations
 
 As of December 31, 2008, our
contractual obligations (in thousands), including payments due by period, are as
follows:
 
 Payments due by periodLess
      than
              
              
              
              
              
              
              
              
              More
      thanTotal
              
              
              1 year
              
              
              1-3 years
              
              
              3-5 years
              
              
              5 yearsLong-term
      debt
              
              $
              14,350
              
              
              $
              74
              
              
              $
              13,456
              
              
              $
              165
              
              
              $
              655Operating
      leases
              
              
              13,519
              
              
              
              2,722
              
              
              
              4,569
              
              
              
              3,253
              
              
              
              2,975Expected
      interest payments:Long-term
      debt
              
              
              3,021
              
              
              
              1,000
              
              
              
              1,852
              
              
              
              61
              
              
              
              108Purchase
      obligations:Medical
      services
              
              
              8,976
              
              
              
              1,944
              
              
              
              2,726
              
              
              
              2,118
              
              
              
              2,188Miscellaneous
      purchase obligations
              
              
              83
              
              
              
              83
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Total
      purchase obligations
              
              
              9,059
              
              
              
              2,027
              
              
              
              2,726
              
              
              
              2,118
              
              
              
              2,188Total
      contractual obligations
              
              $
              39,949
              
              
              $
              5,823
              
              
              $
              22,603
              
              
              $
              5,597
              
              
              $
              5,926
 
 New
Accounting Pronouncements
 
 In September, 2006, the FASB issued
Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value
Measurements”.  SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements.  We adopted SFAS
157 effective January 1, 2008 except for the nonfinancial assets and liabilities
that are subject to a one year deferral allowed by FASB Staff Position FAS157-2
(“FSP FAS 157-2”) Effective
Date of FASB Statement No. 157 issued February 12, 2008.  FSP
FAS157-2 delays the effective date of SFAS No. 157 until fiscal years beginning
after November 15, 2008 for nonfinancial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  The
  43
  adoption
of SFAS 157 did not have a material effect on our financial
statements.  We are evaluating the impact SFAS 157 will have on our
financial statements beginning in fiscal 2009 as it relates to the items subject
to the one-year deferral allowed by FSP FAS 157-2.
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS
141R”), “Business Combinations.”  SFAS 141R expands the definitions of
a business and a business combination and requires all assets and liabilities of
an acquired business (for full, partial and step acquisitions) to be recorded at
fair values, with limited exceptions.  SFAS will be effective for us
in 2009.  We are evaluating the impact on our financial statements of
adopting SFAS 141R.
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial Statements,” an amendment of
ARB 51.  SFAS 160 requires noncontrolling interests to be reported in
the equity section of consolidated financial statements and requires that
consolidated net income include the amounts attributable to both the parent and
noncontrolling interests with these amounts disclosed on the face of the
consolidated income statement and requires any losses attributable to the
noncontrolling interests in excess of noncontrolling interests in equity to be
allocated to the noncontrolling interests.  SFAS 160 will be effective
for us in 2009.  Other than presentation differences, we do not expect
SFAS160 to have a significant impact on our financial statements.
 
 Critical
Accounting Policies and Estimates
 
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make complex judgments and
estimates.  On an on-going basis, we evaluate our estimates, the most
significant of which include establishing allowances for doubtful accounts, a
valuation allowance for our deferred tax assets and determining the
recoverability of our long-lived assets.  The basis for our estimates
are historical experience and various assumptions that are believed to be
reasonable under the circumstances, given the available information at the time
of the estimate, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily available
from other sources.  Actual results may differ from the amounts
estimated and recorded in our financial statements.
 
 We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
 
 Revenue
Recognition:  Revenues are recognized net of contractual provisions at
the expected collectable amount.  We receive payments through
reimbursement from Medicare and Medicaid for our outpatient dialysis treatments
coupled with patients’ private payments, individually and through private
third-party insurers.  A substantial portion of our revenues are
derived from the Medicare ESRD program, which outpatient reimbursement rates are
fixed under a composite rate structure, which includes the dialysis services and
certain supplies, drugs and laboratory tests.  Certain of these
ancillary services are reimbursable outside of the composite
rate.  Medicaid reimbursement is similar and supplemental to the
Medicare program.  Our acute inpatient dialysis operations are paid
under contractual arrangements, usually at higher contractually established
rates, as are certain of the private pay insurers for outpatient
dialysis.  We have developed a sophisticated information and
computerized coding system, but due to the complexity of the payor mix and
regulations, we sometimes receive more or less than the amount expected when the
services are provided.  We reconcile any differences at least
quarterly.
  44
  In those situations where a patient’s
insurance fee schedule cannot be readily determined, which typically occurs with
out of network providers, we estimate fees based on our knowledge base of
historical data for patients with similar insurance plans.  Our
internal controls, including an ongoing review and follow-up on estimated fees,
allows us to make necessary changes to estimated fees on a timely
basis.  When the actual fee schedule is determined, we adjust the
amounts originally estimated, and then use the actual fees to estimate fees for
similar future situations.  We adhere to the guidelines of Staff
Accounting Bulletin Topic 13 (“SAB 104”) in regard to recording reasonable
estimates of revenue based on our historical experience and identifying on a
timely basis necessary changes to estimates.
 
 Allowance
for Doubtful Accounts:  We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our patients or their
insurance carriers to make required payments.  Based on historical
information, we believe that our allowance is adequate.  Changes in
general economic, business and market conditions could result in an impairment
in the ability of our patients and the insurance companies to make their
required payments, which would have an adverse effect on cash flows and our
results of operations.  The allowance for doubtful accounts is
reviewed monthly and changes to the allowance are updated based on actual
collection experience.  We use a combination of percentage of sales
and the aging of accounts receivable to establish an allowance for losses on
accounts receivable.  We adhere to the guidelines of Statement of
Financial Accounting Standards No. 5 (“SFAS 5”), “Accounting for Contingencies”
in determining reasonable estimates of accounts for which uncollectibility is
possible.
 
 Valuation
Allowance for Deferred Tax Assets:  The carrying value of deferred tax
assets assumes that we will be able to generate sufficient future taxable income
to realize the deferred tax assets based on estimates and
assumptions.  If these estimates and assumptions change in the future,
we may be required to adjust our valuation allowance for deferred tax assets
which could result in additional income tax expense.
 
 Goodwill
and Intangible Asset Impairment:  In assessing the recoverability of
our goodwill and other intangibles we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets.  This impairment test requires the determination of
the fair value of the intangible asset.  If the fair value of the
intangible asset is less than its carrying value, an impairment loss will be
recognized in an amount equal to the difference.  If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.  We analyze goodwill and
indefinite lived intangible assets for impairment on at least an annual basis
according to Statement of Financial Accounting Standards No. 142 (“SFAS 142”),
“Goodwill and Other Intangible Assets.”
 
 Long-Lived
Assets:  We state our property and equipment at acquisition cost and
compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets.  In accordance with Statement of
Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the
Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable.  Recoverability of assets
to be held and used is measured by comparison of the carrying amount of an asset
to the future cash flows expected to be generated by the asset.  If
the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset.  These computations are complex
and subjective.
 
 45
 
 Impact
of Inflation
 
 Inflationary factors have not had a
significant effect on our operations. A substantial portion of our 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.  Therefore, dialysis services revenues cannot be voluntarily
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 our earnings in the future.
  Item
      7A.
              Quantitative
      and Qualitative Disclosure About Market
Risk
 
 We do not consider our exposure to
market risks, principally changes in interest rates, to be
significant.
 
 Sensitivity of results of operations to
interest rate risks on our investments is managed by conservatively investing
funds in liquid interest bearing accounts of which we held
approximately
 $1,890,000
at December 31, 2008.
 
 Interest rate risk on debt is managed
by negotiation of appropriate rates for equipment financing and other fixed rate
obligations based on current market rates.  There is an interest rate
risk associated with our variable rate debt obligations, which totaled
approximately $14,350,000 at December 31, 2008.
 
 We have exposure to both rising and
falling interest rates.  Due to the global financial crisis and the
corresponding exceedingly low interest rates on invested funds, there was no
substantial risk of a decrease in interest income as a result of decreased
yields at December 31, 2008.  Assuming a relative 15% increase in
rates on our period-end variable rate debt would have resulted in a negative
impact of approximately $54,000 on our results of operations for the year ended
December 31, 2008.
 
 We do not utilize financial instruments
for trading or speculative purposes and do not currently use interest rate
derivatives.
  Item
      8.
              Financial
      Statements and Supplementary Data
 
 The response to this item is submitted
as a separate section to this annual report, specifically, Part IV, Item 15,
“Exhibits, Financial Statement Schedules and Reports on Form 8-K,” subpart (a)1,
“All Financial Statements – See Index to Consolidated Financial Statements,” and
subpart (a)2, “Financial Statement Schedules – See Index to Consolidated
Financial Statements,” and begins on page F-1 of this annual report on Form
10-K.
  Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
 
 None
  46
  Item
      9A.
              Controls
      and Procedures
 
 Evaluation of Disclosure Controls and
Procedures.
 
 As of the end of the period covered by
this annual report on Form 10-K, we carried out an evaluation, under the
supervision and with the participation of our management, including our
President and CEO, and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-15(e) of the Exchange Act.  These disclosure controls and
procedures are designed to provide reasonable assurance that, among other
things, information is accumulated and communicated to our management, including
our President and CEO, and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.  Based upon such
evaluation, our President and CEO, and our Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in providing reasonable assurance that information
required to be disclosed by our company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods specified by the SEC’s rules and forms.
 
 Management’s Report on Internal
Control Over Financial Reporting
 
 There were no changes in our internal
control over financial reporting that occurred during our fourth quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, our control over financial reporting.  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.  Our internal control over financial reporting
is a process designed by, or under the supervision of, our President and CEO and
Chief Financial Officer and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.  Internal control over financial reporting
includes polices and procedures that:
 
 ●
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;●
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that
      receipts and expenditures of the company are being made only in accordance
      with authorizations of management and directors of the company;
      and●
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on the consolidated financial
  statements
 
 All internal control systems, no matter
how well designed, have inherent limitations and can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations to all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, and
none of which we are aware, within our company have been
detected.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
  47
  In connection with the preparation of
our Form 10-K, our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008.  In making that
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control-Integrated Framework.”  Management’s assessment included an
examination of the design of the company’s internal control over financial
reporting and testing of the operating effectiveness of its internal control
over financial reporting.  Based on management’s assessment,
management believes that, as of December 31, 2008, our internal control over
financial reporting was effective based on those
criteria.  Management’s assessment of the effectiveness of the
company’s internal control over financial reporting as of December 31, 2008, has
been audited by MSPC Certified Public Accountants and Advisors, P.C., an
independent registered public accounting firm, as stated in their report
attached to this annual report on Form 10-K, which expresses unqualified
opinions with respect to management’s assessment and on the effectiveness of the
company’s internal control over financial reporting as of December 31,
2008.
  Item
      9B.
              Other
      Information
 
 To the best of our knowledge, we have
reported all information required to be disclosed in our current reports on Form
8-K during the fourth quarter of 2008.
  PART
III
 
 Item
      10.
              Directors,
      Executive Officers and Corporate
Governance
 
 Directors
and Executive Officers
 
 Information concerning the company’s
directors and executive officers is incorporated herein by reference to the
company’s 2009 proxy statement* under the captions “Proposal No. 1: Election of
Directors” and “Information About Directors and Executive
Officers.”
 
 Information
relating to compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference to the company’s 2009 proxy statement* under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance.”
 
 The
company adopted a Code of Ethics and Business Conduct, referred to as the Code
of Ethics, that applies to our Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer or Controller, and persons performing similar
functions, as well as other employees.  See Item 1, “Business –
Corporate Integrity Program – Code of Ethics.”  See also “Code of
Ethics” in the company’s 2009 proxy statement* incorporated herein by
reference.  The Code of Ethics is available on our website at www.dialysiscorporation.com
under the caption, “Investor Relations.”  A copy of the Code of Ethics
is also available without charge upon request from the Chief Financial Officer
at Dialysis Corporation of America, 1302 Concourse Drive, Suite 304, Linthicum,
MD  21090.  If we make substantive amendments to our Code of
Ethics or grant any waiver from a provision of it, which has not occurred to
date, we will disclose the nature of such amendment or waiver on our website or
in a current report on Form 8-K.
 
 Information concerning the audit,
nominating and compensation committees, their composition, charters and
policies, the audit committee financial expert (as defined in Item 407(5)(ii)
and (iii) of Regulation S-K) and the audit and compensation committee reports
are incorporated herein by reference to the company’s 2009 proxy statement*
under the captions “Corporate Governance,” “Compensation Committee Report” and
“Audit Committee Report.”  The audit, nominating and compensation
committee
  48
  charters
outline those committees’ purposes, membership requirements, administration and
responsibilities.  Each committee member is independent as defined
under the market rules of the Nasdaq Stock Market.  Each committee
reviews and updates its charter at least annually, which charters are approved
by the board of directors.  All the charters are posted on our website
at www.dialysiscorporation.com
under the caption “Investor Relations.”  The charter information is
also available in print without charge to any shareholder who requests it from
our Secretary, Joshua M. Jaffe, Esq., at Jaffe & Falk, LLC, 777 Terrace
Avenue, Hasbrouck Heights, NJ 07604.
  Item
      11.
              Executive
      Compensation
 
 Information
concerning Compensation Discussion and Analysis, the Compensation Committee
Report and executive management and director compensation is incorporated herein
by reference to the company’s 2009 proxy statement* under the captions
“Corporate Governance – Compensation of Directors,” “Compensation Discussion and
Analysis,” “Compensation Committee Report,” “Summary Compensation Table,”
“Grants of Plan-Based Awards – 2008,” “Outstanding Equity Awards at Fiscal Year
End – 2008” and “Option Exercises and Stock Vested in 2008.”
  Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
 
 Information
concerning security ownership of certain beneficial owners and management is
incorporated herein by reference to the company’s 2009 proxy statement* under
the caption “Beneficial Ownership of the Company’s Securities.”
  Securities
Authorized For Issuance Under Equity Compensation Plans
 
 The following table provides
information with respect to equity compensation plans approved by shareholders
in effect at December 31, 2008. Options and stock awards are only granted under
the Dialysis Corporation of America 1999 Incentive Plan, referred to as the DCA
Incentive Plan, which has been approved by shareholders.
 
 Number
      of securities to be
                issued
      upon exercise of
                outstanding
      options, warrants
                and
      rights
              
              
              Weighted-average
                exercise
      price of
                outstanding
      options,
                warrants
      and rights
              
              
              Number
      of securities
                remaining
      available for
                future
      issuance under equity
                compensation
      plans
                (excluding
      securities reflected
                in
      column (a))Plan
      Category
              
              (a)
              
              
              (b)
              
              
              (c)Equity
      compensation plans
                approved
      by security holders:
              
              31,250(1)
              
              
              $7.28
              
              
              704,154(2)Equity
      compensation plans not
                approved
      by security holders:(3)
              
              N/A
              
              
              N/A
 _______________
 
 (1)           Includes
only vested portion of outstanding options as follows: (i) 18,750 five year
options exercisable through June 6, 2009 at $4.02 per share; (ii) 12,500 option
shares of a five year option for 50,000 shares exercisable through April 15,
2012 at $12.18 per share, vesting in equal increments of 12,500 shares each
April 15, 2008 through 2011; does not include 37,500 non-vested option shares;
and
  49
  (iii)
does not include two five year options for an aggregate of 60,000 shares,
exercisable through February 28, 2013 at $12.18 per share, vesting in the
aggregate in equal increments of 15,000 shares each February 28, 2009 through
February 28, 2012; no option shares vested at December 31, 2008; 15,000 option
shares vested on February 28, 2009.  Each of the options provide for
adjustments under limited circumstances, and have termination and acceleration
provisions.
 
 (2)           Includes:
(i) 97,500 option shares not yet vested and not included in column (a); and (ii)
15,875 non-vested outstanding stock awards.  On February 27, 2009, the
board authorized the issuance of 5,000 stock awards, 1,000 shares each to the
independent board members and 2,000 shares to the Chairman of the Board of
Directors.  Accordingly, there are 699,114 shares currently available
for issuance under the DCA Incentive Plan, including subparagraphs (i) and (ii)
above.
 
 (3)           There
are employment agreements with five members of executive management, none of
which specifically provides for the issuance of equity securities of the
company.  Stephen W. Everett, President and CEO of the company, has an
employment agreement which provided for the issuance of securities, which equity
issuance portions of the agreement have expired.  Executive officers
may be entitled to cash and equity bonuses from time to time within the
guidelines of the company’s compensation policies, and as may be recommended by
the Compensation Committee for approval by the board of directors.
  Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
 
 Information concerning certain
relationships and related transactions and director independence is incorporated
herein by reference to the company’s 2009 proxy statement* under the captions
“Proposal No. 1: Election of Directors,” “Information About Directors and
Executive Officers” and “Corporate Governance.”
  Item
      14.
              Principal
      Accountant Fees and Services
 
 Information concerning fees and
services of the company’s independent auditors and the audit committee’s
pre-approved policies and procedures is incorporated herein by reference to the
company’s 2009 proxy statement* under the caption “Proposal No. 3: Ratification
of the Appointment of the Independent Auditors.”
 
 *
              The
      company’s definitive proxy statement relating to the upcoming annual
      meeting of shareholders will be filed within 120 days of the end of the
      company’s fiscal year, which is no later than April 30,
    2009.
 
 50
 
 PART
IV
  Item
      15.
              Exhibits
      and Financial Statement Schedules
  (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.(b)
              Exhibits
      +3.1
              Articles
      of Incorporation ‡3.2
              By-Laws
      of the Company, as amended October 30, 2007 (incorporated by reference to
      the Company’s Current Report on Form 8-K dated November 5, 2007, Exhibit
      (3)(ii)). ‡4
              Instruments
      defining the rights of equity holders, including
  indentures4.1
              Form
      of Common Stock Certificate of the Company ‡4.2
              Form
      of Stock Option Certificate under the 1999 Stock Incentive Plan (May 21,
      1999) (incorporated by reference to the Company’s Annual Report on Form
      10-K for the year ended December 31, 1999, Part IV, Item
      14(c)(10)(xxiv)).4.3
              Form
      of Restricted Stock Agreement (incorporated by reference to the Company’s
      Current Report on Form 8-K dated June 30, 2006, Item 9.01(d)(10)
      10.1).10
              Material
      Contracts10.1
              Indemnity
      Deed of Trust from the Company to Trustees for the benefit of St. Michaels
      Bank [now PNC Bank] dated December 3, 1999 (incorporated by reference to
      the Company’s Current Report on Form 8-K dated December 13, 1999
      (“December Form 8-K”), Item 7(c)(99)(i)).10.2
              Guaranty
      Agreement from the Company to St. Michaels Bank [now PNC Bank] dated
      December 3, 1999 (incorporated by reference to the Company’s December Form
      8-K, Item 7(c)(99)(ii)).10.3
              The
      Company’s Section 125 Plan effective September 1, 2002 (incorporated by
      reference to the Company’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2002, Part II, Item 6(99)).10.4
              Agreement
      of Lease by and between Copt Concourse, LLC and the Company dated March
      31, 2004 (incorporated by reference to the Company’s Current Report on
      Form 8-K dated March 31, 2004, item
  7(c)(10((i)).
 
 51
 
 10.5
              Credit
      Agreement between the Company and KeyBank National Association dated
      October 24, 2005 (incorporated by reference to the Company’s Current
      Report on Form 8-K dated October 27, 2005 (“October 2005 Form 8-K”), Item
      9.01(d)(10)(i)).10.6
              Revolving
      Credit Note dated October 24, 2005 (incorporated by reference to the
      Company’s October 2005 Form 8-K, Item 9.01(d)(10)(ii)).10.7
              Guaranty
      of Payment by the Company’s Wholly-Owned Subsidiaries in favor of KeyBank
      National Association dated October 24, 2005 (incorporated by reference to
      the Company’s October 2005 Form 8-K, Item
    9.01(d)(10)(iii)).10.8
              Pledge
      Agreement by the Company in favor of KeyBank National Association dated
      October 24, 2005 (incorporated by reference to the Company’s October 2005
      Form 8-K, Item 9.01(d)(10)(iv).10.9
              Amendment
      No. 1 to Credit Agreement between the Company and KeyBank National
      Association dated December 15, 2005 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated December 16, 2005, Item
      9.01(d)(10)(i)).10.10
              Amendment
      No. 2 to Credit Agreement between the Company and KeyBank National
      Association dated as of February 14, 2006 (incorporated by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005, Part IV, Item 15, (10.19)).10.11
              Employment
      Agreement between the Company and Stephen W. Everett dated February 22,
      2006 (incorporated by reference to the Company’s Current Report on Form
      8-K dated February 28, 2006, Item 9.01(d)(10)10.1).*10.12
              Promissory
      Note by the Company to American Banking Company, dated April 3, 2006
      (incorporated by reference to the Company’s Current Report on Form 8-K
      dated April 4, 2006, Item 9.01(d)(99) 99.1).10.13
              Amendment
      No. 3 to Credit Agreement between the Company and KeyBank National
      Association dated July 27, 2006 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated August 2, 2006, Item
      9.01(d)(10)(i)).10.14
              Debt
      Modification Agreement by DCA of Vineland, LLC(1) dated May 25, 2006
      (incorporated by reference to the Company’s Current Report on Form 8-K,
      dated May 26, 2006 (“May 2006 Form 8-K”), Item 9.01(d)(99)
      99.1).10.15
              Notice
      and Consent to Modification by Guarantor [the Company] dated May 25, 2006
      (incorporated by reference to the Company’s May 2006 Form 8-K, Item 9.01
      (d)(99) 99.2)10.16
              Amendment
      No. 4 to Credit Agreement between the Company and KeyBank National
      Association dated December 7, 2007 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated December 17, 2007, Item
      9.01(d)(10(i)).10.17
              1999
      Stock Incentive Plan of the Company, as amended (April, 2006)
      (incorporated by reference to the Company’s Current Report on Form 8-K
      dated March 5, 2008, Item
9.01(d)(99)(ii).
  52
  10.18
              Amendment
      No. 5 to Credit Agreement between the Company and KeyBank National
      Association dated November 5, 2008 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated November 6, 2008 (“November
      2008 Form 8-K”), Item 9.01(d)(10)(i)).10.19
              Revolving
      Credit Note dated November 5, 2008 (incorporated by reference to the
      Company’s November 2008 Form 8-K, Item
9.01(d)(10)(ii)).10.20
              Guarantor
      Acknowledgment and Agreement dated November 5, 2008 (incorporated by
      reference to the Company’s November 2008 Form 8-K, Item
      9.01(d)(10)(iii)).10.21
              Asset
      Purchase Agreement dated December 31, 2008 between DCA of Hyattsville(3) and St. Thomas More
      Dialysis Center, LLC (incorporated by reference to the Company’s Current
      Report on Form 8-K dated January 7, 2009 (“January 2009 Form 8-K”), Item
      9.01(d)2.1).10.22
              Escrow
      Agreement dated October 15, 2008 by and among St. Thomas More Dialysis
      Center, LLC, Dialysis Corporation of America and Sack, Harris &
      Martin, P.C. (incorporated by reference to the Company’s January 2009 Form
      8-K, Item 9.01(d)10.1).10.23
              Bill
      of Sale and Assignment and Assumption Agreement dated December 31, 2008
      between St. Thomas More Dialysis Center, LLC and DCA of Hyattsville,
      LLC(3)
      (incorporated by reference to the Company’s January 2009 Form 8-K, Item
      9.01(d)10.2).10.24
              Guaranty
      by St. Thomas More, LLC dated December 31, 2008 (incorporated by reference
      to the Company’s January 2009 Form 8-K, Item
  9.01(d)10.3).10.25
              Amendment
      No. 6 to Credit Agreement between the Company and KeyBank National
      Association dated February 27, 2009 (incorporated by reference to the
      Company’s Current Report on Form 8-K, dated February 27, 2009 (“February
      2009 Form 8-K”), Item 9.01(d)(10)(i)).10.26
              Guarantor
      Acknowledgment and Agreement dated February 27, 2009 (incorporated by
      reference to the Company’s February 2009 Form 8-K, Item
      9.01(d)(10)(ii)).10.27
              Employment
      Agreement, effective January 1, 2009, between the Company and Thomas P.
      Carey (incorporated by reference to the Company’s Current Report on Form
      8-K, dated March 2, 2009 (“March 2009 Form 8-K”) Item 9.01
      (d)10.1).*10.28
              Employment
      Agreement, effective January 1, 2009, between the Company and Andrew
      Jeanneret (incorporated by reference to the Company’s March 2009 Form 8-K,
      Item 9.01(d)10.2).*10.29
              Employment
      Agreement, effective January 1, 2009, between the Company and Daniel R.
      Ouzts (incorporated by reference to the Company’s March 2009 Form 8-K,
      Item 9.01(d)10.3).*10.30
              Employment
      Agreement, effective January 1, 2009, between the Company and Joanne
      Zimmerman (incorporated by reference to the Company’s March 2009 Form 8-K,
      Item 9.01(d)10.4).*
  53
  10.31
              Form
      of Indemnification Agreement for officers and directors of the Company
      (incorporated by reference to the Company’s March 2009 Form 8-K, Item
      9.01(d)10.5).14
              Code
      of Ethics14.1
              Code
      of Ethics and Business Conduct, as amended, September 6, 2006 and April,
      2007 (incorporated by reference to the Company’s Current Report on Form
      8-K dated September 12, 2006, Item 14.1).21
              Subsidiaries
      of the Company23
              Consent
      of experts and counsel23.1
              Consent
      of MSPC Certified Public Accountants and Advisors, P.C.31
              Rule
      13a-14(a)/15d-14(a) Certifications.31.1
              Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.31.2
              Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934.32
              Section
      1350 Certifications32.1
              Certification
      of the Chief Executive Officer and the Chief Financial Officer pursuant to
      Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
      Section 1350(2).
 _________________________
  +
              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.*
              Management
      contract or compensatory plan or arrangement.(1)
              51%
      owned subsidiary.(2)
              In
      accordance with Release No. 34-47551, this exhibit is furnished to the SEC
      as an accompanying document and is not deemed to be “filed” for purposes
      of Section 18 of the Securities Exchange Act of 1934 or otherwise subject
      to the liabilities of that Section, and it shall not be deemed
      incorporated by reference into any filing under the Securities Act of
      1933.(3)
              Wholly
      owned subsidiary.
 
 54
 
 (c)
              Financial
      Statement Schedules Required By Regulation S-X, Excluded From This Annual
      ReportNone
 
 55
 
 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 AMERICABy:
              /s/STEPHEN
      W. EVERETTStephen
      W. EverettPresident
      and Chief Executive Officer
 
 March 13,
2009
 
 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.
 
 Signature
              Title
              Date/s/ THOMAS K. LANGBEIN
              Chairman
      of the Board of Directors
              March
      13, 2009Thomas
      K. Langbein/s/ STEPHEN W. EVERETT
              President,
      Chief Executive OfficerStephen
      W. Everett
              and
      Director
              March
      13, 2009/s/ ANDREW JEANNERET
              Vice
      President of Finance and ChiefAndrew
      Jeanneret
              Financial
      Officer
              March
      13, 2009/s/ DANIEL R OUZTS
              Vice
      President of Finance
              March
      13, 2009Daniel
      R. Ouzts
              and
      Treasurer/s/ PETER D. FISCHBEIN
              Director
              March
      13, 2009Peter
      D. Fischbein/s/ ROBERT W. TRAUSE
              Director
              March
      13, 2009Robert
      W. Trause/s/ ALEXANDER BIENENSTOCK
              Director
              March
      13, 2009Alexander
      Bienenstock
 
 56
  ANNUAL
REPORT ON FORM 10-K
 ITEM
8, ITEM 15(a) (1) and (2)
 LIST
OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
 FINANCIAL
STATEMENT SCHEDULES
 YEAR
ENDED DECEMBER 31, 2008
 DIALYSIS
CORPORATION OF AMERICA
 LINTHICUM,
MARYLAND




FORM
10-K—ITEM 15(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 of the Annual Report on Form
10-K:
 
 Page
 
 Report
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets – December 31, 2008 and 2007
              F-4Consolidated
      Statements of Income – Years Ended December 31, 2008, 2007 and
      2006
              F-5Consolidated
      Statements of Stockholders’ Equity – Years Ended December 31,
      2008,2007
      and 2006
              F-6Consolidated
      Statements of Cash Flows – Years Ended December 31, 2008,2007
      and 2006
              F-7Notes
      to Consolidated Financial Statements
              F-8
  The
following financial statement schedule of Dialysis Corporation of America and
subsidiaries is included in Item 15(a)(2):
 
 Schedule
      II – Valuation and qualifying accounts
              F-28
 
 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
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders
 Dialysis
Corporation of America
 
 We have
audited the accompanying consolidated balance sheets of Dialysis Corporation of
America as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2008.  We also have
audited Dialysis Corporation of America's internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control— Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Dialysis Corporation
of America's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting.  Our responsibility is to express an opinion
on these consolidated financial statements and an opinion on the company's
internal control over financial reporting based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects.  Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audits also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audits provide a reasonable
basis for our opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles.  A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  F-2
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Dialysis Corporation of
America as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.  Also in our opinion, Dialysis
Corporation of America maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
 
 
 
 MSPC
 Certified
Public Accountants and Advisors, P.C.
 Cranford,
New Jersey
 February
27, 2009
  F-3
 
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 
 December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              6,543,000
              
              
              $
              2,447,820Accounts
      receivable, less allowanceof
      $2,540,000 at December 31, 2008;$2,114,000
      at December 31, 2007
              
              
              21,493,780
              
              
              
              20,159,926Inventories,
      less allowance for obsolescenceof
      $15,000 at December 31, 2008; $25,000 at December 31, 2007
              
              
              2,918,578
              
              
              
              2,006,661Deferred
      income tax asset
              
              
              1,185,000
              
              
              
              998,000Prepaid
      expenses and other current assets
              
              
              2,978,049
              
              
              
              3,313,406Total
      current assets
              
              
              35,118,407
              
              
              
              28,925,813Property
      and equipment:Land
              
              
              1,333,191
              
              
              
              1,333,191Buildings
      and improvements
              
              
              5,721,879
              
              
              
              5,716,904Machinery
      and equipment
              
              
              15,143,283
              
              
              
              12,359,797Leasehold
      improvements
              
              
              10,789,122
              
              
              
              9,356,53132,987,475
              
              
              
              28,766,423Less
      accumulated depreciation and amortization
              
              
              14,452,018
              
              
              
              12,264,02918,535,457
              
              
              
              16,502,394Goodwill
              
              
              16,492,401
              
              
              
              8,576,893Other
      assets
              
              
              932,930
              
              
              
              841,092Total
      other assets
              
              
              17,425,331
              
              
              
              9,417,985$
              71,079,195
              
              
              $
              54,846,192LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              7,232,288
              
              
              $
              4,062,611Accrued
      expenses
              
              
              7,485,404
              
              
              
              6,161,588Income
      taxes payable
              
              
              60,470
              
              
              
              33,297Current
      portion of long-term debt
              
              
              74,000
              
              
              
              56,000Total
      current liabilities
              
              
              14,852,162
              
              
              
              10,313,496Long-term
      debt, less current portion
              
              
              14,275,798
              
              
              
              7,009,419Deferred
      income tax liability
              
              
              1,275,000
              
              
              
              574,000Total
      liabilities
              
              
              30,402,960
              
              
              
              17,896,915Minority
      interest in subsidiaries
              
              
              5,412,208
              
              
              
              4,942,797Commitments
      and ContingenciesStockholders'
      equity:Common
      stock, $.01 par value, authorized 20,000,000 shares:
                9,579,743
      shares issued and outstanding at December 31, 2008;
                9,573,596
      shares issued and outstanding at December 31, 2007
              
              
              95,797
              
              
              
              95,736Additional
      paid-in capital
              
              
              16,001,153
              
              
              
              15,587,782Retained
      earnings
              
              
              19,167,077
              
              
              
              16,322,962Total
      stockholders' equity
              
              
              35,264,027
              
              
              
              32,006,480$
              71,079,195
              
              
              $
              54,846,192
 See notes to consolidated financial
statements.
 F-4
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Operating
      revenues:Sales:Medical
      services revenue
              
              $
              85,675,687
              
              
              $
              73,170,573
              
              
              $
              61,138,963Product
      sales
              
              
              1,161,206
              
              
              
              1,077,988
              
              
              
              891,242Total
      sales revenues
              
              
              86,836,893
              
              
              
              74,248,561
              
              
              
              62,030,205Management
      fee income
              
              
              ---
              
              
              
              286,174
              
              
              
              430,03386,836,893
              
              
              
              74,534,735
              
              
              
              62,460,238Cost
      and expenses:Cost
      of sales revenues:Cost
      of medical services
              
              
              51,452,299
              
              
              
              44,248,309
              
              
              
              36,968,682Cost
      of product sales
              
              
              659,766
              
              
              
              598,086
              
              
              
              549,590Total
      cost of sales revenues
              
              
              52,112,065
              
              
              
              44,846,395
              
              
              
              37,518,272Selling,
      general and administrative expensesCorporate
              
              
              10,586,797
              
              
              
              7,917,038
              
              
              
              6,460,309Facility
              
              
              12,851,367
              
              
              
              11,423,072
              
              
              
              8,988,078Total
              
              
              23,438,164
              
              
              
              19,340,110
              
              
              
              15,448,387Stock
      compensation expense
              
              
              221,166
              
              
              
              217,474
              
              
              
              275,438Depreciation
      and amortization
              
              
              2,783,826
              
              
              
              2,619,049
              
              
              
              2,319,070Provision
      for doubtful accounts
              
              
              2,088,248
              
              
              
              1,665,120
              
              
              
              1,198,99580,643,469
              
              
              
              68,688,148
              
              
              
              56,760,162Operating
      income
              
              
              6,193,424
              
              
              
              5,846,587
              
              
              
              5,700,076Other
      (expense) income, net
              
              
              (48,605
              )
              
              
              (39,637
              )
              
              
              100,968Income
      before income taxes, minority and otherequity
      interests and equity in affiliate earnings
              
              
              6,144,819
              
              
              
              5,806,950
              
              
              
              5,801,044Income
      tax provision
              
              
              1,862,479
              
              
              
              1,614,892
              
              
              
              2,085,874Income
      before minority and other equity interestsand
      equity in affiliate earnings
              
              
              4,282,340
              
              
              
              4,192,058
              
              
              
              3,715,170Minority
      and other equity interests in incomeof
      consolidated subsidiaries
              
              
              (1,438,225
              )
              
              
              (1,105,736
              )
              
              
              (919,739
              )Equity
      in affiliate earnings
              
              
              ---
              
              
              
              ---
              
              
              
              253,765Net
      income
              
              $
              2,844,115
              
              
              $
              3,086,322
              
              
              $
              3,049,196Earning
      per share:Basic
              
              $
              .30
              
              
              $
              .32
              
              
              $
              .32Diluted
              
              $
              .30
              
              
              $
              .32
              
              
              $
              .32Weighted
      average shares outstanding:Basic
              
              
              9,579,837
              
              
              
              9,572,893
              
              
              
              9,484,926Diluted
              
              
              9,613,866
              
              
              
              9,607,672
              
              
              
              9,575,733
 See notes
to consolidated financial statements.
 F-5
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Capital
      inCommon
              
              
              Excess
      of
              
              
              RetainedStock
              
              
              Par Value
              
              
              Earnings
              
              
              TotalBalance
      January 1, 2006
              
              $
              92,655
              
              
              $
              15,332,975
              
              
              $
              10,187,444
              
              
              $
              25,613,074Exercise
      of stock options for 303,750shares
      of common stock, net of 27,205shares
      tendered in payment; includestax
      effect of $31,000
              
              
              2,765
              
              
              
              411,484
              
              
              
              ---
              
              
              
              414,249Share
      compensation issued (22,250 shares)
              
              
              223
              
              
              
              258,847
              
              
              
              ---
              
              
              
              259,070Payment
      to dissenting merger shareholders
              
              
              ---
              
              
              
              (2,100
              )
              
              
              ---
              
              
              
              (2,100
              )Merger
      deferred tax adjustment
              
              
              ---
              
              
              
              (272,000
              )
              
              
              ---
              
              
              
              (272,000
              )Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              3,049,196
              
              
              
              3,049,196Balance
      at December 31, 2006
              
              
              95,643
              
              
              
              15,729,206
              
              
              
              13,236,640
              
              
              
              29,061,489Share
      compensation issued (9,250 shares)
              
              
              93
              
              
              
              103,476
              
              
              
              ---
              
              
              
              103,569Stock
      option compensation vesting
              
              
              ---
              
              
              
              58,259
              
              
              
              ---
              
              
              
              58,259Sale
      of minority interest by subsidiary
              
              
              ---
              
              
              
              (303,159
              )
              
              
              ---
              
              
              
              (303,159
              )Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              3,086,322
              
              
              
              3,086,322Balance
      at December 31, 2007
              
              
              95,736
              
              
              
              15,587,782
              
              
              
              16,322,962
              
              
              
              32,006,480Share
      compensation issued (6,500 shares)
              
              
              65
              
              
              
              71,950
              
              
              
              ---
              
              
              
              72,015Stock
      related compensation expense
              
              
              ---
              
              
              
              221,166
              
              
              
              ---
              
              
              
              221,166Share
      cancellation due to escheatment
              
              
              (4
              )
              
              
              4Sale/acquisition
      of subsidiary minority interest
              
              
              ---
              
              
              
              120,251
              
              
              
              ---
              
              
              
              120,251Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              2,844,115
              
              
              
              2,844,115Balance
      at December 31, 2008
              
              $
              95,797
              
              
              $
              16,001,153
              
              
              $
              19,167,077
              
              
              $
              35,264,027
 See notes
to consolidated financial statements.
 F-6
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Operating
      activities:Net
      income
              
              $
              2,844,115
              
              
              $
              3,086,322
              
              
              $
              3,049,196Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
              
              
              2,727,253
              
              
              
              2,583,506
              
              
              
              2,303,795Amortization
              
              
              56,573
              
              
              
              35,543
              
              
              
              15,275Bad
      debt expense
              
              
              2,088,248
              
              
              
              1,665,120
              
              
              
              1,198,995Inventory
      obsolescence adjustment
              
              
              ---
              
              
              
              (52,836
              )
              
              
              ---Deferred
      income tax provision (benefit)
              
              
              514,000
              
              
              
              132,343
              
              
              
              (331,413
              )Deferred
      tax asset utilized
              
              
              ---
              
              
              
              907,952
              
              
              
              1,190,000Stock
      and stock option compensation expense
              
              
              221,166
              
              
              
              217,474
              
              
              
              275,438Minority
      and other equity interests
              
              
              1,438,225
              
              
              
              1,105,736
              
              
              
              919,739Equity
      in affiliate earnings
              
              
              ---
              
              
              
              ---
              
              
              
              (253,765
              )Increase
      (decrease) relating to operating activities from:Accounts
      receivable
              
              
              (2,812,206
              )
              
              
              (6,004,744
              )
              
              
              (5,945,256
              )Inventories
              
              
              (723,337
              )
              
              
              54,376
              
              
              
              (411,557
              )Prepaid
      expenses and other current assets
              
              
              374,148
              
              
              
              (47,644
              )
              
              
              336,311Accounts
      payable
              
              
              3,169,677
              
              
              
              2,064,486
              
              
              
              161,266Accrued
      expenses
              
              
              1,395,830
              
              
              
              448,794
              
              
              
              (115,824
              )Income
      taxes payable
              
              
              27,173
              
              
              
              (626,795
              )
              
              
              614,444Net
      cash provided by operating activities
              
              
              11,320,865
              
              
              
              5,569,633
              
              
              
              3,006,644Investing
      activities:Payments
      received on physician affiliate loans
              
              
              283,450
              
              
              
              171,025
              
              
              
              16,468Additions
      to property and equipment, net of minor disposals
              
              
              (4,333,087
              )
              
              
              (2,520,735
              )
              
              
              (5,196,967
              )Payment
      of employment contract liability
              
              
              ---
              
              
              
              ---
              
              
              
              (1,960,000
              )Payment
      dissenting merger shareholders
              
              
              ---
              
              
              
              ---
              
              
              
              (2,100
              )Acquisition
      of dialysis centers
              
              
              (9,167,568
              )
              
              
              (2,173,134
              )
              
              
              (4,161,304
              )Distributions
      from affiliate
              
              
              ---
              
              
              
              ---
              
              
              
              163,821Purchase
      of minority interests in subsidiaries
              
              
              (25,000
              )
              
              
              (345,000
              )
              
              
              ---Consolidation
      of former affiliate
              
              
              ---
              
              
              
              ---
              
              
              
              149,225Other
      assets
              
              
              80,001
              
              
              
              (161,528
              )
              
              
              (1,264
              )Net
      cash used in investing activities
              
              
              (13,162,204
              )
              
              
              (5,029,372
              )
              
              
              (10,992,121
              )Financing
      activities:Line
      of credit borrowings
              
              
              12,000,000
              
              
              
              2,550,000
              
              
              
              8,000,000Line
      of credit repayments
              
              
              (4,650,000
              )
              
              
              (4,100,000
              )
              
              
              (500,000
              )Payments
      on other long-term debt
              
              
              (65,621
              )
              
              
              (132,906
              )
              
              
              (339,582
              )Exercise
      of stock options
              
              
              ---
              
              
              
              ---
              
              
              
              383,249Minority
      investment in Toledo subsidiary
              
              
              ---
              
              
              
              750,000
              
              
              
              ---Capital
      contributions by subsidiaries’ minority members
              
              
              450,000
              
              
              
              78,107
              
              
              
              1,301,884Distribution
      to subsidiary minority members
              
              
              (1,797,860
              )
              
              
              (729,211
              )
              
              
              (306,062
              )Net
      cash provided by (used in) financing activities
              
              
              5,936,519
              
              
              
              (1,584,010
              )
              
              
              8,539,489Increase
      (decrease) in cash and cash equivalents
              
              
              4,095,180
              
              
              
              (1,043,749
              )
              
              
              554,012Cash
      and cash equivalents at beginning of year
              
              
              2,447,820
              
              
              
              3,491,569
              
              
              
              2,937,557Cash
      and cash equivalents at end of year
              
              $
              6,543,000
              
              
              $
              2,447,820
              
              
              $
              3,491,569Supplemental
      disclosure of cash flow information:Interest
      paid
              
              $
              460,000
              
              
              $
              743,000
              
              
              $
              395,000Income
      taxes paid (refunded)
              
              
              1,541,000
              
              
              
              1,496,000
              
              
              
              (675,000
              )Share
      payment (87,500 options exercised; 27,205 shares paid)for
      stock option exercises
              
              
              ---
              
              
              
              ---
              
              
              
              351,000Increase
      in additional paid-in capital from exercise of non-qualified
      stock options
              
              
              --
              
              
              
              ---
              
              
              
              31,000
 See notes
to consolidated financial statements.
 F-7
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Business
 
 We are primarily engaged in kidney
dialysis operations which include outpatient hemodialysis services, home
dialysis services, inpatient dialysis services and ancillary services associated
with dialysis treatments.  We own 37 operating dialysis centers
located in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and
Virginia and have agreements to provide inpatient dialysis treatments to 11
hospitals.  Our medical products operations are not a significant
component of our operations with operating revenues of $1,161,000 in 2008,
$1,078,000 in 2007 and $891,000 in 2006 (1.3% for 2008 and 1.4% for 2007 and
2006 of operating revenues) and operating income of $179,000 in 2008, $186,000
in 2007 and $69,000 in 2006 (2.9%, 3.1% and 1.2% respectively of operating
income).
 
 Medical
Service Revenue
 
 Our
revenues by payor are as follows:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Medicare
              
              
              46
              %
              
              
              49
              %
              
              
              52
              %Medicaid
      and comparable programs
              
              
              8
              
              
              
              8
              
              
              
              9Hospital
      inpatient dialysis services
              
              
              4
              
              
              
              4
              
              
              
              3Commercial
      insurers and other private payors
              
              
              42
              
              
              
              39
              
              
              
              36100
              %
              
              
              100
              %
              
              
              100
              %
 
 Our sources of revenue (in thousands)
are as follows:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Outpatient
      hemodialysis services
              
              $
              46,348
              
              
              
              54
              %
              
              $
              39,880
              
              
              
              55
              %
              
              $
              32,856
              
              
              
              54
              %Home
      and peritoneal dialysis services
              
              
              4,189
              
              
              
              5
              
              
              
              3,736
              
              
              
              5
              
              
              
              3,625
              
              
              
              6Inpatient
      hemodialysis services
              
              
              3,109
              
              
              
              4
              
              
              
              2,897
              
              
              
              4
              
              
              
              2,191
              
              
              
              3Ancillary
      services
              
              
              32,030
              
              
              
              37
              
              
              
              26,658
              
              
              
              36
              
              
              
              22,467
              
              
              
              37$
              85,676
              
              
              
              100
              %
              
              $
              73,171
              
              
              
              100
              %
              
              $
              61,139
              
              
              
              100
              %
  Consolidation
 
 The consolidated financial statements
include the accounts of Dialysis Corporation of America and its subsidiaries,
collectively referred to as the “company.”  Intercompany accounts and
transactions have been eliminated in consolidation.
  F-8
 
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
  NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Our
Toledo, Ohio subsidiary, which was 40% owned until December, 2006, has been
consolidated since August, 2006 due to our taking control of this
facility.  This subsidiary was previously accounted for using the
equity method of accounting.  In April, 2007, this subsidiary sold a
30% minority interest to the medical directors of the facility for total
consideration of $750,000 and non-compete agreements.  This
transaction resulted in a charge against capital of approximately $123,000 due
to a decrease in our equity position in that subsidiary.
 
 Estimates
 
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America 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.
 
 Our principal estimates are for
estimated uncollectible accounts receivable as provided for in our allowance for
doubtful accounts, estimated useful lives of depreciable assets, and estimates
for patient revenues from non-contracted payors.  Our estimates are
based on historical experience and assumptions believed to be reasonable given
the available evidence at the time of the estimates.  Actual results
could differ from those estimates.
 
 Vendor
Volume Discounts
 
 We have contractual arrangements with
certain vendors pursuant to which we receives discounts based on volume of
purchases.  These discounts are recorded in accordance with paragraph
4 of Emerging Issues Task Force Issue No. 02-16 (“EITF 02-16”) “Accounting by a
Customer for Certain Consideration Received from a Vendor” as a reduction in
inventory costs resulting in reduced costs of sales as the related inventory is
consumed.
 
 Government
Regulation
 
 A substantial portion of our revenues
are attributable to payments received under Medicare, which is supplemented by
Medicaid or comparable benefits in the states in which we operate.
 
 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.  We
believe we are in compliance with all applicable laws and regulations and are
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 interpretation as well as significant regulatory action
including fines, penalties, and exclusions from the Medicare and Medicaid
programs.
  F-9
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
  NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Cash
and Cash Equivalents
 
 We consider 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.  Although
cash and cash equivalents are largely not federally insured, the credit risk
associated with these deposits that typically may be redeemed upon demand is
considered low due to the high quality of the financial institutions in which
they are deposited.
 
 Credit
Risk
 
 Our primary concentration of credit
risk is with accounts receivable, which consist of amounts owed by governmental
agencies, insurance companies and private patients.  Combined
receivables from Medicare and Medicaid comprised 47% of receivables at December
31, 2008 and 49% December 31, 2007, respectively.
 
 Inventories
 
 Inventories are valued at the lower of
cost (first-in, first-out method) or market value and consist of supplies used
in dialysis treatments and the finished goods inventory of our medical products
division.
 
 Accrued
Expenses
 
 Accrued expenses are comprised as
follows:
 
 December 31,2008
              
              
              2007Accrued
      compensation
              
              $
              1,486,042
              
              
              $
              1,342,122Excess
      insurance liability
              
              
              4,687,512
              
              
              
              2,789,055Health
      insurance premiums payable
              
              
              340,851
              
              
              
              687,031Other
              
              
              970,999
              
              
              
              1,343,380$
              7,485,404
              
              
              $
              6,161,588
 
 Excess insurance liability represents
amounts paid by insurance companies in excess of the amounts we believe that we
earned from the associated treatments.  We communicate with the payors
regarding these amounts, which can result from duplicate payments, payments in
excess of contractual agreements, payments as primary when payor is secondary,
and underbillings by us based on estimated fee schedules.  These
amounts remain in excess insurance liability until resolution.  We
identified approximately $1,113,000 of the excess insurance liability as of
December 31, 2008 and $726,000 as of December 31, 2007, as relating to duplicate
payments that will be refunded to the payers.  Approximately $553,000
for 2008 and $442,000 for 2007 of amounts determined to be nonrefundable that
had been included in excess insurance liability were recorded in medical
services revenues.
 
 We have a self-insured medical and
dental insurance plan administered by a third party administrator pursuant to
which we are responsible for claims and administrative fees.  There
was an estimated obligation payable of approximately $341,000 at December 31,
2008 and $687,000 at
  F-10
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 December
31, 2007 included in accrued expenses.  We had a deposit toward our
plan obligations of approximately $400,000 at December 31, 2007 included in
prepaid expenses and other current assets that was applied toward our plan
obligations during the first quarter of 2008.  There was no such
deposit at December 31, 2008.
 
 Vendor
Concentration
 
 There is only one supplier of
erythropoietin (EPO) in the United States.  This supplier and another
manufacturer received FDA approval for two alternative products available for
dialysis patients, which is indicated to be effective for a longer period than
EPO.  The alternative drugs also could be administered by the
patient’s physician.  Accordingly, the use of these drugs could reduce
our revenues from our current treatment of anemia, thereby adversely impacting
our revenues and profitability.  There are no other suppliers of any
similar drugs available to dialysis treatment providers.  Revenues
from the administration of EPO, which amounted to approximately $23,553,000 in
2008, $19,662,000 in 2007 and $16,830,000 in 2006, comprised 27% of medical
services revenues in each of 2008 and 2007 and 28% in 2006.
 
 Property
and Equipment
 
 Property and equipment is stated on the
basis of cost.  Depreciation is computed for book purposes by the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 34 years for buildings and improvements; 3 to 10 years for machinery,
computer and office equipment, and furniture; and 5 to 10 years for leasehold
improvements based on the shorter of the lease term or estimated useful life of
the property.  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 or loss is
recognized.
 
 Revenue
Recognition
 
 Net revenue is recognized as services
are rendered at the net realizable amount from Medicare, Medicaid, commercial
insurers and other third party payors.  We occasionally provide
dialysis treatments on a charity basis to patients who cannot afford to
pay.  The amount is not significant, and we do not record revenues
related to these charitable treatments.  Product sales are recorded
pursuant to stated shipping terms.
 
 Goodwill
 
 Goodwill represents cost in excess of
net assets acquired.  Pursuant to Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142), goodwill
and intangible assets with indefinite lives are not amortized but are reviewed
annually (or more frequently if impairment indicators are present) for
impairment after determination that no other long-lived assets have indicators
of impairment, which testing as of December 31, 2008, has indicated no
impairment for goodwill.
 
 F-11
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Deferred
Expenses
 
 Deferred expenses, except for deferred
loan costs, are amortized on the straight-line method over their estimated
benefit period with deferred loan costs amortized over the lives of the
respective loans.  Deferred expenses of approximately $663,000 at
December 31, 2008 and $207,000 at December 31, 2007 are included in other
assets.  Amortization expense was approximately $57,000 for 2008,
$36,000 for 2007 and $15,000 for 2006.
 
 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
 
 Pursuant to Statement of Financial
Accounting Standards No. 123 (revised), “Share-Based Payment” (SFAS 123R), we
measure compensation cost for stock award compensation arrangements based on
grant date fair value to be expensed ratably over the requisite vesting
period.  Stock compensation expense was approximately $97,000,
$159,000 and $275,000 2008, 2007 and 2006, respectively, with income tax
benefits for shares vesting during these periods of approximately $17,000,
$21,000 and $41,000, respectively.
 
 During February, 2008, the company
issued two incentive stock options with a total grant date value of
$199,200.  These stock options are being expensed over the four-year
vesting period with the expense relating to these options amounting to
approximately $42,000 for the year ended December 31, 2008, with no such expense
for the preceding year.  The fair value of these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions:  risk free interest rate of 2.73%; no dividend
yield; volatility factor of the expected market price of our common stock of
0.626 based on historical volatility for a period coinciding with the expected
option life; and an expected life of four years.  During April, 2007,
the company issued an incentive stock option with a total grant date value of
$329,000.  This stock option is being expensed over the four-year
vesting period with the expense relating to this option amounting to
approximately $82,000 for the year ended December 31, 2008 and $58,000 for the
preceding year.  The fair value of this option was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions:  risk free interest rate of 4.61%; no dividend yield;
volatility factor of the expected market price of our common stock of 0.666
based on historical volatility for a period coinciding with the expected option
life; and an expected life of four years.  As the above options are
incentive stock options, the related expense is not deductible for tax
purposes.
  F-12
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--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 our 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 measure of the fair value of our employee
stock options.
 
 Earnings
per Share
 
 Diluted earnings per share gives effect
to potential common shares that would be dilutive, such as stock options and
warrants, calculated using the treasury stock method and average market
price.
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Net
      income
              
              $
              2,844,115
              
              
              $
              3,086,322
              
              
              $
              3,049,196Weighted
      average shares outstanding
              
              
              9,579,837
              
              
              
              9,572,893
              
              
              
              9,484,926Weighted
      average shares outstanding
              
              
              9,579,837
              
              
              
              9,572,893
              
              
              
              9,484,926Shares
      issuable for employee stock awards and director fees
              
              
              25,492
              
              
              
              23,178
              
              
              
              17,701Weighted
      average shares diluted computation
              
              
              9,605,328
              
              
              
              9,596,071
              
              
              
              9,502,627Effect
      of dilutive stock options
              
              
              8,537
              
              
              
              11,601
              
              
              
              73,106Weighted
      average shares, as adjusted diluted computation
              
              
              9,613,866
              
              
              
              9,607,672
              
              
              
              9,575,733Earnings
      per share:Basic
              
              $
              .30
              
              
              $
              .32
              
              
              $
              .32Diluted
              
              $
              .30
              
              
              $
              .32
              
              
              $
              .32
 
 Other
(Expense) Income
 
 Non-operating:
 
 Other non-operating (expense) income is
comprised as follows:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Rental
      income
              
              $
              404,694
              
              
              $
              389,324
              
              
              $
              369,888Interest
      income
              
              
              87,078
              
              
              
              222,163
              
              
              
              193,429Interest
      expense
              
              
              (589,081
              )
              
              
              (756,671
              )
              
              
              (409,676
              )Other
              
              
              48,704
              
              
              
              105,547
              
              
              
              32,327Litigation
      settlement, net
              
              
              ---
              
              
              
              ---
              
              
              
              (85,000
              )Other
      (expense)income, net
              
              $
              (48,605
              )
              
              $
              (39,637
              )
              
              $
              100,968
 
 F-13
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued
 
 Estimated
Fair Value of Financial Instruments
 
 The carrying value of cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets and
accounts payable and accrued expenses in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments.  Debt approximates fair value since such instruments
either bear variable interest rates which approximate market or have interest
rates approximating those currently available to us for loans with similar terms
and maturities.
 
 Reclassification
 
 Certain prior year amounts have been
reclassified to conform with the current year’s presentation.
 
 New
Pronouncements
 
 In September, 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 157 (SFAS 157), “Fair Value Measurements.”  SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements.  SFAS 157 applies under other accounting
pronouncements that require fair value measurement in which the FASB concluded
that fair value was the relevant measurement, but does not require any new fair
value measurements.  We adopted SFAS 157 effective January 1, 2008,
except for the nonfinancial assets and liabilities that are subject to a
one-year deferral allowed by FASB Staff Position (FSP) FAS 157-2 (FSP FAS157-2),
“Effective Date of FASB Statement No. 157” issued February 12,
2008.  The standard applies to assets and liabilities that are carried
at fair value on a recurring basis.  FSP FAS157-2 delays the effective
date of SFAS 157 until fiscal years beginning after November 15, 2008 for
nonfinancial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis (at least
annually).  The adoption of SFAS 157 did not have a material effect on
our financial statements.  We are evaluating the impact SFAS 157 will
have on our financial statements beginning in fiscal 2009 as it relates to the
items subject to the one-year deferral allowed by FSP FAS 157-2.
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007) (SFAS 141R),
“Business Combinations.”  SFAS 141R expands the definitions of a
business and business combination and requires all assets and liabilities of an
acquired business (for full, partial and step acquisitions) to be recorded at
fair values, with limited exceptions.  SFAS 141R requires earn-outs
and other contingent consideration to be recorded at fair value on acquisition
date and contingencies to be recorded at fair value on acquisition date with
provision for subsequent remeasurement.  SFAS 141R requires
acquisitions costs to be expensed as incurred and generally requires
restructuring costs to be expensed in periods after the acquisition
date.  SFAS 141R requires amounts previously called “negative
goodwill” which result from a bargain purchase in which acquisition date fair
value of identifiable net assets acquired exceeds the fair value of
consideration transferred plus any noncontrolling interest in the acquirer to be
recognized in earnings as a gain attributable to the acquirer.  SFAS
141R is effective with the first annual reporting period beginning on or after
December 15, 2008.  We are evaluating the impact on our financial
statements of adopting SFAS 141R.
 
 F-14
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 160 (SFAS 160), “Noncontrolling
Interests in Consolidated Financial Statements,” an amendment of ARB
51.  SFAS 160 requires noncontrolling interests to be reported in the
equity section of consolidated financial statements and requires that
consolidated net income include the amounts attributable to both the parent and
the noncontrolling interests with disclosure on the face of the consolidated
income statement of net income attributable to the parent and to the
noncontrolling interests, with any losses attributable to the noncontrolling
interests in excess of the noncontrolling interests’ equity to be allocated to
the noncontrolling interest.  Calculation of earnings per share
amounts in the consolidated financial statements will continue to be based on
amounts attributable to the parent.  SFAS 160 is effective with the
first annual reporting period beginning on or after December 15,
2008.  Other than presentation differences, we do not expect SFAS160
to have a significant impact on our financial statements.
 
 NOTE
2--LONG-TERM DEBT
 
 Long-term
debt is as follows:
 
 December 31,2008
              
              
              2007Revolving
      line of credit
              
              $
              13,300,000
              
              
              $
              5,950,000Development
      loan secured by land and building
              
              
              495,292
              
              
              
              526,304Mortgage
      note secured by land and building
              
              
              554,506
              
              
              
              589,11514,349,798
              
              
              
              7,065,419Less
      current portion
              
              
              74,000
              
              
              
              56,000$
              14,275,798
              
              
              $
              7,009,419
 
 Pursuant to a December 3, 1999 loan
agreement through our subsidiary, DCA of Vineland, LLC, we obtained a $700,000
development loan currently secured by a mortgage on our real property in Easton,
Maryland.  In May 2006, the loan was modified to extend the maturity
date to May 2, 2026.  Monthly payments are $2,402 plus interest at
prime.  This loan had an outstanding principal balance of
approximately $495,000 at December 31, 2008 and $526,000 at December 31,
2007.
 
 In April,
2001, we obtained a $788,000 five-year mortgage through April, 2006, on our
building in Valdosta, Georgia.  We refinanced this mortgage in April,
2006 with the new mortgage having an April, 2011, maturity.  Interest
was at prime with a rate floor of 5.75% and a rate ceiling of 8.00% until
September 15, 2008 when the rate floor was revised to 5.00% and the rate ceiling
was revised to 7.50%.  As of May, 2006, payments are $6,000 including
principal and interest, with a final payment consisting of a balloon payment and
any unpaid interest due April, 2011.  The remaining principal balance
under this mortgage amounted to approximately $555,000 at December 31, 2008 and
$589,000 at December 31, 2007.
 
 The prime rate was 3.50% at December
31, 2008 and 7.25% at December 31, 2007.
  F-15
 
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
2--LONG-TERM DEBT--Continued
 
 Scheduled maturities of long-term debt
outstanding at December 31, 2008 are approximately:
 
 2009
              
              $
              74,0002010
              
              
              77,0002011
              
              
              13,379,0002012
              
              
              81,0002013
              
              
              84,000Thereafter
              
              
              655,000$
              14,350,000
 
 On October 24, 2005, we entered into a
three year, $15,000,000 revolving line of credit with a maturity date of October
24, 2008 which was extended for one year to October 24, 2009.  On
November 5, 2008, the line of credit was increased to $25,000,000 and extended
to November 4, 2011.  Each of our wholly-owned subsidiaries has
guaranteed this credit facility, as will any future wholly-owned
subsidiaries.  Further, the obligation under the revolving line of
credit is secured by our pledge of our ownership in our
subsidiaries.  The credit facility, which has provisions for both base
rate and LIBOR loans, is intended to provide funds for the development and
acquisition of new dialysis facilities, to meet general working capital
requirements, and for other general corporate purposes.  Up to
$3,000,000 has been allocated for the repurchase of company stock should
management determine to establish a stock repurchase program, provided the
company continues to be in compliance with the financial covenants of the credit
facility after giving effect to any such stock repurchase.  Borrowings
under the revolving line of credit accrue interest at the base rate for base
rate loans and the LIBOR rate for LIBOR loans plus an applicable margin, as
those terms are defined in the agreement.  The LIBOR rate applicable
to a LIBOR loan is determined by the interest period selected by the company for
that particular loan, which represents the duration of the loan.  We
have the right to convert a base rate loan to a LIBOR loan, and vice
versa.  The agreement contains customary reporting and financial
covenant requirements for this type of credit facility.  We are in
compliance with the requirements of this credit facility at December 31, 2008
and December 31, 2007.  We have $13,300,000 in outstanding borrowings
under our line of credit at December 31, 2008, consisting of three LIBOR loans
with one month terms.  The interest rate on the individual LIBOR loans
ranges from 3.50% to 4.9375% and includes LIBOR at issuance plus an applicable
margin of 3.0%.  The individual LIBOR loans outstanding at December
31, 2008 are renewable at the end of their respective one month
terms.
 
 Our two mortgage agreements contain
certain restrictive covenants that, among other things, limit the payment of
dividends, require lenders’ approval for a merger, sale of substantially all of
our assets, or other business combination to which we are a party, and require
maintenance of certain financial ratios.  The company was in
compliance with the debt covenants at December 31, 2008 and December 31,
2007.
 
 Effective
January 1, 2007, we adopted the provisions of FIN 48.  FIN 48
clarifies the accounting for uncertain tax positions in accordance with FASB
Statement No. 109, Accounting for Income Taxes and prescribes a recognition
threshold and measurement attribute criteria for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return.  The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  We evaluated our tax position in tax
returns filed, as well as
  F-16
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
  NOTE
3--INCOME TAXES
 
 tax
positions to be taken in future returns and the amounts comprising our deferred
tax assets.  The adoption of FIN 48 did not have a material impact on
our financial condition, results of operations or cash flows.
 
 We file
income tax returns in the U.S. federal jurisdiction and various state and local
jurisdictions.  Our federal income tax returns for 2004 through 2007
are open tax years.  State and local jurisdictions that remain subject
to examination range from 2003 to 2007.
 
 We may
from time to time be assessed interest or penalties by major tax jurisdictions,
although such assessments historically have been minimal and immaterial to our
financial results.  Our policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax
expense.
 
 The
income tax provision consists of the following income tax expense (benefit)
components:
 
 2008
              
              
              2007
              
              
              2006Current:Federal
              
              $
              931,000
              
              
              $
              1,238,000
              
              
              $
              1,970,000State
              
              
              378,000
              
              
              
              207,000
              
              
              
              410,000City
              
              
              39,000
              
              
              
              38,000
              
              
              
              37,0001,348,000
              
              
              
              1,483,000
              
              
              
              2,417,000Deferred:Federal
              
              
              540,000
              
              
              
              72,000
              
              
              
              (317,000
              )State
              
              
              (26,000
              )
              
              
              60,000
              
              
              
              (14,000
              )514,000
              
              
              
              132,000
              
              
              
              (331,000
              )$
              1,862,000
              
              
              $
              1,615,000
              
              
              $
              2,086,000
 
 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
our deferred tax liabilities and assets are as follows:
 
 December 31,2008
              
              
              2007Deferred
      tax liabilities:Depreciation
      and amortization
              
              $
              1,305,000
              
              
              $
              619,000Total
      deferred tax liabilities
              
              
              1,305,000
              
              
              
              619,000Deferred
      tax assets:Accrued
      expenses
              
              
              317,000
              
              
              
              256,000Bad
      debt allowance
              
              
              832,000
              
              
              
              700,000Startup
      costs and other intangibles
              
              
              30,000
              
              
              
              45,000Inventory
      costs capitalization
              
              
              36,000
              
              
              
              42,000Total
      deferred tax assets
              
              
              1,215,000
              
              
              
              1,043,000Net
      deferred tax liability
              
              $
              90,000
              
              
              $
              424,000
  F-17
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
3--INCOME TAXES--Continued
 
 No valuation allowance was recorded for
deferred tax assets at December 31, 2008 or December 31, 2007, due to our
anticipated prospects for future taxable income in an amount sufficient to
realize the deferred tax assets.
 
 As a result of our merger with our
former parent, we acquired a deferred tax asset of approximately $3,300,000,
representing tax benefits from our former parent’s net operating loss
carryforwards that we were able to utilize to satisfy income tax
liabilities.  We fully utilized the available net operating loss
carryforwards as of December 31, 2007.
 
 The
reconciliation of income tax attributable to income before income taxes computed
at the U.S. federal statutory rate is:
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Statutory
      tax rate (34%) applied to incomebefore
      income taxes, minority and other equity
                interest
      and equity in affiliate earnings
              
              $
              2,089,000
              
              
              $
              1,974,000
              
              
              $
              1,972,000Adjustments
      due to:State
      and city taxes, net of federal benefit
              
              
              275,000
              
              
              
              162,000
              
              
              
              295,000Previously
      unrecognized NOL carryforwards
              
              
              ---
              
              
              
              (239,000
              )
              
              
              ---Tax
      return accrual adjustment
              
              
              ---
              
              
              
              (84,000
              )
              
              
              ---Non-deductible
      items
              
              
              18,000
              
              
              
              14,000
              
              
              
              13,000Subsidiary
      minority ownership
              
              
              (584,000
              )
              
              
              (254,000
              )
              
              
              (271,000
              )Ownership
      in affiliate
              
              
              ---
              
              
              
              ---
              
              
              
              72,000Other
              
              
              64,000
              
              
              
              42,000
              
              
              
              5,000$
              1,862,000
              
              
              $
              1,615,000
              
              
              $
              2,086,000
  We have equity positions in 31
limited liability companies (“LLC’s”), and one limited partnership (“LP”) each
possessing a finite life, as well as ownership in 6 corporate
subsidiaries.  Based on their limited liability status, members are
not liable for the LLC’s and LP’s debts, liabilities, or
obligations.  Each LLC and LP has complied with the criteria for tax
treatment as a partnership.  As a result, taxable income or loss is to
be reported on each member’s respective tax returns.  Income and
losses attributable to our equity position in subsidiary LLC’s and LP’s are
included in our Consolidated Statements of Income with the minority interest in
the results of operations of subsidiary LLC’s and LP’s shown separately on the
Consolidated Statements of Income.  Income attributable to our equity
position in our 40% owned affiliate prior to the affiliate’s consolidation as a
subsidiary effective August 1, 2006, is shown separately on the company’s
Consolidated Statements of Income.
 
 The exercise of 10,000 non-qualified
stock options during 2006 resulted in a tax deduction of $84,000, corresponding
to the difference in the market value of the shares obtained on exercise and the
exercise price of the options.  The reduction in income taxes payable
of approximately $31,000 resulted in a corresponding increase in additional
paid-in capital.
  F-18
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
4--OTHER RELATED PARTY TRANSACTIONS
 
 We have constructed dialysis facilities
which we sold upon completion to entities in which medical directors of the
related facilities have an interest.  Our subsidiaries that operate
those dialysis facilities lease the facilities from the purchasers on terms
which are as favorable as could be obtained from unaffiliated
parties.  The cost of the land and construction costs for any such
facilities were included in prepaid expenses and other current assets until the
sale of the facilities.
 
 NOTE
5--STOCK OPTIONS AND STOCK AWARDS
 
 In September, 2001, the board of
directors granted five-year options exercisable at $.75 per share through
September 5, 2006, to certain officers, directors and key
employees.  100,000 options were exercised in March, 2006 and the
balance of 5,000 options were exercised in April, 2006 with the company
receiving cash payments totaling $78,750 for the exercise price.
 
 In June, 2003, the board of directors
granted to an officer a five-year option for 50,000 shares exercisable at $1.80
per share through June 3, 2008.  These options were exercised in
March, 2006 with the company receiving a $90,000 cash payment for the exercise
price.
 
 In August, 2003, the board of directors
granted a three-year option to a director for 10,000 shares exercisable at $2.25
per share through August 18, 2006.  These options were exercised in
June, 2006 with the company receiving a $22,500 cash payment.
 
 In January, 2004, the board of
directors granted a five year option to an employee exercisable at $3.09 per
share through January 12, 2009.  5,000 options were exercised in
January, 2006 with the company receiving a cash payment of $15,425 for the
exercise price, and 10,000 options were exercised in June, 2006 with the company
receiving a $30,850 cash payment.
 
 In June, 2004, the board of directors
granted 160,000 stock options to officers, directors and a key employee
exercisable at $4.02 per share through June 6, 2009.  25,000 options
were exercised in March, 2006 with the company receiving a $100,500 cash payment
for the exercise price.  An additional 87,500 options were exercised
in March, 2006 with an exercise price of $351,750 that was satisfied through
payment of 27,205 shares of our stock.  7,500 options were exercised
in May and June, 2006 and 3,750 options were exercised in August, 2006 with the
company receiving a total of $45,225 cash payments.  There are 18,750
options outstanding under this grant.
 
 On June 8, 2006, our shareholders
approved an amendment to our stock option plan to allow for the grant of stock
awards in addition to options.  The employment agreement of Stephen W.
Everett, our President, CEO and a director, contains provisions for the receipt
of up to 40,000 shares of our common stock, pursuant to which 10,000 shares were
issued during 2006 resulting in approximately $100,000 stock compensation
expense, with an additional up to 10,000 performance based shares for each of
2006, 2007 and 2008 not earned.
 
 We granted stock awards of 1,000 shares
to each of our independent directors in February, 2006 with the shares vesting
in 250 share increments for each director at the end of each quarter of 2006,
resulting in approximately $38,000 stock compensation expense.
 
 F-19
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
5--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 On June 27, 2006, we granted stock
awards of 64,000 shares to officers and key employees with the awards vesting in
equal yearly increments over four years commencing December 31,
2006.  One of the June, 2006 stock awards for 30,000 shares, which
contained performance criteria, was cancelled in November, 2006 upon resignation
of the officer.  8,500 of the June, 2006 stock awards vested during
2006 resulting in $94,180 stock compensation expense with the related shares
being issued during the first quarter of 2007.  One of the June, 2006
stock awards for 8,000 shares was cancelled in July, 2007 upon resignation of
the employee and the remaining 6,000 shares did not vest.  6,500 of
the June, 2006 stock awards vested during each of 2007 and 2008 resulting in
approximately $72,000 stock compensation expense each year with the related
shares being issued during the first quarter of 2008 and the first quarter of
2009, respectively.
 
 In November, 2006, we entered a
six-month contract with an individual to serve as our Chief Operating Officer
for which the compensation was 10,000 shares of our common stock to be earned
over the six month period, with 3,333 shares earned during 2006, resulting in
approximately $44,000 stock compensation expense and the remaining 6,667 shares
earned during 2007 with approximately $87,000 stock compensation
expense.
 
 In April, 2007, the board of directors
granted a five-year 50,000 share option to our newly retained Vice President of
Operations, exercisable at $12.18 per share through April 15,
2012.  The option vests in equal increments of 12,500 shares every 12
months commencing April 15, 2008.  The grant date fair value of
$329,000 is being expensed over the five-year vesting period with approximately
$58,000 expense recorded during 2007 and $82,000 expense recorded during
2008.
 
 On January 10, 2008, the board of
directors granted stock awards for 13,500 shares to non-executive management
personnel with the awards to vest over four years in 25% equal increments
commencing on January 9, 2009.  One award for 1,000 shares was
cancelled due to resignation of an employee, leaving awards for 12,500 shares
outstanding for which approximately $25,000 stock compensation expense was
recorded during 2008.
 
 On February 29, 2008, the board of
directors granted a five year option to our newly appointed Chief Financial
Officer for 50,000 shares and a five year option to a key employee for 10,000
shares, each option exercisable at $12.18 through February 28,
2013.  Each of the options vests in equal increments totaling 15,000
shares every 12 months commencing February 28, 2009.  The grant date
fair value of $199,200 is being expensed over the four-year vesting period with
approximately $42,000 expense recorded during 2008.
 
 F-20
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
5--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 On September 23, 2008, the company
filed a registration statement on Form S-8 covering 15,000 shares issuable under
the June, 2004 options, and all the shares issuable under the April, 2007 and
February, 2008 options.
 
 A summary of our stock option activity
and related information for the years ended December 31 follows:
 
 
 2008
              
              
              2007
              
              
              2006Weighted
                Average
              
              
              
              
              
              Weighted
                Average
              
              
              
              
              
              Weighted
                AverageOptions
              
              
              Exercise Price
              
              
              Options
              
              
              Exercise Price
              
              
              Options
              
              
              Exercise PriceOutstanding-beginning
      of year
              
              
              68,750
              
              
              $
              9.95
              
              
              
              18,750
              
              
              $
              4.02
              
              
              
              322,500
              
              
              $
              2.51Granted
              
              
              60,000
              
              
              $
              12.18
              
              
              
              50,000
              
              
              $
              12.18
              
              
              
              ---Cancellations
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              ---Exercised
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              (303,750
              )
              
              $
              2.42Expired
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              ---Outstanding-end
      of year
              
              
              128,750
              
              
              
              
              
              
              
              68,750
              
              
              
              
              
              
              
              18,750Outstanding:February
      2008 options
              
              
              60,000
              
              
              $
              12.18
              
              
              
              ---
              
              
              
              
              
              
              
              ---April
      2007 options
              
              
              50,000
              
              
              $
              12.18
              
              
              
              50,000
              
              
              $
              12.18
              
              
              
              ---June
      2004 options
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.02128,750
              
              
              
              
              
              
              
              68,750
              
              
              
              
              
              
              
              18,750Outstanding
      and exercisable
                end
      of year:April
      2007 options
              
              
              12,500
              
              
              $
              12.18
              
              
              
              ---
              
              
              
              
              
              
              
              ---June
      2004 options
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.0231,250
              
              
              
              
              
              
              
              18,750
              
              
              
              
              
              
              
              18,750Weighted-average
      fair value of
                options
      granted during the year
              
              $
              3.32
              
              
              
              
              
              
              $
              6.58
 
 The remaining contractual life at
December 31, 2008 is 0.4 years for the June, 2004 options, 3.3 years for the
April, 2007 options, and 4.2 years for the February, 2008 options.
 
 The total exercise price for stock
options exercised during 2006 was approximately $735,000 compared to a total
stock value on the dates of exercises of approximately $3,923,000, resulting in
an intrinsic value on these exercises of $3,188,000.  There were no
options exercised during 2007 or 2008.
 
 F-21
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
5--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 A summary
of information on our stock compensation and nonvested shares for the years
ended December 31 follows:
 
 2008
              
              
              2007
              
              
              2006Total
              
              
              Weighted
                Average
              
              
              
              
              
              Total
              
              
              Weighted
                Average
              
              
              
              
              
              Total
              
              
              Weighted
                AverageShares
              
              
              Fair Value
              
              
              Fair Value
              
              
              Shares
              
              
              Fair Value
              
              
              Fair Value
              
              
              Shares
              
              
              Fair Value
              
              
              Fair ValueNonvested-beginning
      of year:Issued
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---
              
              
              
              6,667
              
              
              $
              87,204
              
              
              $
              13.08
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Unissued
              
              
              23,000
              
              
              
              244,140
              
              
              $
              10.61
              
              
              
              45,500
              
              
              
              482,740
              
              
              $
              10.61
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---23,000
              
              
              $
              244,140
              
              
              $
              10.61
              
              
              
              52,167
              
              
              $
              569,944
              
              
              $
              10.93
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Shares
      granted:Issued
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              22,250
              
              
              $
              259,070
              
              
              $
              11.64Unissued
              
              
              13,500
              
              
              
              109,755
              
              
              $
              8.13
              
              
              
              ---
              
              
              
              ---
              
              
              
              
              
              
              
              94,750
              
              
              
              1,018,810
              
              
              $
              10.7513,500
              
              
              $
              109,755
              
              
              $
              8.13
              
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              117,000
              
              
              $
              1,277,880
              
              
              $
              10.92Shares
      vesting:Issued
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              (6,667
              )
              
              $
              (87,204
              )
              
              $
              13.08
              
              
              
              (15,583
              )
              
              $
              (171,866
              )
              
              $
              11.03Unissued
              
              
              (6,500
              )
              
              
              (72,020
              )
              
              $
              11.08
              
              
              
              (6,500
              )
              
              
              (72,020
              )
              
              $
              11.08
              
              
              
              (9,250
              )
              
              
              (103,570
              )
              
              $
              11.20(6,500
              )
              
              $
              (72,020
              )
              
              $
              11.08
              
              
              
              (13,167
              )
              
              $
              (159,224
              )
              
              $
              12.09
              
              
              
              (24,833
              )
              
              $
              (275,436
              )
              
              $
              11.09Shares
      forfeited:Issued
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Unissued
              
              
              (11,000
              )
              
              
              (108,230
              )
              
              $
              9.84
              
              
              
              (16,000
              )
              
              
              (166,580
              )
              
              $
              10.41
              
              
              
              (40,000
              )
              
              
              (432,500
              )
              
              $
              10.81(11,000
              )
              
              $
              (108,230
              )
              
              $
              9.94
              
              
              
              (16,000
              )
              
              
              (166,580
              )
              
              $
              10.41
              
              
              
              (40,000
              )
              
              
              (432,500
              )
              
              $
              10.81Nonvested-end
      of year:Issued
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              6,667
              
              
              $
              87,204
              
              
              $
              13.08Unissued
              
              
              19,000
              
              
              
              173,645
              
              
              $
              10.61
              
              
              
              23,000
              
              
              
              244,140
              
              
              $
              10.61
              
              
              
              45,500
              
              
              
              482,740
              
              
              $
              10.6119,000
              
              
              $
              173,645
              
              
              $
              10.61
              
              
              
              23,000
              
              
              $
              244,140
              
              
              $
              10.61
              
              
              
              52,167
              
              
              $
              569,944
              
              
              $
              10.93Weighted
      average period over which nonvestedcompensation
      cost expected to be recognized:Issued
      shares
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0.33 yearsUnissued
      shares:Performance
      based
              
              
              
              
              
              
              
              
              
              
              1.00 years
              
              
              
              
              
              
              
              
              
              
              2.00 yearsNonperformance
      based
              
              
              1.01 years
              
              
              2.00 years
              
              
              
              
              
              
              
              
              
              
              3.00 yearsOverall
              
              
              1.01 years
              
              
              1.09 years
              
              
              
              
              
              
              
              
              
              
              1.64 years
  F-22
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
5--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 The total grant date fair value of
stock awards vesting during 2008, 2007 and 2006 was approximately $72,000,
$159,000 and $275,000, respectively compared to a total stock value on the dates
of vesting of approximately $46,000, $140,000 and $289,000, resulting in fair
value differentials of $(26,000), ($19,000) and $14,000.
 
 As of December 31, 2008, we have
755,404 shares reserved for issuance, including 60,000 shares for the February,
2008 options.  50,000 shares for the April, 2007 options, 18,750
shares for the June, 2004 options, and 30,000 for outstanding non-vested and
performance-based stock awards.  All options were issued at fair
market value on date of grant.
 
 NOTE
6--COMMITMENTS
 
 We have leases on facilities housing
our dialysis, administrative and medical operations, as well as equipment
leases.  Total rent expense was approximately $2,676,000, $2,315,000
and $1,727,000 for the years ended December 31, 2008, 2007, and 2006,
respectively.  The aggregate lease commitments at December 31, 2008
for our non-cancelable operating leases with a term of one year or more are
approximately:
 
 2009
              
              $
              2,722,0002010
              
              
              2,441,0002011
              
              
              2,128,0002012
              
              
              1,892,0002013
              
              
              1,361,000Thereafter
              
              
              2,975,000$
              13,519,000
  We have a 401(k) savings plan (salary
deferral plan) with eligibility requirements of one year of service and an age
requirement of at least 21 years.  Our 401(k) plan allows employees,
in addition to regular employee contributions, to elect to have a portion of
bonus payments contributed.  As an incentive to save for retirement,
we will match 10% of an employee’s contribution resulting from any bonus paid
during the year and may make a discretionary contribution with the percentage of
any discretionary contribution to be determined each year with only employee
contributions up to 6% of annual compensation considered when determining
employer matching.  To date, employer matching expense has been
minimal.
 
 NOTE
7--ACQUISITIONS
 
 Our various acquisitions were made
either on the basis of existing profitability or expectation of future
profitability for the interest acquired based on our analysis of the potential
for each acquisition, and the value of the relationship with the physician
affiliated with the selling entity.  Each acquisition was intended to
either strengthen our market share within a geographic area or provide us with
the opportunity to enter a new geographic area and market.  Management
also reviews the purchase price and
 
 F-23
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
7--ACQUISITIONS--Continued
 
 any
resulting goodwill based on established current per patient valuations for
dialysis centers.  Also considered are the synergistic effects of a
potential acquisition, including potential costs integration and the effect of
the acquisition on our overall valuation.  Certain of the acquisition
transactions were of minority interests held by medical directors of certain of
our dialysis facilities.
 
 These transactions resulted in an
aggregate of approximately $16,492,000 of goodwill, representing the excess of
the purchase price over the fair value of the net assets acquired, including net
goodwill of $7,916,000 from 2008 acquisitions as further described
below.  The goodwill is being amortized for tax purposes over a
15-year period with the exception of $1,358,000 goodwill from a stock
acquisition which is not amortizable for tax purposes.
 
 During the first quarter of 2006, we
acquired a Virginia dialysis center and a Maryland company with two dialysis
centers.  These transactions resulted in approximately $326,000 of
goodwill amortizable over 15 years for tax purposes.  We determined
there is no impairment of goodwill.  In December, 2006, we acquired
the remaining 60% interest in our 40% owned Toledo, Ohio dialysis facility
pursuant to a put option valued at $3,200,000 resulting in goodwill of
approximately $2,707,000 amortizable over 15 years for tax
purposes.  We determined there is no impairment of
goodwill.
 
 During the first quarter of 2007 we
acquired the assets of an Ohio dialysis center and a Pennsylvania dialysis
center.  These transactions resulted in approximately $1,705,000 of
goodwill amortizable over 15 years for tax purposes.  We determined
there is no impairment of goodwill.
 
 Effective December 1, 2007, we
increased our ownership in DCA of West Baltimore, LLC from 60% to 75% by
acquiring a portion of the existing minority interest for $345,000 resulting in
goodwill of approximately $190,000 amortizable over 15 years for tax
purposes.  We determined there is no impairment of
goodwill.
 
 Pursuant to a call option which was
exercised on January 11, 2007, one of our subsidiaries acquired, effective
January 1, 2008, the assets of a Georgia dialysis facility that we had been
managing pursuant to a management services agreement.  Effective
January 1, 2008, we have an 80% interest in the facility, which is operated
through our subsidiary with the former owner having a 20%
interest.  The purchase price included the 20% minority interest and
approximately $2,541,000, one half of which was paid at closing with the
remaining portion subject to a one year promissory note payable to the seller
with interest at prime plus 1% which was paid in December, 2008.  This
transaction resulted in approximately $2,311,000 of goodwill amortizable over 15
years for tax purposes.  We determined there is no impairment of
goodwill.
 
 F-24
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
7--ACQUISITIONS--Continued
 
 Effective March 1, 2008, we acquired
the 20% minority interest in DCA of Chesapeake, LLC and DCA of North Baltimore,
LLC for $25,000.  This transaction resulted in a reduction of $159,000
in the existing goodwill on these subsidiaries.
 
 On December 31, 2008, we acquired a
Maryland dialysis center for approximately $6,627,000, including acquisition
costs resulting in approximately $5,715,000 of goodwill, the excess of the net
purchase price over the estimated fair value of net assets acquired, including
the valuation of a ten year non-competition agreement that will be amortized
over the life of the agreement.  The goodwill is amortizable for tax
purposes over 15 years.  We determined there is no impairment of
goodwill.  The initial allocation of purchase cost at fair value was
based upon available information and will be finalized as any contingent
purchase amounts are resolved and estimated fair values of assets are
finalized.  We will begin recording the results of operations for the
acquired company as of January 1, 2009.
 
 The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition for the December, 2008 Maryland acquisition:
 
 Inventory
      and other current assets
              
              $
              134,000Property,
      plant and equipment,
              
              
              365,000Intangible
      assets
              
              
              413,000Goodwill
              
              
              5,715,000Net
      assets acquired
              
              $
              6,627,000
  Pro forma results of operations as if
the Maryland acquisition had completed as of January 1, 2006 are as follows (in
thousands except per share data):
 
 Year Ended December 31,2008
              
              
              2007
              
              
              2006Operating
      revenues
              
              $
              91,998
              
              
              $
              78,967
              
              
              $
              66,067Net
      income
              
              $
              2,932
              
              
              $
              3,116
              
              
              $
              2,999Earnings
      per share:Basic
              
              $
              .31
              
              
              $
              .33
              
              
              $
              .32Diluted
              
              $
              .30
              
              
              $
              .32
              
              
              $
              .31
 
 NOTE
8--LOAN TRANSACTIONS
 
 The company has and may continue to
provide funds in excess of capital contributions subject to financing agreements
with our subsidiaries to meet working capital requirements of our dialysis
facility subsidiaries, usually until they become self-sufficient.  The
operating agreements for the subsidiaries provide for cash flow and other
proceeds to first pay any such financing, exclusive of any tax payment
distributions.  Minority members of the subsidiaries would be
responsible for their respective portion of the financing according to their
ownership interests.
  F-25
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008
 NOTE
9--QUARTERLY FINANCIAL INFORMATION (Unaudited)
 
 The following summarizes certain
quarterly operating data (in thousands except per share data):
 
 Year Ended December 31,
2008March 31
              
              
              June 30
              
              
              Sept. 30
              
              
              Dec.31
              
              
              TotalNet
      sales
              
              $
              20,485
              
              
              $
              20,836
              
              
              $
              21,860
              
              
              $
              23,656
              
              
              $
              86,837Gross
      profit
              
              
              7,967
              
              
              
              8,000
              
              
              
              8,896
              
              
              
              9,862
              
              
              
              34,725Net
      income
              
              
              449
              
              
              
              663
              
              
              
              875
              
              
              
              857
              
              
              
              2,844Earnings
      per shares:Basic
              
              $
              .05
              
              
              $
              .07
              
              
              $
              .09
              
              
              $
              .09
              
              
              $
              .30Diluted
              
              $
              05
              
              
              $
              .07
              
              
              $
              .09
              
              
              $
              .09
              
              
              $
              .30
 
 Year Ended December 31,
2007March 31
              
              
              June 30
              
              
              Sept. 30
              
              
              Dec.31
              
              
              TotalNet
      Sales
              
              $
              16,828
              
              
              $
              18,418
              
              
              $
              19,092
              
              
              $
              19,911
              
              
              $
              74,249Gross
      profit
              
              
              6,282
              
              
              
              7,342
              
              
              
              7,762
              
              
              
              8,017
              
              
              
              29,403Net
      income
              
              
              383
              
              
              
              753
              
              
              
              927
              
              
              
              1,023
              
              
              
              3,086Earnings
      per shares:Basic
              
              $
              .04
              
              
              $
              .08
              
              
              $
              .10
              
              
              $
              .11
              
              
              $
              .32Diluted
              
              $
              .04
              
              
              $
              .08
              
              
              $
              .10
              
              
              $
              .11
              
              
              $
              .32
 
 Since the computation of earnings per
share is made independently for each quarter using the treasury stock method,
the total of four quarters’ earnings do not necessarily equal earnings per share
for the year.
 
 F-26
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To The
Board of Directors and Shareholders of
 Dialysis
Corporation of America
 
 Our
report on our audit of the basic consolidated financial statements of Dialysis
Corporation of America and subsidiaries appears on page F-2.  That
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The supplemental schedule II is
presented for purposes of complying with the Securities and Exchange
Commission’s Rules and Regulations under the Securities Exchange Act of 1934 and
is not otherwise a required part of the basic consolidated financial
statements.  Such information has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements,
and in our opinion, is fairly stated in all material respects in relation to the
basic consolidated financial statements taken as a whole.
 
 MSPCCertified
      Public Accountants and Advisors,
P.C.
 
 
 Cranford,
New Jersey
 February
27, 2009
 
 F-27
 
 Schedule
II - Valuation and Qualifying Accounts
 Dialysis
Corporation of America, Inc. and Subsidiaries
 December
31, 2008
 
 COL.
      A
              
              COL.
      B
              
              
              COL.
      C
              
              COL.
      D
              
              
              COL.
      EClassification
              
              Balance
      at
                Beginning
                Of
      Period
              
              
              Additions
      (Deductions)
                Charged
      (Credited) to
                Cost
      and Expenses
              
              Additions
                Charged
      to
                Other
      Accounts
                Describe
              
              Other
      Changes
                Add
      (Deduct)
                Describe
              
              
              Balance
                at
      End of
                PeriodYEAR
      ENDED DECEMBER 31, 2008:Reserves
      and allowances deductedfrom
      asset accounts:Allowance
      for uncollectible accounts
              $
              2,114,000
              
              
              $
              2,088,000
              
              
              
              $
              (1,662,000
              )(1)
              
              $
              2,540,000Reserve
      for inventory obsolescence
              
              25,000
              
              
              
              ---
              
              
              
              
              (10,000
              )(2)
              
              
              15,000$
              2,139,000
              
              
              $
              2,088,000
              
              
              
              $
              1,672,000
              
              
              $
              2,555,000YEAR
      ENDED DECEMBER 31, 2007:Reserves
      and allowances deductedfrom
      asset accounts:Allowance
      for uncollectible accounts
              $
              2,512,000
              
              
              $
              1,665,000
              
              
              
              $
              (2,063,00
              )(1)
              
              $
              2,114,000Reserve
      for inventory obsolescence
              
              78,000
              
              
              
              (53,000
              )
              
              
              
              --
              
              
              
              25,000$
              2,590,000
              
              
              $
              1,612,000
              
              
              
              $
              (2,063,000
              )
              
              $
              2,139,000YEAR
      ENDED DECEMBER 31, 2006:Reserves
      and allowances deductedfrom
      asset accounts:Allowance
      for uncollectible accounts
              $
              1,886,000
              
              
              $
              1,199,000
              
              
              
              $
              (573,000
              )(1)
              
              $
              2,512,000Reserve
      for inventory obsolescence
              
              77,000
              
              
              
              1,000
              
              
              
              
              
              
              
              
              78,000$
              1,963,000
              
              
              $
              1,200,000
              
              
              
              $
              (573,000
              )
              
              $
              2,590,000
 
 (1)
              Uncollectible
      accounts written off, net of recoveries.(2)
              Net
      write-offs against inventory
reserves.
 
 F-28
 
 Exhibit
Index
 
 DIALYSIS
CORPORATION OF AMERICA
 Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 2008
  21
              Subsidiaries
      of the Company23.1
              Consent
      of MSPC, Certified Public Accountant and Advisors, P.C.31.1
              Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 193431.2
              Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 193432.1
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Rule
      13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350