**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
                1934





For
      the
      fiscal year ended December
      31, 2006




OR





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from ____________ to __________




Commission
      file number 0-8527




**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:


None





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




Title
                of each classcommon
                stock, $.01 par
                value




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 or a non-accelerated filer. Check One




Large
      accelerated filer o    Accelerated filer x    Non-accelerated filer 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





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the closing price at which the common
      equity was sold on June 30, 2006 was approximately
      $81,912,000.





As
      of
      March 14, 2007, the Company had 9,573,596 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.





Registrant’s
      Registration Statement on
      Form S-4/A-1 dated June 3, 2005, as amended August 10, 2005, Registration No.
      333-125515, Annex A to the Proxy Statement/Prospectus, incorporated in Part
      IV
      of this Annual Report.





Registrant’s
      Definitive Proxy
      Statement, Schedule 14A, dated April 26, 2006, Appendix A, incorporated in
      Part
      IV of this Annual Report.





Registrant’s
      former parent’s (Medicore,
      Inc.’s) Annual Report, Form 10-K for the year ended December 31, 1997, 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 2007 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, 2006




Page**PART
                  I**Cautionary
                Notice Regarding Forward-Looking
                Information
              
              1Item
                  1.
              
              Business
              
              2Item
                  1A.
              
              Risk
                  Factors
              
              22Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              30Item
                  2.
              
              Properties
              
              30Item
                  3.
              
              Legal
                  Proceedings
              
              32Item
                  4.
              
              Submission
                  of Matters to a Vote of Security
                  Holders
              
              32**PART
                  II**Item
                  5.
              
              Market
                  for the Registrant’s Common Equity, Related
                  Stockholder Matters andIssuer
                  Purchases of Equity Securities
              
              32Item
                  6.
              
              Selected
                  Financial Data
              
              35Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Resultsof
                  Operations
              
              36Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosure About Market
                  Risk
              
              50Item
                  8.
              
              Financial
                  Statements and Supplementary
                  Data
              
              50Item
                  9.
              
              Changes
                  in and Disagreements with Accountants on Accounting
                  and FinancialDisclosure
              
              50Item
                  9A.
              
              Controls
                  and Procedures
              
              50Item
                  9B.
              
              Other
                  Information
              
              52


i




Page**PART
                  III**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate
                  Governance
              
              52Item
                  11.
              
              Executive
                  Compensation
              
              52Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and
                  Management andRelated
                  Stockholder Matters
              
              53Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              53Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              53**PART
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              54Signatures
              
              
              
              58




ii


**Part
      I**




**Cautionary
      Notice Regarding Forward-Looking
      Information**





The
      statements contained in this annual report on Form 10-K dated March 15, 2007
      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, market and business conditions,
      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 22 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**





We
      are a
      Florida corporation organized in 1976. We develop and operate 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 operate 34 outpatient dialysis facilities including
      an
      unaffiliated center in Georgia, which we manage pursuant to a management
      services agreement. Pursuant to the exercise of a call option held by one of
      our
      subsidiaries, we are acquiring the assets of this center through that subsidiary
      which will operate the facility and in which we will have an 80% interest.
      See
      Note 7 and Note 17 to “Notes to Consolidated Financial Statements.” During 2006,
      we acquired three dialysis centers, one in Virginia and two in Maryland, as
      well
      as all of the interest of an Ohio facility in which we were previously the
      minority owner, and we opened three new dialysis centers, one in Georgia, one
      in
      Pennsylvania and one in South Carolina. We are in the process of developing
      two
      new centers, one each in Ohio and South Carolina. Subsequent to the completion
      of the company’s merger with Medicore, Inc., its former parent in September,
      2005, the company also engages 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 SEC, press releases, corporate
      profiles and corporate governance materials. We also make those documents
      available to shareholders free of charge upon request.




**General**





Management
      believes the company distinguishes itself on the basis of quality patient care,
      and a patient-focused, courteous, highly trained professional staff. In addition
      to outpatient facilities, we provide acute inpatient dialysis treatments that
      are conducted under contractual relationships. Currently we have such
      relationships with ten hospitals and medical centers located in areas and
      states serviced by our outpatient dialysis facilities. 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 (54%, 52% and 46% of medical services revenue for 2006,
      2005 and 2004, respectively); (ii) home dialysis services (6%, 7%, and 7% of
      medical services revenue for 2006, 2005 and 2004, respectively); (iii) inpatient
      hemodialysis services for acute patient care provided through agreements with
      hospitals and medical centers (3%, 5% and 5% of medical services revenue for
      2006, 2005 and 2004, respectively);
      and (iv) ancillary services associated with dialysis treatments, primarily
      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), (37%, 36% and
      42% of medical services revenue for 2006, 2005 and 2004, respectively with
      EPO
      representing 28% of medical services revenue for each of 2006, 2005 and 2004).
      Dialysis is an ongoing and necessary therapy to sustain life for kidney dialysis
      patients. ESRD patients normally receive 156 dialysis treatments each year.





2


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. From
      commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
      composite rate was unchanged, and thereafter decreased over the years until
      January, 2000, when the rate was minimally increased by Congress, and further
      minimally increased in January, 2001. However, Congress approved a 1.6%
      composite rate increase for each of 2005 and 2006. For 2007, the drug add-on
      adjustment to the composite rate will increase .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 will remain the same for 2007. 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. 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. See under this Item 1, “Operations - Medicare Reimbursement” and
      Item 1A, “Risk Factors.” Commercial third-party reimbursement rates, which have
      increased as a percentage of our revenues over the last two years, are also
      susceptible to reduction. See “Operations - Medicare Reimbursement.” The
      inpatient dialysis service agreements for treating acute kidney disease are
      not
      subject to government fixed rates, but rather are negotiated with hospitals.
      Typically these rates are at least equivalent to or higher than the government
      fixed rates on a per treatment basis.





**Dialysis
      Industry**





Kidneys
      act as a filter removing harmful substances and excess water from the blood,
      enabling the body to maintain proper and healthy balances of chemicals and
      water. Chronic kidney failure, 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 information published by CMS, the number of ESRD patients requiring
      dialysis treatments in the United States at December 31, 2004 was approximately
      336,000, and continues to grow at a 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 4,500 dialysis facilities, with a current annual cost for treating
      ESRD patients in the United States at approximately $32.5 billion at December,
      2004, of which Medicare accounted for approximately $20.1
      billion.




3





*ESRD
      Treatment Options*





Treatment
      options for ESRD patients include (1) hemodialysis, performed either at (i)
      an
      outpatient facility, or (ii) inpatient hospital facility, or (iii) the patient’s
      home; (2) peritoneal dialysis, either continuous ambulatory peritoneal dialysis
      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, and 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 staff
      physician’s instructions.





Home
      hemodialysis treatment requires the patient to be medically suitable and have
      a
      qualified assistant. Additionally, home hemodialysis requires training for
      both
      the patient and the patient’s assistant, which usually encompasses four to eight
      weeks.





A
      second
      home treatment for ESRD patients is peritoneal dialysis. There are several
      variations of peritoneal dialysis, the most common being 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 cycle
      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, another treatment option for patients with ESRD, 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 30 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. We acquired three centers in early 2006 as
      well
      as opening three new centers that we developed. We acquired two centers in
      the
      first quarter of 2007, and we are in the process of developing two new dialysis
      centers. 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 fiscal 2006, we experienced approximately 10%
      increase in dialysis treatments for our facilities that qualified to be included
      in same center growth compared to 3% 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, 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 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 our own dialysis facilities, or acquisition
      of existing outpatient dialysis centers. While an acquisition of existing
      outpatient dialysis centers is a faster means for achieving operational status
      at that center, 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
      six
      to eight months, and approximately 12 months or longer to generate income,
      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 $750,000
      to
      $1,000,000, including equipment and initial working capital requirements,
      depending on 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
      greater than that of a development. Nevertheless, we attempt to selectively
      identify potential acquisitions where the costs can be
      maintained within the range of development costs for a similar project. Any
      significant expansion, whether through acquisition or development of new
      facilities, is dependent upon existing funds or financing from other
      sources.





5


On
      October 24, 2005, we entered into a Credit Agreement with KeyBank National
      Association for a three year, $15,000,000 revolving credit facility intended
      to
      provide available funds for the development and acquisition of new dialysis
      facilities and for other general working capital and corporate purposes. This
      financing agreement is secured by our ownership interest in each of our
      subsidiaries. Additionally, each of our wholly-owned subsidiaries and any future
      wholly-owned subsidiary is and will be a guarantor of our obligation under
      the
      credit facility. Both base rate loans and LIBOR loans may be obtained with
      the
      interest rate to include the applicable margin based on the type of loan. We
      had
      $7,500,000 of outstanding borrowings under this financing agreement as of
      December 31, 2006. See Note 2 to “Notes to Consolidated Financial
      Statements.”





*Inpatient
      Services*





We
      also
      seek to increase acute dialysis treatments through contracts with hospitals
      for
      inpatient dialysis services. These contracts are 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 such 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
      operate 34 outpatient dialysis facilities in Georgia, Maryland, New Jersey,
      Ohio, Pennsylvania, Virginia and South Carolina including an unaffiliated center
      in Georgia which we manage. These dialysis facilities have a total designed
      capacity of 499 licensed stations.





6


Of
      our 34
      dialysis facilities, 33 are owned by us through subsidiaries as follows: 19
      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. We also manage an unaffiliated dialysis
      center in Georgia. One of the Pennsylvania and one of the Georgia dialysis
      centers are located on properties
      that we own and lease to our subsidiaries. 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 group of
      local doctors. One of our Aiken, South Carolina dialysis centers is leased
      from
      an entity owned by the medical director of that center. Our York, Pennsylvania
      dialysis facility is leased from a limited partnership in which we have a 60%
      ownership interest with the remaining 40% owned by two doctors who are also
      affiliated with the entity that owns a 40% minority ownership in the subsidiary
      that operates that facility. See Item 2, “Properties.”





We
      had
      given the non-affiliated owner of the facility in Georgia that we manage a
      put
      option to sell to one of our subsidiaries all the assets of that Georgia
      dialysis facility. Our subsidiary held a call option to purchase the assets
      of
      the Georgia facility. The put option expired unexercised in September, 2005.
      The
      call option was extended until January 14, 2007, and our subsidiary exercised
      the option on January 11, 2007, pursuant to which we are acquiring the assets
      of
      this center through that subsidiary. At the conclusion of this acquisition
      we
      will hold an 80% interest in this facility and the former owner will hold the
      remaining 20% interest. See Note 7 and Note 17 to “Notes to Consolidated
      Financial Statements.”





Additionally,
      the company provides acute care inpatient dialysis services to ten
      hospitals in areas serviced by our dialysis facilities. We are in the process
      of
      negotiating additional acute dialysis services contracts in the areas
      surrounding our facilities, which we will also do in tandem with development
      of
      future proposed sites. Furthermore, 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
      219,000 hemodialysis treatments in 2006, an increase of approximately 40,000
      treatments compared to fiscal 2005.





We
      estimate that on average our centers were operating at approximately 51% of
      capacity as of December 31, 2006, 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 our centers without
      making significant additional capital expenditures.





*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, a dialyzer reprocessing room
      (where, with both the patient’s and physician’s consent, the patient’s dialyzer
      is sterilized for reuse), staff work area, offices and a staff lounge. 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.





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 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 an
      administrator who supervises the daily operations and the 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. In addition, there are independent consultants who visit with our
      dialysis patients. These individuals supervise the patient’s needs and
      treatments. See “Employees” below. In furtherance of our business strategy, we
      strive to attract and retain skilled nurses and other staff, competition for
      whom is intense.




7





Our
      dialysis facilities offer high-efficiency conventional hemodialysis, which,
      in
      our experience, provides the most viable treatment for most patients. We
      consider our dialysis equipment to be both modern and efficient, providing
      state
      of the art treatment in a safe and comfortable environment.





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.





*Inpatient
      Dialysis Services*





We
      presently provide inpatient dialysis services to ten hospitals in Georgia,
      Ohio, Pennsylvania, and Virginia under agreements either with us or with one
      of
      our subsidiaries in the area. The agreements are for a term ranging from one
      to
      five years, with automatic renewal terms, subject to termination by notice
      of
      either party. Inpatient services are typically necessary for patients with
      acute
      kidney failure resulting from trauma or similar causes, patients in the early
      stages of ESRD, and ESRD patients who require hospitalization for other
      reasons.





*Ancillary
      Services*





Our
      dialysis facilities provide certain 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 this product
      could have a material adverse effect on our operating revenue and
      income.





Amgen
      has
      developed a new product, darbepoetin alfa, known as Aranesp®, which has been
      approved by the FDA. Aranesp® can be administered to patients less frequently
      than EPO, which is generally administered to the patient with each dialysis
      treatment. We are unable to predict to what extent this product will impact
      our
      revenues and income, although there has been no impact to date. See Item 1A
      ,”Risk Factors” below.





*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 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 or training 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 thirteen of our centers 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.





8


Agreements
      with medical directors typically range from a term of 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 his, her or its 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. Usually, 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 professional association.





Our
      ability to establish and operate a dialysis facility in a particular area is
      substantially dependent on the availability of a qualified physician or
      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, most likely resulting in closure. 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*





Dialysis
      Corporation of America implements 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 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.





9


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.
      It is critical to strive to achieve a Kt/V level of greater than 1.2 for as
      many
      patients as possible. 95.5% of our patients had a Kt/V level greater than 1.2,
      for 2006 and 94.5% for 2005.





Anemia
      is
      a shortage of oxygen-carrying red blood cells. Because red blood cells bring
      oxygen to all the cells in the body, anemia causes severe fatigue, heart
      disorders, difficulty concentrating, reduced immune function, and other
      problems. Anemia is common among renal patients, caused by insufficient
      erythropoietin, iron deficiency, repeated blood losses, and other factors.
      Anemia can be detected with a blood test for hemoglobin or
      hematocrit. ** It
      is
      ideal to have as many patients as possible with hemoglobin levels above 11.
      Approximately 81% of our patients had a hemoglobin level greater than 11 for
      2006 and 2005.





Vascular
      access is the “lifeline” for hemodialysis patients. 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
      48% and 43% of DCA patients were dialyzed with a fistula during 2006 and 2005,
      respectively.





*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 personal
      funds. If there is no secondary 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
      and allows us to retain any profit earned. 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, certain laboratory tests and medications.




10





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, for which the allowable rate for the fourth quarter of 2006 was $9.446
      and
      for the first quarter of 2007 is $9.574 per 1000 units for amounts in excess
      of
      three units per patient per year, and certain physician-ordered tests provided
      to dialysis patients. Approximately 28% of our medical services revenue in
      2006
      was derived from providing dialysis patients with EPO. CMS limits the EPO
      reimbursement based upon patients’ hematocrit levels. CMS issued a new payment
      coverage policy for EPO, which became effective April 1, 2006. This policy
      restricts payments based on EPO doses and hemoglobin levels for certain patients
      and has affected physician prescription patterns. Other ancillary services,
      mostly other drugs, account for approximately an additional 9% of our medical
      services revenue. We submit claims monthly and are usually paid by Medicare
      within 14 days of the submission.





There
      have been a variety of proposals to Congress for Medicare reform. We are unable
      to predict what, if any, future changes may occur in the rate of reimbursement.
      Congress approved a 1.6% composite rate increase for each of 2005 and 2006.
      For
      2007, the drug-add on adjustment to the composite rate will increase .5%.
      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%, which will continue in
      2007; 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 has been included. Accordingly, CMS
      determined that the Medicare ESRD composite rate would increase by approximately
      8.7% or $11 per treatment, and that payments for separately billable drugs
      would
      be reduced as described above. As of April 1, 2005, 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. Any reduction in the Medicare
      composite reimbursement rate could have a material adverse effect on our
      business, revenues and net earnings.





*Medicaid
      Reimbursement*





Medicaid
      programs are state administered programs partially funded by the federal
      government. These programs are intended to provide coverage for patients whose
      income and assets fall below state defined levels and who are otherwise
      uninsured. The programs also serve as supplemental insurance programs for the
      Medicare co-insurance portion and provide certain coverages (e.g., oral
      medications) that are not covered by Medicare. State 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. We are a licensed ESRD
      provider in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina
      and Virginia.




11





**Sources
      of Medical Services Revenue**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Medicare
            
            
            52
            %
            
            51
            %
            
            48
            %Medicaid
                and Comparable Programs
            
            
            9
            %
            
            8
            %
            
            8
            %Hospital
                inpatient dialysis services
            
            
            3
            %
            
            5
            %
            
            6
            %Commercial
                and private payors
            
            
            36
            %
            
            36
            %
            
            38
            %





*Management
      Services*





Dialysis
      Corporation of America has a management services agreement with each of its
      subsidiaries, and with an unaffiliated Georgia dialysis center, providing each
      of them with administrative and management services, including, but not limited
      to, assisting in procuring capital equipment, preparing budgets, bookkeeping,
      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.





**Corporate
      Integrity Program**





Dialysis
      Corporation of America has developed a Corporate Integrity Program to assure
      it
      continues to achieve its 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
      compliance with the law, which, in turn, should assist us in operating in a
      cost-effective manner, and accordingly, benefit our shareholders.





We
      have
      developed a Compliance Program to assure 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 Compliance 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 (none to date), among other responsibilities.
      The audit committee operates under a charter providing for its detailed
      responsibilities.





We
      also
      maintain disclosure controls and procedures and internal control over financial
      reporting to ensure the accuracy of our disclosure in our filings and our
      financial reporting and financial statements filed under the federal securities
      laws. Management provides a report on, and our independent 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.




12




*Code
      of Ethics*





As
      part
      of our Corporate Integrity 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:




·
              officers,
                  directors and employees to be committed to the best interests of
                  our
                  company  ·
              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,
      Lawrence E. Jaffe, Esq., Jaffe & Falk, LLC, at 2337 West 76th
      Street, Hialeah, FL 33016, telephone (305) 364-1300, or email,
      lej@jaffefalkllc.com.





The
      Corporate Integrity Program is implemented, and 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.




13





**Government
      Regulation**





*General*





Regulation
      of healthcare facilities, including dialysis facilities, is extensive, with
      legislation continually proposed relating to safety, maintenance of equipment
      and proper records, quality assurance programs, reimbursement rates,
      confidentiality of medical records, licensing, patient care and other areas
      of
      operations. Each dialysis facility must be certified by CMS, and we 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 have maintained all of our licenses,
      including our Medicare and Medicaid and equivalent certifications. The loss
      of
      any licenses and certifications would have a material adverse effect on our
      operations, revenues and earnings.





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 with physicians, patients or others 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.





*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*





Certain
      aspects of our business 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.




14




The
      fraud
      and abuse laws apply because our medical directors have financial relationships
      with the dialysis facilities and also 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
      implicate 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 exclusion from Medicare, Medicaid, and
      other federal health care programs. 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.
      Individuals and entities convicted of violating the Anti-Kickback Statute are
      subject to mandatory exclusion from participation in Medicare, Medicaid and
      other federal healthcare programs for a minimum of five years.





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 our company’s medical directors, who are
      independent contractors, is fixed by a medical director agreement and reflects
      competitive factors in each respective location, the size of the 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 between us and physicians
      who,
      in most cases, hold a minority position through a professional association.
      Other than for two facilities, these physicians also act as the medical
      directors for those facilities. We attempt to structure our arrangements with
      our physicians to comply with the Anti-Kickback Statute. Many of these
      physicians’ patients are treated at our facilities. We believe that the value of
      the minority interest in a subsidiary acquired by the physician has been
      consistent with the fair market value of the cash consideration paid, assets
      transferred to, and/or services performed by that physician for the subsidiary,
      and there is no intent to induce referrals to any of our centers. See “Business
      - Physician Relationships” above. We lease space for five of our centers from
      entities in which physicians hold ownership interests, and we sublease space
      to
      four of our medical directors at five 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 material
      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.




15




Management
      believes 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,
      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.




16




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, that 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
      nephrologist-physicians, or practices with which they are affiliated, as medical
      directors of our dialysis centers pursuant to medical director agreements,
      which
      we believe meet the exception for personal service arrangements under Stark
      II.
      Non-affiliated physicians who send their patients to or treat their patients at
      any of our facilities do not receive any compensation from the
      company.





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.





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
      pursuant to a prohibited referral, and imposes substantial civil monetary
      penalties on facilities which submit claims for reimbursement. If such were
      to
      be the case, 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 the com pany.




17


*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.





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. The Incentive Program for Fraud and Abuse
      Information rewards Medicare recipients 10% of the overpayment up to $1,000
      for
      reporting Medicare fraud and abuse. HIPAA further created health care fraud
      crimes and extended their applicability to private health plans.





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.




18




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 expended
      significant resources to develop and implement policies and procedures to
      address privacy issues, and 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.





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




19




*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 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 has received payments from Medicaid in 2006, in excess of $5 million.
      Accordingly, the company must and does comply 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.





Dialysis
      Corporation of America has developed a Compliance Program as part of its
      Corporate Integrity Program, designed to assure compliance with fraud and abuse
      laws and regulations. See above under the caption “Corporate Integrity 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, of which we have had
      none
      since our inception in 1976. 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 additionally
      distribute a line of blood lancets used to draw blood for testing. The lancets
      are distributed 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. Although we
      hold
      three patents related to our lancets (see “Patents and Trade Names” below), and
      obtained required FDA approval relating to the production of lancets, we are
      no
      longer manufacturing these products. Marketing of medical products is conducted
      by independent manufacturer representatives and our employees.




20




**Patents
      and Trade Names**





We
      sell
      certain of our medical supplies and products under the trademark MedicoreTM.
      Certain of our lancets are marketed under the trademarks Providers of Quality
      Medical DisposablesTM and Lady LiteTM, and under the brand name Lite Touch.
      Although we hold three patents related to our lancets, we do not rely on patents
      or trademarks in our medical products division.





**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.
      Some of our major competitors are large public companies, including 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 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 a substantial source of patients for the dialysis centers,
      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. 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 with any of our
      competitors.





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





The
      medical products industry is extremely competitive and our medical products
      operations are not a significant competitive factor in this area.




21




**Employees**





As
      of
      March 12, 2007, our company had 429 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 39 part-time employees consisting of registered nurses,
      patient care technicians and clerical employees. We also utilize 133 per diem
      personnel to supplement staffing.





We
      retain
      26 independent contractors and sub-contractors who include social workers and
      dietitians at our Maryland, New Jersey, Ohio, Pennsylvania, Virginia and certain
      Georgia facilities. These contractors are in addition to the medical directors,
      who supervise patient treatment at each facility.





We
      believe our relationship with our employees is excellent and we have not
      suffered any strikes or work stoppages. None of our employees is 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 Dialysis Corporation of
      America 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.





**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  ·
              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
  22


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.





In
      February, 2005, CMS published a proposed rule that would revise the conditions
      for coverage for dialysis facilities. The revised conditions would establish
      performance expectations and promote continuous quality improvement. These
      rules
      are subject to revision and would not become effective until issued in final
      form. Until the rules are finalized, it is impossible to predict what impact
      any
      revisions to the conditions of coverage will have on our business or our
      operating results.




**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 that do not fall within a safe harbor
      may be subject to greater scrutiny by enforcement agencies.




**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 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 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.




23




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 and results
      of
      operations.




**Our
      revenues and financial stability are dependent on fixed reimbursement rates
      under Medicare and Medicaid**





During
      2004, 2005 and 2006, approximately 48% , 51% and 52%, respectively of our
      patient revenues was derived from Medicare reimbursement, and 8%, 8% and 9%,
      respectively, of our patient revenues in each of these years was derived from
      Medicaid and equivalent programs. Decreases in Medicare and Medicaid and
      equivalent rates and programs for our dialysis treatments would adversely affect
      our revenues and profitability.





Federal
      and state governments seek to maintain, if not reduce, costs, and any such
      actions in the healthcare industry could adversely affect our revenues and
      earnings, including the following:




·
              reductions
                  in payments to us or government programs in which we
                  participate  ·
              increases
                  in labor and supply costs, which we do experience, without comparable
                  governmental reimbursement rate increases  ·
              inclusion
                  in the flat composite rate for dialysis treatments those ancillary
                  services which we currently bill
                  separately





In
      November, 2005, CMS released the final physician fee schedule for 2006. A number
      of provisions contained in the fee schedule affects dialysis facilities. First,
      CMS revised the geographic designations and wage index adjustment applied to
      the
      composite payment rate. CMS eliminated the wage index cap, previously set at
      1.3, and reduced the wage index floor for 2007 to .8423 from .85. Revisions
      to
      the geographic adjustments applicable to composite rate payments will be phased
      in over a four year period. For 2006, 75% of the wage adjusted composite rate
      reflected the old geographic adjustments and 25% reflected the revised
      adjustments. For 2007, the wage index blend will be 50%/50%.




24




CMS
      also
      revised its drug payment methodology, moving from average acquisition cost
      pricing to average sales price plus 6%. While these rates will result in lower
      payments for pharmaceuticals, the composite
      rate was concurrently increased with a revision to the drug add-on adjustment,
      for 2007 from 1.145 to 1.151. CMS is continuing the case mix adjustments
      finalized in 2005 whereby providers receive higher composite rate payments
      for
      certain patients based on age, body mass index and body surface
      area.





Management
      does not believe that in the aggregate these changes in Medicare reimbursement
      have significantly impacted our operations, expenses or earnings. Future changes
      in the structure of, and payment rates under, the Medicare program could
      substantially reduce our earnings.




**Decreases
      in reimbursement payments from third-party, non-government payors could
      adversely affect our earnings**





Any
      reduction in the rates paid by private insurers, hospitals and other
      non-governmental third-party organizations would adversely affect our business.
      Alternatively, 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 44%, 41% and 39% of our patient revenues
      for
      2004, 2005 and 2006, 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 private payors reduce their payments or we
      experience a shift in revenue mix toward Medicare or Medicaid reimbursement,
      then our revenue, cash flow and earnings would decrease, and our cash flow
      and
      profits would be disproportionately affected.




**Any
      decrease in the availability of or the reimbursement rate of EPO would reduce
      our revenues and earnings**





EPO,
      a
      bio-engineered drug used for treating anemia in dialysis patients, is currently
      available from a single manufacturer, Amgen, Inc. There currently is no
      alternative drug available to us for the treatment of anemia of our dialysis
      patients. 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 would adversely
      impact our revenues and profitability, since approximately 28% of our medical
      revenues in each of 2004, 2005 and 2006 were based upon the administration
      of
      EPO to our dialysis patients.





If
      government or private payors reduce reimbursement for EPO, then our revenues
      and
      earnings will decline. Most of our EPO reimbursement is from government
      programs. For 2006, Medicare and Medicaid reimbursement represented 64% of
      the
      total revenue derived from EPO. In 2005, 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 will result in lower reimbursement for pharmaceuticals,
      but
      offset by the 1.6% composite rate increase.





Changes
      in Medicare reimbursement criteria may also impact EPO revenue. In 2005, CMS
      adopted a national monitoring policy for EPO claims. This policy, effective
      April, 2006, did not have an adverse impact on our net revenue and earnings.
      Under the new policy, CMS initiates monitoring when patient hematocrit levels
      reach a threshold of 39.0. CMS expects a reduction in the dosage of EPO for
      patients whose hemotocrit exceeds this threshold. If dosage is not reduced,
      payment will be made as if the reduction had occurred. The policy also limits
      the quantity of EPO that can be administered in a month, regardless of
      hematocrit levels. We have revised our protocols on anemia management to address
      this policy.




25


**The
      implementation of the case-mix adjustment could adversely affect our revenues,
      profitability and cash flow.**





In
      April,
      2005, CMS adopted a case-mix adjustment for the ESRD composite rate, under
      which
      the Medicare composite rate is adjusted based on a patient’s age, body mass
      index and body surface area. This change is intended to link payment more
      closely to acuity and its impact on revenues will turn on our patient acuity
      mix. For 2006, case-mix adjustment has not adversely affected revenues or
      profitability.




**New
      Amgen drug 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 and obtained FDA
      approval for its new drug Aranesp®, used to treat anemia, and which is indicated
      to be effective for a longer period than EPO. Based on its longer lasting
      capabilities, potential profit margins on Aranesp® could be significantly lower
      than on EPO, and furthermore, Aranesp® could be administered by a dialysis
      patient’s physician, further eliminating potential revenues from the treatment
      of anemia in our dialysis patients. The introduction of Aranesp ® as an
      anemia treatment for dialysis patients, could adversely impact our revenues
      and
      profitability.




**Our
      ability to grow is subject to our resources and available
      locations**





Other
      than four center acquisitions over the period 2002 through 2004, three centers
      acquired in the first quarter of 2006, and two centers acquired during the
      first
      quarter of 2007, expansion of our operations has been through construction
      of
      dialysis centers. We developed two dialysis centers and acquired one facility
      in
      2003, opened five new centers and acquired a company with two dialysis
      facilities in 2004, opened three new centers in 2005, opened three new centers
      in 2006, acquired three centers in 2006, acquired two centers in the first
      quarter of 2007, and have two centers under development. 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. The
      time
      period from the beginning of construction through commencement of operations
      of
      a dialysis center generally takes four to six months and sometimes longer.
      Once
      the center is operable, it generates revenues, but usually does not operate
      at
      full capacity, and may incur losses for approximately 12 months or longer.
      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 and financial
      condition.




26




**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, and 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 $750,000 to $1,000,000. While the cost of acquiring a center can be greater
      than the development costs of a similar center, we attempt to target our
      acquisitions such that those costs are in the range of costs we would expect
      to
      incur in a similar development project. We cannot assure you that we will be
      successful in developing or acquiring dialysis facilities, or otherwise
      successfully expanding our operations. We are 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.




**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. 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.




27




**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 earnings, financial
      condition or business.




**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 operation, development
      and acquisition of existing dialysis centers. Our competition comes from other
      dialysis centers, many of which are owned by much larger companies, and from
      hospitals. The dialysis industry is rapidly consolidating, resulting in several
      very large dialysis companies competing for the acquisition of existing dialysis
      centers and the development of relationships with referring physicians. Many
      of
      our competitors have significantly greater financial resources, more dialysis
      facilities and a significantly larger patient base. In addition, technological
      advances by our competitors may provide more effective dialysis treatments
      than
      the services provided by our centers.





We
      also
      compete with physicians who open their own dialysis facilities. Competition
      for
      existing centers has increased the costs of acquiring such facilities.
      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. Our failure to do so could impair our continued
      growth and profitability.




**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, as is the case with most healthcare treatment services, entails
      significant risks of liability. 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.




28




**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 steadily and significantly 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 would 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
      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.




**The
      loss of certain executive personnel without retaining qualified replacements
      could adversely affect our business operations, and as a result, our revenues
      and earnings could decline**





We
      are
      dependent upon the services of Thomas K. Langbein, Chairman of the Board, and
      Stephen W. Everett, our President, Chief Executive Officer and a director.
      Mr.
      Langbein has been involved with us since we organized in 1976. Mr. Everett
      joined our company in November, 1998 as Vice President, became Executive Vice
      President in June, 1999, President on March 1, 2000, and Chief Executive Officer
      in May, 2003. Mr. Everett has been involved in the healthcare industry for
      27
      years. A new five-year employment agreement was entered into with Mr. Everett
      effective as of January 3, 2006. Among other things, the employment agreement
      contains a non-competition provision during the term of the agreement and for
      one year after termination. It would be very difficult to replace the services
      of these individuals, whose services, both individually and combined, if lost,
      would adversely affect our operations and earnings, and most likely as a result,
      the trading price of our common stock. There is no key-man life insurance
      covering any of our officers.




**Shares
      eligible for future sale by restricted shareholders may adversely affect our
      stock price**





Our
      officers and directors own 2,213,225 shares of our common stock and vested
      options exercisable into an additional 15,000 shares of common stock, for an
      aggregate of 2,228,225 shares or approximately 23% of our outstanding common
      stock. Most of the shares held by these officers and directors, 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 one year 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;




29




·
            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 7,360,000
      shares. Common stock of the company owned by our officers and directors
      represent approximately 30% 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 Capital Market under the symbol “DCAI.” The
      market price of our common stock has exhibited volatility. For fiscal 2006,
      our
      per share price range was $9.64  to
      $14.69.





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
                generally





Investors
      should understand that in general, stock prices fluctuate for reasons unrelated
      to operating results. Any changes in the above discussed factors, the Medicare
      and Medicaid reimbursement rates in particular, 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**





Dialysis
      Corporation of America owns 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.




30





Our
      Easton, Maryland property has a mortgage to secure a $700,000 development loan
      at an annual interest rate of prime rate, maturing in May 2026. This loan had
      a
      remaining principal balance of approximately $555,000  at
      December 31, 2006. See Item 7, “Management’s Discussions and Analysis of
      Financial Condition and Results of Operations” and Note 2 to “Notes to
      Consolidated Financial Statements.”





We
      also
      own a 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, 2008, with
      one
      additional renewal period of five years. The center is approved for 17 dialysis
      stations with space available for expansion. We use the remaining square footage
      of the Lemoyne property for administrative offices.





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 5.75% and a maximum rate
      of
      8%, maturing in April, 2011. This mortgage had a remaining principal balance
      of
      approximately $617,000 at December 31, 2006. 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.





For
      our
      Cincinnati, Ohio facility, we purchased the property, and completed the
      construction of an approximately 5,000 square foot dialysis facility at a cost
      of approximately $740,000. In February, 2003, we sold the property to a
      corporation owned by the medical director of that facility, which, in turn,
      leased the facility to our Cincinnati subsidiary for an initial term of 10
      years
      from the commencement date of February 6, 2003, with two additional five-year
      renewal periods. Annual rental fees remain the same for the first four years
      of
      the lease, and thereafter increase annually based upon a percentage increase
      in
      the CPI for the Cincinnati, Ohio area.





In
      addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio
      facilities, we presently own or manage 30 other dialysis centers, that lease
      their respective facilities from unaffiliated 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 five 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.”





In
      July,
      2004, we moved our executive offices to Linthicum, Maryland, which comprise
      approximately 4,600 square feet and are leased for five years to July 11,
      2009.





During
      2005 we acquired undeveloped properties in Georgia, Pennsylvania and South
      Carolina where we subsequently constructed dialysis centers. The land purchase
      prices ranged from $150,000 to $205,000 and were paid in cash. In September,
      2006, we completed a sale and leaseback transaction with an unaffiliated entity
      owned by a group of local doctors for the Georgia facility, similar to the
      arrangement at our Cincinnati, Ohio facility, and in February 2007 completed
      a
      similar sale and leaseback transaction for the South Carolina center with an
      entity owned by the medical director of that facility. We have another South
      Carolina center under development that may become subject to a similar
      arrangement when
      it
      is completed. In December, 2006, we sold the developed Pennsylvania facility
      to
      a 60% owned subsidiary limited partnership from which our operating subsidiary
      at this location is leasing the premises. We acquired three new centers, one
      in
      Virginia and two in Maryland in early 2006, that lease the facilities in which
      they operate. We continue to actively pursue the additional development and
      acquisition of dialysis facilities in other areas which would entail the
      acquisition or lease of additional property.





31


Dialysis
      stations at our centers are equipped with modern dialysis machines, which were
      largely financed under a 1996 master lease/purchase agreement until 2003 since
      which we have not utilized this financing agreement for additional equipment
      acquisitions. See Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.”





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 administrative offices at 27 Miller Street, Suite 2,
      Lemoyne, Pennsylvania 17043, and 2337 West 76 th Street,
      Hialeah, Florida 33016.




**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,
      2006 to a vote of security holders through the solicitation of proxies or
      otherwise.




**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 Nasdaq Capital Market under the symbol “DCAI.” The
      following table indicates the high and low bid prices for our common stock
      for
      each of the four quarters for the years ended December 31, 2005 and 2006 as
      reported by Nasdaq.





**Bid
                Price****2005**
            
            **High**
            
            **Low**1stQuarter
            
            $
            34.60
            
            $
            16.742ndQuarter
            
            
            24.60
            
            
            13.123rdQuarter
            
            
            27.98
            
            
            11.934thQuarter
            
            
            14.71
            
            
            9.14





32





**Bid
                Price****2006**
            
            **High**
            
            **Low**1stQuarter
            
            $
            13.65
            
            $
            9.642ndQuarter
            
            
            13.90
            
            
            10.493rdQuarter
            
            
            13.52
            
            
            10.504thQuarter
            
            
            14.69
            
            
            12.02





As
      of
      March 5, 2007, the high and low sales prices of our common stock were $13.62
      and
      $13.31, respectively.





Bid
      prices represent prices between brokers, and do not include retail mark-ups,
      mark-downs or any commission, and may not necessarily represent prices in actual
      transactions.





**Stockholders**





At
      March
      5, 2007, we had 1,021 shareholders of record as reported by our transfer agent.
      We have been advised by ADP, which organization holds securities for banks,
      brokers and depositories, that there are currently 3,400 beneficial owners
      of
      our common stock.




**Dividend
      Policy**





The
      company does not anticipate that it will pay dividends in the foreseeable
      future. The board of directors intends to retain earnings for use in the
      business. 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,” and Note 2 to “Notes to Consolidated
      Financial Statements”) 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.




**Sale
      of Securities Not Registered Under the Securities Act**





The
      only
      unregistered sales of our common stock during the fourth quarter of 2006
      included: (i) 10,000 shares of common stock in November, 2006, upon retaining
      our interim Chief Operating Officer; (ii) 750 shares of common stock, 250 shares
      each to our three independent directors, which had vested on December 31, 2006,
      under a stock award granted in March, 2006 (previously reported in the company’s
      quarterly report on Form 10-Q for the first quarter ended March 31, 2006, Part
      II, Item 2); and (iii) 8,500 shares of common stock which had vested on December
      31, 2006 pursuant to an aggregate grant of 64,000 stock awards to certain
      officers and key employees in the second quarter of 2006 (of which 30,000 shares
      were cancelled in November, 2006, upon resignation of an officer),, which stock
      awards vest in equal yearly increments through 2009, and which awards contain
      termination and acceleration provisions (previously reported on a current report
      on Form 8-K dated June 30, 2006). See Item 11, “Executive
      Compensation.”





33


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,” Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters,” and Note 6 to “Notes to Consolidated Financial
      Statements.” Other sales of common stock, which were not significant, during
      2006, have been reported in our quarterly reports, Form 10-Q, for the periods
      ended March 31, 2006, June 30, 2006 and September 30, 2006.




**Stock
      Repurchases**





The
      company had a common stock repurchase plan which it terminated in the second
      quarter of 2005. The company has not made any repurchases of any equity
      securities during the fourth quarter months of October, November and December,
      2006.




**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, 2001 through December 31, 2006. 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.




**COMPARISON
          OF 5-YEAR CUMULATIVE TOTAL RETURN**
 **AMONG
          DIALYSIS CORPORATION OF AMERICA,**
 **NASDAQ
          MARKET INDEX AND SIC CODE INDEX**





******2001**
            
            ******2002**
            
            ******2003**
            
            ******2004**
            
            ******2005**
            
            ******2006**Dialysis
                Corporation of America
            
            
            100.00
            
            
            115.36
            
            
            194.20
            
            
            1,416.23
            
            
            581.45
            
            
            736.81Kidney
                Dialysis Centers
            
            
            100.00
            
            
            99.94
            
            
            144.06
            
            
            209.92
            
            
            261.64
            
            
            318.70NASDAQ
                Market Index
            
            
            100.00
            
            
            69.75
            
            
            104.88
            
            
            113.70
            
            
            116.19
            
            
            128.12





The
      current composition of SIC Code 8092 – Kidney
      Dialysis
      Centers – is as follows:





Davita
      Inc.


Dialysis
      Corporation of America


Fresenius
      Med Care AG&Co.




34




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, 2006
      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, 2006, 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 31,2006
            
            2005
            
            2004
            
            2003
            
            2002Revenues(1)
            
            $
            62,460
            
            $
            45,392
            
            $
            40,986
            
            $
            29,997
            
            $
            25,354Net
                income
            
            
            3,049
            
            
            1,900
            
            
            2,214
            
            
            1,150
            
            
            1,242Earnings
                per share(2)Basic
            
            
            .32
            
            
            .22
            
            
            .27
            
            
            .15
            
            
            .16Diluted
            
            
            .32
            
            
            .20
            
            
            .25
            
            
            .13
            
            
            .14





**Consolidated
                Balance Sheet Data**
              (in
                thousands)
              December 31,2006
            
            2005
            
            2004
            
            2003
            
            2002Working
                capital
            
            $
            17,098
            
            $
            7,617
            
            $
            3,644
            
            $
            3,773
            
            $
            4,593Total
                assets
            
            
            49,856
            
            
            38,803
            
            
            26,490
            
            
            19,604
            
            
            17,154Intercompany
                advance payable(receivable)
                from Medicore(non-current
                portion)(3)
            
            
            —
            
            
            —
            
            
            449
            
            
            234
            
            
            —Intercompany
                note and accrued interestpayable
                to Medicore(3)
            
            
            —
            
            
            —
            
            
            1,462
            
            
            —
            
            
            —Long
                term debt, net of current portion
            
            
            8,618
            
            
            635
            
            
            1,586
            
            
            2,097
            
            
            2,727Stockholders’
                equity
            
            
            29,061
            
            
            25,613
            
            
            13,330
            
            
            10,970
            
            
            9,727







(1)
            Prior
                year amounts have been reclassified to conform to current year
                presentation.






(2)
            All
                share and per share data retroactively adjusted for two-for-one stock
                split effected January 28, 2004.




(3)
            Pursuant
                to merger with former parent company, Medicore, Inc. in September,
                2005,
                intercompany indebtedness was
                forgiven.




35






**Item
      7. Management’sDiscussion 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***





Dialysis
      Corporation of America provides dialysis services, primarily kidney dialysis
      treatments through 34 outpatient dialysis centers, including three centers
      acquired in the first quarter of 2006, three centers opened during 2006, two
      centers acquired in the first quarter of 2007, and one unaffiliated dialysis
      center which it manages and is acquiring (see Note 7 and Note 17 to “Notes to
      Consolidated Financial Statements”), to patients with chronic kidney failure,
      also know as end-stage renal disease or ESRD. We provide dialysis treatments
      to
      dialysis patients of ten hospitals and medical centers through acute
      inpatient dialysis services agreements with those entities. We provide homecare
      services, including home peritoneal dialysis.





***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 manage and one in which we had a 40% ownership interest
      until August 1, 2006, when this center was consolidated, in which center we
      subsequently acquired the other 60% interest in December, 2006, and those
      hospitals and medical centers with which we have inpatient acute service
      agreements for the periods presented:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**In
                center
            
            
            197,628
            
            
            155,130
            
            
            127,293Home
                peritoneal
            
            
            15,486
            
            
            16,942
            
            
            13,311Acute
            
            
            6,350
            
            
            7,100
            
            
            8,387219,464
            (1)
            
            179,172
            (1)
            
            148,991
            (1)


(1)
              Treatments
                  by the managed Georgia center include: in-center treatments of
                  9,428;
                  8,888; and 7,532; respectively, for 2006, 2005 and 2004 and no
                  home
                  treatments or acute
                  treatments.




36




***New
      Business Development***





Dialysis
      Corporation of America ’s
      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, and be responsible
      for
      the supervision of those dialysis centers. The company is currently constructing
      three dialysis centers and is in various stages of development with two others.
      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 twelve months of
      operations, or when they achieve consistent profitability, whichever is sooner.
      For the year ended December 31, 2006, we incurred an aggregate of approximately
      $1,423,000 in pre-tax losses for start-up centers compared to $744,000 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. This manufacturer developed another anemia drug that could
      possibly substantially reduce our revenues and profit from the treatment of
      anemia in our patients.





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.




37





***Reimbursement***





Approximately
      61% of our medical services revenue for 2006 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 2005 and 2006. 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. 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,****2006**
            
            **2005**
            
            **2004**Medicare
            
            
            52
            %
            
            51
            %
            
            48
            %Medicaid
                and comparable programs
            
            
            9
            %
            
            8
            %
            
            8
            %Hospital
                inpatient dialysis services
            
            
            3
            %
            
            5
            %
            
            6
            %Commercial
                insurers and other private payors
            
            
            36
            %
            
            36
            %
            
            38
            %100
            %
            
            100
            %
            
            100
            %




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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Outpatient
                hemodialysis services
            
            $
            32,856
            
            
            54
            %
            $
            23,084
            
            
            52
            %
            $
            18,599
            
            
            46
            %Home
                dialysis services
            
            
            3,625
            
            
            6
            %
            
            3,198
            
            
            7
            %
            
            2,691
            
            
            7
            %Inpatient
                hemodialysis services
            
            
            2,191
            
            
            3
            %
            
            2,055
            
            
            5
            %
            
            2,261
            
            
            5
            %Ancillary
                services
            
            
            22,467
            
            
            37
            %
            
            16,350
            
            
            36
            %
            
            16,899
            
            
            42
            %$
            61,139
            
            
            100
            %
            $
            44,687
            
            
            100
            %
            $
            40,450
            
            
            100
            %




***Compliance***





The
      healthcare industry is subject to extensive regulation by federal and state
      authorities. There are a variety of fraud and abuse measures to combat waste,
      including Anti-Kickback regulations and extensive prohibitions relating to
      self-referrals, violations of which are punishable by criminal or civil
      penalties, including exclusion from Medicare and other governmental programs.
      Unanticipated changes in healthcare programs or laws could require us to
      restructure our business practices which, in turn, could materially adversely
      affect our business, operations and financial condition. See Item 1, “Business -
      Government Regulation.” We have developed a Corporate Integrity 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. Among the different programs is our Compliance Program,
      which has been implemented to assure
      our compliance with fraud and abuse laws and to supplement our existing policies
      relating to claims submission, cost report preparation, initial audit and human
      resources, all geared towards a cost-efficient operation beneficial to patients
      and shareholders. See Item 1, “Business - Corporate Integrity
      Program.”





38


**Results
      of Operations**





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Medical
                services revenue
            
            $
            61,139
            
            $
            44,687
            
            $
            40,450Product
                sales
            
            
            891
            
            
            207
            
            
            —Total
                sales
            
            
            62,030
            
            
            44,894
            
            
            40,450Other
                income
            
            
            430
            
            
            498
            
            
            536Total
                operating revenues
            
            
            62,460
            
            
            45,392
            
            
            40,986Cost
                of medical services
            
            
            36,969
            
            
            27,860
            
            
            23,546Cost
                of product sales
            
            
            549
            
            
            119
            
            
            —Total
                cost of sales
            
            
            37,518
            
            
            27,979
            
            
            23,546Corporate
                selling, general and administrative expenses
            
            
            6,460
            
            
            4,524
            
            
            4,671Facility
                selling, general and administrative expenses
            
            
            8,988
            
            
            7,183
            
            
            5,919Total
                selling, general and administrative expense
            
            
            15,448
            
            
            11,707
            
            
            10,590Stock
                compensation expense
            
            
            276
            
            
            —
            
            
            —Depreciation
                and amortization
            
            
            2,319
            
            
            1,749
            
            
            1,499Provision
                for doubtful accounts
            
            
            1,199
            
            
            571
            
            
            1,198Total
                operating costs and expenses
            
            
            56,760
            
            
            42,006
            
            
            36,833Operating
                income
            
            
            5,700
            
            
            3,386
            
            
            4,153Other
                income
            
            
            101
            
            
            66
            
            
            35Income
                before income taxes, minority interestand
                equity in affiliate earnings
            
            
            5,801
            
            
            3,452
            
            
            4,188Income
                tax provision
            
            
            2,086
            
            
            1,427
            
            
            1,576Income
                before minority interest andequity
                in affiliate earnings
            
            
            3,715
            
            
            2,025
            
            
            2,612Minority
                interest in income ofconsolidated
                subsidiaries
            
            
            (920
            )
            
            (454
            )
            
            (681
            )Equity
                in affiliate earnings
            
            
            254
            
            
            329
            
            
            283Net
                income
            
            $
            3,049
            
            $
            1,900
            
            $
            2,214




***2006
      Compared to 2005***





Medical
      services revenue increased approximately $16,452,000 (37%) for the year ended
      December 31, 2006, compared to the preceding year. Medical services revenue
      for
      2006 includes approximately $688,000 of amounts previously included in excess
      insurance liability that was determined to
      be
      non-refundable compared to approximately $43,000 in the preceding year. See
      Note
      1 to “Notes to Consolidated Financial Statements.” Dialysis treatments performed
      increased from 179,172 in 2005 to 219,464 in 2006, a 22% increase which includes
      treatments at managed facilities, one for which we acquired the 60% interest
      not
      already owned by the company in December, 2006, and one of which we are
      acquiring an 80% interest (see Note 7, Note 9, Note 14 and Note 17 to “Notes to
      Consolidated Financial Statements”). The increase in treatments includes
      treatments at the three new centers we opened during 2005 that were in operation
      throughout 2006, three centers acquired in the first quarter of 2006, and three
      new centers opened during 2006. 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.





39


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 2005 and prior years made during 2006 resulted
      in
      approximately a $65,000 reduction in revenues in 2006. 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 $2,314,000 (68%) for the year ended December
      31,
      2006, compared to the preceding year, despite an increase in start-up costs
      associated with our new centers of $1,423,000 in 2006 compared to $744,000
      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 an unaffiliated Georgia center decreased
      approximately $68,000 during 2006 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.
      See
      Note 7, Note 9, Note 14 and Note 17 to “Notes to Consolidated Financial
      Statements.”





Cost
      of
      medical services sales as a percentage of sales decreased to 60% for the year
      ended December 31, 2006, compared to 62% for the preceding year, as a result
      of
      decreases in payroll costs and supply costs as a percentage of medical service
      sales.





Approximately
      28% of our medical services revenue for the years ended December 31, 2006 and
      December 31, 2005 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 complimentary increases in
      the
      composite rate. Management believes these changes have had little impact on
      the
      company’s average Medicare revenue per treatment. See Item 1, “Business – Operations
–
      Medicare Reimbursement.”





Our
      medical products division was acquired pursuant to our merger with our former
      parent company in September, 2005. Operations of the medical products division
      are included in our operating results subsequent to the merger. These operations
      represent a minor portion of our operations with operating revenues of $891,000
      during 2006, and $207,000 during 2005 (1.4% of total 2006 operating revenues
      and
      .5% of total 2005 operating revenues). Operating income for the medical products
      division was $69,000 for 2006 and $25,000 for 2005 (1.2% of total 2006 operating
      income and .7% of total 2005 operating income).




40





Cost
      of
      sales for our medical products division amounted to 62% of sales for the year
      ended December 31, 2006 and 58% of sales for the year ended December 31, 2005.
      Cost of sales for this division 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 $3,741,000
      (32%) for the year ended December 31, 2006, 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
      25% for the year ended December 31, 2006 compared to 26% for the preceding
      year.





Provision
      for doubtful accounts increased approximately $628,000 for year ended December
      31, 2006, compared to the preceding year. The provision amounted to 2% of sales
      for the year ended December 31, 2006 compared to 1% for the preceding year.
      Medicare bad debt recoveries of $537,000 were recorded during the year ended
      December 31, 2006, compared to approximately $505,000 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, 2006 compared to 2%
      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 82 as of December 31, 2006 compared to 79 as of December
      31, 2005. 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 $117,000 for the year ended
      December 31, 2006, compared to the preceding year. This includes an increase
      in
      interest income of $94,000, an increase in rental income of $131,000, an
      increase in miscellaneous other income of $5,000 and an increase in interest
      expense to unrelated parties of $262,000 due to increased average
      non-inter-company borrowings and an increase in average interest rates and
      net
      litigation settlement expense of $85,000. Interest expense to our former parent,
      Medicore, Inc., decreased $158,000 for the year ended December 31,
      2006
      compared to the preceding year as a result of our merger with our former parent
      in September 2005. Both the intercompany advance payable and the demand
      promissory note payable, as well as accrued interest on the note, were forgiven
      in conjunction with our merger with our former parent. The prime rate was 8.25%
      at December 31, 2006, and 7.25% at December 31, 2005. See Notes 1, 2, 3, 4,
      12,
      and 15 of “Notes to the Consolidated Financial Statements.”





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
      interest 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. See Note
      1,
      Note 9 and Note 14 to “Notes to Consolidated Financial Statements.”




***200*** **5
      *Compared to 2004***





Medical
      services revenue increased approximately $4,237,000 (10%) for the year ended
      December 31, 2005, compared to the preceding year. Dialysis treatments performed
      increased from 135,667 in 2004 to 163,689 in 2005, a 21% increase. The increase
      in treatments includes treatments at the five new centers we opened during
      2004
      which were in operation throughout 2005, the two Pennsylvania centers acquired
      in late August, 2004 which were in operation throughout 2005 and three new
      centers we opened during 2005. 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 2004 and prior years made during 2005 resulted
      in
      approximately a $74,000 reduction in revenues in 2005. 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.





Our
      medical products division was acquired pursuant to our merger with our former
      parent company in September, 2005. Operations of the medical products division
      are included in our operating results subsequent to the merger. These operations
      represent a minor portion of our operations with sales revenues of $207,000
      during 2005 (.5% of total 2005 sales revenues).





Operating
      income decreased approximately $768,000 (18%) for the year ended December 31,
      2005, compared to the preceding year, including the reflection of start-up
      costs
      associated with our new centers.





Other
      operating income decreased by approximately 7% for the year ended December
      31,
      2005, compared to the preceding year. Management fee income pursuant to
      management services agreements with our 40% owned Toledo, Ohio affiliate and
      an
      unaffiliated Georgia center increased $96,000. There was a gain on litigation
      settlement of $134,000 during 2004.




42





Cost
      of
      medical services sales as a percentage of sales increased to 62% for the year
      ended December 31, 2005, compared to 58% for the preceding year, as a result
      of
      increases in payroll costs and supply costs as a percentage of medical service
      sales.





Cost
      of
      sales for our medical products division amounted to 58% of sales. Cost of sales
      for this division is largely related to product mix.





Approximately
      28% of our medical services revenue for the years ended December 31, 2005 and
      December 31, 2004 derived from the administration of EPO to our dialysis
      patients. Beginning this year, Medicare will reimburse 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 complimentary
      increases in the composite rate. Management believes these changes will have
      little impact on the company’s average Medicare revenue per treatment. See Item
      1, “Business – Operations – Medicare Reimbursement.”





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 $1,367,000
      (11%) for the year ended December 31, 2005, 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
      30% for the ended year December 31, 2005, and for the preceding
      year.





Provision
      for doubtful accounts decreased approximately $627,000 for year ended December
      31, 2005, compared to the preceding year. The provision amounted to 1% of sales
      for the year ended December 31, 2005 compared to 3% for the preceding year.
      Medicare bad debt recoveries of $505,000 were recorded during the year ended
      December 31, 2005, compared to approximately $214,000 for the preceding year.
      Without the effect of the Medicare bad debt recoveries, the provision would
      have
      amounted to 2% of sales for the year ended December 31, 2005 compared to 3%
      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 79 as of December 31, 2005 compared to 74 as of December
      31, 2004. The 2004 collection delays resulting in the company’s Georgia dialysis
      facilities experiencing a deterioration in their accounts receivable aging
      were
      largely due to the State of Georgia Medicaid program’s implementation of a new
      computer system in 2003. Days sales outstanding were also impacted by the
      expected and typical slower receivable turnover at our new centers opened during
      2005 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.





43


**Medical
      Services**


**Accounts
      Receivable Aging Schedule**





Fiscal
      2006




**Classification**
            ****
            **December**
            ****
            **November**
            ****
            **October**
            ****
            **September**
            ****
            **August
                plus**
            ****
            **Prepayments**
            ****
            **Total**BLUE
                CROSS
            
            $
            778,345
            
            $
            789,095
            
            $
            562,097
            
            $
            316,589
            
            $
            1,581,192
            
            $
            (8,842
            )
            $
            4,018,476COMMERCIAL
            
            
            732,511
            
            
            846,980
            
            
            560,484
            
            
            301,350
            
            
            212,464
            
            
            (4,874
            )
            
            2,648,915HMO
            
            
            166,732
            
            
            147,562
            
            
            83,931
            
            
            77,437
            
            
            136,668
            
            
            
            
            
            612,330MEDICAID
            
            
            267,990
            
            
            427,311
            
            
            456,556
            
            
            317,218
            
            
            1,433,020
            
            
            (15,687
            )
            
            2,886,408MEDICARE
            
            
            4,343,038
            
            
            516,425
            
            
            344,875
            
            
            213,336
            
            
            1,135,052
            
            
            (14,827
            )
            
            6,537,899PRESUMPTIVE
                ELIGIBILITY
            
            
            549
            
            
            1,314
            
            
            (22,475
            )
            
            2,221
            
            
            14,413
            
            
            
            
            
            (3,978
            )SELF
                PAY
            
            
            331
            
            
            66,500
            
            
            90,372
            
            
            129,683
            
            
            1,256,446
            
            
            (43,756
            )
            
            1,499,576HOSPITAL
            
            
            146,185
            
            
            182,089
            
            
            29,120
            
            
            1,446
            
            
            9,744
            
            
            
            
            
            368,584Total
            
            $
            6,435,681
            
            $
            2,977,276
            
            $
            2,104,960
            
            $
            1,359,280
            
            $
            5,778,999
            
            $
            (87,986
            )
            $
            18,568,210





Fiscal
      2005




**Classification**
            ****
            **December**
            ****
            **November**
            ****
            **October**
            ****
            **September**
            ****
            **August
                plus**
            ****
            **Prepayments**
            ****
            **Total**BLUE
                CROSS
            
            $
            641,684
            
            $
            680,315
            
            $
            407,726
            
            $
            212,608
            
            $
            1,488,486
            
            $
            0
            
            $
            3,430,819COMMERCIAL
            
            
            376,782
            
            
            484,186
            
            
            240,537
            
            
            116,123
            
            
            540,421
            
            
            0
            
            
            1,758,049HMO
            
            
            56,853
            
            
            39,526
            
            
            8,942
            
            
            1,026
            
            
            (6,280
            )
            
            0
            
            
            100,067MEDICAID
            
            
            177,240
            
            
            307,818
            
            
            192,304
            
            
            109,923
            
            
            1,221,859
            
            
            0
            
            
            2,009,144MEDICARE
            
            
            2,821,902
            
            
            261,276
            
            
            156,261
            
            
            203,381
            
            
            673,578
            
            
            0
            
            
            4,116,398PRESUMPTIVE
                ELIGIBILITY
            
            
            (7,913
            )
            
            4,759
            
            
            (7,198
            )
            
            5,180
            
            
            20,149
            
            
            0
            
            
            14,977SELF
                PAY
            
            
            3,534
            
            
            39,221
            
            
            59,803
            
            
            58,320
            
            
            481,831
            
            
            (45,116
            )
            
            597,593HOSPITAL
            
            
            82,410
            
            
            1,388
            
            
            (15,707
            )
            
            64,627
            
            
            192,991
            
            
            0
            
            
            325,709Total
            
            $
            4,152,492
            
            $
            1,818,489
            
            $
            1,042,668
            
            $
            771,188
            
            $
            4,613,035
            
            $
            (45,116
            )
            $
            12,352,756





Other
      non-operating income (expense) increased approximately $131,000 for the year
      ended December 31, 2005, compared to the preceding year. This includes an
      increase in interest income of $64,000, an increase in rental income of $47,000,
      an increase in miscellaneous other income of $5,000 and a decrease in interest
      expense to unrelated parties of $15,000 with the effect of reduced average
      non-inter-company borrowings more than offsetting an increase in average
      interest rates. Interest expense to our former parent, Medicore, Inc., increased
      $102,000 for the year ended December 31, 2005 compared to the preceding year
      as
      a result of an increase in the intercompany advance payable to our former parent
      and borrowings under a demand promissory note payable to our former parent
      and
      increases in the average interest rates on these borrowings. Both the
      intercompany advance payable and the demand promissory
      note payable, as well as accrued interest on the note, were forgiven in
      conjunction with our merger with our former parent. The prime rate was 7.25%
      at
      December 31, 2005, and 5.25% at December 31, 2004. See Notes 1, 2, 3, 4, 12,
      and
      15 of “Notes to the Consolidated Financial Statements.”





44


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
      interest 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 40% owned Ohio affiliate until this company was consolidated
      effective August 1, 2006, due to a change in control, with the company stall
      having a 40% ownership interest until December, 2006, when it acquired the
      other
      60% ownership. See Note 1, Note 9 and Note 14 to “Notes to Consolidated
      Financial Statements.”




**Liquidity
      and Capital Resources**





Working
      capital totaled approximately $17,098,000 at December 31, 2006, which reflected
      an increase of $9,481,000 (124%) during the current year. Included in the
      changes in components of working capital was an increase in cash and cash
      equivalents of $554,000, which included net cash provided by operating
      activities of $3,007,000; net cash used in investing activities of $10,992,000
      (including additions to property and equipment of $5,197,000, payment of an
      employment contract liability of $1,960,000, payments of $4,161,000 on dialysis
      center acquisitions, and distributions of $164,000 received from our 40% owned
      Ohio affiliate); and net cash provided by financing activities of $8,539,000
      (including borrowings of $7,500,000 under our line of credit, debt repayments
      of
      $340,000, distributions to subsidiary minority members of $306,000, receipts
      of
      $383,000 from the exercise of stock options, and capital contributions of
      $1,302,000 by subsidiary minority members).





Net
      cash
      provided by operating activities consists of net income before non-cash items
      consisting of depreciation and amortization of $2,319,000, bad debt expense
      of
      $1,199,000, a deferred income tax benefit of $331,000, deferred tax asset
      utilized of $1,190,000, income applicable to minority interest of $920,000,
      equity in affiliate earnings of $254,000 and non-cash stock compensation expense
      of $275,000, as adjusted for changes in components of working capital.
      Significant changes in components of working capital, in addition to the
      $554,000 increase in cash, included a decrease in refundable income taxes of
      $1,053,000, largely due to tax refunds received; an increase in accounts
      receivable of $5,604,000, an increase in prepaid expenses and other current
      assets of $1,307,000 including property to be sold of $626,000, a decrease
      in
      employment contract liability of $1,960,000 resulting from our merger with
      our
      former parent due to payment of the liability, a decrease in the current portion
      of long-term debt of $822,000 largely due to our refinancing our Georgia
      mortgage that matured April, 2006, a decrease of $380,000 in acquisition
      liabilities from the final payment due on our Keystone acquisition, and an
      increase in income taxes payable at $660,000. 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 $555,000 at December 31,
      2006 and $583,000 at December 31, 2005. 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 $617,000 at December 31, 2006 and $633,000 at December 31, 2005.
      See Note 2 to “Notes to Consolidated Financial Statements.”





45


We
      have
      an equipment financing agreement for kidney dialysis machines that had an
      outstanding balance of approximately $76,000 at December 31, 2006, and $371,000
      at December 31, 2005. There was no additional equipment financing under this
      agreement during 2006. See Note 2 to “Notes to Consolidated Financial
      Statements.”





We
      opened
      centers in Calhoun, Georgia, Aiken, South Carolina (our second Aiken center)
      and
      York, Pennsylvania during 2006. We are in the process of developing a new
      dialysis center in each of South Carolina and Ohio. Payment of the final payment
      due of approximately $381,000 was made on our Keystone Kidney Care acquisition
      in August, 2006. See Note 10 to “Notes to Consolidated Financial
      Statements.”





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 $750,000 to $1,000,000, 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 income. 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.





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. See Notes 3 and 5 to “Notes to Consolidated
      Financial Statements.” To assist with our future expansion we entered into a
      $15,000,000, 3 year credit agreement for a revolving line of credit with Key
      Bank National Association in October 2005. No amounts were financed under this
      new credit facility during 2005. We have outstanding borrowings of $7,500,000
      under this credit facility as of December 31, 2006. 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.”





46




**Aggregate
      Contractual Obligations**





As
      of
      December 31, 2006, the Company’s contractual obligations (in thousands),
      including payments due by period, are as follows:




**Payments
                  due by period****Less
                  than**
              
              
              
              
              
              **More
                  than****Total**
              
              **1
                  year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **5
                  years**Long-term
                  debt
              
              $
              8,748,000
              
              $
              128,000
              
              $
              7,611,000
              
              $
              119,000
              
              $
              890,000Operating
                  leases
              
              
              7,422,000
              
              
              1,810,000
              
              
              3,001,000
              
              
              1,943,000
              
              
              668,000Expected
                  interest payments:Long-term
                  debt
              
              
              1,660,000
              
              
              655,000
              
              
              597,000
              
              
              155,000
              
              
              253,000Purchase
                  obligations:Medical
                  services
              
              
              7,024,000
              
              
              1,501,000
              
              
              2,849,000
              
              
              1,318,000
              
              
              1,356,000Miscellaneous
                  purchase obligations
              
              
              99,000
              
              
              99,000
              
              
              —
              
              
              —
              
              
              —Total
                  purchase obligations
              
              
              7,123,000
              
              
              1,600,000
              
              
              2,849,000
              
              
              1,318,000
              
              
              1,356,000Total
                  contractual obligations
              
              $
              24,953,000
              
              $
              4,193,000
              
              $
              14,158,000
              
              $
              3,535,000
              
              $
              3,167,000





**Merger
      with Our Former Parent, Medicore, Inc.**





Effective
      September 21, 2005, the company and Medicore, Inc., the company’s former parent,
      completed the merger of Medicore with and into the company pursuant to the
      provisions of the Agreement and Plan of Merger between the company and Medicore,
      dated June 2, 2005. In accordance with the terms of that Agreement, on September
      21, 2005, the outstanding shares of Medicore common stock were deemed cancelled
      and converted into the right to receive .68 of a share of the company for each
      common share of Medicore outstanding on that date.





In
      connection with the merger there was a net issuance of approximately 449,000
      common shares of the company resulting in approximately 9,116,000 common shares
      of the company outstanding after the merger. The net issuance gives effect
      to an
      aggregate of approximately 5,271,000 common shares issued by the company to
      former shareholders of Medicore based upon the .68 exchange ratio, and the
      cancellation of 4,821,244 common shares of the company owned by Medicore prior
      to the merger.





The
      merger enabled the control interest in the company to be in the hands of the
      public stockholders and provides the company with additional capital resources
      to continue its growth. See Note 1, Note 3, Note 4, Note 12, and Note 15 to
      “Notes to Consolidated Financial Statements.”





**New
      Accounting Pronouncements**





In
      June,
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes,” which prescribes a recognition threshold and
      measurement attribute for financial statement recognition and measurement of
      tax
      position taken or expected to be taken in a tax return and provides guidance
      on
      derecognition, classification, interest and penalties, accounting in interim
      periods disclosure. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006, with the cumulative effect of the change
      in
      accounting principle recorded as an adjustment to opening retained earnings.
      The
      company is evaluating the impact of adopting FIN 48, but does not expect FIN
      48
      to have a significant effect on its financial statements. See Note 1 to “Notes
      to Consolidated Financial Statements.”




47




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.
      SFAS 157 will be effective for us beginning in 2009. The company is evaluating
      the impact on its financial statements of adopting SFAS 157. See Note 1 to
      “Notes to Consolidated Financial Statements.”





In
      September, 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on
      how the effects of prior year misstatements should be considered in quantifying
      current year financial statement misstatements. SAB 108 is effective for fiscal
      years ending after November 15, 2006. SAB 108 has not had a significant effect
      on our financial statements. See Note 1 to “Notes to Consolidated Financial
      Statements.”




**Critical
      Accounting Policies and Estimates**





The
      SEC
      has issued cautionary advice to elicit more precise disclosure in this Item
      7,
      MD&A, about accounting policies management believes are most critical in
      portraying our financial results and in requiring management’s most difficult
      subjective or complex judgments.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      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.




48




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 SAB 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 SFAS 5 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.





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 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.





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
      adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets,” (FAS 142) effective January 1, 2002, and are required to
      analyze goodwill and indefinite lived intangible assets for impairment on at
      least an annual basis.




49




**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


$3,351,000  at
      December 31, 2006.





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 $8,672,000 at December 31, 2006.





We
      have
      exposure to both rising and falling interest rates. Assuming a relative 15%
      decrease in rates on our period-end investments in interest bearing accounts
      and
      a relative 15% increase in rates on our period-end variable rate debt would
      have
      resulted in a negative impact of approximately $71,000 on our results of
      operations for the year ended December 31, 2006.





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





**Item
      9A. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures.**





As
      of the
      end of the period covered by this areport on Form 10-K for the year ended
      December 31, 2006, 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 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.




50




**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, 2006 that have materially affected,
      or are reasonably likely to materially affect, our control over financial
      reporting. During the year ended December 31, 2006, we retained independent
      consultants and additional personnel to continue to develop formal processes,
      review procedures and documentation standards for the accounting and monitoring
      of non-routine and complex transactions, and for the testing of our internal
      controls, and we anticipate continually improving our internal 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.




51




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, 2006. 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, 2006, 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, 2006, has
      been audited by Moore Stephens, 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, 2006.




**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 our fiscal
      year,
      2006.




**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 2007 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 2007 proxy statement* under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance.”





The
      company adopted a 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 2007 proxy statement* incorporated herein by
      reference.





Information
      concerning the audit, nominating and compensation committees and their charters
      and policies, and the audit committee report is incorporated herein by reference
      to the company’s 2007 proxy statement* under the captions “Corporate Governance”
and “Report of the Audit Committee.”




**Item
      11. Executive Compensation**





Information
      concerning Compensation Discussion and Analysis, the Compensation Committee
      Report and management and director compensation is incorporated herein by
      reference to the company’s 2007 proxy statement* under the captions
“Compensation Discussion and Analysis,” “Compensation Committee Report” and
“Director Compensation.”




52




**Item
          12.****Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters**





Information
      concerning security ownership of certain beneficial owners and management and
      securities authorized for issuance under equity compensation plans is
      incorporated herein by reference to the company’s 2007 proxy statement* under
      the caption “Security Ownership of Certain Beneficial Owners and
      Management.”




**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence**





Information
      concerning certain relationships and related transactions is incorporated herein
      by reference to the company’s 2007 proxy statement* under the caption “Certain
      Relationships and Related Transactions, and Director Independence.” Reference is
      also made to Item 10, “Directors, Executive Officers and Corporate
      Governance.”




**Item
      14. Principal Accountant Fees and
      Services**





Information
      concerning fees and services of the company’s independent auditors is
      incorporated herein by reference to the company’s 2007 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, 2007.




53




**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‡





4
            Instruments
                defining the rights of equity holders, including
                indentures





4.1
            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
                Contracts





10.1
            1999
                Stock Incentive Plan of the Company, as amended (April, 2006)
                (incorporated by reference to the Company’s Proxy Statement dated April
                26, 2006, Appendix A.*




10.2
            Indemnity
                Deed of Trust from the Company to Trustees for the benefit of St.
                Michaels
                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)).





10.3
            Guaranty
                Agreement from the Company to St. Michaels Bank dated December 3,
                1999
                (incorporated by reference to the Company’s December Form 8-K, Item
                7(c)(99)(ii)).





10.4
            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).





10.5
            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).




54




10.6
            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)





10.7
            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)).





10.8
            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)).





10.9
            Lease
                between Viragen, Inc.*(2)*[now Gesualdo and Rosanna Vitale*(3)*]
                and the Company dated December 8, 1992 (incorporated by reference
                to the
                Medicore, Inc.*(4)*Annual Report on Form 10-K for the year ended December 31, 1997 (“Medicore
                Form 10-K”), Part IV, Item
                14(c)(10((xi)).





10.10
            Addendum
                to Lease between Viragen, Inc.*(2)*[now Gesualdo and Rosanna Vitale*(3)*]
                and the Company dated January 15, 1993 (incorporated by reference
                to the
                Medicore*(4)*Form 10-K, Part IV, Item
                14(c)(10)(xii)).





10.11
            Lease
                Renewal Letter by the Company to Gesualdo Vitale*(3)*dated August 5, 2002 (incorporated by reference to Medicore,
                Inc.’s*(4)*Quarterly Report on Form 10-Q for the quarter ended September 30,
                2002,
                Part II, Item 6(10)(i)).





10.12
            Agreement
                and Plan of Merger By and Among Medicore, Inc.*(2)*and the Company dated June 2, 2005 (incorporated by reference to
                Annex A
                to the proxy statement/prospectus included in and made a part of
                the
                Company’s registration statement on Form S-4/A1 dated June 3, 2005, as
                amended on August 10, 2005, registration no.
                333-125515).





10.13
            Articles
                and Plan of Merger filed by the Company and Medicore, Inc.*(2)*dated September 21, 2005 (incorporated herein by reference to the
                Company’s Current Report on Form 8-K dated September 26, 2005, Item
                9.01(c)3.1).





10.14
            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)).





10.15
            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)).





10.16
            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)).





10.17
            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).




55




10.18
            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)).





10.19
            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).*





10.20
            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)).





10.21
            Amendment
                No. 3 to Credit Agreement between the Company and KeyBank National
                Association dated April 7, 2006 (incorporated by reference to the
                Company’s Current Report on Form 8-K dated August 2,
                2006).





10.22
            Independent
                Contractor Agreement dated November 8, 2006 (incorporated by reference
                to
                the Company’s Quarterly Report on Form 10-Q for the quarter ended
                September 30, 2006 (Part II, Item
                10.1).*





14
            Code
                of Ethics





14.1
            Code
                of Ethics and Business Conduct, as amended, September 6, 2006
                (incorporated by reference to the Company’s Current Report on Form 8-K
                dated September 12, 2006, Item
                14.1).





21
            Subsidiaries
                of the Company





23
            Consent
                of experts and counsel





23.1
            Consent
                of Moore Stephens, 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 Certifications





32.1
            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(5).





*
            Management
                contract or compensatory plan or
                arrangement.




56




+
            Documents
                incorporated by reference not included in Exhibit
                Volume.





‡
            Incorporated
                by reference to the company’s registration statement on Form SB-2 dated
                December 22, 1995 as amended February 9, 1996, April 2, 1996 and
                April 15,
                1996, registration no. 33-80877-A, Part II, Item
                27.





*(1)*
            51%
                owned subsidiary.





*(2)*
            Former
                public subsidiary of the company; sold in
                1993.





*(3)*
            Purchasers
                of the property from Viragen, Inc. in August,
                2000.





*(4)*
            Former
                parent of the company. Merged into the company on September 21,
                2005.





*(5)*
            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.





(c)
            Financial
                Statement Schedules Required By Regulation S-X, Excluded From This
                Annual
                Report





None




57




**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. Everett
              *President
                and Chief Executive
                Officer*




March
      15,
      2007





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
                  15, 2007Thomas
                  K. Langbein/s/
                  STEPHEN W. EVERETT
              
              President,
                  Chief Executive Officer and Director
              
              March
                  15, 2007Stephen
                  W. Everett/s/
                  DANIEL R. OUZTS
              
              Vice
                  President of Finance, Chief Financial Officer, Chief Accounting
                  Officer
                  and Treasurer
              
              March
                  15, 2007Daniel
                  R. Ouzts
 /s/
                  PETER D. FISCHBEIN
              
              Director
              
              March
                  15, 2007Peter
                  D. Fischbein/s/
                  ROBERT W. TRAUSE
              
              Director
              
              March
                  15, 2007Robert
                  W. Trause/s/
                  ALEXANDER BIENENSTOCK
              
              Director
              
              March
                  15, 2007Alexander
                  Bienenstock




58




**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, 2006**


**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 as of December 31, 2006 and
                  2005
              
              F-4Consolidated
                  Statements of Income –
                  Years ended
                  December 31, 2006, 2005, and 2004
              
              F-5Consolidated
                  Statements of Stockholders’ Equity – Years ended
                  December 31, 2006, 2005 and 2004
              
              F-6Consolidated
                  Statements of Cash Flows – Years ended December
                  31, 2006, 2005 and 2004
              
              F-7Notes
                  to Consolidated Financial Statements – December 31,
                  2006
              
              F-8The
                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-34




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




**REPORTOF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**




To
      the
      Board of Directors and Shareholders of


Dialysis
      Corporation of America


Linthicum,
      Maryland




We
      have
      audited the accompanying consolidated balance sheets of Dialysis Corporation
      of
      America and its subsidiaries as of December 31, 2006 and 2005, and the related
      consolidated statements of income, stockholders’ equity, and cash flows for each
      of the three years in the period ended December 31, 2006. We also have audited
      management’s assessment, included in the accompanying Report of Management’s
      Internal Control over Financial Reporting, that Dialysis Corporation of America
      maintained effective internal control over financial reporting as of December
      31, 2006 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. Our responsibility is to express
      an
      opinion on these consolidated financial statements, an opinion on management’s
      assessment, and an opinion on the effectiveness of 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 audit 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 audit includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the consolidated financial statements.
      Our audit also includes assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall consolidated
      financial statement presentation. Our audit of internal control over financial
      reporting included obtaining an understanding of internal control over financial
      reporting, evaluating management’s assessment, testing and evaluating the design
      and operating effectiveness of internal control, and performing such procedures
      as we considered necessary in the circumstances. We believe that our audits
      provide a reasonable basis for our opinion.





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 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 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 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 control 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 consolidated financial position of Dialysis
      Corporation of America and its subsidiaries as of December 31, 2006 and 2005,
      and the consolidated results of their operations and their cash flows for each
      of the three years in the period ended December 31, 2006, in conformity with
      accounting principles generally accepted in the United States of
      America.





Also
      in
      our opinion, management’s assessment that Dialysis Corporation of America
      maintained effective internal control over financial reporting as of December
      31, 2006, is fairly stated, in all material respects, based on criteria
      established in “Internal Control - Integrated Framework” issued by the Committee
      of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore,
      in
      our opinion, Dialysis Corporation of America maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2006, based on criteria established in “Internal Control - Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).




MOORE
                STEPHENS, P. C.
              Certified
                Public Accountants.Cranford,
                New Jersey
              February
                23,
                2007




F-3


**DIALYSISCORPORATION
      OF AMERICA AND
      SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**





**December
                  31,****2006**
            
            **December
                  31,****2005** ******ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,491,569
            
            $
            2,937,557Accounts
                receivable, less allowanceof
                $2,512,000 at December 31, 2006;$1,886,000
                at December 31, 2005
            
            
            16,142,202
            
            
            10,538,033Inventories,
                less allowance for obsolescenceof
                $78,000 at December 31. 2006; $77,000 at December 31, 2005
            
            
            1,985,415
            
            
            1,457,566Deferred
                income tax asset
            
            
            1,105,000
            
            
            838,000Prepaid
                expenses and other current assets
            
            
            2,731,888
            
            
            1,425,112Refundable
                income taxes
            
            
            174,174
            
            
            1,227,306Total
                current assets
            
            
            25,630,248
            
            
            18,423,574Property
                and equipment:Land
            
            
            1,338,191
            
            
            1,571,975Buildings
                and improvements
            
            
            6,128,626
            
            
            4,411,670Machinery
                and equipment
            
            
            12,056,713
            
            
            9,686,962Leasehold
                improvements
            
            
            7,921,149
            
            
            6,735,72727,444,679
            
            
            22,406,334Less
                accumulated depreciation and amortization
            
            
            11,091,432
            
            
            8,622,82216,353,247
            
            
            13,783,512Deferred
                income taxes
            
            
            359,295
            
            
            1,680,234Goodwill
            
            
            6,681,160
            
            
            3,649,014Other
                assets
            
            
            831,776
            
            
            1,266,789Total
                other assets
            
            
            7,872,231
            
            
            6,596,037$
            49,855,726
            
            $
            38,803,123**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            1,998,125
            
            $
            1,775,352Accrued
                expenses
            
            
            5,744,348
            
            
            5,739,266Employment
                contract liability
            
            
            —
            
            
            1,960,000Income
                taxes payable
            
            
            660,092
            
            
            —Current
                portion of long-term debt
            
            
            130,000
            
            
            952,000Acquisition
                liabilities – current portion
            
            
            —
            
            
            380,298Total
                current liabilities
            
            
            8,532,565
            
            
            10,806,916Long-term
                debt, less current portion
            
            
            8,618,325
            
            
            635,003Total
                liabilities
            
            
            17,150,890
            
            
            11,441,919Minority
                interest in subsidiaries
            
            
            3,643,347
            
            
            1,748,130Commitments
                and ContingenciesStockholders’
                equity:Common
                stock, $.01 par value, authorized 20,000,000 shares:
              9,564,346
                shares issued and outstanding at December 31, 2006;
              9,265,534
                shares issued and outstanding at December 31, 2005
            
            
            95,643
            
            
            92,655Additional
                paid-in capital
            
            
            15,729,206
            
            
            15,332,975Retained
                earnings
            
            
            13,236,640
            
            
            10,187,444Total
                stockholders’ equity
            
            
            29,061,489
            
            
            25,613,074$
            49,855,726
            
            $
            38,803,123




See
      notes
      to consolidated financial statements.




F-4


**DIALYSISCORPORATION
      OF AMERICA AND
      SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME**




**Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Operating
                revenues:Sales:Medical
                services revenue
            
            $
            61,138,963
            
            $
            44,686,579
            
            $
            40,449,562Product
                sales
            
            
            891,242
            
            
            206,941
            
            
            —Total
                sales revenues
            
            
            62,030,205
            
            
            44,893,520
            
            
            40,449,562Other
                income
            
            
            430,033
            
            
            498,257
            
            
            536,43462,460,238
            
            
            45,391,777
            
            
            40,985,996Cost
                and expenses:Cost
                of sales revenues:Cost
                of medical services
            
            
            36,968,682
            
            
            27,859,804
            
            
            23,545,586Cost
                of product sales
            
            
            549,590
            
            
            119,327
            
            
            —Total
                cost of sales revenues
            
            
            37,518,272
            
            
            27,979,131
            
            
            23,545,586Selling,
                general and administrative expensesCorporate
            
            
            6,460,309
            
            
            4,674,367
            
            
            4,870,851Facility
            
            
            8,988,078
            
            
            7,032,596
            
            
            5,718,683Total
            
            
            15,448,387
            
            
            11,706,963
            
            
            10,589,534Stock
                compensation expense
            
            
            275,438
            
            
            —
            
            
            —Depreciation
                and amortization
            
            
            2,319,070
            
            
            1,748,738
            
            
            1,498,987Provision
                for doubtful accounts
            
            
            1,198,995
            
            
            571,016
            
            
            1,197,90556,760,162
            
            
            42,005,848
            
            
            36,832,012Operating
                income
            
            
            5,700,076
            
            
            3,385,929
            
            
            4,153,984Other
                income (expense):Interest
                income officer/director note
            
            
            —
            
            
            5,527
            
            
            4,193Interest
                expense on note and advancespayable
                to parent
            
            
            —
            
            
            (157,591
            )
            
            (55,996
            )Other
                income, net
            
            
            100,968
            
            
            217,821
            
            
            86,753100,968
            
            
            65,757
            
            
            34,950Income
                before income taxes, minority interestand
                equity in affiliate earnings
            
            
            5,801,044
            
            
            3,451,686
            
            
            4,188,934Income
                tax provision
            
            
            2,085,874
            
            
            1,426,552
            
            
            1,576,292Income
                before minority interest and equity inaffiliate
                earnings
            
            
            3,715,170
            
            
            2,025,134
            
            
            2,612,642Minority
                interest in incomeof
                consolidated subsidiaries
            
            
            (919,739
            )
            
            (454,214
            )
            
            (681,385
            )Equity
                in affiliate earnings
            
            
            253,765
            
            
            328,732
            
            
            282,946Net
                income
            
            $
            3,049,196
            
            $
            1,899,652
            
            $
            2,214,203Earning
                per share:Basic
            
            
            .32
            
            $
            .22
            
            $
            .27Diluted
            
            
            .32
            
            $
            .20
            
            $
            .25Weighted
                average shares outstanding:Basic
            
            
            9,484,926
            
            
            8,769,399
            
            
            8,256,282Diluted
            
            
            9,575,733
            
            
            9,266,905
            
            
            8,783,857




See
      notes
      to consolidated financial statements.





F-5





**DIALYSISCORPORATION
      OF AMERICA AND
      SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**




**Capital
                in****Common**
            
            **Excess
                of**
            
            **Retained**
            
            **Notes****Stock**
            
            **Par
                Value**
            
            **Earnings**
            
            **Receivable**
            
            **Total**Balance
                December 31, 2003
            
            $
            79,376
            
            $
            5,238,952
            
            $
            6,073,589
            
            $
            (421,600
            )
            $
            10,970,317Net
                income
            
            
            —
            
            
            —
            
            
            2,214,203
            
            
            —
            
            
            2,214,203Exercise
                of stock options for 712,446shares
                of common stock, net of 72,375shares
                tendered in payment; includes tax effect
              of
                $119,611 (Notes 3 and 6)
            
            
            6,400
            
            
            238,706
            
            
            —
            
            
            —
            
            
            245,106Notes
                receivable paid with 91,800shares
                of common stock (Note 6)
            
            
            (918
            )
            
            (520,512
            )
            
            —
            
            
            421,600
            
            
            (99,830
            )Balance
                December 31,2004
            
            
            84,858
            
            
            4,957,146
            
            
            8,287,792
            
            
            —
            
            
            13,329,796Net
                income
            
            
            —
            
            
            —
            
            
            1,899,652
            
            
            —
            
            
            1,899,652Exercise
                of stock options for 330,616shares
                of common stock
            
            
            3,306
            
            
            329,329
            
            
            —
            
            
            —
            
            
            332,635Merger
                with former parent(449,103
                shares) (Note 16)
            
            
            4,491
            
            
            10,046,500
            
            
            —
            
            
            —
            
            
            10,050,991Balance
                December 31, 2005
            
            
            92,655
            
            
            15,322,975
            
            
            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 (Notes 3 and 6)
            
            
            2,765
            
            
            411,484
            
            
            —
            
            
            —
            
            
            414,249Share
                compensation issued (22,250 shares)
            
            
            223
            
            
            258,848
            
            
            —
            
            
            —
            
            
            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
            
            $
            —
            
            $
            29,061,489





See
      notes
      to consolidated financial statements.




F-6




**DIALYSISCORPORATION
      OF AMERICA AND
      SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Operating
                activities:Net
                income
            
            $
            3,049,196
            
            $
            1,899,652
            
            $
            2,214,203Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
            
            
            2,303,795
            
            
            1,735,559
            
            
            1,492,744Amortization
            
            
            15,275
            
            
            13,179
            
            
            6,243Bad
                debt expense
            
            
            1,198,995
            
            
            571,016
            
            
            1,197,905Deferred
                income tax provision (benefit)
            
            
            (331,413
            )
            
            (63,930
            )
            
            192,000Deferred
                tax asset utilized
            
            
            1,190,000
            
            
            1,309,283
            
            
            —Stock
                compensation expense
            
            
            275,438
            
            
            —
            
            
            —Minority
                interest
            
            
            919,739
            
            
            454,214
            
            
            681,385Equity
                in affiliate earnings
            
            
            (253,765
            )
            
            (328,732
            )
            
            (282,946
            )Increase
                (decrease) relating to operating activities from:Accounts
                receivable
            
            
            (5,945,256
            )
            
            (2,462,593
            )
            
            (4,661,238
            )Inventories
            
            
            (411,557
            )
            
            4,383
            
            
            (193,486
            )Interest
                receivable on officer loan
            
            
            —
            
            
            16,696
            
            
            (4,193
            )Prepaid
                expenses and other current assets
            
            
            (716,821
            )
            
            (150,739
            )
            
            85,183Refundable
                income taxes
            
            
            1,053,132
            
            
            (1,111,929
            )
            
            —Accounts
                payable
            
            
            161,266
            
            
            95,809
            
            
            330,112Accrued
                interest on note payable to former parent
            
            
            —
            
            
            37,443
            
            
            26,639Accrued
                expenses
            
            
            (115,824
            )
            
            (96,676
            )
            
            1,839,390Income
                taxes payable
            
            
            614,444
            
            
            —
            
            
            90,662Net
                cash provided by operating activities
            
            
            3,006,644
            
            
            1,922,635
            
            
            3,014,603Investing
                activities:Acquisition
                of former parent
            
            
            —
            
            
            2,736,500
            
            
            —Loans
                to physician affiliates
            
            
            —
            
            
            —
            
            
            (125,000
            )Payments
                received on physician affiliate loans
            
            
            16,468
            
            
            17,146
            
            
            5,987Repayment
                of officer loan
            
            
            —
            
            
            95,000
            
            
            —Additions
                to property and equipment, net of minor disposals
            
            
            (5,196,967
            )
            
            (5,482,338
            )
            
            (3,131,701
            )Payment
                of employment contract liability
            
            
            (1,960,000
            )
            
            —
            
            
            —Payment
                dissenting merger shareholders
            
            
            (2,100
            )
            
            —
            
            
            —Acquisition
                of dialysis centers
            
            
            (4,161,304
            )
            
            (380,297
            )
            
            (757,616
            )Distributions
                from affiliate
            
            
            163,821
            
            
            339,606
            
            
            96,633Purchase
                of minority interests in subsidiaries
            
            
            —
            
            
            —
            
            
            (670,000
            )Consolidation
                of former affiliate
            
            
            149,225
            
            
            —
            
            
            —Other
                assets
            
            
            (1,264
            )
            
            (55,399
            )
            
            (23,389
            )Net
                cash used in investing activities
            
            
            (10,992,121
            )
            
            (2,729,782
            )
            
            (4,605,086
            )Financing
                activities:Advances
                from former parent
            
            
            —
            
            
            161,929
            
            
            215,023Notes
                payable to former parent
            
            
            —
            
            
            3,096,000
            
            
            1,435,008Line
                of credit borrowings
            
            
            7,500,000
            
            
            —
            
            
            —Payments
                on long-term debt
            
            
            (339,582
            )
            
            (511,933
            )
            
            (715,037
            )Exercise
                of stock options
            
            
            383,249
            
            
            332,635
            
            
            5,400Capital
                contributions by subsidiaries’ minority members
            
            
            1,301,884
            
            
            434,000
            
            
            172,000Distribution
                to subsidiary minority members
            
            
            (306,062
            )
            
            (369,530
            )
            
            (435,510
            )Net
                cash provided by financing activities
            
            
            8,539,489
            
            
            3,143,101
            
            
            676,884Increase
                (decrease) in cash and cash equivalents
            
            
            554,012
            
            
            2,335,954
            
            
            (913,599
            )Cash
                and cash equivalents at beginning of year
            
            
            2,937,557
            
            
            601,603
            
            
            1,515,202Cash
                and cash equivalents at end of year
            
            $
            3,491,569
            
            $
            2,937,557
            
            $
            601,603




See
      notes
      to consolidated financial statements.





F-7




**DIALYSISCORPORATION
        OF AMERICA AND
        SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Business***





The
      company is primarily engaged in kidney dialysis operations which include
      outpatient hemodialysis services, home dialysis services, inpatient dialysis
      services and ancillary services associated with dialysis treatments. The company
      owns 34 operating dialysis centers (including three centers acquired in the
      first quarter of 2006 and two centers acquired in the first quarter of 2007)
      located in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina
      and
      Virginia. The company also manages an unaffiliated Georgia center (see Note
      7
      and Note 17), has 3 dialysis facilities under development and has agreements
      to
      provide inpatient dialysis treatments to 10 hospitals. Subsequent to the
      completion of the company’s merger with Medicore, Inc., its former parent, the
      company also engages in medical product sales. The medical products operations
      are not a significant component of the company’s operations with operating
      revenues of $891,000 in 2006 and $207,000 in 2005 (1.4% and .5%, respectively
      of
      operating revenues) and operating income of $69,000 in 2006 and $25,000 in
      2005
      (1.2% and .7%, respectively of operating income). See “Consolidation” below in
      this Note 1, Note 3, Note 4, Note 12, and Note 15.





***Medical
      Service Revenue***





Our
      revenues by payor are as follows:





******Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Medicare
            
            
            52
            %
            
            51
            %
            
            48
            %Medicaid
                and comparable programs
            
            
            9
            
            
            8
            
            
            8Hospital
                inpatient dialysis services
            
            
            3
            
            
            5
            
            
            6Commercial
                insurers and other private payors
            
            
            36
            
            
            36
            
            
            38100
            %
            
            100
            %
            
            100
            %




Our
      sources of revenue (in thousands) are as follows:





******Year Ended December 31,********2006**
            
            ******2005**
            
            ******2004**Outpatient
                hemodialysis services
            
            $
            32,856
            
            
            54
            %
            $
            23,084
            
            
            52
            %
            $
            18,599
            
            
            46
            %Home
                dialysis services
            
            
            3,625
            
            
            6
            
            
            3,198
            
            
            7
            
            
            2,691
            
            
            7Inpatient
                hemodialysis services
            
            
            2,191
            
            
            3
            
            
            2,055
            
            
            5
            
            
            2,261
            
            
            5Ancillary
                services
            
            
            22,467
            
            
            37
            
            
            16,350
            
            
            36
            
            
            16,899
            
            
            42$
            61,139
            
            
            100
            %
            $
            44,687
            
            
            100
            %
            $
            40,450
            
            
            100
            %




***Consolidation***





The
      consolidated financial statements include the accounts of Dialysis Corporation
      of America and its subsidiaries, collectively referred to as the “company.” All
      material intercompany accounts and transactions have been eliminated in
      consolidation. The company was formerly a majority owned subsidiary of Medicore,
      Inc., until the merger of Medicore into the company effected on September 21,
      2005. See “Business” above in this Note 1, Note 3, Note 4, Note 12, and Note
      15.




F-8




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued**





The
      company’s Toledo, Ohio subsidiary, which was 40% owned until December 2006, has
      been consolidated since August, 2006 due to the company taking control of this
      facility. This subsidiary was previously accounted for using the equity method
      of accounting. See Note 14.





***Stock
      Split***





On
      January 28, 2004, the company effected a two-for-one stock split. All share
      and
      per share data in the consolidated financial statements and notes have been
      adjusted to reflect the two-for-one split. See Note 13.





***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.





The
      company’s 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***





The
      company has contractual arrangements with certain vendors pursuant to which
      it
      receives discounts based on volume of purchases. These discounts are recorded
      in
      accordance with paragraph 4 of EITF 02-16 as a reduction in inventory costs
      resulting in reduced costs of sales as the related inventory is
      utilized.





***Government
      Regulation***





A
      substantial portion of the company’s revenues are attributable to payments
      received under Medicare, which is supplemented by Medicaid or comparable
      benefits in the states in which the company operates.





Reimbursement
      rates under these programs are subject to regulatory changes and governmental
      funding restrictions. Laws and regulations governing the Medicare and Medicaid
      programs are complex and subject to interpretation. The company believes that
      it
      is in compliance with all applicable laws and regulations and is not aware
      of
      any pending or threatened investigations involving allegations of potential
      wrongdoing. While no such regulatory inquiries have been made, compliance with
      such laws and regulations can be subject to future government review and
      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, 2006**
 **NOTE
        1—SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES—Continued**





***Cash
      and Cash Equivalents***





The
      company considers all highly liquid investments with a maturity of three months
      or less when purchased to be cash equivalents. The carrying amounts reported
      in
      the balance sheet for cash and cash equivalents approximate their fair values.
      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 invested.





***Credit
      Risk***





The
      company’s primary concentration of credit risk is with accounts receivable,
      which consist of amounts owed by governmental agencies, insurance companies
      and
      private patients. Receivables from Medicare and Medicaid comprised 45% of
      receivables at December 31, 2006 and December 31, 2005.





***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 inventory of the company’s
      medical products division acquired pursuant to the company’s merger with its
      former parent. See “Consolidation” above in this Note 1, Note 3, Note 4, Note 12
      and Note 15.





***Prepaid
      Expenses and Other Current Assets***





Prepaid
      expenses and other current assets is comprised as follows:





**December
                31,********2006**
            
            **2005**Property
                to be sold (See Note 5)
            
            $
            625,716
            
            $Prepaid
                expenses
            
            
            1,089,186
            
            
            993,277Other
            
            
            1,016,986
            
            
            431,835$
            2,731,888
            
            $
            1,425,112




***Accrued
      Expenses***





Accrued
      expenses is comprised as follows:





**December
                31,****2006**
            
            **2005**Accrued
                compensation
            
            $
            1,817,953
            
            $
            1,059,791Excess
                insurance liability
            
            
            2,835,216
            
            
            3,195,520Other
            
            
            1,091,179
            
            
            1,483,955$
            5,744,348
            
            $
            5,739,266




F-10


**DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
          31, 2006**
 **NOTE
        1—SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES—Continued**





Excess
      insurance liability represents amounts paid by insurance companies in excess
      of
      the amounts expected by the company from the insurers. The company communicates
      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 the company based on estimated fee
      schedules. These amounts remain in excess insurance liability until resolution.
      The company has identified approximately $536,000 of the excess insurance
      liability as of December 31, 2006, as relating to duplicate payments that will
      be refunded. Approximately $688,000 for 2006 and $43,000 for 2005 of amounts
      determined to be nonrefundable that had been included in excess insurance
      liability were recorded in medical services revenues.





***Vendor
      Concentration***





There
      is
      only one supplier of erythropoietin (EPO) in the United States. This supplier
      received FDA approval for an alternative product available for dialysis
      patients, which is indicated to be effective for a longer period than EPO.
      The
      alternative drug also could be administered by the patient’s physician.
      Accordingly, the use of this drug 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 $16,830,000 in 2006, $12,580,000 in 2005 and $11,381,000 in 2004,
      comprised 28% of medical services revenues in each of 2006, 2005 and
      2004.





***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. See
      Note 8.





***Long-Lived
      Asset Impairment***





Pursuant
      to Financial Accounting Standards Board Statement No. 121, “Accounting for the
      Impairment of Long-Lived Assets to be Disposed of,” impairment of long-lived
      assets, including intangibles related to such assets, is recognized whenever
      events or changes in circumstances indicate that the carrying amount of the
      asset, or related groups of assets, may not be fully recoverable from estimated
      future cash flows and the fair value of the related assets is less than their
      carrying value. Financial Accounting Standards Board Statement No. 144,
“Accounting for the Impairment of Disposal of Long-lived Assets” (FAS 144)
      clarified when a long-lived asset held for sale should be classified as such.
      It
      also clarifies previous guidance under FAS 121. The company, based on current
      circumstances, does not believe any indicators of impairment are
      present.




F-11




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued**





***Comprehensive
      Income***





The
      company follows Financial Accounting Standards Board Statement No. 130,
“Reporting Comprehensive Income” (FAS 130) which contains rules for the
      reporting of comprehensive income and its components. Comprehensive income
      consists of net income.





***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. The
      company occasionally provides dialysis treatments on a charity basis to patients
      who cannot afford to pay. The amount is not significant, and the company does
      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. The company adopted Statement
      of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
      Assets” (FAS 142) effective January 1, 2002. Under FAS 142, goodwill and
      intangible assets with indefinite lives are no longer amortized but are reviewed
      annually (or more frequently if impairment indicators are present) for
      impairment, which testing indicated no impairment for goodwill. See Note
      9.





***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
      $135,000 at December 31, 2006 and $67,000 at December 31, 2005 are included
      in
      other assets. Amortization expense was $15,275 for 2006, $13,179 for 2005 and
      $6,243 for 2004.





***Income
      Taxes***





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





***Stock-Based
      Compensation***





The
      company measures 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 for shares vesting during 2006 was
      approximately $275,000 with a related income tax benefit of approximately
      $105,000.




The
      company adopted Statement of Financial Statement of Financial Accounting
      Standards No. 123 (revised), “Share-Based Payment:” (“FAS 123(R)”) effective
      January 1, 2006. Provisions of FAS123(R) required companies to recognize the
      fair value of stock option grants as a compensation costs in their financial
      statements. In addition to stock options granted after the effective date,
      companies are required to recognize a compensation cost with respect to any
      unvested stock options outstanding as of the effective date equal to the grant
      date fair value of those options with the cost related to unvested options
      to be
      recognized over the vesting period of the options. The board of directors
      approved accelerated vesting of all unvested options as of December 31, 2005
      resulting in there being no unvested options as of December 31,
      2005.




F-12


**DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
          31, 2006**
 **NOTE
        1—SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES—Continued**





Pro
      forma
      information regarding net income and earnings per share has been presented
      below
      for 2005 and 2004 as if the company had accounted for its employee stock options
      under the fair value method required by FAS 123(R). The fair value for these
      options was estimated at the date of grant using a Black-Scholes option pricing
      model with the following weighted-average assumptions for options granted during
      2004, 2003, 2002 and 2001, respectively: risk-free interest rate of 3.83%,
      1.44%, 3.73%, and 5.40%; no dividend yield; volatility factor of the expected
      market price of the company’s common stock of 1.31, 1.07, 1.15 and 1.14, and a
      weighted-average expected life of 5 years, 4.7 years, 5 years and 4
      years.





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





For
      purposes of pro forma disclosures, the estimated fair value of options is
      amortized to expense over the options’ vesting period. The board of directors
      approved accelerated vesting of all unvested options with all outstanding
      options considered vested as of December 31, 2005. The effect of the accelerated
      vesting on 2005 pro forma results is reflected in the company’s pro forma
      information that follows:





**2005**
            
            **2004**Net
                income, as reported
            
            $
            1,900,000
            
            $
            2,214,000Stock-based
                employee compensation expense underfair
                value method, net of related tax effects
            
            
            (430,000
            )
            
            (170,000
            )Pro
                forma net income
            
            $
            1,470,000
            
            $
            2,044,000Earnings
                per share:Basic,
                as reported
            
            $
            .22
            
            $
            .27Basic,
                pro forma
            
            $
            .17
            
            $
            .25Diluted,
                as reported
            
            $
            .20
            
            $
            .25Diluted,
                pro forma
            
            $
            .16
            
            $
            .23




F-13




**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2006**




**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued**





***Earnings
      per Share***





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                income
            
            $
            3,049,196
            
            $
            1,899,652
            
            $
            2,214,203Weighted
                average shares outstanding
            
            
            9,484,926
            
            
            8,769,399
            
            
            8,256,282Weighted
                average shares outstanding
            
            
            9,484,926
            
            
            8,769,399
            
            
            8,256,282Shares
                issuable for employee stock awards and director fees
            
            
            17,701
            
            
            —
            
            
            —Weighted
                average shares diluted computation
            
            
            9,502,627
            
            
            8,769,399
            
            
            8,256,282Effect
                of diluted stock options
            
            
            73,106
            
            
            497,506
            
            
            527,575Weighted
                average shares, as adjusted diluted computation
            
            
            9,575,733
            
            
            9,266,905
            
            
            8,783,857Earnings
                per share:Basic
            
            $
            .32
            
            $
            .22
            
            $
            .27Diluted
            
            $
            .32
            
            $
            .20
            
            $
            .25




The
      company had various potentially dilutive outstanding stock options during the
      periods presented. See Note 6.




***Other
      Income***





Operating:





Other
      operating income is comprised as follows:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Management
                fee income
            
            $
            430,033
            
            $
            498,257
            
            $
            402,251Litigation
                settlement
            
            
            —
            
            
            —
            
            
            134,183$
            430,033
            
            $
            498,257
            
            $
            536,434




F-14




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued**





Non-operating:





Other
      non-operating income (expense) is comprised as follows:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Rental
                income
            
            $
            369,888
            
            $
            238,743
            
            $
            191,350Interest
                income
            
            
            193,429
            
            
            99,300
            
            
            35,402Interest
                expense
            
            
            (409,676
            )
            
            (147,635
            )
            
            (162,791
            )Other
            
            
            32,327
            
            
            27,413
            
            
            22,792Litigation
                settlement, net
            
            
            (85,000
            )
            
            —
            
            
            —Other
                income, net
            
            $
            100,968
            
            $
            217,821
            
            $
            86,753




***Estimated
      Fair Value of Financial Instruments***





The
      carrying value of cash, accounts receivable and debt in the accompanying
      financial statements approximate their fair value because of the short-term
      maturity of these instruments, and in the case of debt because such instruments
      either bear variable interest rates which approximate market or have interest
      rates approximating those currently available to the company 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
      June,
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes,” which clarifies the accounting for uncertainty in
      income taxes. FIN 48 prescribes a recognition threshold and measurement
      attribute for financial statement recognition and measurement of a tax position
      taken or expected to be taken in a tax return. FIN 48 requires that a company
      recognize in its financial statements, the impact of a tax position, if that
      position is more likely than not to be sustained on audit, based on the
      technical merits of the position. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods and disclosure. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006, with the cumulative effect of the change
      in
      accounting principle recorded as an adjustment to opening retained earnings.
      The
      company is evaluating the impact of adopting FIN 48, but does not expect FIN
      48
      to have a significant effect on its financial statements.





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.
      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. SFAS 157
      will
      be effective for the company beginning in 2009. The company is evaluating the
      impact on its financial statements of adopting SFAS 157.




F-15


**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued**





In
      September, 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on
      how the effects of prior year misstatements should be considered in quantifying
      current year financial statement misstatements. The interpretations by the
      SEC
      staff in SAB 108 were issued to address the diversity in the practice of
      quantifying financial statements misstatements and the potential for a build
      up
      of improper amounts on the balance sheet. The SEC staff indicated that companies
      should quantify errors using both a balance sheet and income statement approach
      and determine whether either approach results in material misstatement. SAB
      108
      is effective for fiscal years ending after November 15, 2006. SAB 108 has not
      had a significant effect on the company’s financial statements.





**NOTE
      2—LONG-TERM DEBT**





Long-term
      debt is as follows:





******December 31,****2006**
            
            **2005**Revolving
                line of credit
            
            $
            7,500,000
            
            $
            —Maturity
                of October 24, 2008.See
                below for details.Development
                loan secured by land and buildingwith
                a net book value of $378,000 atDecember
                31, 2006. Monthly principalpayments
                of $2,402 plus interest atprime
                with remaining balance due May 2, 2026.
            
            
            555,122
            
            $
            582,979Mortgage
                note secured by land and buildingwith
                a net book value of $823,000 atDecember
                31, 2006. Interest ofprime
                with a rate floor of 5.75% and arate
                ceiling of 8.00%. Monthlypayments
                of $6,000 including principal andinterest
                with remaining balance due April, 2011.
            
            
            617,145
            
            
            632,591Equipment
                financing agreement secured by equipmentwith
                a net book value of $168,000 at December 31,2006.
                Monthly payments totaling approximately $10,000 as ofDecember
                31, 2006, including principal and interest,as
                described below, pursuant to various schedulesextending
                through August, 2007 with interest at ratesranging
                from 7.36% to 8.22%.
            
            
            76,058
            
            
            371,4338,748,325
            
            
            1,587,003Less
                current portion
            
            
            130,000
            
            
            952,000$
            8,618,325
            
            $
            635,003




F-16




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**





**NOTE
      2—LONG-TERM DEBT—Continued**





The
      company through its subsidiary, DCA of Vineland, LLC, pursuant to a December
      3,
      1999 loan agreement obtained a $700,000 development loan with interest at 8.75%
      through December 2, 2001, 11⁄2% over the prime rate thereafter through December
      15, 2002, 1% over prime until May 2006 and prime thereafter secured by a
      mortgage on the company’s real property in Easton, Maryland. The bank
      subsequently released DCA of Vineland, LLC’s assets as security leaving the
      company as the remaining obligor on this loan agreement. Outstanding borrowings
      were subject to monthly payments of interest only through December 2, 2001,
      with
      monthly payments thereafter of $2,917 principal plus interest through December
      2, 2002, monthly payments thereafter of $2,217 plus interest until May 2006
      when
      the loan was modified and $2,402 plus interest thereafter until maturity on
      May
      2, 2026. This loan had an outstanding principal balance of approximately
      $555,000 at December 31, 2006 and $583,000 December 31, 2005.





In
      April
      2001, the company obtained a $788,000 five-year mortgage through April, 2006,
      on
      its building in Valdosta, Georgia with interest at 8.29% until March, 2002,
      7.59% thereafter until December 16, 2002, prime plus 1⁄2% with a minimum of 6.0%
      effective December 16, 2002 thereafter until April 2006 when the mortgage was
      refinanced, with a rate thereafter of prime with a rate floor of 5.75% and
      a
      rate ceiling of 8.00%. Payments are $6,000 including principal and interest
      commencing May, 2006, 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 $617,000 at December 31, 2006 and $633,000
      at
      December 31, 2005.





The
      equipment financing agreement represents financing for kidney dialysis machines
      for the company’s dialysis facilities. There was no financing under this
      agreement in 2006, 2005 or 2004. Payments under the agreement are pursuant
      to
      various schedules extending through August, 2007. Financing under the equipment
      purchase agreement is a noncash financing activity, which is a supplemental
      disclosure required by Financial Accounting Standards Board Statement No 95,
      “Statement of Cash Flows.” The remaining principal balance under this financing
      amounted to approximately $76,000 at December 31, 2006 and $371,000 at December
      31, 2005.





The
      prime
      rate was 8.25% as of December 31, 2006 and 7.25% as of December 31, 2005. For
      interest payments, see Note 12.





Scheduled
      maturities of long-term debt outstanding at December 31, 2006 are
      approximately:





2007
            
            $
            130,0002008
            
            
            7,554,0002009
            
            
            56,0002010
            
            
            58,0002011
            
            
            61,000Thereafter
            
            
            889,000$
            8,748,000




F-17


**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2006**





**NOTE
      2—LONG-TERM DEBT—Continued**





The
      company’s two mortgage agreements contain certain restrictive covenants that,
      among other things, restrict the payment of dividends, require lenders’ approval
      for a merger, sale of substantially all the assets, or other business
      combination of the company, and require maintenance of certain financial ratios.
      The company was in compliance with the debt covenants at December 31, 2006
      and
      December 31, 2005.





On
      October 24, 2005, the company entered into a three year, $15,000,000 revolving
      line of credit with a maturity date of October 24, 2008. There was no financing
      under this agreement in 2005. Each of the company’s 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 the company’s pledge of its ownership in its 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. Borrowings under the revolving line of credit accrue interest at
      a
      rate based upon the applicable margin for base rate and LIBOR loans plus the
      base rate for base rate loans and the LIBOR rate for LIBOR loans, 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. The company has the right
      to
      convert the 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. The company was in compliance with the requirements of
      this
      credit facility at December 31, 2006 and December 31, 2005.





The
      company has $7,500,000 in outstanding borrowings under its line of credit at
      December 31, 2006, including three LIBOR loans totaling $6,000,000, and a
      $1,500,000 in base rate loan. The LIBOR loans have an interest rate of 6.625%,
      including a LIBOR rate of 5.375% plus an applicable margin of 1.25%. The base
      rate loan has an interest rate of 8.25% as of December 31, 2006. The LIBOR
      loans
      are all three month loans including a $1,500,000 loan maturing January 3, 2007,
      a $3,500,000 loan maturing March 5, 2007 and a $1,000,000 loan maturing March
      8,
      2007. These loans have been renewed for the same terms.





**NOTE
      3—INCOME TAXES**





The
      income tax provision consists of the following income tax expense (benefit)
      components:





**2006**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            1,970,000
            
            $
            1,241,000
            
            $
            1,052,000State
            
            
            410,000
            
            
            240,000
            
            
            324,000City
            
            
            37,000
            
            
            10,000
            
            
            8,0002,417,000
            
            
            1,491,000
            
            
            1,384,000Deferred:Federal
            
            
            (317,000
            )
            
            (156,000
            )
            
            227,000State
            
            
            (14,000
            )
            
            92,000
            
            
            (35,000
            )(331,000
            )
            
            (64,000
            )
            
            192,000$
            2,086,000
            
            $
            1,427,000
            
            $
            1,576,000




F-18




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      3—INCOME TAXES—Continued**





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





**December
                31,****2006**
            
            **2005**Deferred
                tax liabilities:Depreciation
                and amortization
            
            $
            640,000
            
            $
            814,000Total
                deferred tax liabilities
            
            
            640,000
            
            
            814,000Deferred
                tax assets:Accrued
                expenses
            
            
            207,000
            
            
            153,000Bad
                debt allowance
            
            
            898,000
            
            
            685,000Startup
                costs and other intangibles
            
            
            64,000
            
            
            141,000Subtotal
            
            
            1,169,000
            
            
            979,000Net
                operating loss carryforwards
            
            
            935,000
            
            
            2,353,000Total
                deferred tax assets
            
            
            2,104,000
            
            
            3,332,000Net
                deferred tax asset
            
            $
            1,464,000
            
            $
            2,518,000





No
      valuation allowance was recorded for deferred tax assets at December 31, 2006
      or
      December 31, 2005, due to the company’s anticipated prospects for future taxable
      income in an amount sufficient to realize the deferred tax assets.





As
      a
      result of the company’s merger with its former parent, the company acquired a
      deferred tax asset of approximately $3,300,000, representing tax benefits from
      the former parent’s net operating loss carryforwards that the company can
      utilize to satisfy future income tax liabilities. The company has applied
      approximately $560,000 of the acquired deferred tax asset to offset a deferred
      income tax liability of the same amount, which would otherwise represent a
      future tax liability of the company. The company has also applied approximately
      $2,400,000 of the deferred tax asset toward its 2005 and 2006 tax liability.
      See
      Note 1, Note 4, Note 12 and Note 15.





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Statutory
                tax rate (34%) applied to income (loss)before
                income taxes, minority interest and equity
              in
                affiliate earnings
            
            $
            1,972,000
            
            $
            1,174,000
            
            $
            1,424,000Adjustments
                due to:State
                and city taxes, net of federal benefit
            
            
            295,000
            
            
            193,000
            
            
            218,000Change
                in valuation allowance
            
            
            —
            
            
            —
            
            
            (18,000
            )Non-deductible
                items
            
            
            13,000
            
            
            11,000
            
            
            18,000Subsidiary
                minority ownership
            
            
            (271,000
            )
            
            (131,000
            )
            
            (206,000
            )Ownership
                in affiliate
            
            
            72,000
            
            
            112,000
            
            
            96,000Other
            
            
            5,000
            
            
            68,000
            
            
            44,000$
            2,086,000
            
            $
            1,427,000
            
            $
            1,576,000




F-19




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      3—INCOME
      TAXES—Continued**





The
      company has equity positions in 30 limited liability companies (“LLC’s”), and
      one limited partnership (“LP”) each possessing a finite life. Based on their
      limited liability status, its 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 the company’s equity position in subsidiary LLC’s and LP’s are
      included in the company’s 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
      the
      company’s equity position in its 40% owned affiliate (see Note 1 and Note 14)
      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 and 70,348
      non-qualified stock options during 2004 resulted in tax deductions of $84,000
      and $304,000, respectively, 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 and $120,000,
      respectively, resulted in a corresponding increase in additional paid-in capital
      of approximately $31,000 and $120,000, respectively. This represents, a non
      cash
      financing activity, which is a supplemental disclosure required by Accounting
      Standards Board Statement No. 95 “Statement of Cash Flows”. See Note
      12.





For
      income tax payments, see Note 12.





**NOTE
      4—TRANSACTIONS
      WITH
      FORMER PARENT**





Our
      former parent provided certain financial and administrative services for us.
      Central operating costs were charged on the basis of time spent. In the opinion
      of management, this method of allocation is reasonable. The amount of expenses
      allocated by the former parent totaled approximately $150,000 for the year
      ended
      December 31, 2005, with this allocation ceasing when the company and its former
      parent merged (see Note 1, Note 3, Note 12 and Note 15) and $200,000 for the
      year ended December 31, 2004, which is included in selling, general and
      administrative expenses in the Consolidated Statements of Income.





We
      had an
      intercompany advance payable to our former parent of approximately $449,000
      as
      of December 31, 2004, which bore interest at the short-term Treasury Bill rate.
      Interest expense on intercompany advances payable was approximately $9,000
      and
      $5,000 for the years ended December 31, 2005 and 2004, respectively with the
      interest ceasing when the company and its former parent merged in September,
      2005. Interest was included in the intercompany advance balance. The
      intercompany advance of approximately $611,000 was forgiven as a result of
      the
      company’s merger with its former parent. See Note 1, Note 3, Note 12 and Note
      15.




F-20


**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      4—TRANSACTIONS WITH FORMER PARENT—Continued**




On
        March
        17, 2004, the company issued a demand promissory note to its former parent
        for
        up to $1,500,000 of financing for equipment purchases with annual interest
        of
        1.25% over the prime rate. The note was subsequently modified by increasing
        the
        maximum amount of advances that can be made to $5,000,000, and by adding
        to the
        purposes of the financing, working capital and other corporate needs. The
        outstanding note balance of approximately $4,531,000 was forgiven as a result
        of
        the company’s merger with its former parent. The weighted average interest rate
        on the note during the period it was outstanding during 2005 and 2004 was
        7.58%
        and 5.84%, respectively. Interest expense on the note amounted to approximately
        $149,000 and $51,000 for the years ended December 31, 2005 and 2004 with
        the
        interest ceasing when the company and its former parent merged. Accrued interest
        on the note of approximately $64,000 was forgiven as a result of the company’s
        merger with its former parent. See Note 1, Note 3, Note 12, and Note
        15.





**NOTE
      5—OTHER RELATED PARTY TRANSACTIONS**





In
      May
      2001, the company loaned its president $95,000 to be repaid with accrued
      interest at prime minus 1% (floating prime) on or before maturity on May 11,
      2006. This demand loan was collateralized by all of the President’s stock
      options in the company, as well as common stock from exercise of the options
      and
      proceeds from sale of such stock. Interest income on the loan amounted to
      approximately $6,000 and $4,000 for 2005 and 2004, respectively. The note and
      accrued interest of approximately $22,000 were repaid in December,
      2005.





Minority
      members in subsidiaries in certain situations have funded a portion of required
      capital contributions by issuance of an interest bearing note payable to the
      company which the minority members repay directly or through their portion
      of
      capital distributions of the subsidiary. The minority members did not fund
      any
      capital contributions through notes payable to the company during 2006 and
      funded in the aggregate approximately $15,000 in capital contributions through
      notes during 2005, and $324,000 during the preceding year, under notes accruing
      interest at prime plus 2%, with an aggregate of approximately $154,000 of
      distributions applied against the notes and accrued interest during 2006,
      $68,000 during 2005 and $74,000 during 2004. These represent non-cash investing
      activities, which is a supplemental disclosure required by Financial Accounts
      Standards Board Statement No. 95, “Statement of Cash Flows.” See Note 10 and
      Note 12.





The
      company has constructed and is constructing dialysis facilities, one of which
      is
      anticipated to be sold upon completion to a medical director of the company.
      The
      company’s subsidiary that will operate that dialysis facility will lease the
      facility from the purchaser on terms which are as favorable as could be obtained
      from unaffiliated parties. The cost of the land and construction costs are
      included in Prepaid Expenses and Other Current Assets. See Note 1.





**NOTE
      6—STOCK OPTIONS AND STOCK AWARDS**





In
      January, 2001, the board of directors granted to the company’s Chief Executive
      Officer and President a five-year option for 330,000 shares exercisable at
      $.63
      per share. In January, 2004, 56,384 of these
      options were exercised for $35,240 with the exercise price satisfied by a
      director bonus. In March, 2005, 150,000 of these options were exercised with
      the
      company receiving a $93,750 cash payment for the exercise price. In December,
      2005, the remaining 123,616 of these options were exercised with the company
      receiving a $76,024 cash payment for the exercise price.




F-21




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      6—STOCK OPTIONS—Continued**




In
      September, 2001, the board of directors granted five-year options for an
      aggregate of 150,000 shares exercisable at $.75 per share through September
      5,
      2006, to certain officers, directors and key employees. In 2003 and 2004, 8,146
      of these options were exercised, with the exercise prices satisfied by director
      bonuses. These exercises represent non-cash investing activity, which is a
      supplemental disclosure required by Financial Accounting Standards Board
      Statement No. 95, “Statement of Cash Flows.” See Note 12. In January, 2004,
      7,200 options were exercised. In February, 2005, 15,000 options were exercised
      for cash. 14,654 options were cancelled due to the resignation of a director
      in
      June, 2004. 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
      May,
      2002, the board of directors granted five-year options for an aggregate of
      21,000 shares to certain of the company’s employees. Options for 14,000 shares
      have been cancelled as a result of the termination of several employee option
      holders. During 2005, 7,000 of these options were exercised with the company
      receiving $14,350 cash payments 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
      for 20,000 shares exercisable at $3.09 per share through January 12, 2009.
      In
      February, 2005, a portion of this option was exercised for 5,000 shares with
      the
      company receiving a cash payment of $15,425. 5,000 options were exercised in
      January, 2006
      with
      the company receiving a cash payment of $15,425 for the exercise price, and
      the
      balance of 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. 3,750 options were exercised in July, 2005 with the company receiving
      a
      cash payment of $15,075 and an additional 13,750 options were exercised in
      December, 2005 with the company receiving $55,275 cash payments. 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 company
      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, leaving 18,750 options outstanding.




F-22




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      6—STOCK OPTIONS—Continued**




In
      August, 2004, the board of directors granted 50,000 incentive stock options
      to
      an officer exercisable at $4.02 per share through August 15, 2009. The options
      were to vest 25% annually commencing August 16, 2005 with 12,500 vested options
      exercised in December, 2005 and the company receiving a cash payment of $50,250.
      The remaining 37,500 options were cancelled due to the officer’s
      resignation.





On
      June
      8, 2006, the company’s shareholders approved an amendment to the company’s stock
      option plan to allow for the grant of stock awards in addition to options.
      The
      employment agreement of Stephen W. Everett, President, CEO and a director of
      the
      company, contains provisions for the receipt of up to 40,000 shares of the
      company’s company stock as described in Note 8, pursuant to which 10,000 shares
      were issued during 2006 resulting in $100,100 stock compensation expense, with
      an additional up to 10,000 performance based shares for 2006 not earned. See
      Note 7. The company granted stock awards of 1,000 shares each to each of its
      independent directors with the shares vesting in 250 share increments for each
      director at the end of each quarter of 2006, resulting in $37,560 stock
      compensation expense. On June 27, 2006, the company 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,
      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. In November, 2006, the company entered a six-month
      contract with an individual to serve as Chief Operating Officer for which the
      compensation is 10,000 shares of common stock to be earned over the six month
      period, with 3,333 shares earned during 2006 resulting in $43,598 stock
      compensation expense.





On
      January 28, 2004, the company affected a two-for-one stock split of its
      outstanding common stock. All option amounts and exercise prices have been
      adjusted to reflect the stock split. See Note 1. Split-adjusted option exercise
      prices resulting in a fraction of a cent have been rounded up to the nearest
      cent for purposes of these Notes.




F-23




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      6—STOCK OPTIONS—Continued**





A
      summary
      of the company’s stock option activity and related information for the years
      ended December 31 follows:




**2006**
            
            **2005**
            
            **2004****Weighted-**
            
            
            
            **Weighted-**
            
            
            
            **Weighted-****Average**
            
            
            
            **Average**
            
            
            
            **Average****Options**
            
            **Exercise
                Price**
            
            **Options**
            
            **Exercise
                Price**
            
            **Options**
            
            **Exercise
                Price**Outstanding-beginning
                of year
            
            
            322,500
            
            
            
            
            
            694,616
            
            
            
            
            
            1,191,716Granted
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            230,000
            
            $
            3.94Cancellations
            
            
            —
            
            
            
            
            
            (41,500
            )
            $
            3.83
            
            
            (14,654
            )
            $
            .75Exercised
            
            
            (303,750
            )
            $
            2.42
            
            
            (330,616
            )
            $
            1.01
            
            
            (712,446
            )
            $
            .63Expired
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Outstanding-end
                of year
            
            
            18,750
            
            
            
            
            
            322,500
            
            
            
            
            
            694,616Outstanding:August
                2004 options
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            50,000
            
            $
            4.02June
                2004 options
            
            
            18,750
            
            $
            4.02
            
            
            142,500
            
            $
            4.02
            
            
            160,000
            
            $
            4.02January
                2004 options
            
            
            —
            
            
            
            
            
            15,000
            
            $
            3.09
            
            
            20,000
            
            $
            3.09August
                2003 options
            
            
            —
            
            
            
            
            
            10,000
            
            $
            2.25
            
            
            10,000
            
            $
            2.25June
                2003 options
            
            
            —
            
            
            
            
            
            50,000
            
            $
            1.80
            
            
            50,000
            
            $
            1.80May
                2002 options
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            11,000
            
            $
            2.05September
                2001 options
            
            
            —
            
            
            
            
            
            105,000
            
            $
            .75
            
            
            120,000
            
            $
            .75January
                2001 options
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            273,616
            
            $
            .6318,750
            
            
            
            
            
            322,500
            
            
            
            
            
            694,616Outstanding
                and exercisableend
                of year:June
                2004 options
            
            
            18,750
            
            $
            4.02
            
            
            142,500
            
            $
            4.02
            
            
            15,000
            
            $
            4.02January
                2004 options
            
            
            —
            
            
            
            
            
            15,000
            
            $
            3.09
            
            
            —August
                2003
            
            
            —
            
            
            
            
            
            10,000
            
            $
            2.25
            
            
            5,000
            
            $
            2.25June
                2003
            
            
            —
            
            
            
            
            
            50,000
            
            $
            1.80
            
            
            12,500
            
            $
            1.80May
                2002
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            11,000
            
            $
            2.05September
                2001 options
            
            
            —
            
            
            
            
            
            105,000
            
            $
            .75
            
            
            90,000
            
            $
            .75January
                2001 options
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            207,616
            
            $
            .6318,750
            
            
            
            
            
            322,500
            
            
            
            
            
            341,116Weighted-average
                fair value ofoptions
                granted during the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3.88





The
      remaining contractual life at December 31, 2006 is 2.4 years for the June,
      2004
      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 exercise of
        approximately $3,923,000, resulting in an intrinsic value on these exercises
        of
        $3,188,000.




A
          summary
          of information on the company’s stock compensation and nonvested shares for the
          years ended December 31 follows:
  **2006**
                
                **2005**
                
                **2004****Shares**
                
                **Total**
                  **Fair
                    Value**
                
                **Weighted**
                  **Average
                    Fair Value**
                
                **Shares**
                
                **Total**
                  **Fair
                    Value**
                
                **Weighted**
                  **Average**
                  **Fair
                    Value**
                
                **Shares**
                
                **Total**
                  **Fair
                    Value**
                
                **Weighted**
                  **Average**
                  **Fair
                    Value**Nonvested-beginning
                    of year
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Issued
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Unissued
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Shares
                    granted:Issued
                
                
                22,250
                
                $
                259,070
                
                $
                11.64Unissued
                
                
                94,750
                
                
                1,018,810
                
                $
                10.75117,000
                
                $
                1,277,880
                
                $
                10.92Shares
                    vesting:Issued
                
                
                (15,583
                )
                $
                (171,866
                )
                $
                11.03
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Unissued
                
                
                (9,250
                )
                
                (103,570
                )
                $
                11.20
                
                
                —
                
                
                —
                
                $
                —
                
                
                —
                
                
                —
                
                $
                —(24,833
                )
                $
                (275,436
                )
                $
                11.09
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Shares
                    forfeited:Issued
                
                
                —
                
                
                —
                
                $
                0.00Unissued
                
                
                (40,000
                )
                
                (432,500
                )
                $
                10.81(40,000
                )
                
                (432,500
                )
                $
                10.81Nonvested-end
                    of year:Issued
                
                
                6,667
                
                $
                87,204
                
                $
                13.08
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Unissued
                
                
                45,000
                
                
                482,740
                
                $
                10.61
                
                
                —
                
                
                —
                
                $
                —
                
                
                —
                
                
                —
                
                $
                —52,167
                
                $
                569,944
                
                $
                10.93
                
                
                —
                
                $
                —
                
                $
                —
                
                
                —
                
                $
                —
                
                $
                —Weighted
                    average period over which nonvestedcompensation
                    cost expected to be recognized:Issued
                    shares
                0.33
                    yearsUnissued
                    shares:Performance
                    based
                2.00
                    yearsNonperformance
                    based
                3.00
                    yearsOverall
                1.64
                    years
  The
          total
          grant date fair value of stock awards vesting during 2006 was approximately
          $275,000 compared to a total stock value on the dates of vesting of
          approximately $289,000 resulting in a fair value differential of
          $14,000.




As
      a
      result of board of director approval of accelerated vesting of remaining
      unvested options, all outstanding options at December 31, 2005 were
      vested.




F-24




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      6—STOCK
      OPTIONS—Continued**





As
      of
      December 31, 2006, the company has 722,404 shares reserved for issuance,
      including: 18,750 shares for the June, 2004 options, and 45,500 outstanding
      non-vested stock awards. All options were issued at fair market value on date
      of
      grant.





The
      number and exercise price of outstanding options was adjusted based upon a
      two-for-one stock split affected by the company in February, 2004. See Note
      1
      and Note 13.





**NOTE
      7—COMMITMENTS**





The
      company has leases on facilities housing its dialysis, administrative and
      medical operations and equipment leases. Total rent expense was approximately
      $1,727,000, $1,466,000 and $1,194,000 for the years ended December 31, 2006,
      2005, and 2004, respectively. The aggregate lease commitments at December 31,
      2006 for the company’s non-cancelable operating leases with a term of one year
      or more are approximately:





2007
            
            $
            1,810,0002008
            
            
            1,633,0002009
            
            
            1,368,0002010
            
            
            1,143,0002011
            
            
            800,000Thereafter
            
            
            668,000$
            7,422,000




Effective
      January 1, 1997, the company established a 401(k) savings plan (salary deferral
      plan) with an eligibility requirement of one year of service and 21 year old
      age
      requirement. The company and its former parent established a new 401(k) plan
      effective January, 2003, which 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, the company 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.





Stephen
      W. Everett, CEO, President and director of the company, had a five-year
      employment contract through December 31, 2005. The company and Mr. Everett
      finalized a new five-year employment agreement, agreed to in principle and
      effective January 3, 2006 with an initial annual salary of $275,000 and minimum
      increases of $10,000 per year thereafter. The agreement contains provisions
      for
      receipt of up to 40,000 shares of the company’s common stock of which 10,000
      shares was granted upon shareholder approval in June, 2006. Issuance of the
      remaining 30,000 shares is based upon agreed upon performance criteria with
      the
      potential for 10,000 shares to be earned annually for 2006 - 2008. No
      performance shares were earned during 2006 since the performance criteria were
      not met. The agreement provides for certain fringe benefits, reimbursement
      of
      reasonable out-of-pocket expenses, and a non-competition agreement with the
      company during the term of the agreement and for one year after termination.
      See
      Note 6.




F-25




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      7—COMMITMENTS—Continued**





A
      non-affiliated owner of a Georgia facility that is managed by the company held
      a
      put option to sell to a subsidiary of the company all the assets of that
      dialysis facility. The company’s subsidiary held a call option to purchase the
      assets of the Georgia facility. Each of the put and call options were
      exercisable through September, 2005. In August, 2005, our subsidiary notified
      the owner of the Georgia facility of its intent to exercise the call option
      and
      negotiate the acquisition of that facility’s assets. The parties agreed to
      extend the call option through December 31, 2006 with the option further
      extended until January 14, 2007. The call option was exercised on January
      11,2007. See Note 17. The put option expired unexercised and was not
      extended.





**NOTE
      8—CAPITAL EXPENDITURES AND DEPRECIATION**





Capital
                expenditures and depreciationexpense
                were as follows:**2006**
            
            **2005**
            
            **2004**Capital
                expenditures
            
            $
            5,197,000
            
            $
            5,482,000
            
            $
            3,132,000Depreciation
                expense
            
            $
            2,304,000
            
            $
            1,736,000
            
            $
            1,493,000





**NOTE
      9—ACQUISITIONS**





The
      company has made various acquisitions commencing in 2001, as further described
      below. These acquisitions were made either on the basis of existing
      profitability or expectation of future profitability for the interest acquired
      based on the company’s 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 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
      the
      overall valuation of the company.





These
      transactions resulted in an aggregate of approximately $6,681,000 of goodwill,
      representing the excess of the purchase price over the fair value of the net
      assets acquired. The goodwill is being amortized for tax purposes over a 15-year
      period with the exception of the goodwill on the acquisition of the stock of
      a
      Pennsylvania dialysis company in August 2004 as described below. Certain of
      the
      acquisition transactions were of minority interests held by medical directors
      of
      certain of our dialysis facilities.





In
      August, 2004, the company acquired a Pennsylvania dialysis company resulting
      in
      $1,358,000 of goodwill, the excess of the net purchase price over the estimated
      fair value of net assets acquired, including a valuation of an eight year
      non-competition agreement that will be amortized over the life of the agreement.
      The goodwill is not amortizable for tax purposes, since the transaction was
      a
      stock acquisition.




F-26




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**




**NOTE
      9—ACQUISITIONS—Continued**





During
      the first quarter of 2006, the company 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.
      In December, 2006, the company acquired the remaining 60% interest in its 40%
      owned Toledo, Ohio dialysis facility pursuant to a put option valued at
      $3,200,000 resulting in goodwill of approximately $2,707,000 for which the
      company has determined there is no impairment. See Note 14.




**NOTE
      10—LOAN TRANSACTIONS**





The
      company has and may continue to provide funds in excess of capital contributions
      to meet working capital requirements of its 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. See Note 5 and Note
      12.




**NOTE
      11—QUARTERLY FINANCIAL INFORMATION (Unaudited)**





The
      following summarizes certain quarterly operating data (in thousands except
      per
      share data):





**Year
                Ended December 31, 2006****March
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.31**
            
            **Total**Net
                sales
            
            $
            13,111
            
            $
            14,281
            
            $
            16,504
            
            $
            18,134
            
            $
            62,030Gross
                profit
            
            
            5,129
            
            
            5,497
            
            
            6,464
            
            
            7,422
            
            
            24,512Net
                income
            
            
            519
            
            
            595
            
            
            818
            
            
            1,121
            
            
            3,049Earnings
                per shares:Basic
            
            $
            .06
            
            $
            .06
            
            $
            .09
            
            $
            .12
            
            $
            .32Diluted
            
            $
            .05
            
            $
            .06
            
            $
            .08
            
            $
            .12
            
            $
            .32




**Year
                Ended December 31, 2005****March
                31**
            
            **June
                30**
            
            **Sept.
                30**
            
            **Dec.31**
            
            **Total**Net
                Sales
            
            $
            10,484
            
            $
            11,022
            
            $
            11,373
            
            $
            12,015
            
            $
            44,894Gross
                profit
            
            
            3,941
            
            
            4,297
            
            
            4,194
            
            
            4,483
            
            
            16,915Net
                income
            
            
            324
            
            
            444
            
            
            537
            
            
            595
            
            
            1,900Earnings
                per shares:Basic
            
            $
            .04
            
            $
            .05
            
            $
            .06
            
            $
            .06
            
            $
            .22Diluted
            
            $
            .04
            
            $
            .05
            
            $
            .06
            
            $
            .06
            
            $
            .20





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-27




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**





**NOTE
      12—SUPPLEMENTAL
      CASH
      FLOW INFORMATION**





The
      following amounts represent (rounded to the nearest thousand) non-cash financing
      and investing activities and other cash flow information in addition to
      information disclosed in Note 1, Note 2, Note 3, Note 4, Note 5, Note 6, Note
      10, and Note 15:





**2006**
            
            **2005**
            
            **2004**Interest
                paid (see Note 2)
            
            $
            395,000
            
            $
            273,000
            
            $
            204,000Income
                taxes (refunded) paid (see Note 3)
            
            
            (675,000
            )
            
            1,301,000
            
            
            1,350,000Options
                exercise bonus (191,238 shares 2004;
              159,284
                shares 2003) (see Note 6)
            
            
            —
            
            
            —
            
            
            120,000Subsidiary
                minority member capital contributions
              financing
                (see Note 5 and Note 10)
            
            
            —
            
            
            15,000
            
            
            324,000Subsidiary
                minority member distributions applied
              against
                financing (see Note 5 and Note 10)
            
            
            154,000
            
            
            68,000
            
            
            74,000Share
                payment (2006—87,500 options exercised; 27,205 shares paid; 2005—514,008
                options exercised, 72,375shares
                paid) for stock option exercises (see Note 6)
            
            
            351,000
            
            
            —
            
            
            321,000Payment
                on note receivable with 91,800 shares of commonstock
                (see Note 6)
            
            
            —
            
            
            —
            
            
            521,000Increase
                in additional paid-in capital from exercise of non-qualified
                stock options (see Note 3 and Note 6)
            
            
            31,000
            
            
            —
            
            
            120,000Net
                share issuance in merger with former parent (Note 1, Note 3, Note
                4 and
                Note 15)
            
            
            —
            
            
            10,051,000
            
            
            —




**NOTE
      13—STOCK
      SPLIT**





The
      board
      of directors declared a two-for-one stock split with respect to the company’s
      3,968,772 shares of outstanding common stock. The record date of the split
      was
      January 28, 2004; the distribution date was February 9, 2004; and the date
      Nasdaq reported the adjusted price of the common stock was February 10, 2004.
      The two-for-one stock split increased the outstanding shares of common stock
      at
      that time to 7,937,544 shares. The split also required adjustment in the
      outstanding stock options by doubling the number of shares obtainable upon
      exercise, and halving the exercise price of the options. See Note 1 and Note
      6.





F-28


**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2006**





**NOTE
      14—PRO FORMA FINANCIAL INFORMATION FORMER AFFILIATE**





The
      following amounts (in thousands) represent certain pro forma consolidated
      operating data reflecting consolidation of the company’s Toledo, Ohio subsidiary
      as if this subsidiary had been 100% owned and consolidated effective January
      1,
      2004. This subsidiary was consolidated as a 40% owned subsidiary for financial
      reporting purposes effective August 1, 2006, due to the company taking control
      of the facility, which was previously accounted for by the equity method and
      not
      consolidated and was consolidated as a 100% owned subsidiary upon payment for
      the put option exercised on the 60% interest owned by the former medical
      director in December, 2006. See Note 1 and Note 9:





**2006**
            
            **2005**
            
            **2004**Operating
                revenues
            
            $
            64,106,000
            
            $
            47,804,000
            
            $
            43,049,000Gross
                profit
            
            $
            25,477,000
            
            $
            18,399,000
            
            $
            18,148,000Net
                income
            
            $
            3,088,000
            
            $
            2,078,000
            
            $
            2,352,000Earnings
                per share:Basic
            
            $
            .33
            
            $
            .24
            
            $
            .28Diluted
            
            $
            .32
            
            $
            .22
            
            $
            .27




The
      following amounts (in thousands) represent certain pro forma consolidated
      balance sheet data as if the company’s Toledo, Ohio subsidiary had been
      consolidated effective December 31, 2005:





**December
                31, 2005**ASSETSCurrent
                assets
            
            $
            19,349Property
                and equipment, net
            
            
            13,908Other
                assets
            
            
            9,062$
            42,319LIABILITES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities
            
            $
            11,023Long-term
                debt, less current portion
            
            
            3,935Minority
                and other equity interests
            
            
            1,748Stockholders’
                equity
            
            
            25,613$
            42,319





**NOTE
      15—ACQUISITION OF FORMER PARENT COMPANY**





On
      June
      2, 2005, the company and its former parent, Medicore, Inc., which owned
      approximately 56% of the company, entered into an Agreement and Plan of Merger
      for Medicore to merge into the company for consideration consisting of
      approximately 5,271,000 shares of the company’s common stock. On September 21,
      2005, the shareholders of Medicore and the company approved the merger, the
      articles of merger were filed, and the merger was completed. Each Medicore
      shareholder received .68 shares of the company’s common stock for each share of
      Medicore common stock, and Medicore’s ownership in the company of approximately
      4,821,000 of the company’s common stock was retired resulting in approximately
      9,116,000 shares of the company outstanding after the merger. See Note 1, Note
      3, Note 4 and Note 12.




F-29




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2006**


**NOTE
      15—ACQUISITION OF FORMER PARENT COMPANY—Continued**





The
      following table summarizes the merger transaction:




Assets
                  acquired:Cash
              
              $
              2,736,500Other
                  current assets
              
              
              384,874Fixed
                  assets, net
              
              
              1,042,849Deferred
                  tax asset
              
              
              3,602,587Other
                  assets
              
              
              5,831Total
                  assets acquired
              
              
              7,772,641Forgiveness
                  of intercompanyindebtedness
                  to former parent
              
              
              5,206,13612,978,777Liabilities
                  assumed:Employment
                  agreement liability
              
              
              1,960,000Accounts
                  payable and accrued liabilities
              
              
              967,786Total
                  liabilities assumed
              
              
              2,927,786Net
                  assets acquired
              
              $
              10,050,991




A
      deferred tax asset of approximately $3,300,000 resulted from benefits from
      net
      operating loss carryforwards of the company’s former parent that can be utilized
      to satisfy future income tax liabilities of the company. Pursuant to Section
      382
      of the Internal Revenue Code, utilization of the acquired net operating losses
      are limited to certain amounts annually, though the company anticipates using
      all acquired net operating loss carryforwards prior to their expiration date.
      See Note 1 Note 3, Note 4 and Note 12.





In
      conjunction with the merger, a payment of $1,960,000 due pursuant to the
      employment agreement buyout of the CEO of the former parent, who is Chairman
      of
      the Board of the company, was deferred and reflected as a current liability
      on
      the company’s consolidated balance sheet at December 31, 2005. Payment of this
      liability was made in January, 2006.





The
      merger simplified the corporate structure and enabled the ownership of the
      control interest in the company to be in the hands of the public shareholders.
      The merger provided the company with additional capital resources to continue
      to
      build its dialysis business.





F-30


**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2006**




**NOTE
      15—ACQUISITION OF FORMER PARENT COMPANY—Continued**





The
      results of operations of the company’s former parent are included in the
      company’s consolidated operating results effective with the merger, September
      21, 2005. Pro forma results of operations if the merger had completed as of
      January 1, 2004 are as follows (in thousands except per share
      data):





**Year
                Ended December 31,****2005**
            
            **2004**Operating
                revenues
            
            $
            46,008
            
            $
            41,768Net
                income
            
            $
            2,093
            
            $
            2,572Earnings
                per share:Basic
            
            $
            .23
            
            $
            .29Diluted
            
            $
            .22
            
            $
            .28




**NOTE
      16—TRANSACTIONS WITH VIRAGEN, INC.**





The
      company’s former parent, Medicore, Inc., had a royalty agreement with Viragen,
      Inc., a former subsidiary of Medicore pursuant to which it was to receive a
      royalty on Viragen’s gross sales of interferon and related products. The
      agreement provides for aggregate royalty payments of $2.4 million to be paid
      based on the following percentages of Viragen sales: 5% of the first $7 million,
      4% of the next $10 million, and 3% of the next $55 million. The effective date
      of the agreement was November 15, 1994, with royalty payments due quarterly,
      commencing March 31, 1995. A payment of approximately $108,000, earned under
      a
      previous royalty agreement, is due as the final payment under the existing
      royalty agreement.





In
      August, 2002, Medicore initiated a legal action against Viragen for breach
      of
      the royalty agreement and for an accounting of sales pursuant to the royalty
      agreement. In July, 2003, Medicore reached an agreement with Viragen pursuant
      to
      mediation proceedings following its obtaining a partial summary judgment against
      Viragen in March, 2003, for amounts owed to it under the royalty agreement.
      Viragen remitted $30,000 on August 1, 2003, August 1, 2004 and August 1, 2005,
      with annual interest at 5% on the August, 2004 and 2005 payments. Viragen also
      agreed to commence remitting the quarterly royalty payments due under the
      royalty agreement. Pursuant to the company’s merger with its former parent,
      royalties are now payable to the company. See Note 1, Note 3, Note 4, Note
      12
      and Note 15.





**NOTE
      17—SUBSEQUENT EVENTS**





Pursuant
      to a call option which it exercised on January 11, 2007, a subsidiary of the
      company is acquiring the assets of a Georgia dialysis facility that it has
      been
      managing pursuant to a management services agreement. The company will have
      an
      80% interest in the facility to be operated through its subsidiary with the
      present owner to have a 20% interest. The company has determined that there
      will
      be no impairment of the goodwill that will result from this transaction. See
      Note 1 and Note 7.





F-31


**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.




MOORE
                STEPHENS, P.C.
              Certified
                Public AccountantsCranford,
                New Jersey
              February
                23,
                2007




F-32





**ScheduleII
      - Valuation and Qualifying
      Accounts**


**Dialysis
      Corporation of America, Inc. and Subsidiaries**


**December
      31, 2006**




**COL.
                  A**
              ****
              **COL.
                  B**
              ****
              **COL.
                  C**
              ****
              **COL.
                  D**
              ****
              **COL.
                  E**
              ******Classification**
              ****
              **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**
                **Period**YEAR
                  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
              )
              $
              2,590,000YEAR
                  ENDED DECEMBER 31, 2005:Reserves
                  and allowances deductedfrom
                  asset accounts:Allowance
                  for uncollectible accounts
              
              $
              1,636,000
              
              $
              571,000
              
              
              
              
              $
              (321,000
              )(1)
              $
              1,886,000Reserve
                  for inventory obsolescence
              
              
              —
              
              
              —
              
              
              
              
              
              91,000
              (2)
              
              77,000(14,000
              )(3)$
              1,636,000
              
              $
              571,000
              
              
              
              
              $
              (244,000
              )
              $
              1,963,000YEAR
                  ENDED DECEMBER 31, 2004:Reserves
                  and allowances deductedfrom
                  asset accounts:Allowance
                  for uncollectible accounts
              
              $
              785,000
              
              $
              1,198,000
              
              
              
              
              $
              (347,000
              )(1)
              $
              1,636,000Valuation
                  allowance for deferred tax asset
              
              
              52,000
              
              
              (52,000
              )
              
              
              
              
              —
              
              
              —$
              837,000
              
              $
              1,146,000
              
              
              
              
              $
              (347,000
              )
              $
              1,636,000




(1)
            Uncollectible
                accounts written off, net of
                recoveries.




(2)
            Acquisition
                of former parent company.




(3)
            Net
                write-offs against inventory
                reserves.





F-33




**Exhibit
      Index**





**DIALYSIS
      CORPORATION OF AMERICA**


**Annual
      Report on Form 10-K for the Fiscal Year Ended December 31,
      2006**




21
            Subsidiaries
              of the Company  23.1
            Consent
              of Moore Stephens, P.C.





31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
                Exchange Act of 1934





31.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
                Exchange Act of 1934





32.1
            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