UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-K
 (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31,
      2007
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from____________ to __________Commission
      file number0-8527
  DIALYSIS CORPORATION OF
AMERICA
 (Exact
name of registrant as specified in its charter)
 
 FLORIDA
              59-1757642(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)
 
 1302 CONCOURSE DRIVE,
      SUITE 204, LINTHICUM, MARYLAND
              21090(Address
      of principal executive offices)
              (Zip
      Code)
 
 Registrant’s
telephone number, including area code (410)
694-0500
 
 Securities
registered under Section 12(b) of the Act:
 
 Title of Each
      Class
              Name of Each Exchange
      on Which Registeredcommon
      stock, $.01 par value
              Nasdaq
      Stock Market, LLC
 
 Securities
registered under Section 12(g) of the Exchange Act:
 None
 Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
 Yes o                      No
x
 
 Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
 Yes o                      No
x
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes x    No
o
 
 Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.  o
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  (Check One)
 Large
      accelerated filer o
              Accelerated
      filer x
              Non-accelerated
      filer o
              Smaller
      reporting company o
  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes o  No x
 
 As of June 30, 2007, the number of
shares of the registrant’s common stock outstanding was 9,573,596 shares and the
aggregate market value of the common stock held by non-affiliates computed by
reference to the closing price of these shares on the Nasdaq Stock Market was
approximately $76,278,000.
 
 As of March 11, 2008, the Company had
9,580,096 shares of its common stock outstanding and the aggregate market value
of the common stock  outstanding held by non-affiliates based upon the
closing price of these shares on the Nasdaq Stock Market was approximately
$57,120,000.
 
 
 
  DOCUMENTS
INCORPORATED BY REFERENCE
 
 Registrant’s Registration Statement on
Form SB-2 dated December 22, 1995, as amended February 9, 1996, April 2, 1996
and April 15, 1996, Registration No. 33-80877-A Part II, Item 27, Exhibits,
incorporated in Part IV of this Annual Report.
 
 Registrant’s Annual Report, Form 10-K
for the years ended December 31, 1999 and 2005, Part IV, Exhibits, incorporated
in Part IV of this Annual Report.
 
 Portions of Registrant’s Definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with its 2008 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, 2007
 
 
 
 PagePART
      ICautionary
      Notice Regarding Forward-Looking Information
              1Item
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              22Item
      1B.
              Unresolved
      Staff Comments
              30Item
      2.
              Properties
              31Item
      3.
              Legal
      Proceedings
              32Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              32PART
      IIItem
      5.
              Market
      for the Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              33Item
      6.
              Selected
      Financial Data
              35Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      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 Financial
      Disclosure
              50Item
      9A.
              Controls
      and Procedures
              51Item
      9B.
              Other
      Information
              52
 
 i
 
 PagePART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              52Item
      11.
              Executive
      Compensation
              53Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              53Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              54Item
      14.
              Principal
      Accountant Fees and Services
              54PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              55Signatures
              
              58
 
 ii
 Part
I
 
 Cautionary
Notice Regarding Forward-Looking Information
 
 The statements contained in this annual
report on Form 10-K dated March 14, 2008 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
  
  Dialysis Corporation of America is a
Florida corporation organized in 1976.  The company develops and
operates outpatient kidney dialysis centers that provide quality dialysis and
ancillary
 services
to patients suffering from chronic kidney failure, generally referred to as end
stage renal disease, or ESRD.  The company also provides acute
inpatient dialysis treatments in hospitals, homecare services and dialysis
center management services.  The company currently owns 35 outpatient
dialysis facilities.  See Note 8 and Note 13 to “Notes to Consolidated
Financial Statements.”  During 2007, the company acquired two dialysis
centers, one in Ohio and one in Pennsylvania.  Effective January 1,
2008 a subsidiary of the company acquired the assets of a Georgia center that we
formerly managed with our having an 80% interest in the facility to be operated
through our subsidiary and the former owner having a 20%
interest.  See Note 14 to “Notes to Consolidated Financial
Statements.”  The company is in the process of developing two new
centers, one each in Indiana and Pennsylvania.  The Indiana center
will be owned by the medical director of that facility which we will manage
pursuant to a management services agreement.  We have an option to
acquire a controlling interest in that facility in the
future.  Subsequent to the completion of our merger with Medicore,
Inc., our former parent in September, 2005, we engage 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) 694-0500Fax:
      (410) 694-0596Email:
      info@dialysiscorporation.com
 
 Our internet website can be found at
www.dialysiscorporation.com.  You
may obtain through our internet website, free of charge, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
amendments to those reports filed with the Securities and Exchange Commission,
referred to as the SEC, press releases, corporate profiles and corporate
governance materials.  We also make those documents available to
shareholders free of charge upon request.  The SEC maintains a website
at www.sec.gov
where our reports and other information about us may be obtained.
  General
 
 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 12 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 (55%, 54% and
52% of medical services revenue for 2007, 2006 and 2005, respectively); (ii)
home and peritoneal dialysis services (5%, 6%, and 7% of medical services
revenue for 2007, 2006 and 2005, respectively); (iii) inpatient hemodialysis
services for acute patient care provided through agreements with hospitals and
medical centers (4%, 3% and 5% of medical services revenue for 2007, 2006 and
2005, 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), (36%, 37% and 36% of medical services revenue for 2007,
2006 and 2005, respectively with EPO representing 27% of medical services
revenue for 2007 and 28% for each of 2006 and 2005).  Dialysis is an
ongoing and necessary therapy to sustain life for kidney dialysis
patients.  ESRD patients can receive up to 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.  Congress approved a 1.6%
composite rate increase for each of 2005 and 2006, and a 1.6% increase that was
effective April 1, 2007.  Also for 2007, the drug add-on adjustment to
the composite rate increased 0.5%.  In 2005, Medicare implemented an
additional change in the manner it reimburses dialysis treatments, which
includes a pricing revision to the current average wholesale price for
separately billable drugs and biologicals.  Effective January 1, 2006,
payments for pharmaceuticals (including EPO) were set at the pharmaceutical’s
average sales price as determined by the Inspector General of HHS, plus 6%,
which remained the same for 2007.  Effective April, 2006, CMS
implemented a policy for monitoring the dosage of EPO based upon the patient’s
hematocrit level and for limiting the quantity of EPO that can be administered
in any one month.  Effective January 1, 2008, CMS further decreased
the quantity of EPO that may be administered in any month.  Medicare
has implemented a case mix payment system, adjusting the composite rate for a
limited number of patient characteristics.  The increase in the
composite rate is intended to offset reductions in pharmaceutical
reimbursements.  See under this Item 1, “Operations – Medicare
Reimbursement.”  Commercial third-party reimbursement rates, which
have increased as a percentage of our revenues over the last two years, are also
susceptible to reduction.  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, or ESRD, results from chemical imbalance and buildup of toxic
chemicals, and is a state of kidney disease characterized by advanced
irreversible renal impairment.  ESRD is a likely consequence of
complications resulting from diabetes, hypertension, advanced age, and specific
hereditary, cystic and urological diseases.  ESRD patients, in order
to survive, must either obtain a kidney transplant, which procedure is limited
due to lack of suitable kidney donors and the incidence of rejection of
transplanted organs, or obtain dialysis treatments for the rest of their
lives.
 
 Based upon CMS information published in
the 2007 USRDS, the number of ESRD patients requiring dialysis treatments in the
United States at December 31, 2005 was approximately 350,000, 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
billion at December, 2005, of which Medicare accounted for approximately $20
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 32
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 two centers in 2007 and an additional center
effective January 1, 2008.  We are in the process of developing two
new dialysis centers, one in Pennsylvania and one in Indiana.  With
respect to the Indiana facility, the physician has a put option and the company
has a call option to acquire a controlling interest in the center.  We
are in different phases of negotiations with physicians for potential new
facilities in a variety of states.
 
 Same
Center Growth
 
 We endeavor to increase same center
growth by adding quality staff and management and attracting new patients to our
existing facilities.  We seek to accomplish this objective by
rendering high caliber patient care in convenient, safe and pleasant
conditions.  We believe that we have adequate space and stations
within our facilities to accommodate greater patient volume and maximize our
treatment potential.  Same center growth relates to those centers that
were operable during the entire prior year.  During 2007, we
experienced approximately 6% increase in dialysis treatments for our facilities
that qualified to be included in same center growth compared to 10% 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 $1,500,000,
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 substantially 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.  We have a 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.  See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and Note 2 to “Notes to
Consolidated Financial Statements.”
  5
  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 currently own 35 outpatient dialysis
facilities in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and
South Carolina.  These dialysis facilities have a total designed
capacity 524 licensed stations.
 
 Of our 35
dialysis facilities, 34 are owned by us through subsidiaries as follows: 21
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.  Three of the dialysis centers
are located on properties that we own and lease to our
subsidiaries.  See Item 2, “Properties.”
 
 One of our Georgia subsidiaries
exercised a call option which resulted in the acquisition of the assets
effective January 1, 2008 of the Georgia facility we previously
managed.  We hold an 80% interest in this facility and the former
owner holds the remaining 20% interest.  See Note 13 to “Notes to
Consolidated Financial Statements.”
  6
  Additionally, the company provides
acute care inpatient dialysis services to 12 hospitals in areas serviced by our
dialysis facilities.  We are in the process of negotiating additional
acute dialysis services contracts in the areas surrounding certain of 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
252,000 hemodialysis treatments in 2007, an increase of approximately 32,000
treatments compared to fiscal 2006.
 
 We estimate that on average our centers
were operating at approximately 51% of capacity as of December 31, 2007, 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 almost all of 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 a
governing body comprised of an administrator, the medical director of that
facility and the company’s regional administrator for that area.  The
governing body supervises the facility’s daily operations, patient care,
services necessary for the operation of the facility, and staff, which consists
of registered nurses, licensed practical nurses, patient care technicians, a
social worker to assist the patient and family to adjust to dialysis treatment
and to provide help in financial assistance and planning, and a registered
dietitian.  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.
 
 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 12 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.
  7
  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 patient treatment and our operating
revenue and income.
 
 Amgen has developed an additional
product, darbepoetin alfa, known as Aranesp®, which has been approved by the
FDA.  Roche has also developed and received FDA approval for its drug,
Mircera®, used to treat anemia, although it is currently unavailable to patients
in the United States due to Amgen’s current patent on EPO.  These
drugs can be administered to patients less frequently than EPO, which is
generally administered to the patient with each dialysis
treatment.  Although we are unable to predict the impact of these
products on our operations, a significant increase in the development and use of
these alternatives to EPO could have an adverse effect on our revenues, earnings
and cash flow.
 
 Physician Relationships
 
 An integral element to the success of a
facility is its association with area nephrologists.  A dialysis
patient generally seeks treatment at a facility near the patient’s home 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 13 of our centers, through their affiliated entities, have a
minority ownership interest in the center they service.  We make every
effort to comply with federal and state regulations concerning our relationship
with the physicians and the medical directors treating patients at our
facilities.  See “Government Regulation” below.
 
 Agreements with medical directors
typically 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.  Customarily, physician’s professional fees for services are
billed directly to the patient or to government payment authorities by the
treating physician and paid directly to the physician or the professional
association.
  8
  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. In our 32 years of operation, we have not been unable to provide for
or replace a medical director.  Compensation of medical directors is
separately negotiated for each facility and generally depends on competitive
factors, the size of the facility, and the fair market value of the services to
be provided.
 
 Quality Assurance
 
 We have implemented a quality assurance
program to maintain and improve the quality of dialysis treatment and care we
provide to our patients in each facility.  Quality assurance
activities involve the ongoing examination of care provided, the identification
of therapy deficiencies, the need for any necessary improvements in the quality
of care, and evaluation of improved technology.  Specifically, this
program requires each center’s staff, including its medical director and nurse
administrator, to regularly review quality assurance data and initiate programs
for improvement, including dialysis treatment services, equipment, technical and
environmental improvements, and staff-patient and personnel
relationships.  These evaluations are in addition to assuring
regulatory compliance with CMS and the Occupational Safety and Health
Administration.  Our Vice President of Clinical Services, a certified
nephrology nurse, oversees this program in addition to ensuring that we meet
federal and state compliance requirements for our dialysis
centers.  See “Government Regulation” below.
 
 Quality Clinical Results
 
 Our goal is to provide consistent
quality clinical care to our patients from caring and qualified doctors, nurses,
patient care technicians, social workers and dieticians.  We have
demonstrated an unwavering commitment to quality renal care through our
continuous quality improvement initiatives.  We strive to maintain a
leadership position as a quality provider in the dialysis industry and often set
our goals higher than the national average standards.
 
 Kt/V is a formula that measures the
amount of dialysis delivered to the patient, based on the removal of urea, an
end product of protein metabolism.  Kt/V provides a means to determine
an individual dialysis prescription and to monitor the effectiveness or adequacy
of the dialysis treatment as delivered to the patient. It is critical to strive
to achieve a Kt/V level of greater than 1.2 for as many patients as
possible.  Approximately, 95% of our patients had a Kt/V level greater
than 1.2 for 2007 and 2006.
 
 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 80% and 81% of our patients had a hemoglobin level
greater than 11 for 2007 and 2006, respectively.
  9
  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 53% of our patients were dialyzed with a
fistula during 2007 and 49% during 2006, 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.
 
 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 2007 was $9.058 and
for the first quarter of 2008 is $8.963 per 1,000 units for amounts in excess of
three units per patient per year, and certain physician-ordered tests provided
to dialysis patients.  Approximately 27% of our medical services
revenue in 2007 was derived from providing dialysis patients with EPO. Effective
April, 2006, and revised again in January, 2008, CMS implemented a policy for
monitoring the dosage of EPO based upon the patient’s hematocrit level and for
limiting the quantity
of EPO that can be administered in any one month.  This policy
restricts payments based on EPO doses and hemoglobin levels for certain patients
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 21 days of the submission.
  10
  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, and a 1.6% increase which became effective April 1,
2007.  For 2007, the drug-add on adjustment to the composite rate
increased 0.5%.  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%, 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.  CMS reimburses providers using a case mix
formula.  CMS adjusted reimbursements based on predefined patient
parameters such as patient height, weight and age.  Congress has
mandated a budget neutrality factor adjustment so that aggregate payments under
the system equal payments that would have been made without the case mix
adjustments and the add-on composite for reimbursement of the
drugs.  Management believes there has been minimal impact on its
average Medicare revenue per treatment as a result of these changes in Medicare
reimbursement.  Our Medicare composite payment rate for 2007 was
between $130 and $150 per dialysis treatment.  Any reduction in the
Medicare composite reimbursement rate could have a material adverse effect on
our results of operations, financial position and cash flows.
 
 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.
 
 Sources
of Medical Services Revenue
 
 Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Medicare
              
              
              49
              %
              
              
              52
              %
              
              
              51
              %Medicaid
      and Comparable Programs
              
              
              8
              %
              
              
              9
              %
              
              
              8
              %Hospital
      inpatient dialysis services
              
              
              4
              %
              
              
              3
              %
              
              
              5
              %Commercial
      and private payors
              
              
              39
              %
              
              
              36
              %
              
              
              36
              %
  11
  Management Services
 
 We have a management services agreement
with each of our subsidiaries, 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
 
 We have developed a Corporate Integrity
Program to assure we continue to achieve our goal of providing the highest level
of care and service in a professional and ethical manner consistent with
applicable federal and state laws and regulations.  This program is
intended to (i) reinforce our management’s, employees’ and professional
affiliates’ awareness of their responsibilities to comply with applicable laws
in the increased and complex regulatory environment relating to our operations,
(ii) benefit the overall care and services for our dialysis patients, and (iii)
assure our operations are in 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 (no complaints 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.
 
 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.
  12
  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, Joshua M. Jaffe, Esq., Jaffe & Falk, LLC,
at 777 Terrace Avenue, Hasbrouck Heights, New Jersey 07604, telephone (201)
288-8282, or email, jmj@jaffefalkllc.com.
 
 The Corporate Integrity Program is
reviewed and upgraded from time to time, to provide a highly professional work
environment and lawful and efficient business operations to better serve our
patients and our shareholders.
 
 Potential
Liability and Insurance
 
 Participants in the health care
industry are subject to lawsuits based upon alleged negligence, many of which
involve large claims and significant defense costs.  We currently have
general and umbrella liability insurance, as well as professional and products
liability.  Our insurance policies provide coverage on an “occurrence”
basis and are subject to annual renewal.  A hypothetical successful
claim against us in excess of our insurance coverage could have a material
adverse effect upon our business and results of operations.  The
medical directors supervising our dialysis operations and other physicians
practicing at the facilities are required to maintain their own professional
malpractice insurance coverage.
 
 Government
Regulation
 
 General
 
 Regulation of healthcare facilities,
including dialysis facilities, is extensive, with legislation continually
proposed relating to safety, maintenance of equipment and 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.
  13
  Many states have eliminated the
requirement to obtain a certificate of need prior to the establishment or
expansion of a dialysis center.  There are no certificate of need
requirements in the states in which we are presently operating.
 
 Our record of compliance with federal,
state and local governmental laws and regulations remains
excellent.  Nevertheless, we are unable to predict the scope and
effect of any changes in government regulations, particularly any modifications
in the reimbursement rate for medical services or requirements to obtain
certification from CMS.  Enforcement, both privately and by the
government, has become more stringent, particularly in attempts to combat fraud
and waste.  Since our inception in 1976, we continue to maintain our
licenses, including our Medicare and Medicaid and equivalent
certifications.  The permanent loss of any licenses and certifications
would have a material adverse effect on our results of operations, financial
position and cash flows.
 
 We
regularly review legislative and regulatory changes and developments and will
restructure a business arrangement if we determine such might place our
operations in material noncompliance with applicable laws or
regulations.  See “Fraud and Abuse” and “Stark II”
below.  To date, none of our business arrangements 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.  CMS was expected to promulgate a final rule by
February, 2008, which was deferred until February 4, 2009, to revise the
conditions of coverage for ESRD facilities like ours.  The proposed
rule considered the establishment of performance expectations for the dialysis
facilities, eliminates certain procedural requirements, and encourages
continuous quality improvement.  We do not know if there will be a
final rule, and we are unable to predict the extent or impact of any such
rule.
 
 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.
 
 The fraud
and abuse laws apply because our medical directors have financial relationships
with the dialysis facilities and typically refer patients to those facilities
for items and services reimbursed by federal and state health care
programs.  Financial relationships with patients who are federal
program beneficiaries also 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.
  14
  Anti-Kickback Statutes
 
 The
federal Anti-Kickback Statute prohibits the knowing and willful solicitation,
receipt, offer, or payment of any remuneration, directly or indirectly, in
return for or to induce the referral of patients or the ordering or purchasing
of items or services payable under the Medicare, Medicaid, or other federal
health care program.
 
 Sanctions for violations of the
Anti-Kickback Statute include criminal penalties, such as imprisonment and fines
of up to $25,000 per violation, and civil penalties of up to $50,000 per
violation, as well as mandatory exclusion from Medicare, Medicaid, and other
federal health care programs for a minimum of five years.  Under U.S.
Sentencing Guidelines, an individual may be fined up to $250,000 and an
organization may be fined up to $500,000 upon conviction of offenses described
in any federal statute.
 
 The
language of the Anti-kickback Statute has been construed broadly by the
courts.  Over the years, the federal government has published
regulations that established “safe harbors” to the Anti-Kickback
Statute.  An arrangement that meets all of the elements of the safe
harbor is immunized from prosecution under the Anti-Kickback
Statute.  The failure to satisfy all elements, however, does not
necessarily mean the arrangement violates the Anti-Kickback
Statute.
 
 Some states have enacted laws similar
to the Anti-Kickback Statute.  These laws may apply regardless of
payor source, may include criminal and civil penalties, and may contain
exceptions that differ from the safe harbors to the Anti-Kickback
Statute.
 
 As
required by Medicare regulations, each of our dialysis centers is supervised by
a medical director, who is a licensed nephrologist or otherwise qualified
physician.  The compensation of our 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.  Fifteen 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
  We
believe that the Anti-Kickback Statute and other fraud and abuse laws are
primarily directed at abusive practices that increase the utilization and cost
of services covered by governmentally funded programs.  The dialysis
services we provide generally cannot, by their very nature, be over-utilized
since dialysis treatment is not elective, and is only indicated when there is
temporary or permanent kidney failure.  Medical necessity is capable
of being supported by objective documentation, drastically reducing the
possibility of over-utilization.  Additionally, there are safe harbors
for certain arrangements.  Nevertheless, while relationships created
by medical director ownership of minority interests in our facilities satisfy
many but not all of the criteria for the safe harbor, there can be no assurance
that these relationships will not subject us to investigation or prosecution by
enforcement agencies.  In an effort to further our compliance with the
law, we have adopted a corporate Compliance Program that addresses medical
necessity and medical chart audits to confirm medical necessity of
referrals.
 
 With respect to our inpatient dialysis
services, we provide hospitals with dialysis services, including qualified
nursing and technical personnel, supplies, equipment and technical
services.  In certain instances, the medical director of our dialysis
center who has a minority interest in that facility may refer patients to
hospitals with which we have an inpatient dialysis services
arrangement.  We believe our acute inpatient hospital services are in
compliance with the law.  See “Stark II” below.
 
 We
endeavor in good faith to comply with all governmental
regulations.  However, there can be no assurance that we will not be
required to change our practices or experience a material adverse effect as a
result of any such potential challenge.  We cannot predict the outcome
of the rule-making process, enforcement procedures, or whether changes in the
safe harbor rules will affect our position with respect to the Anti-Kickback
Statute, but we will continue to make every effort to remain in
compliance.
 
 Stark II
 
 The federal physician self referral
law, commonly known as Stark II, prohibits a physician who has a financial
relationship, or who has an immediate family member who has a financial
relationship, with entities providing “designated health services” from
referring Medicare or Medicaid patients to such entity for such services unless
an exception applies.  A “financial relationship” includes an
ownership or investment interest in, or a compensation arrangement between the
physician and the entity.  For purposes of Stark II, “designated
health services” include clinical laboratory services, durable medical
equipment, parenteral and enteral nutrients, home health services, and inpatient
and outpatient hospital services.  Dialysis treatments are not
“designated health services.”
 
 The
self-referral prohibition has numerous exceptions, including exceptions for
personal service arrangements, leases of space and equipment, employment
relationships and referrals within group practices.
 
 An entity
is prohibited from submitting Medicare or Medicaid claims for services furnished
pursuant to an unlawful referral and must refund amounts received pursuant to
prohibited referrals.  Violators are subject to civil monetary
penalties of up to $15,000 for each improper claim and may be excluded from
participation in the Medicare and Medicaid programs.  Unlike the
federal Anti-Kickback Statute, intent to violate the law is not
required.  Knowing violations of Stark II may also serve as the basis
for liability under the False Claims Act.  See “False Claims Act”
below.
  16
  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
us.
 
 Medical directors of our dialysis
centers who hold a minority investment interest in the subsidiaries operating
those centers may refer patients to hospitals with which we have an acute
inpatient dialysis service arrangement.  Although the regulations of
Stark II may be interpreted to apply to these types of transactions, we believe
that our contractual arrangements with hospitals for acute care inpatient
dialysis services are in compliance with Stark II.
 
 A limited number of dialysis facilities
are leased from entities in which physicians hold ownership interests, and we
sublease space to four of our medical directors.  Stark II provides an
exception for these types of affiliated physician lease agreements if specific
requirements are met.  The company believes these leases materially
satisfy the requirements for these exceptions.
 
 If CMS or any other government entity
otherwise interprets the Stark II regulations, we may be required to restructure
certain existing compensation or investment agreements with our medical
directors, or, in the alternative, refuse to accept referrals for designated
health services from certain physicians.  Stark II prohibits Medicare
or Medicaid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on facilities which
submit claims for reimbursement for such prohibited referrals.  If
such were to be the case, we could be required to repay amounts reimbursed for
drugs, equipment and services that CMS determines to have been furnished in
violation of Stark II, in addition to substantial civil monetary penalties,
which could adversely affect our operations and financial results.  We
believe that if Stark II is interpreted by CMS or any other governmental entity
to apply to our arrangements, it is possible that we could be permitted to bring
our financial relationships with referring physicians into material compliance
with the provisions of Stark II on a prospective basis.  However,
prospective compliance may not eliminate the amounts or penalties, if any, that
might be determined to be owed for past conduct, and there can be no assurance
that the costs and expenses associated with such prospective compliance, if
permissible, would not have a material adverse effect on our results of
operation, financial position or cash flows.
  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.  The federal government can use
other criminal federal statutes to prosecute false claims.
 
 Our
Corporate Compliance Program is designed to address risks inherent in the
submission of claims and other information in connection with the Medicare and
Medicaid program and we are committed to ensuring the accuracy of all
claims.  There can be no assurance, however, that we will not be
subject to an investigation or audit regarding the accuracy of any claim or
other information submitted in connection with our operations.
 
 HIPAA
 
 The Health Insurance Portability and
Accountability Act of 1996, known as HIPAA, provided for health insurance
reforms which included a variety of provisions important to healthcare
providers, such as significant changes to the Medicare and Medicaid fraud and
abuse laws.  HIPAA established two programs that coordinate federal,
state and local healthcare fraud and abuse activities.  Under these
programs, these governmental entities undertake a variety of monitoring
activities, including medical utilization and fraud review, cost report audits
and secondary payor determinations.  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 2007, 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.
 
 We have developed a Compliance Program
as part of our 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 a patent related to our lancets, and obtained
required FDA approval relating to the production of lancets, we are no longer
manufacturing these products.  Marketing of our medical products
is conducted by independent manufacturer representatives and our
employees.
  20
  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 significantly larger
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.  Over the last year, we have experienced competitive
pressures in negotiating contracts with commercial healthcare
payers.
 
 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 13, 2008, we had 496 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 40 part-time employees consisting of
registered nurses, patient care technicians and clerical
employees.  We also utilize 117 per diem personnel to supplement
staffing.
 
 We retain seven independent
contractors and sub-contractors who include social workers and dietitians at our
Georgia, Ohio and Pennsylvania 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 us and our securities.  There may be other
risks and uncertainties that we may face and of which we are currently unaware
which could also adversely affect our business, operations and financial
condition.  If any of such risks or uncertainties arise, or the risks
listed below occur, our operations, earnings and financial condition could be
materially harmed, which, in turn, would most likely adversely affect the
trading price of our common stock.  Any such event could negatively
impact a shareholder’s investment in the company.
 
 
 Our
dialysis operations are subject to extensive government regulation
 
 Our dialysis operations are subject to
extensive federal and state government regulations, which include:
 
 ·
              licensing
      requirements for each dialysis center·
              government
      healthcare program participation requirements·
              reimbursement
      for patient services·
              patient
      referral prohibitions; broad federal and state Anti-Kickback
      regulations·
              false
      claims prohibitions for health care reimbursement and other fraud and
      abuse regulations·
              record
      keeping requirements·
              health,
      safety and environmental compliance·
              expanded
      protection of the privacy and security of personal medical
      data·
              standards
      for the exchange of electronic health information; electronic transactions
      and code sets; unique identifiers for providers·
              medical
      waste disposal regulations
 
 Many of these laws and regulations are
complex and open to further judicial and legislative
interpretations.  If we are forced to change our method of operations
because of these regulations, our earnings, financial condition and business
could be adversely affected.  The imposition of additional licensing
and other regulatory requirements may, among other things, increase our cost of
doing business. In
addition, any violation of these governmental regulations could involve
substantial civil and criminal penalties and fines, revocation of our licenses,
closure of one or more of our centers, and our exclusion from participating in
Medicare and Medicaid programs.  Any loss of federal or state
certifications or licenses would materially adversely impact our
business.
 
 22
 
 Our
arrangements with our physician medical directors do not meet the safe harbor
provisions of federal and state laws, and may subject us to greater governmental
scrutiny
 
 Neither our arrangements with the
medical directors of our facilities, typically retained by us as independent
contractors under a fixed fee medical director agreement, nor the minority
ownership interests of physicians in certain of our dialysis facilities meet all
of the requirements of safe harbors to the Anti-Kickback Statute and similar
state laws.  These laws impose civil and criminal sanctions on persons
who receive or make payments for referring a patient for treatment that is paid
for in whole or in part by Medicare, Medicaid or similar state
programs.  Transactions and arrangements involving physician minority
ownership that do not fall within a safe harbor may be subject to greater
scrutiny by enforcement agencies, and if determined to violate the anti-kickback
statute or Stark II law could subject us to repayment of certain reimbursement
amounts, monetary penalties and exclusion from further participation in
government programs.  If we are unable to modify the arrangement to
satisfy the applicable laws and safe-harbor provisions, we would not be allowed
to accept patient referrals from the physician with whom we have the
arrangement.  In any of these circumstances, our revenues and earnings
would be adversely affected.
 
 
 Our
operations are subject to Medicare and Medicaid audits with concurrent potential
civil and criminal penalties for failure to comply
 
 We are subject to periodic audits by
the Medicare and Medicaid programs, which have various rights and remedies if
they assert that we have overcharged the programs or failed to comply with
program requirements.  Rights and remedies available under these
programs include repayment of any amounts alleged to be overpayments or in
violation of program requirements, or making deductions from future amounts due
to us.  These programs may also impose fines, criminal penalties or
program exclusions.
 
 In the ordinary course of our business,
we 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.
 
 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.
 
 23
 
 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 2005, 2006 and 2007,
approximately 51% , 52% and 49%, respectively, of our patient revenues was
derived from Medicare reimbursement, and 8%, 9% and 8%, 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
      of those ancillary services which we currently bill separately in the flat
      composite rate for dialysis
treatments
 
 In recent
years Congress approved modest percentage increases in the Medicare composite
rate (the fixed payment rate for a dialysis treatment including related
supplies, laboratory tests and pharmaceuticals) but at the same time CMS adopted
a case mix adjustment for the composite rate to link payment more closely with
patient acuity, and modified the bases by which it reimburses for separately
billable services and pharmaceuticals, such as EPO, resulting in a decrease in
the reimbursement rates for these other “ancillary” services.  We do
not believe that in the aggregate these changes in Medicare reimbursement have
significantly impacted our results of operations, financial position or cash
flows.  Nevertheless, the government continues to review the processes
for reimbursement of dialysis services including the prospect of “bundling” or
adding services that are currently separately billed into the composite rate,
which could result in lower overall reimbursement by Medicare.  Future
changes in the structure of, and payment rates under, the Medicare program,
including the bundling of services under the composite rate, or further
reductions in reimbursement for separately billable services without a
corresponding increase  in the composite rate, could substantially
reduce our results of operations, financial position of cash flows.
 
 24
 
 A
decline in the reimbursement payments from third-party, non-government payors as
well as a change in patient coverage from commercial to Medicare could adversely
affect our earnings
 
 The dialysis services industry is
experiencing a growing number of commercial payors seeking to reduce payment
rates as a result of several factors, including recent consolidations, a greater
focus by these payors on dialysis services and market conditions
generally.  These commercial payors have become more aggressive in
attempting to negotiate lower contracted payment rates and imposing limitations
on out-of-network access and payment rates.  A decline in the rates
paid by 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 41%, 39% and 43% of our patient
revenues for 2005, 2006 and 2007, 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 results of operations, financial
position or cash flows 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 which is the
most commonly used pharmaceutical for treating anemia in dialysis patients, is
currently available from a single manufacturer, Amgen, Inc.  The
available supply of EPO could be delayed or reduced, whether by Amgen itself,
through unforeseen circumstances, or as a result of excessive
demand.  In addition, Amgen could increase the price of
EPO.  This would adversely impact our revenues and profitability,
since approximately 28% of our medical revenues in each of 2005 and 2006 and 27%
in 2007 were based upon the administration of EPO to our dialysis
patients.
 
 Most of our EPO reimbursement is from
government programs.  For 2007, Medicare and Medicaid reimbursement
represented 71% of the total revenue derived from EPO.  In recent
years, CMS revised its rules for reimbursement of pharmaceuticals, including
EPO, which resulted in a net reduction of average Medicare payment
rates.  In 2006, reimbursement for EPO was at the average sales price
plus 6%, which resulted in lower reimbursement for pharmaceuticals, but was
offset by the 1.6% composite rate increase.  If government or private
payors further reduce reimbursement for EPO, then our revenues and earnings per
treatment may decline.
  Further
changes and rules intended to address EPO and other pharmaceuticals could
adversely affect our revenues and income.
 
 Changes in Medicare reimbursement
criteria have impacted EPO revenue.  Although CMS implemented a
national monitoring policy for EPO claims in April, 2006, this policy did not
have an adverse impact on our results of operations, financial position or cash
flows.  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.  Nevertheless, since the latter part of 2006 a significant
amount of government and media attention has been paid to the management of
anemia generally in all fields of medicine resulting in congressional hearings
and FDA required label changes to EPO and Aranesp which will continue to be
examined in the future.  In January, 2008, CMS put into effect
additional changes to its EPO monitoring policy intended to further limit
reimbursement.  Commercial payors may also follow suit as they direct
greater scrutiny to their policies for EPO use as part of their overall analysis
of dialysis services reimbursement.  Further changes in EPO
administration policies that result in further restrictions on utilization could
result in a decline in our revenues and earnings per treatment.
 
 25
 
 New
drugs could affect use of EPO, adversely impacting our
profitability.
 
 Amgen is the sole manufacturer of EPO,
which is administered in conjunction with dialysis treatments to address a
patient’s anemia.  Amgen has developed and obtained FDA approval for
the drug Aranesp®, and Roche has developed and obtained FDA approval for
Mircera®, each of which can be used to treat anemia, and which are indicated to
be effective for longer periods than EPO.  Based on its longer lasting
capabilities, potential margins on these alternative pharmaceuticals could be
significantly lower than on EPO, and furthermore, their potential for being
administered by a dialysis patient’s physician, could further eliminate
potential revenues from the treatment of anemia in our dialysis
patients.  The introduction and marketing of alternative
pharmaceuticals as an anemia treatment for dialysis patients, could adversely
impact our results of operations, financial position or cash
flows.  Currently, Mircera® is not available for use in the United
States due to a patent held by Amgen.
  Our
ability to grow is subject to our resources and available locations
 
 Over the past several years we have
both built and acquired several dialysis centers, some of which have
partners.  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, financial position or cash
flows.
  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 $1,500,000.  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 results of operation, financial position or cash
flows.
  Our
business is subject to substantial competition, and we must compete effectively,
otherwise our growth could slow
 
 We are operating in a highly
competitive environment in terms of 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 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
2,161,924 shares of our common stock and vested options exercisable into an
additional 15,000 shares of common stock, for an aggregate of 2,176,924 shares
or approximately 23% of our outstanding common stock.  All of the
shares held by these officers and directors, other than the 15,000 shares
obtainable upon exercise of their options, upon satisfying the conditions of
Rule 144 under the Securities Act, may be sold without complying with the
registration provisions of the Securities Act.  Rule 144 conditions
include:
  29
  ·
              holding
      the shares for six months from acquisition;·
              volume
      limits of selling every three months an amount of shares which does not
      exceed the greater of 1% of the outstanding common stock, or the average
      weekly volume of trading as reported by Nasdaq during the four calendar
      weeks prior to the sale;·
              filing
      Form 144 with the SEC;·
              the
      company continuing to timely file its reports under the Exchange
      Act;
 
 Our
publicly tradable common stock, known as the float, is approximately 7,418,000
shares.  Our common stock owned by our officers and directors
represent approximately 29% of the float.  Accordingly, the sale by
such officers and directors under Rule 144 may have an adverse affect on the
market price of our common stock, and may inhibit our ability to manage
subsequent equity or debt financing.
  Over
the last year, our stock price has exhibited volatility, and any investment in
our common stock may, therefore, decline for reasons unrelated to our
performance
 
 Our common stock trades on the Nasdaq
Global Market under the symbol “DCAI.”  The market price of our common
stock has exhibited volatility.  For fiscal 2007, our per share price
range was $7.70to
$14.16.
 
 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, 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.
  30
  Item
2.  Properties
 
 We own a
property in Easton, Maryland which consists of approximately 7,500 square feet,
most of which is leased to a competitor under a 10-year lease through June 30,
2009 with two renewals of five years each.  The lease is guaranteed by
the tenant’s parent company.
 
 Our
Easton, Maryland property has a mortgage to secure a $700,000 development loan
with interest at the prime rate, maturing in May, 2026.  This loan had
a remaining principal balance of approximately $526,000 at December 31,
2007.  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 own
property in Lemoyne, Pennsylvania which consists of approximately 15,000 square
feet and houses one of our dialysis centers, accounting for approximately 5,400
square feet, under a five year lease through December 22, 2008, with one
additional renewal period of five years.  The center is approved for
17 dialysis stations with space available for expansion.  The
remaining space is used for record storage and training sessions.
 
 We acquired property in Valdosta,
Georgia in 2000, subject to a five year $788,000 mortgage obtained in April,
2001, subsequently refinanced in April, 2006, with interest at the prime rate,
with a minimum rate of 5.75% and a maximum rate of 8%, maturing in April,
2011.  This mortgage had a remaining principal balance of
approximately $589,000 at December 31, 2007.  See item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 2 to “Notes to Consolidated Financial
Statements.”  We constructed a dialysis center at this property
comprising approximately 6,000 square feet which we have leased to one of our
subsidiaries for $90,600 per year under a 10-year lease, with two additional
renewal periods of five years each.
 
 Our Cincinnati, Ohio dialysis center is
leased from a corporation owned by the medical director of that center who,
together with his wife, holds a minority interest in the subsidiary operating
that center.  Our Calhoun, Georgia dialysis center is leased from a
partnership comprised of local doctors who became the medical directors for that
facility in 2007.  Our Aiken, South Carolina dialysis center is leased
from an entity owned by the medical director of that center.  Our
York, Pennsylvania dialysis facility is leased from a limited partnership in
which we have a 60% ownership interest with the remaining 40% owned by two
doctors, one of whom serves as the medical director for that
facility.  These doctors are also affiliated with the entity that owns
a 40% minority ownership in the subsidiary that operates that
facility.
 
 In
addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio
facilities, we presently own 32 other dialysis centers, that lease their
respective facilities from third parties, most under five to ten year initial
terms, usually with two additional renewal periods of five years each, for space
ranging from approximately 3,000 to 7,000 square feet.
 
 We sublet
a minimal amount of space at 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.”
  31
  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 and
December, 2006, we completed a sale and leaseback transaction for each of our
Georgia and Pennsylvania facilities, respectively, and in February, 2007
completed a similar sale and leaseback transaction for the South Carolina
center.  We have another South Carolina center that opened in the
beginning of 2008 that may become subject to a similar arrangement in the
future.  We continue to actively pursue the development and
acquisition of dialysis facilities in other areas which would entail the
acquisition or lease of additional property.
 
 Pursuant
to the merger with our parent, Medicore, Inc., in 2005, we acquired land and
buildings in Hialeah, Florida.  Two properties have buildings
consisting of approximately 28,000 square feet and are leased through April 31,
2010 to a public company previously affiliated with Medicore.  The
remaining land, aggregating approximately 48,000 square feet, is comprised of
two paved parking lots and three parcels of vacant land.
 
 Most of
our dialysis facilities do not operate at full capacity.  See
“Business – Operations – Location, Capacity and Use of Facilities”
above.  The existing dialysis facilities could accommodate greater
patient volume, particularly if we increase hours and/or days of operation
without adding additional dialysis stations or any additional capital
expenditures.  We also have the ability and space at most of our
facilities to expand to increase patient volume subject to obtaining appropriate
governmental approval.
 
 We maintain executive offices at 1302
Concourse Drive, Suite 204, Linthicum, Maryland 21090, and 777 Terrace Avenue,
Hasbrouck Heights, New Jersey 07604, and administrative offices at 214 Senate
Avenue, Suite 300, Camp Hill, Pennsylvania 17011, and 2337 West 76th Street,
Hialeah, Florida 33016.  These offices aggregate approximately 25,000
square feet of space and are under leases expiring in 2009, except for the Camp
Hill lease, which expires in 2012.
 
 Item
3.  Legal Proceedings
 
 None.
 
 Item
4.  Submission of Matters to a Vote of Security Holders
 
 No matter was submitted during the
fourth quarter of our fiscal year ended December 31, 2007 to a vote of security
holders through the solicitation of proxies or otherwise.
 
 32
 
 PART
II
 
 Item
5. Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 
 Price
Range
 
 Our common stock trades on the Global
Market of the Nasdaq Stock Market under the symbol “DCAI.”  The
following table indicates the high and low sales prices for our common stock for
each of the four quarters for the years ended December 31, 2006 and 2007 as
reported by Nasdaq.
 
 2006
              
              High
              
              
              Low1st
      Quarter
              
              $
              13.68
              
              
              $
              9.652ndQuarter
              
              
              13.94
              
              
              
              10.493rdQuarter
              
              
              13.59
              
              
              
              10.584thQuarter
              
              
              14.72
              
              
              
              12.04
 
 Bid Price2007
              
              High
              
              
              Low1st
      Quarter
              
              $
              14.16
              
              
              $
              12.332ndQuarter
              
              
              12.69
              
              
              
              8.613rdQuarter
              
              
              11.00
              
              
              
              9.024thQuarter
              
              
              9.83
              
              
              
              7.70
 
 As of March 11, 2008, the high and low
sales prices of our common stock were $8.06 and $7.60,
respectively.
 
 Stockholders
 
 At March 11, 2008, we had 1,005
shareholders of record as reported by Continental Stock Transfer & Trust
Company, our transfer agent.  We have been advised by Broadridge
Financial Solutions, Inc., which organization holds securities for banks,
brokers and depositories, that there are approximately 2,800 beneficial owners
of our common stock.
 
 Dividend
Policy
 
 We have not declared or paid cash
dividends to our shareholders, and we do not anticipate paying dividends in the
foreseeable future.  The board of directors intends to retain earnings
to finance our growth strategy.  Future dividend policy will be at the
discretion of the board of directors, and will depend on our earnings, capital
requirements, financial condition and other similar relevant
factors.  Any determination to pay a dividend is also subject to the
covenants in the KeyBank National Association credit facility (see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” 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.
  33
 Sale
of Securities Not Registered Under the Securities Act
 
 The only unregistered sales of our
equity securities during 2007 were (i) the vesting on December 31, 2007 of 6,500
shares of common stock pursuant to an aggregate grant of 64,000 stock awards to
certain officers and key employees in the second quarter of 2006 (of which
30,000 shares were cancelled in November, 2006, upon resignation of an officer
and 6,000 shares were cancelled in July, 2007 upon resignation of an employee),
which stock awards vest in equal yearly increments through 2009 (previously
reported on a current report on Form 8-K dated June 30, 2006); and (ii) the
grant of an incentive stock option upon the employment of Thomas P. Carey as
Vice president of Operations in April, 2007, which option is exercisable at
$12.18 per share, vests in equal increments of 12,500 shares at the end of each
12 month period from the date of grant (previously reported on a current report
on Form 8-K dated April 19, 2007).  Each of the stock and option
awards contain termination and acceleration provisions.  See Item 11,
“Executive Compensation.”
 
 The sales of our securities were exempt
from the registration requirements of Section 5 of the Securities Act under the
private placement exemptions of Section 4(2) and/or Regulation D of the
Securities Act, based on the limited number of persons, each of whom are
officers, directors and/or key employees knowledgeable concerning the affairs of
the company.  See Item 11, “Executive Compensation,” Item 12,
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters,” and Note 6 to “Notes to Consolidated Financial
Statements.”
 
 Stock
Repurchases
 
 There were no repurchases of our common
stock in 2007.
 
 Equity
Compensation Plan Information
 
 Information relating to compensation
plans under which equity securities of the company are authorized for issuance
is set forth in Part III, Item 12, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters” of this annual report on
Form 10-K, incorporated herein by reference.
 
 
 PERFORMANCE
GRAPH
 
 The following graph shows a five-year
comparison of cumulative total shareholder returns for the company, the Nasdaq
Market Index and the Dialysis Center Industry Index from December 31, 2002
through December 31, 2007.  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.
 
 34
 
 COMPARISON OF 5-YEAR CUMULATIVE TOTAL
RETURN
 AMONG DIALYSIS CORPORATION OF AMERICA,
 NASDAQ MARKET INDEX AND SIC CODE
INDEX
 
 
 
 
 ASSUMES $100 INVESTED ON JANUARY 1, 2003
 ASSUMES DIVIDEND REINVESTED
 FISCAL YEAR ENDING DECEMBER 31, 2007
 
 2002
              
              
              2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007Dialysis
      Corporation of America
              
              
              100.00
              
              
              
              168.34
              
              
              
              1227.64
              
              
              
              504.02
              
              
              
              638.69
              
              
              
              427.14Dialysis
      Centers Industry
              
              
              100.00
              
              
              
              144.14
              
              
              
              210.04
              
              
              
              261.79
              
              
              
              318.89
              
              
              
              360.68NASDAQ
      Market Index
              
              
              100.00
              
              
              
              150.36
              
              
              
              163.00
              
              
              
              165.58
              
              
              
              183.68
              
              
              
              201.91
 
 The
      current composition of SIC Code 8092 – Dialysis Centers Industry – is as
      follows:DaVita
      Inc.Dialysis
      Corporation of AmericaFresenius
      Medical Care AG & Co. KGaA.
 
 
 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, 2007 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, 2007, 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 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Revenues(1)
              
              $
              74,535
              
              
              $
              62,460
              
              
              $
              45,392
              
              
              $
              40,986
              
              
              $
              29,997Net
      income
              
              
              3,086
              
              
              
              3,049
              
              
              
              1,900
              
              
              
              2,214
              
              
              
              1,150Earnings
      per share(2)Basic
              
              
              .32
              
              
              
              .32
              
              
              
              .22
              
              
              
              .27
              
              
              
              .15Diluted
              
              
              .32
              
              
              
              .32
              
              
              
              .20
              
              
              
              .25
              
              
              
              .13
 
 35
 
 Consolidated
      Balance Sheet Data(in
      thousands)December
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Working
      capital
              
              $
              18,612
              
              
              $
              17,098
              
              
              $
              7,617
              
              
              $
              3,644
              
              
              $
              3,773Total
      assets
              
              
              54,846
              
              
              
              49,856
              
              
              
              38,803
              
              
              
              26,490
              
              
              
              19,604Intercompany
      advance payablefrom
      Medicore(non-current
      portion)(3)
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              449
              
              
              
              234Intercompany
      note and accrued interestPayable
      to
      Medicore(3)
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              1,462
              
              
              
              ---Long
      term debt, net of current portion
              
              
              7,009
              
              
              
              8,618
              
              
              
              635
              
              
              
              1,586
              
              
              
              2,097Stockholders’
      equity
              
              
              32,006
              
              
              
              29,061
              
              
              
              25,613
              
              
              
              13,330
              
              
              
              10,970
 _________________________
 
 (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.
 
 Item
7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
 Management’s Discussion and Analysis of
Financial Condition and Results of Operations, commonly known as MD&A, is
our attempt to provide a narrative explanation of our financial statements, and
to provide our shareholders and investors with the dynamics of our business as
seen through our eyes as management.  Generally, MD&A is intended
to cover expected effects of known or reasonably expected uncertainties,
expected effects of known trends on future operations, and prospective effects
of events that have had a material effect on past operating
results.  Our discussion of MD&A should be read in conjunction
with our consolidated financial statements, including the notes, included
elsewhere in this annual report on Form 10-K.  Please also review the
Cautionary Notice Regarding Forward-Looking Information on page one of this
Annual Report.
 
 Overview
 
 We provide dialysis services, primarily
kidney dialysis treatments through 35 outpatient dialysis centers, including one
center acquired effective January 1, 2008 (See Note 14 to “Notes to Consolidated
Financial Statements”), two centers acquired in the first quarter of 2007, three
centers acquired in the first quarter of 2006, and three additional centers
opened during 2006, to patients with chronic kidney failure, also know as
end-stage renal disease or ESRD.  We provide dialysis treatments to
dialysis patients of 12 hospitals and medical centers through acute inpatient
dialysis services agreements with those entities.  We provide homecare
services, including home peritoneal dialysis.
  36
 Quality
Clinical Results
 
 Our goal is to provide consistent
quality clinical care to our patients from caring and qualified doctors, nurses,
patient care technicians, social workers and dieticians.  We have
demonstrated an unwavering commitment to quality renal care through our
continuous quality improvement initiatives.  We strive to maintain a
leadership position as a quality provider in the dialysis industry and often set
our goals to exceed the national average standards.  See Item 1,
“Business – Operations – Quality Clinical Results.”
 
 Patient
Treatments
 
 The following table shows the number of
in-center, home peritoneal and acute inpatient treatments performed by us
through the dialysis centers we operate, including one center we managed until
January 1, 2008(1) and one in which we had a 40% ownership interest until August
1, 2006(2), and those hospitals and medical centers with which we have inpatient
acute service agreements for the periods presented:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005In
      center
              
              
              228,456
              
              
              
              197,628
              
              
              
              155,130Home
      peritoneal
              
              
              15,940
              
              
              
              16,115
              
              
              
              16,942Acute
              
              
              7,930
              
              
              
              6,350
              
              
              
              7,100252,326
              (3)
              
              
              220,093
              (3)
              
              
              179,172
              (3)
 
 (1)
              At
      that date we acquired the 80% controlling interest.(2)
              At
      that date this center was consolidated, in which center we acquired the
      other 60% interest in December, 2006, and subsequently sold 30% to that
      facility’s medical director in 2007.(3)
              Treatments
      by the Georgia center managed through December 31, 2007 and acquired
      effective January 1, 2008 include: in-center treatments of 10,631; 9,428;
      and 8,888; respectively, for 2007, 2006 and 2005, home treatments of 506
      and 297, respectively for 2007 and 2006 and no acute
      treatments.
 
 New
Business Development
 
 Our future growth depends primarily on
the availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and our ability to manage the development
costs for these potential dialysis centers while competing with larger
companies, some of which are public companies or divisions of public companies
with greater numbers of personnel and financial resources available for
acquiring and/or developing dialysis centers in areas targeted by
us.  Additionally, there is intense competition for qualified
nephrologists who would serve as medical directors of dialysis facilities, and
be responsible for the supervision of those dialysis centers. We currently have
two dialysis facilities under development (including one center we will manage
pursuant to a management services agreement with provisions pursuant to which we
can acquire a controlling interest in the future.  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.
  37
 Start-up
Losses
 
 It has
been our experience that newly established dialysis centers, although
contributing to increased revenues, have adversely affected our results of
operations in the short term due to start-up costs and expenses and a smaller
patient base. These losses are typically a result of several months of
pre-opening costs, and six to eighteen months of post opening costs, in excess
of revenues. We consider new dialysis centers to be “start-up centers” through
their initial 12 months of operations, or when they achieve consistent
profitability, whichever is sooner. For the year ended December 31, 2007, we
incurred an aggregate of approximately $608,000 in pre-tax losses for start-up
centers compared to $1,423,000 for the preceding year, primarily due to less
centers in the start-up phase on average during 2007 than during
2006.
 
 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.
 
 ESRD patients must either obtain a
kidney transplant or obtain regular dialysis treatments for the rest of their
lives.  Due to a lack of suitable donors and the possibility of
transplanted organ rejection, the most prevalent form of treatment for ESRD
patients is hemodialysis through a kidney dialysis
machine.  Hemodialysis patients usually receive three treatments each
week with each treatment lasting between three and five hours on an outpatient
basis.  Although not as common as hemodialysis in an outpatient
facility, home peritoneal dialysis is an available treatment option,
representing the third most common type of ESRD treatment after outpatient
hemodialysis and kidney transplantation.
 
 Reimbursement
 
 Approximately 57% of our medical
services revenue for 2007 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, 2006 and 2007.  In 2007, Medicare changed the way it reimburses
dialysis providers, which includes revision of pricing for separately billable
drugs and biologics, with an add-on component to make the change
budget-neutral.  Medicare also implemented a case mix payment system
as an adjustment to the composite rate.  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.
  38
 The following table shows the breakdown
of our revenues by type of payor for the periods presented:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Medicare
              
              
              49
              %
              
              
              52
              %
              
              
              51
              %Medicaid
      and comparable programs
              
              
              8
              %
              
              
              9
              %
              
              
              8
              %Hospital
      inpatient dialysis services
              
              
              4
              %
              
              
              3
              %
              
              
              5
              %Commercial
      insurers and other private payors
              
              
              39
              %
              
              
              36
              %
              
              
              36
              %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 31,2007
              
              
              2006
              
              
              2005Outpatient
      hemodialysis services
              
              $
              39,880
              
              
              
              55
              %
              
              $
              32,856
              
              
              
              54
              %
              
              $
              23,084
              
              
              
              52
              %Home
      and peritoneal dialysis services
              
              
              3,736
              
              
              
              5
              %
              
              
              3,625
              
              
              
              6
              %
              
              
              3,198
              
              
              
              7
              %Inpatient
      hemodialysis services
              
              
              2,897
              
              
              
              4
              %
              
              
              2,191
              
              
              
              3
              %
              
              
              2,055
              
              
              
              5
              %Ancillary
      services
              
              
              26,658
              
              
              
              36
              %
              
              
              22,467
              
              
              
              37
              %
              
              
              16,350
              
              
              
              36
              %$
              73,171
              
              
              
              100
              %
              
              $
              61,139
              
              
              
              100
              %
              
              $
              44,687
              
              
              
              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.”
  39
 Results
of Operations
 
 The following table shows our results
of operations (in thousands):
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Medical
      services revenue
              
              $
              73,171
              
              
              $
              61,139
              
              
              $
              44,687Product
      sales
              
              
              1,078
              
              
              
              891
              
              
              
              207Total sales
              
              
              74,249
              
              
              
              62,030
              
              
              
              44,894Other
      income
              
              
              286
              
              
              
              430
              
              
              
              498Total
      operating revenues
              
              
              74,535
              
              
              
              62,460
              
              
              
              45,392Cost
      of medical services
              
              
              44,248
              
              
              
              36,969
              
              
              
              27,860Cost
      of product sales
              
              
              598
              
              
              
              549
              
              
              
              119Total cost of
      sales
              
              
              44,846
              
              
              
              37,518
              
              
              
              27,979Corporate
      selling, general and administrative expenses
              
              
              7,917
              
              
              
              6,460
              
              
              
              4,524Facility
      selling, general and administrative expenses
              
              
              11,423
              
              
              
              8,988
              
              
              
              7,183Total selling, general and
      administrative expense
              
              
              19,340
              
              
              
              15,448
              
              
              
              11,707Stock
      compensation expense
              
              
              218
              
              
              
              276
              
              
              
              ---Depreciation
      and amortization
              
              
              2,619
              
              
              
              2,319
              
              
              
              1,749Provision
      for doubtful accounts
              
              
              1,665
              
              
              
              1,199
              
              
              
              571Total
      operating costs and expenses
              
              
              68,688
              
              
              
              56,760
              
              
              
              42,006Operating
      income
              
              
              5,847
              
              
              
              5,700
              
              
              
              3,386Other
      (expense) income
              
              
              (40
              )
              
              
              101
              
              
              
              66Income
      before income taxes, minority and otherEquity
      interests and equity in affiliate earnings
              
              
              5,807
              
              
              
              5,801
              
              
              
              3,452Income
      tax provision
              
              
              1,615
              
              
              
              2,086
              
              
              
              1,427Income
      before minority and other equity interestsand
      equity in affiliate earnings
              
              
              4,192
              
              
              
              3,715
              
              
              
              2,025Minority
      and other equity interests in income ofconsolidated
      subsidiaries
              
              
              (1,106
              )
              
              
              (920
              )
              
              
              (454
              )Equity
      in affiliate earnings
              
              
              ---
              
              
              
              254
              
              
              
              329Net income
              
              $
              3,086
              
              
              $
              3,049
              
              
              $
              1,900
 2007
Compared to 2006
 
 Medical services revenue increased
approximately $12,032,000 (20%) for the year ended December 31, 2007, compared
to the preceding year.  Medical services revenue for 2007 includes
approximately $442,000 of amounts previously included in excess insurance
liability that was determined to be non-refundable compared to approximately
$688,000 in the preceding year.  See Note 1 to “Notes to Consolidated
Financial Statements.”  Dialysis treatments performed increased from
approximately 220,000 in 2006 to approximately 252,000 in 2007, a 15% increase
which includes treatments at managed facilities,
one for which we acquired the 60% interest not already owned by the company in
December, 2006, and one in which we acquired an 80% interest effective January
1, 2008 (see Note 8 and Note 13 to “Notes to Consolidated Financial
Statements”).  The increase in treatments includes treatments at the
three centers acquired in the first quarter of 2006, three new centers opened
during 2006, and two centers acquired in the first quarter of
2007.  Some of our patients carry commercial insurance which may
require an out of pocket co-pay by the patient, which is often uncollectible by
us.  This co-pay is typically limited, and therefore may lead to our
under-recognition of revenue at the time of service.  We routinely
recognize these revenues as we become aware that these limits have been
met.
  40
  We record contractual adjustments based
on fee schedules for a patient’s insurance plan except in circumstances where
the schedules are not readily determinable, in which case rates are estimated
based on similar insurance plans and subsequently adjusted when actual rates are
determined.  Out-of-network providers generally do not provide fee
schedules and coinsurance information and, consequently, represent the largest
portion of contractual adjustment changes.  Estimated contractual
adjustments for 2006 and prior years made during 2007 resulted in approximately
a $381,000 reduction in revenues in 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 $147,000 (3%) for the year ended December 31, 2007, compared to
the preceding year, including in start-up costs associated with our new centers
of $608,000 in 2007 compared to $1,423,000 in the preceding year.
 
 Other operating income, representing
management fee income pursuant to management services agreements with our
Toledo, Ohio facility (until its consolidation effective August 1, 2006) and a
Georgia center in which we acquired an 80% interest effective January 1, 2008,
decreased approximately $144,000 during 2007 compared to the preceding
year.  This decrease largely resulted from the consolidation of our
Toledo facility effective August 1, 2006 whereas that facility had previously
been accounted for on the equity method with no revenue elimination in our
consolidated financial statements.  See Note 8 and Note 13 to “Notes
to Consolidated Financial Statements.”
 
 Cost of medical services sales as a
percentage of sales was stable and amounted to 60% for the year ended December
31, 2007 and for the preceding year.
 
 Approximately
27% of our medical services revenue for the year ended December 31, 2007 derived
from the administration of EPO to our dialysis patients compared to 28% for the
preceding year.  Beginning in 2006, Medicare reimburses dialysis
providers for the top ten most utilized ESRD drugs at an amount equal to the
cost of such drugs as determined by the Inspector General of HHS, with
complementary increases in the composite rate.  We believe these
changes have had little impact on our average Medicare revenue per
treatment.  See Item 1, “Business – Operations – Medicare
Reimbursement.”
 
 Our medical products 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
$1,078,000 during 2007, and $891,000 during 2006 (1.4% of total 2007 and 2006
operating revenues).  Operating income for the medical products
division was $186,000 for 2007 and $69,000 for 2006 (3.1% of total 2007
operating income and 1.2% of total 2006 operating income).
  41
  Cost of sales for our medical products
division amounted to 56% of sales for the year ended December 31, 2007 and 62%
of sales for the year ended December 31, 2006.  Cost of sales for this
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 $3,892,000 (25%) for the year ended December 31,
2007, compared to the preceding year.  This increase reflects
operations of our new dialysis centers and increased support activities
resulting from expanded operations.  Included are expenses of new
centers incurred prior to Medicare approval for which there were no
corresponding medical services revenue.  Selling, general and
administrative expenses as a percentage of medical services revenue amounted to
approximately 26% for the year ended December 31, 2007 compared to 25% for the
preceding year.
 
 Provision for doubtful accounts
increased approximately $466,000for year ended
December 31, 2007, compared to the preceding year.  The provision
amounted to 2% of sales for the year ended December 31, 2007 and for the
preceding year.  Medicare bad debt recoveries of $253,000 were
recorded during the year ended December 31, 2007, compared to approximately
$537,000 for the preceding year.  Without the effect of the Medicare
bad debt recoveries, the provision would have amounted to 3% of sales for the
year ended December 31, 2007 and for the preceding year.  The
provision for doubtful accounts reflects our collection experience with the
impact of that experience included in accounts receivable presently reserved,
plus recovery of accounts previously considered uncollectible from our Medicare
cost report filings.  The provision for doubtful accounts is
determined under a variety of criteria, primarily aging of the receivables and
payor mix.  Accounts receivable are estimated to be uncollectible
based upon various criteria including the age of the receivable, historical
collection trends and our understanding of the nature and collectibility of the
receivables, and are reserved for in the allowance for doubtful accounts until
they are written off.
 
 Days sales outstanding were 89 as of
December 31, 2007 compared to 82 as of December 31, 2006.  Days sales
outstanding are impacted by the expected and typical slower receivable turnover
at our new centers opened and by payor mix.  Based on our collection
experience with the different payor groups comprising our accounts receivable,
our analysis indicates that our allowance for doubtful accounts reasonably
estimates the amount of accounts receivable that we will ultimately not
collect.
 
 After a patient’s insurer has paid the
applicable coverage for the patient, the patient is billed for the applicable
co-payment or balance due.  If payment is not received from the
patient for its applicable portion, collection letters and billings are sent to
that patient until such time as the patient’s account is determined to be
uncollectible, at which time the account will be charged against the allowance
for doubtful accounts.  Patient accounts that remain outstanding four
months after initial collection efforts are generally considered
uncollectible.
 
 Other non-operating income decreased
approximately $141,000 for the year ended December 31, 2007, compared to the
preceding year.  This includes an increase in interest income of
$29,000, an increase in rental income of $19,000, an increase in miscellaneous
other income of $73,000 and an increase in interest expense to unrelated parties
of $347,000 due to increased average non-inter-company borrowings and net
litigation settlement expense of $85,000 in 2006.  The prime rate was
7.25% at December 31, 2007, and 8.25% at December 31, 2006.  See Note
1 and Note 2 of “Notes to the Consolidated Financial Statements.”
  42
  Although operations of additional
centers have resulted in additional revenues, certain of these centers are still
in the start-up stage and, accordingly, their operating results will adversely
impact our overall results of operations until they achieve a patient count
sufficient to sustain profitable operations.
 
 Minority and other equity interests
represents the proportionate equity interests of minority owners of our
subsidiaries whose financial results are included in our consolidated
results.  Equity in affiliate earnings represents our proportionate
interest in the earnings of our Toledo, Ohio subsidiary until its consolidation
effective August 1, 2006, prior to which it was accounted for on the equity
method.  See Note 1 and Note 8 to “Notes to Consolidated Financial
Statements.”
 
 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 8 and Note 13 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.
 
 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 1 and
Note 8 to “Notes to Consolidated Financial Statements.”
  43
  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.  We believe these changes have had
little impact on our average Medicare revenue per treatment.  See Item
1, “Business – Operations – Medicare Reimbursement.”
 
 Our medical products 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).
 
 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.
  44
  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 and 11 of “Notes to the Consolidated Financial
Statements.”
 
 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 and
Note 8 to “Notes to Consolidated Financial Statements.”
 
 Liquidity
and Capital Resources
 
 Working capital totaled approximately
$18,612,000 at December 31, 2007, which reflected an increase of $1,515,000 (9%)
during the current year.  Included in the changes in components of
working capital was a decrease in cash and cash equivalents of $1,044,000, which
included net cash provided by operating activities of $5,570,000; net cash used
in investing activities of $5,029,000 (including additions to property and
equipment of $2,521,000; and payments of $2,518,000 on dialysis center
acquisitions), and net cash used in financing activities of $1,584,000
(including borrowings of $2,550,000 under our line of credit, repayments of
$4,100,000 on our line of credit, other debt repayments of $133,000,
distributions to subsidiary minority members of $729,000, capital contributions
of $78,000 by subsidiary minority members and a minority investment in
our  Toledo, Ohio subsidiary of $750,000).
  45
 Net cash provided by operating
activities consists of net income before non-cash items consisting of
depreciation and amortization of $2,619,000, bad debt expense of $1,665,000,
deferred income tax of $132,000, deferred tax asset utilized of $908,000, income
applicable to minority interest of $1,106,000, and non-cash stock compensation
expense of $217,000, as adjusted for changes in components of working
capital.  Significant changes in components of working capital, in
addition to the $1,044,000 increase in cash, included an increase in refundable
income taxes of $294,000, an increase in accounts receivable of $4,465,000, a
decrease of $333,000 in prepaid expenses and other current assets, and increases
in accounts payable of $2,064,000 and accrued expenses of
$417,000.  The decrease in prepaid expenses and other current assets
includes the sale of $626,000 of property classified as property to be sold at
December 31, 2006, the collection of $417,000 from the minority owner in our 60%
owned subsidiary that purchased the York, Pennsylvania center, a deposit of
approximately $400,000 toward our self-insured health insurance plan and an
increase of approximately $383,000 in our estimated Medicare bad debt recovery
receivable. The decrease in income taxes payable at $627,000 which includes
income tax payments and utilization of a deferred tax asset from net operating
loss carryforward.  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 $526,000 at December 31, 2007 and $555,000 at
December 31, 2006.  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 $589,000 at
December 31, 2007 and $617,000 at December 31, 2006.  See Note 2 to
“Notes to Consolidated Financial Statements.”
 
 We had an equipment financing agreement
for kidney dialysis machines that had an outstanding balance of approximately
$76,000 at December 31, 2006, that was paid during 2007.  There was no
additional equipment financing under this agreement during 2007.  See
Note 2 to “Notes to Consolidated Financial Statements.”
 
 We
acquired an 80% interest in a Georgia center effective January 1, 2008 are in
the process of developing a new dialysis center in each of Indiana and
Pennsylvania with the Indiana center to be managed by the company with
provisions for the company to acquire a controlling interest in the
future.  See Note 1 and Note 13 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.
  46
  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 Note
2 to “Notes to Consolidated Financial Statements.”  To assist with our
future expansion we entered into a $15,000,000, three year credit agreement for
a revolving line of credit with Key Bank National Association in October, 2005
that we have extended for one additional year.  No amounts were
financed under this new credit facility during 2005.  We have
outstanding borrowings of $5,950,000 under this credit facility as of December
31, 2007.  No assurance can be given that we will be successful in
implementing our growth strategy or that available financing will be adequate to
support our expansion.  See Item 1, “Business-Business
Strategy.”
 
 Aggregate
Contractual Obligations
 
 As of December 31, 2007, our
contractual obligations (in thousands), including payments due by period, are as
follows:
 
 Payments due by periodLess
      than
              
              
              
              
              
              
              
              
              More
      thanTotal
              
              
              1 year
              
              
              1-3 years
              
              
              3-5 years
              
              
              5 yearsLong-term
      debt
              
              $
              7,065
              
              
              $
              56
              
              
              $
              6,074
              
              
              $
              134
              
              
              $
              801Operating
      leases
              
              
              11,194
              
              
              
              2,524
              
              
              
              3,899
              
              
              
              2,759
              
              
              
              2,012Expected
      interest payments:Long-term
      debt
              
              
              1,004
              
              
              
              421
              
              
              
              145
              
              
              
              126
              
              
              
              312Purchase
      obligations:Medical
      services
              
              
              7,046
              
              
              
              1,607
              
              
              
              2,353
              
              
              
              1,401
              
              
              
              1,685Miscellaneous
      purchase obligations
              
              
              101
              
              
              
              101
              
              
              
              0
              
              
              
              0
              
              
              
              0Total
      purchase obligations
              
              
              7,147
              
              
              
              1,708
              
              
              
              2,353
              
              
              
              1,401
              
              
              
              1,685Total
      contractual obligations
              
              $
              26,410
              
              
              $
              4,709
              
              
              $
              12,471
              
              
              $
              4,420
              
              
              $
              4,810
 New
Accounting Pronouncements
 
 In September, 2006, the FASB issued
Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value
Measurements”.  SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements.  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 December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS
141R”), “Business Combinations.”  SFAS 141R expands the definitions of
a business and a business combination and requires all assets and liabilities of
an acquired business (for full, partial and step acquisitions) to be recorded at
fair values, with limited exceptions.  SFAS will be effective for us
in 2009.  The company is evaluating the impact on its financial
statements of adopting SFAS 141R.  See Note 1 to “Notes to
Consolidated Financial Statements.”
  47
  In February, 2007, the FASB issued
Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair
Value Option for Financial Assets and Financial Liabilities.”  SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 is effective for us beginning January 1,
2008 for assets and liabilities that are carried at fair value on a recurring
basis in the financial statements.  We are evaluating the impact on
our financial statements of adopting SFAS 159.  See Note 1 to “Notes
to Consolidated Financial Statements.”
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial Statements,” an amendment of
ARB 51.  SFAS 160 requires non controlling interests to be reported in
the equity section of consolidated financial statements and requires that
consolidated net income include the amounts attributable to both the parent and
noncontrolling interest with these amounts disclosed on the face of the
consolidated income statement and requires any losses attributable to the
noncontrolling interest in excess of noncontrolling interest in equity to be
allocated to the noncontrolling interest.  SFAS 160R will be effective
for us in 2009.  The company is evaluating the impact on its financial
statements.  See Note 1 to “Notes to Consolidated Financial
Statements.”
 
 Critical
Accounting Policies and Estimates
 
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make complex judgments and
estimates.  On an on-going basis, we evaluate our estimates, the most
significant of which include establishing allowances for doubtful accounts, a
valuation allowance for our deferred tax assets and determining the
recoverability of our long-lived assets.  The basis for our estimates
are historical experience and various assumptions that are believed to be
reasonable under the circumstances, given the available information at the time
of the estimate, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily available
from other sources.  Actual results may differ from the amounts
estimated and recorded in our financial statements.
 
 We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
 
 Revenue
Recognition:  Revenues are recognized net of contractual provisions at
the expected collectable amount.  We receive payments through
reimbursement from Medicare and Medicaid for our outpatient dialysis treatments
coupled with patients’ private payments, individually and through private
third-party insurers.  A substantial portion of our revenues are
derived from the Medicare ESRD program, which outpatient reimbursement rates are
fixed under a composite rate structure, which includes the dialysis services and
certain supplies, drugs and laboratory tests.  Certain of these
ancillary services are reimbursable outside of the composite
rate.  Medicaid reimbursement is similar and supplemental to the
Medicare program.  Our acute inpatient dialysis operations are paid
under contractual arrangements, usually at higher contractually established
rates, as are certain of the private pay insurers for outpatient
dialysis.  We have developed a sophisticated information and
computerized coding system, but due to the complexity of the payor mix and
regulations, we sometimes receive more or less than the amount expected when the
services are provided.  We reconcile any differences at least
quarterly.
  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 Staff
Accounting Bulletin Topic 13 (“SAB 104”) in regard to recording reasonable
estimates of revenue based on our historical experience and identifying on a
timely basis necessary changes to estimates.
 
 Allowance
for Doubtful Accounts:  We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our patients or their
insurance carriers to make required payments.  Based on historical
information, we believe that our allowance is adequate.  Changes in
general economic, business and market conditions could result in an impairment
in the ability of our patients and the insurance companies to make their
required payments, which would have an adverse effect on cash flows and our
results of operations.  The allowance for doubtful accounts is
reviewed monthly and changes to the allowance are updated based on actual
collection experience.  We use a combination of percentage of sales
and the aging of accounts receivable to establish an allowance for losses on
accounts receivable.  We adhere to the guidelines of Statement of
Financial Accounting Standards No. 5 (“SFAS 5”), “Accounting for Contingencies”
in determining reasonable estimates of accounts for which uncollectibility is
possible.
 
 Valuation
Allowance for Deferred Tax Assets:  The carrying value of deferred tax
assets assumes that we will be able to generate sufficient future taxable income
to realize the deferred tax assets based on estimates and
assumptions.  If these estimates and assumptions change in the future,
we may be required to adjust our valuation allowance for deferred tax assets
which could result in additional income tax expense.
 
 Goodwill
and Intangible Asset Impairment:  In assessing the recoverability of
our goodwill and other intangibles we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets.  This impairment test requires the determination of
the fair value of the intangible asset.  If the fair value of the
intangible asset is less than its carrying value, an impairment loss will be
recognized in an amount equal to the difference.  If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets.  We adopted Statement of
Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other
Intangible Assets,” effective January 1, 2002, and are required to analyze
goodwill and indefinite lived intangible assets for impairment on at least an
annual basis.
 
 Long-Lived
Assets:  We state our property and equipment at acquisition cost and
compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets.  In accordance with Statement of
Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the
Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable.  Recoverability of assets
to be held and used is measured by comparison of the carrying amount of an asset
to the future cash flows expected to be generated by the asset.  If
the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset.  These computations are complex
and subjective.
  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 $2,364,000
at December 31, 2007.
 
 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 $7,065,000 at December 31, 2007.
 
 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 $56,000 on our results of operations for the
year ended December 31, 2007.
 
 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
  50
 
 Item
9A.  Controls and Procedures
 
 Evaluation of Disclosure Controls and
Procedures.
 
 As of the end of the period covered by
this annual report on Form 10-K, we carried out an evaluation, under the
supervision and with the participation of our management, including our
President and CEO, and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-15(e) of the Exchange Act.  These disclosure controls and
procedures are designed to provide reasonable assurance that, among other
things, information is accumulated and communicated to our management, including
our President and CEO, and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.  Based upon such
evaluation, our President and CEO, and our Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in providing reasonable assurance that information
required to be disclosed by our company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods specified by the SEC’s rules and forms.
 
 Management’s Report on Internal
Control Over Financial Reporting
 
 There were no changes in our internal
control over financial reporting that occurred during our fourth quarter ended
December 31, 2007 that have materially affected, or are reasonably likely to
materially affect, our control over financial reporting.  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.  Our internal control over financial reporting
is a process designed by, or under the supervision of, our President and CEO and
Chief Financial Officer and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.  Internal control over financial reporting
includes polices and procedures that:
 
 ·
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that
      receipts and expenditures of the company are being made only in accordance
      with authorizations of management and directors of the company;
      and·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on the consolidated financial
  statements
 
 All internal control systems, no matter
how well designed, have inherent limitations and can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations to all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, and
none of which we are aware, within our company have been
detected.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
  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, 2007.  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, 2007, 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, 2007, 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, 2007.
 
 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 2007.
 
 
 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 2008 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 2008 proxy statement* under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance.”
 
 The
company adopted a Code of Ethics and Business Conduct, referred to as the Code
of Ethics, that applies to our Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer or Controller, and persons performing similar
functions, as well as other employees.  See Item 1, “Business –
Corporate Integrity Program – Code of Ethics.”  See also “Code of
Ethics” in the company’s 2008 proxy statement* incorporated herein by
reference.  The Code of Ethics is available on our website at www.dialysiscorporation.com
under the caption, “Investor Relations.”  A copy of the Code of Ethics
is also available without charge upon request from the Chief Financial Officer
at Dialysis Corporation of America, 214 Senate Avenue, Suite 300, Camp Hill, PA
17011.  If we make substantive amendments to our Code of Ethics or
grant any waiver from a provision of it, which has not occurred to date, we will
disclose the nature of such amendment or waiver on our website or in a current
report on Form 8-K.
  52
  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 2008
proxy statement* under the captions “Corporate Governance,” “Compensation
Committee Report” and “Report of the Audit Committee.”  The audit,
nominating and compensation committee charters outline those committees’
purposes, membership requirements, administration and
responsibilities.  Each committee member is independent as defined
under the market rules of the Nasdaq Stock Market.  Each committee
reviews and updates its charter at least annually, which charters are approved
by the board of directors.  All the charters are posted on our website
at www.dialysiscorporation.com under the caption “Investor
Relations.”  The charter information is also available in print
without charge to any shareholder who requests it from our Secretary, Joshua M.
Jaffe, Esq., at Jaffe & Falk, LLC, 777 Terrace Avenue, Hasbrouck Heights, NJ
07604.
 
 Item
11.  Executive Compensation
 
 Information
concerning Compensation Discussion and Analysis, the Compensation Committee
Report and management and director compensation is incorporated herein by
reference to the company’s 2008 proxy statement* under the captions
“Compensation Discussion and Analysis,” “Compensation Committee Report” and
“Director Compensation.”  Information of our audit committee financial
expert is incorporated herein by reference to the company’s 2008 proxy
statement* under the captions “Corporate Governance” and “Audit Committee
Report.”
 
 Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 
 Information
concerning security ownership of certain beneficial owners and management is
incorporated herein by reference to the company’s 2008 proxy statement* under
the caption “Security Ownership of Certain Beneficial Owners and
Management.”
 
 Securities
Authorized For Issuance Under Equity Compensation Plans
 
 The following table provides
information with respect to equity compensation plans approved by shareholders
in effect at December 31, 2007. Options and stock awards are only granted under
the Dialysis Corporation of America 1999 Incentive Plan, referred to as the DCA
Incentive Plan, which has been approved by shareholders.
 
 Plan
      Category
              Number
      of securities to be
                issued
      upon exercise of
                outstanding
      options, warrants
                and
      rights
              Weighted-average
                exercise
      price of
                outstanding
      options,
                warrants
      and rights
              Number
      of securities
                remaining
      available for
                future
      issuance under equity
                compensation
      plans
                (excluding
      securities reflected
                in
      column (a))(a)
              (b)
              (c)Equity
      compensation plans
                approved
      by security holders:
              68,750
      (1)
                
                46,500
      (2)
              $9.95
                
                N/A
              669,154Equity
      compensation plans not
                approved
      by security holders:
              N/A
              N/A
 _______________
 
 (1)           Includes
(i) 18,750 five year options exercisable through June 6, 2009 at $4.02 per
share; and (ii) a five year option exercisable through April 15, 2012 at $12.18
per share, vesting in equal increments of 12,500
shares each April 15, 2008 through 2011.  Each of the options provide
for adjustments under limited circumstances, and have termination and
acceleration provisions.
  53
 
 (2)           Includes
(i) 36,500 shares issuable upon vesting pursuant to outstanding stock awards;
and (ii) 10,000 shares issuable under the employment agreement with Stephen W.
Everett, President and CEO of the company, the vesting of which is subject to
satisfaction of performance criterion.
 
 Item
13.  Certain Relationships and Related Transactions, and Director
Independence
 
 Information concerning certain
relationships and related transactions and director independence is incorporated
herein by reference to the company’s 2008 proxy statement* under the captions
“Proposal No. 1: Election of Directors,” “Information About Directors and
Executive Officers” and “Corporate Governance.”
 
 Item
14.  Principal Accountant Fees and Services
 
 Information concerning fees and
services of the company’s independent auditors is incorporated herein by
reference to the company’s 2008 proxy statement* under the caption “Proposal No.
2: 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,
    2008.
 
 54
 
 PART
IV
 
 
 Item
15.  Exhibits and Financial Statement Schedules
 
 (a)
              The
      following is a list of documents filed as part of this
    report.1.
              All
      financial statements – See Index to Consolidated Financial
      Statements.2.
              Financial
      statement schedules – See Index to Consolidated Financial
      Statements.(b)
              Exhibits
      +3.1
              Articles
      of Incorporation ‡3.2
              By-Laws
      of the Company, as amended October 30, 2007 (incorporated by reference to
      the Company’s Current Report on Form 8-K dated November 5, 2007, Exhibit
      (3)(ii)). ‡4
              Instruments
      defining the rights of equity holders, including
  indentures4.1
              Form
      of Common Stock Certificate of the Company ‡4.2
              Form
      of Stock Option Certificate under the 1999 Stock Incentive Plan (May 21,
      1999) (incorporated by reference to the Company’s Annual Report on Form
      10-K for the year ended December 31, 1999, Part IV, Item
      14(c)(10)(xxiv)).4.3
              Form
      of Restricted Stock Agreement (incorporated by reference to the Company’s
      Current Report on Form 8-K dated June 30, 2006, Item 9.01(d)(10)
      10.1).10
              Material
      Contracts10.1
              Indemnity
      Deed of Trust from the Company to Trustees for the benefit of St. Michaels
      Bank dated December 3, 1999 (incorporated by reference to the Company’s
      Current Report on Form 8-K dated December 13, 1999 (“December Form 8-K”),
      Item 7(c)(99)(i)).10.2
              Guaranty
      Agreement from the Company to St. Michaels Bank dated December 3, 1999
      (incorporated by reference to the Company’s December Form 8-K, Item
      7(c)(99)(ii)).10.3
              The
      Company’s Section 125 Plan effective September 1, 2002 (incorporated by
      reference to the Company’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2002, Part II, Item 6(99)).10.4
              Agreement
      of Lease by and between Copt Concourse, LLC and the Company dated March
      31, 2004 (incorporated by reference to the Company’s Current Report on
      Form 8-K dated March 31, 2004, item 7(c)(10((i)).10.5
              Credit
      Agreement between the Company and KeyBank National Association dated
      October 24, 2005 (incorporated by reference to the Company’s Current
      Report on Form 8-K dated October 27, 2005 (“October 2005 Form 8-K”), Item
      9.01(d)(10)(i)).
  55
  10.6
              Revolving
      Credit Note dated October 24, 2005 (incorporated by reference to the
      Company’s October 2005 Form 8-K, Item 9.01(d)(10)(ii)).10.7
              Guaranty
      of Payment by the Company’s Wholly-Owned Subsidiaries in favor of KeyBank
      National Association dated October 24, 2005 (incorporated by reference to
      the Company’s October 2005 Form 8-K, Item
    9.01(d)(10)(iii)).10.8
              Pledge
      Agreement by the Company in favor of KeyBank National Association dated
      October 24, 2005 (incorporated by reference to the Company’s October 2005
      Form 8-K, Item 9.01(d)(10)(iv).10.9
              Amendment
      No. 1 to Credit Agreement between the Company and KeyBank National
      Association dated December 15, 2005 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated December 16, 2005, Item
      9.01(d)(10)(i)).10.10
              Amendment
      No. 2 to Credit Agreement between the Company and KeyBank National
      Association dated as of February 14, 2006 (incorporated by reference to
      the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005, Part IV, Item 15, (10.19)).10.11
              Employment
      Agreement between the Company and Stephen W. Everett dated February 22,
      2006 (incorporated by reference to the Company’s Current Report on Form
      8-K dated February 28, 2006, Item 9.01(d)(10)10.1).*10.12
              Promissory
      Note by the Company to American Banking Company, dated April 3, 2006
      (incorporated by reference to the Company’s Current Report on Form 8-K
      dated April 4, 2006, Item 9.01(d)(99) 99.1).10.13
              Amendment
      No. 3 to Credit Agreement between the Company and KeyBank National
      Association dated July 27, 2006 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated August 2, 2006, Item
      9.01(d)(10)(i)).10.14
              Debt
      Modification Agreement by DCA of Vineland, LLC(1) dated May 25, 2006
      (incorporated by reference to the Company’s Current Report on Form 8-K,
      dated May 26, 2006 (“May 2006 Form 8-K”), Item 9.01(d)(99)
      99.1).10.15
              Notice
      and Consent to Modification by Guarantor [the Company] dated May 25, 2006
      (incorporated by reference to the Company’s May 2006 Form 8-K, Item 9.01
      (d)(99) 99.2)10.16
              Amendment
      No. 4 to Credit Agreement between the Company and KeyBank National
      Association dated December 7, 2007 (incorporated by reference to the
      Company’s Current Report on Form 8-K dated December 17, 2007, Item
      9.01(d)(10(i)).10.17
              1999
      Stock Incentive Plan of the Company, as amended (April, 2006)
      (incorporated by reference to the Company’s Current Report on Form 8-K
      dated March 5, 2008, Item 9.01(d)(99)(ii).14
              Code
      of Ethics
  56
  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 Company23
              Consent
      of experts and counsel23.1
              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 Certifications32.1
              Certification
      of the Chief Executive Officer and the Chief Financial Officer pursuant to
      Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
      Section 1350(2).
 
 _________________________
 
 *
              Management
      contract or compensatory plan or arrangement.+
              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)
              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
      ReportNone
 
 
 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. EverettPresident
      and Chief Executive Officer
 
 March 14,
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
      14, 2008Thomas
      K. Langbein/s/ STEPHEN W. EVERETT
              
              President,
      Chief Executive OfficerStephen
      W. Everett
              
              and
      Director
              
              March
      14, 2008/s/ DANIEL R. OUZTS
              
              Vice
      President of Finance, ChiefDaniel
      R. Ouzts
              
              Financial
      Officer* and Treasurer
              
              March
      14, 2008/s/ ANDREW JEANNERET
              
              Vice
      President of Finance*
              
              March
      14, 2008Andrew
      Jeanneret
              
              (principal
      accounting officer)/s/ PETER D. FISCHBEIN
              
              Director
              
              March
      14, 2008Peter
      D. Fischbein/s/ ROBERT W. TRAUSE
              
              Director
              
              March
      14, 2008Robert
      W. Trause/s/ ALEXANDER BIENENSTOCK
              
              Director
              
              March
      14, 2007Alexander
      Bienenstock
 
 *
              Upon
      filing of this Annual Report on Form 10-K for the year ended December 31,
      2007, Andrew Jeanneret will succeed to the position of Chief Financial
      Officer in lieu of Daniel R. Ouzts, who will continue as Vice President,
      Finance and Treasurer.
 
 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, 2007
 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:
 
 PageReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets – of December 31, 2007 and 2006
              F-4Consolidated
      Statements of Income – Years Ended December 31, 2007, 2006 and
      2005
              F-5Consolidated
      Statements of Stockholders’ Equity – Years Ended December 31, 2007, 2006
      and 2005
              F-6Consolidated
      Statements of Cash Flows – Years Ended December 31, 2007, 2006 and
      2005
              F-7Notes
      to Consolidated Financial Statements
              F-9The
      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-33
 
 All other schedules for which provision
is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable,
and therefore have been omitted.
  F-1
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders
 Dialysis
Corporation of America
 
 We have
audited the accompanying consolidated balance sheets of Dialysis Corporation of
America as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2007.  We also have
audited Dialysis Corporation of America's internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control— Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission(COSO).  Dialysis Corporation
of America's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting.  Our responsibility is to express an opinion
on these consolidated financial statements and an opinion on the company's
internal control over financial reporting based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects.  Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.  Our
audits also included performing such other procedures as we considered necessary
in the circumstances.  We believe that our audits provide a reasonable
basis for our opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles.  A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  F-2
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Dialysis Corporation of
America as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.  Also in our opinion, Dialysis
Corporation of America maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
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.
 Cranford,
NJ
 March 13,
2008
  F-3
 
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 
 December
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              2,447,820
              
              
              $
              3,491,569Accounts
      receivable, less allowanceof
      $2,114,000 at December 31, 2007,$2,512,000
      at December 31, 2006
              
              
              20,159,926
              
              
              
              15,695,302Inventories,
      less allowance for obsolescenceof
      $25,000 at December 31. 2007; $78,000 at December 31, 2006
              
              
              2,006,661
              
              
              
              1,985,415Deferred
      income tax asset
              
              
              998,000
              
              
              
              1,105,000Prepaid
      expenses and other current assets
              
              
              2,845,675
              
              
              
              3,178,788Refundable
      income taxes
              
              
              467,731
              
              
              
              174,174Total
      current assets
              
              
              28,925,813
              
              
              
              25,630,248Property
      and equipment:Land
              
              
              1,333,191
              
              
              
              1,338,191Buildings
      and improvements
              
              
              5,716,904
              
              
              
              6,128,626Machinery
      and equipment
              
              
              12,359,797
              
              
              
              12,056,713Leasehold
      improvements
              
              
              9,356,531
              
              
              
              7,921,14928,766,423
              
              
              
              27,444,679Less
      accumulated depreciation and amortization
              
              
              12,264,029
              
              
              
              11,091,43216,502,394
              
              
              
              16,353,247Deferred
      income taxes
              
              
              ---
              
              
              
              359,295Goodwill
              
              
              8,576,893
              
              
              
              6,681,160Other
      assets
              
              
              841,092
              
              
              
              831,776Total
      other assets
              
              
              9,417,985
              
              
              
              7,872,231$
              54,846,192
              
              
              $
              49,855,726LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              4,062,611
              
              
              $
              1,998,125Accrued
      expenses
              
              
              6,161,588
              
              
              
              5,744,348Income
      taxes payable
              
              
              33,297
              
              
              
              660,092Current
      portion of long-term debt
              
              
              56,000
              
              
              
              130,000Total
      current liabilities
              
              
              10,313,496
              
              
              
              8,532,565Long-term
      debt, less current portion
              
              
              7,009,419
              
              
              
              8,618,325Deferred
      income tax liability
              
              
              574,000
              
              
              
              ---Total
      liabilities
              
              
              17,896,915
              
              
              
              17,150,890Minority
      interest in subsidiaries
              
              
              4,942,797
              
              
              
              3,643,347Commitments
      and ContingenciesStockholders'
      equity:Common
      stock, $.01 par value, authorized 20,000,000 shares:9,573,596
      shares issued and outstanding at December 31, 2007;9,564,346
      shares issued and outstanding at December 31, 2006
              
              
              95,736
              
              
              
              95,643Additional
      paid-in capital
              
              
              15,587,782
              
              
              
              15,729,206Retained
      earnings
              
              
              16,322,962
              
              
              
              13,236,640Total
      stockholders' equity
              
              
              32,006,480
              
              
              
              29,061,489$
              54,846,192
              
              
              $
              49,855,726
  See notes to consolidated financial
statements.
 F-4
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME
 
 
 Year Ended December
      31,2007
              
              
              2006
              
              
              2005Operating
      revenues:Sales:Medical
      services revenue
              
              $
              73,170,573
              
              
              $
              61,138,963
              
              
              $
              44,686,579Product
      sales
              
              
              1,077,988
              
              
              
              891,242
              
              
              
              206,941Total
      sales revenues
              
              
              74,248,561
              
              
              
              62,030,205
              
              
              
              44,893,520Other
      income
              
              
              286,174
              
              
              
              430,033
              
              
              
              498,25774,534,735
              
              
              
              62,460,238
              
              
              
              45,391,777Cost
      and expenses:Cost
      of sales revenues:Cost
      of medical services
              
              
              44,248,309
              
              
              
              36,968,682
              
              
              
              27,859,804Cost
      of product sales
              
              
              598,086
              
              
              
              549,590
              
              
              
              119,327Total
      cost of sales revenues
              
              
              44,846,395
              
              
              
              37,518,272
              
              
              
              27,979,131Selling,
      general and administrative expensesCorporate
              
              
              7,917,038
              
              
              
              6,460,309
              
              
              
              4,674,367Facility
              
              
              11,423,072
              
              
              
              8,988,078
              
              
              
              7,032,596Total
              
              
              19,340,110
              
              
              
              15,448,387
              
              
              
              11,706,963Stock
      compensation expense
              
              
              217,474
              
              
              
              275,438
              
              
              
              ---Depreciation
      and amortization
              
              
              2,619,049
              
              
              
              2,319,070
              
              
              
              1,748,738Provision
      for doubtful accounts
              
              
              1,665,120
              
              
              
              1,198,995
              
              
              
              571,01668,688,148
              
              
              
              56,760,162
              
              
              
              42,005,848Operating
      income
              
              
              5,846,587
              
              
              
              5,700,076
              
              
              
              3,385,929Other
      income (expense):Interest
      income officer/director note
              
              
              ---
              
              
              
              ---
              
              
              
              5,527Interest
      expense on note and advancespayable
      to parent
              
              
              ---
              
              
              
              ---
              
              
              
              (157,591
              )Other
      (expense) income, net
              
              
              (39,637
              )
              
              
              100,968
              
              
              
              217,821(39,637
              )
              
              
              100,968
              
              
              
              65,757Income
      before income taxes, minority and otherequity
      interests and equity in affiliate earnings
              
              
              5,806,950
              
              
              
              5,801,044
              
              
              
              3,451,686Income
      tax provision
              
              
              1,614,892
              
              
              
              2,085,874
              
              
              
              1,426,552Income
      before minority and other equity interestsand
      equity in affiliate earnings
              
              
              4,192,058
              
              
              
              3,715,170
              
              
              
              2,025,134Minority
      and other equity interests in incomeof
      consolidated subsidiaries
              
              
              (1,105,736
              )
              
              
              (919,739
              )
              
              
              (454,214
              )Equity
      in affiliate earnings
              
              
              ---
              
              
              
              253,765
              
              
              
              328,732Net
      income
              
              $
              3,086,322
              
              
              $
              3,049,196
              
              
              $
              1,899,652Earning
      per share:Basic
              
              $
              .32
              
              
              $
              .32
              
              
              $
              .22Diluted
              
              $
              .32
              
              
              $
              .32
              
              
              $
              .20Weighted
      average shares outstanding:Basic
              
              
              9,572,893
              
              
              
              9,484,926
              
              
              
              8,769,399Diluted
              
              
              9,607,672
              
              
              
              9,575,733
              
              
              
              9,266,905
 See notes
to consolidated financial statements.
 
 F-5
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 Capital
      inCommon
              
              
              Excess
      of
              
              
              RetainedStock
              
              
              Par Value
              
              
              Earnings
              
              
              TotalBalance
      January 1,2005
              
              $
              84,858
              
              
              $
              4,957,146
              
              
              $
              8,287,792
              
              
              $
              13,329,796Exercise
      of stock options for 330,616shares of common
      stock
              
              
              3,306
              
              
              
              329,329
              
              
              
              ---
              
              
              
              332,635Merger
      with former parent(449,103 shares)
              
              
              4,491
              
              
              
              10,046,500
              
              
              
              ---
              
              
              
              10,050,991Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              1,899,652
              
              
              
              1,899,652Balance
      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
              
              
              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
              
              
              
              29,061,489Share
      compensation issued (9,250 shares)
              
              
              93
              
              
              
              103,476
              
              
              
              ---
              
              
              
              103,569Stock
      option compensation vesting
              
              
              ---
              
              
              
              58,259
              
              
              
              ---
              
              
              
              58,259Sale
      of minority interest by subsidiary
              
              
              ---
              
              
              
              (303,159
              )
              
              
              ---
              
              
              
              (303,159
              )Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              3,086,322
              
              
              
              3,086,322Balance
      at December 31, 2007
              
              $
              95,736
              
              
              $
              15,587,782
              
              
              $
              16,322,962
              
              
              $
              32,006,480
 
 See notes
to consolidated financial statements.
 F-6
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Year Ended December
      31,2007
              
              
              2006
              
              
              2005Operating
      activities:Net
      income
              
              $
              3,086,322
              
              
              $
              3,049,196
              
              
              $
              1,899,652Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
              
              
              2,583,506
              
              
              
              2,303,795
              
              
              
              1,735,559Amortization
              
              
              35,543
              
              
              
              15,275
              
              
              
              13,179Bad
      debt expense
              
              
              1,665,120
              
              
              
              1,198,995
              
              
              
              571,016Inventory
      obsolescence adjustment
              
              
              (52,836
              )
              
              
              ---
              
              
              
              ---Deferred
      income tax provision (benefit)
              
              
              132,343
              
              
              
              (331,413
              )
              
              
              (63,930
              )Deferred
      tax asset utilized
              
              
              907,952
              
              
              
              1,190,000
              
              
              
              1,309,283Stock
      and stock option compensation expense
              
              
              217,474
              
              
              
              275,438
              
              
              
              ---Minority
      and other equity interests
              
              
              1,105,736
              
              
              
              919,739
              
              
              
              454,214Equity
      in affiliate earnings
              
              
              ---
              
              
              
              (253,765
              )
              
              
              (328,732
              )Increase
      (decrease) relating to operating activities from:Accounts
      receivable
              
              
              (6,004,744
              )
              
              
              (5,945,256
              )
              
              
              (2,462,593
              )Inventories
              
              
              54,376
              
              
              
              (411,557
              )
              
              
              4,383Interest
      receivable on officer loan
              
              
              ---
              
              
              
              ---
              
              
              
              16,696Prepaid
      expenses and other current assets
              
              
              245,913
              
              
              
              (716,821
              )
              
              
              (150,739
              )Refundable
      income taxes
              
              
              (293,557
              )
              
              
              1,053,132
              
              
              
              (1,111,929
              )Accounts
      payable
              
              
              2,064,486
              
              
              
              161,266
              
              
              
              95,809Accrued
      interest on note payable to former  parent
              
              
              ---
              
              
              
              ---
              
              
              
              37,443Accrued
      expenses
              
              
              448,794
              
              
              
              (115,824
              )
              
              
              (96,676
              )Income
      taxes payable
              
              
              (626,795
              )
              
              
              614,444
              
              
              
              ---Net
      cash provided by operating activities
              
              
              5,569,633
              
              
              
              3,006,644
              
              
              
              1,922,635Investing
      activities:Acquisition
      of former parent
              
              
              ---
              
              
              
              ---
              
              
              
              2,736,500Payments
      received on physician affiliate loans
              
              
              171,025
              
              
              
              16,468
              
              
              
              17,146Repayment
      of officer loan
              
              
              ---
              
              
              
              ---
              
              
              
              95,000Additions
      to property and equipment, net of minor disposals
              
              
              (2,520,735
              )
              
              
              (5,196,967
              )
              
              
              (5,482,338
              )Payment
      of employment contract liability
              
              
              ---
              
              
              
              (1,960,000
              )
              
              
              ---Payment
      dissenting merger shareholders
              
              
              ---
              
              
              
              (2,100
              )
              
              
              ---Acquisition
      of dialysis centers
              
              
              (2,173,134
              )
              
              
              (4,161,304
              )
              
              
              (380,297
              )Distributions
      from affiliate
              
              
              ---
              
              
              
              163,821
              
              
              
              339,606Purchase
      of minority interests in subsidiaries
              
              
              (345,000
              )
              
              
              ---
              
              
              
              ---Consolidation
      of former affiliate
              
              
              ---
              
              
              
              149,225
              
              
              
              ---Other
      assets
              
              
              (161,528
              )
              
              
              (1,264
              )
              
              
              (55,399
              )Net
      cash used in investing activities
              
              
              (5,029,372
              )
              
              
              (10,992,121
              )
              
              
              (2,729,782
              )
 
 F-7
 
 
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Year Ended December
      31,2007
              
              
              2006
              
              
              2005Financing
      activities:Advances
      from former parent
              
              $
              ---
              
              
              $
              ---
              
              
              $
              161,929Notes
      payable to former parent
              
              
              ---
              
              
              
              ---
              
              
              
              3,096,000Line
      of credit borrowings
              
              
              2,550,000
              
              
              
              8,000,000
              
              
              
              ---Line
      of credit repayments
              
              
              (4,100,000
              )
              
              
              (500,000
              )
              
              
              ---Payments
      on other long-term debt
              
              
              (132,906
              )
              
              
              (339,582
              )
              
              
              (511,933
              )Exercise
      of stock options
              
              
              ---
              
              
              
              383,249
              
              
              
              332,635Minority
      investment in Toledo subsidiary
              
              
              750,000
              
              
              
              ---
              
              
              
              ---Capital
      contributions by subsidiaries’ minority members
              
              
              78,107
              
              
              
              1,301,884
              
              
              
              434,000Distribution
      to subsidiary minority members
              
              
              (729,211
              )
              
              
              (306,062
              )
              
              
              (369,530
              )Net
      cash (used in) provided by financing activities
              
              
              (1,584,010
              )
              
              
              8,539,489
              
              
              
              3,143,101(Decrease)
      increase in cash and cash equivalents
              
              
              (1,043,749
              )
              
              
              554,012
              
              
              
              2,335,954Cash
      and cash equivalents at beginning of year
              
              
              3,491,569
              
              
              
              2,937,557
              
              
              
              601,603Cash
      and cash equivalents at end of year
              
              $
              2,447,820
              
              
              $
              3,491,569
              
              
              $
              2,937,557Supplemental
      disclosure of cash flow information:Interest
      paid
              
              $
              743,000
              
              
              $
              395,000
              
              
              $
              273,000Income
      taxes paid (refunded)
              
              
              1,496,000
              
              
              
              (675,000
              )
              
              
              1,301,000Share
      payment (87,500 options exercised; 27,205 shares paid)for
      stock option exercises
              
              
              ---
              
              
              
              351,000
              
              
              
              ---Increase
      in additional paid-in capital from exercise of non-qualified
      stock options
              
              
              ---
              
              
              
              31,000
              
              
              
              ---Net
      share issuance in merger with former parent
              
              
              ---
              
              
              
              ---
              
              
              
              10,051,000
 See notes
to consolidated financial statements.
 F-8
 
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Business
 
 We are primarily engaged in kidney
dialysis operations which include outpatient hemodialysis services, home
dialysis services, inpatient dialysis services and ancillary services associated
with dialysis treatments.  We own 35 operating dialysis centers
(including one Georgia center acquired effective January 1, 2008) located in
Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and
Virginia.  We have two dialysis facilities under development
(including one center we will manage pursuant to a management services agreement
with provisions pursuant to which we can acquire a controlling interest in the
future) and have agreements to provide inpatient dialysis treatments to 12
hospitals.  Subsequent to the completion of our merger with Medicore,
Inc., our former parent, we also engage in medical product sales.  The
medical products operations are not a significant component of our operations
with operating revenues of $1,078,000 in 2007, $891,000 in 2006 and $207,000 in
2005 (1.4% for 2007 and 2006 and .5% for 2005 of operating revenues) and
operating income of $186,000 in 2007, $69,000 in 2006 and $25,000 in 2005 (3.1%,
1.2% and .7% respectively of operating income).
 
 Medical
Service Revenue
 
 Our revenues by payor are as
follows:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Medicare
              
              
              49
              %
              
              
              52
              %
              
              
              51
              %Medicaid
      and comparable programs
              
              
              8
              
              
              
              9
              
              
              
              8Hospital
      inpatient dialysis services
              
              
              4
              
              
              
              3
              
              
              
              5Commercial
      insurers and other private payors
              
              
              39
              
              
              
              36
              
              
              
              36100
              %
              
              
              100
              %
              
              
              100
              %
 Our sources of revenue (in thousands)
are as follows:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Outpatient
      hemodialysis services
              
              $
              39,880
              
              
              
              55
              %
              
              $
              32,856
              
              
              
              54
              %
              
              $
              23,084
              
              
              
              52
              %Home
      and peritoneal dialysis services
              
              
              3,736
              
              
              
              5
              
              
              
              3,625
              
              
              
              6
              
              
              
              3,198
              
              
              
              7Inpatient
      hemodialysis services
              
              
              2,897
              
              
              
              4
              
              
              
              2,191
              
              
              
              3
              
              
              
              2,055
              
              
              
              5Ancillary
      services
              
              
              26,658
              
              
              
              36
              
              
              
              22,467
              
              
              
              37
              
              
              
              16,350
              
              
              
              36$
              73,171
              
              
              
              100
              %
              
              $
              61,139
              
              
              
              100
              %
              
              $
              44,687
              
              
              
              100
              %
  Consolidation
 
 The consolidated financial statements
include the accounts of Dialysis Corporation of America and its subsidiaries,
collectively referred to as the “company.”  Intercompany accounts and
transactions have been eliminated in consolidation.  We were formerly
a majority owned subsidiary of Medicore, Inc., until the merger of Medicore into
the company effected on September 21, 2005.
  F-9
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Our
Toledo, Ohio subsidiary, which was 40% owned until December 2006, has been
consolidated since August, 2006 due to our taking control of this
facility.  This subsidiary was previously accounted for using the
equity method of accounting.
 
 Estimates
 
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.
 
 Our principal estimates are for
estimated uncollectible accounts receivable as provided for in our allowance for
doubtful accounts, estimated useful lives of depreciable assets, and estimates
for patient revenues from non-contracted payors.  Our estimates are
based on historical experience and assumptions believed to be reasonable given
the available evidence at the time of the estimates.  Actual results
could differ from those estimates.
 
 Vendor
Volume Discounts
 
 We have contractual arrangements with
certain vendors pursuant to which we receives discounts based on volume of
purchases.  These discounts are recorded in accordance with paragraph
4 of EITF 02-16 “Accounting by a Customer for Certain Consideration Received
from a Vendor” as a reduction in inventory costs resulting in reduced costs of
sales as the related inventory is consumed.
 
 Government
Regulation
 
 A substantial portion of our revenues
are attributable to payments received under Medicare, which is supplemented by
Medicaid or comparable benefits in the states in which we operate.
 
 Reimbursement rates under these
programs are subject to regulatory changes and governmental funding
restrictions.  Laws and regulations governing the Medicare and
Medicaid programs are complex and subject to interpretation.  We
believe we are in compliance with all applicable laws and regulations and are
not aware of any pending or threatened investigations involving allegations of
potential wrongdoing.  While no such regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future
government review and interpretation as well as significant regulatory action
including fines, penalties, and exclusions from the Medicare and Medicaid
programs.
  F-10
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Cash
and Cash Equivalents
 
 We consider all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.  The carrying amounts reported in the balance sheet for
cash and cash equivalents approximate their fair values.  Although
cash and cash equivalents are largely not federally insured, the credit risk
associated with these deposits that typically may be redeemed upon demand is
considered low due to the high quality of the financial institutions in which
they are invested.
 
 Credit
Risk
 
 Our primary concentration of credit
risk is with accounts receivable, which consist of amounts owed by governmental
agencies, insurance companies and private patients.  Combined
receivables from Medicare and Medicaid comprised 49% of receivables at December
31, 2007 and 51% December 31, 2006, respectively.
 
 Inventories
 
 Inventories, are valued at the lower of
cost (first-in, first-out method) or market value and consist of supplies used
in dialysis treatments and inventory of our medical products division acquired
pursuant to our merger with our former parent.
 
 Prepaid
Expenses and Other Current Assets
 
 Prepaid expenses and other current
assets is comprised as follows:
 
 December 31,2007
              
              
              2006Property
      to be sold
              
              $
              ---
              
              
              $
              625,716Prepaid
      expenses
              
              
              1,112,600
              
              
              
              1,089,186Other
              
              
              1,733,075
              
              
              
              1,463,886$
              2,845,675
              
              
              $
              3,178,788
 Accrued
Expenses
 
 Accrued expenses is comprised as
follows:
 
 December 31,2007
              
              
              2006Accrued
      compensation
              
              $
              1,342,122
              
              
              $
              1,817,953Excess
      insurance liability
              
              
              2,789,055
              
              
              
              2,835,216General
      insurance premiums payable
              
              
              342,746
              
              
              
              329,419Health
      insurance premiums payable
              
              
              687,031
              
              
              
              ---Other
              
              
              1,000,634
              
              
              
              761,760$
              6,161,588
              
              
              $
              5,744,348
  F-11
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
   NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Excess insurance liability represents
amounts paid by insurance companies in excess of the amounts we expect from the
insurers.  We communicate with the payors regarding these amounts,
which can result from duplicate payments, payments in excess of contractual
agreements, payments as primary when payor is secondary, and underbillings by us
based on estimated fee schedules.  These amounts remain in excess
insurance liability until resolution.  We identified approximately
$726,000 of the excess insurance liability as of December 31, 2007 and $535,000
as of December 31, 2006, as relating to duplicate payments that will be refunded
to the payers.  Approximately $442,000 for 2007 and $688,000 for 2006
of amounts determined to be nonrefundable that had been included in excess
insurance liability were recorded in medical services revenues.
 
 We have a self-insured health insurance
plan that is administered by a third party administrator.  We are
responsible for claims and administrative fees for which the obligation payable
at December 31, 2007 was approximately $687,000 included in accrued
expenses.  We have a deposit of approximately $400,000 to assure
fulfillment of our obligations under the plan that are refundable upon
satisfaction of our plan obligations with this deposit included in prepaid
expenses and other current assets.
 
 Vendor
Concentration
 
 There is only one supplier of
erythropoietin (EPO) in the United States.  This supplier and another
manufacturer received FDA approval for two alternative products available for
dialysis patients, which is indicated to be effective for a longer period than
EPO.  The alternative drugs also could be administered by the
patient’s physician.  Accordingly, the use of these drugs could reduce
our revenues from our current treatment of anemia, thereby adversely impacting
our revenues and profitability.  There are no other suppliers of any
similar drugs available to dialysis treatment providers.  Revenues
from the administration of EPO, which amounted to approximately $19,662,000 in
2007, $16,830,000 in 2006 and $12,580,000 in 2005, comprised 27% of medical
services revenues in 2007 and 28% in each of 2006 and 2005.
 
 Property
and Equipment
 
 Property and equipment is stated on the
basis of cost.  Depreciation is computed for book purposes by the
straight-line method over the estimated useful lives of the assets, which range
from 5 to 34 years for buildings and improvements; 3 to 10 years for machinery,
computer and office equipment, and furniture; and 5 to 10 years for leasehold
improvements based on the shorter of the lease term or estimated useful life of
the property.  Replacements and betterments that extend the lives of
assets are capitalized.  Maintenance and repairs are expensed as
incurred.  Upon the sale or retirement of assets, the related cost and
accumulated depreciation are removed and any gain or loss is
recognized.
 
 Revenue
Recognition
 
 Net revenue is recognized as services
are rendered at the net realizable amount from Medicare, Medicaid, commercial
insurers and other third party payors.  We occasionally provide
dialysis treatments on a charity basis to patients who cannot afford to
pay.  The amount is not significant, and we do not record revenues
related to these charitable treatments.  Product sales are recorded
pursuant to stated shipping terms.
  F-12
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Goodwill
 
 Goodwill
represents cost in excess of net assets acquired.  We 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 not amortized but
are reviewed annually (or more frequently if impairment indicators are present)
for impairment, which testing included testing as of December 31, 2007, has
indicated no impairment for goodwill.
 
 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 $207,000 at
December 31, 2007 and $135,000 at December 31, 2006 are included in other
assets.  Amortization expense was approximately $36,000 for 2007,
$15,000 for 2006 and $13,000 for 2005.
 
 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.
 
 Effective beginning 2007, we adopted
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 has not had a significant effect on our financial
condition, results of operations or cash flows.
 
 Stock-Based
Compensation
 
 We measure compensation cost for stock
award compensation arrangements based on grant date fair value to be expensed
ratably over the requisite vesting period.  Stock compensation expense
was approximately $159,000 and $275,000 for shares vesting during 2007 and 2006,
respectively, with related income tax benefits of approximately $61,000 and
$105,000.
 
 During April, 2007 the company issued
an incentive stock option with a total grant date value of
$329,000.  This stock option is being expensed over the five-year
vesting period and such stock option expense amounted to approximately $58,000
for the year ended December 31, 2007, with no such expense for the preceding
year.  The fair value of this option was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
risk free interest rate of 4.61%; no dividend yield; volatility factor of the
expected market price of our common stock of .666 based on historical volatility
for a period coinciding with the expected option life; and an expected life of
four years.  As this is an incentive stock option, the related expense
is not deductible for tax purposes.
 
 We adopted Statement of Financial
Statement of Financial Accounting Standards No. 123 (revised), “Share-Based
Payment:” (“SFAS 123(R)”) effective January 1, 2006.  Provisions of
SFAS 123R require companies to recognize the fair value of stock option grants
as a compensation costs in their financial
  F-13
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 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.
 
 Pro forma
information regarding net income and earnings per share has been presented below
for 2005 as if we had accounted for our employee stock options under the fair
value method required by SFAS 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 our employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management’s opinion, the existing models do
not necessarily provide a reliable measure of the fair value of our employee
stock options.
 
 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:
 
 2005Net
      income, as reported
              
              $
              1,900,000Stock-based
      employee compensation expense underair
      value method, net of related tax effects
              
              
              (430,000
              )Pro
      forma net income
              
              $
              1,470,000Earnings
      per share:Basic,
      as reported
              
              $
              .22Basic,
      pro forma
              
              $
              .17Diluted,
      as reported
              
              $
              .20Diluted,
      pro forma
              
              $
              .16
  F-14
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 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 31,2007
              
              
              2006
              
              
              2005Net
      income
              
              $
              3,086,322
              
              
              $
              3,049,196
              
              
              $
              1,899,652Weighted
      average shares outstanding
              
              
              9,572,893
              
              
              
              9,484,926
              
              
              
              8,769,399Weighted
      average shares outstanding
              
              
              9,572,893
              
              
              
              9,484,926
              
              
              
              8,769,399Shares
      issuable for employee stock awards and director fees
              
              
              23,178
              
              
              
              17,701
              
              
              
              ---Weighted
      average shares diluted computation
              
              
              9,596,071
              
              
              
              9,502,627
              
              
              
              8,769,399Effect
      of dilutive stock options
              
              
              11,601
              
              
              
              73,106
              
              
              
              497,506Weighted
      average shares, as adjusted diluted computation
              
              
              9,607,672
              
              
              
              9,575,733
              
              
              
              9,266,905Earnings
      per share:Basic
              
              $
              .32
              
              
              $
              .32
              
              
              $
              .22Diluted
              
              $
              .32
              
              
              $
              .32
              
              
              $
              .20
 We had
various potentially dilutive outstanding stock options during the periods
presented.
 
 Other
Income (Expense)
 
 Operating:
 
 Other operating income is comprised as
follows:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Management
      fee income
              
              $
              286,175
              
              
              $
              430,033
              
              
              $
              498,257
  F-15
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 Non-operating:
 
 Other non-operating (expense) income is
comprised as follows:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Rental
      income
              
              $
              389,324
              
              
              $
              369,888
              
              
              $
              238,743Interest
      income
              
              
              222,163
              
              
              
              193,429
              
              
              
              99,300Interest
      expense
              
              
              (756,671
              )
              
              
              (409,676
              )
              
              
              (147,635
              )Other
              
              
              105,547
              
              
              
              32,327
              
              
              
              27,413Litigation
      settlement, net
              
              
              ---
              
              
              
              (85,000
              )
              
              
              ---Other
      income, net
              
              $
              (39,637
              )
              
              $
              100,968
              
              
              $
              217,821
 Estimated
Fair Value of Financial Instruments
 
 The carrying value of cash and cash
equivalents, accounts receivable, prepaid expenses and other current assets and
accounts payable and accrued expenses in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments.  Debt approximates fair value since such instruments
either bear variable interest rates which approximate market or have interest
rates approximating those currently available to us for loans with similar terms
and maturities.
 
 Reclassification
 
 Certain prior year amounts have been
reclassified to conform with the current year’s presentation.
 
 New
Pronouncements
 
 In
September, 2006, the 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 us beginning in
2008.  We are evaluating the impact on our financial statements of
adopting SFAS 157.
  F-16
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 
 NOTE
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS
141R”), “Business Combinations.”  SFAS 141R expands the definitions of
a business and business combination and requires all assets and liabilities of
an acquired business (for full, partial and step acquisitions) to be recorded at
fair values, with limited exceptions.  SFAS 141R requires earn-outs
and other contingent consideration to be recorded at fair value on acquisition
date and contingencies to be recorded at fair value on acquisition date with
provision for subsequent remeasurement.  SFAS 141R requires
acquisitions costs to be expensed as incurred and generally requires
restructuring costs to be expensed in periods after the acquisition
date.  SFAS 141R requires amounts previously called “negative
goodwill” which result from a bargain purchase in which acquisition date fair
value of identifiable net assets acquired exceeds the fair value of
consideration transferred plus any noncontrolling interest in the acquirer to be
recognized in earnings as a gain attributable to the acquirer.  SFAS
141R is effective with the first annual reporting period beginning on or after
December 15, 2008.  We are evaluating the impact on our financial
statements of adopting SFAS 141R.
 
 In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair
Value Option for Financial Assets and Financial Liabilities.”  SFAS
No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 is effective for us beginning January 1,
2008 for assets and liabilities, as well as for any other assets and liabilities
that are carried at fair value on a recurring basis in the financial
statements.  We are evaluating the impact on our financial statements
of adopting SFAS 159.
 
 In December, 2007, the FASB issued
Statement of Financial Accounting Standards No. 160 (“SFAS 160”),
“Noncontrolling Interests in Consolidated Financial Statements,” an amendment of
ARB5 1.  SFAS 160 requires noncontrolling interests to be reported in
the equity section of consolidated financial statements and requires that
consolidated net income include the amounts attributable to both the parent and
the noncontrolling interest with disclosure on the face of the consolidated
income statement of net income attributable to the parent and to the
noncontrolling interest, with any losses attributable to the noncontrolling
interest in excess of the noncontrolling interest equity to be allocated to the
noncontrolling interest.  Calculation of earning per share amounts in
the consolidated financial statements will continue to be based on amounts
attributable to the parent.  SFAS 160 is effective with the first
annual reporting period beginning on or after December 15, 2008.  We
are evaluating the impact on our financial statements of adopting SFAS
160.
  F-17
 
 NOTE
2--LONG-TERM DEBT
 
 Long-term
debt is as follows:
 
 December 31,2007
              
              
              2006Revolving
      line of credit
              
              $
              5,950,000
              
              
              $
              7,500,000Maturity
      of October 24, 2009.See
      below for details.Development
      loan secured by land and buildingwith
      a net book value of $359,000 atDecember
      31, 2007.  Monthly principalpayments
      of $2,402 plus interest atprime
      with remaining balance due May 2, 2026.
              
              
              526,304
              
              
              
              555,122Mortgage
      note secured by land and buildingwith
      a net book value of $798,000 atDecember
      31, 2007.  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.
              
              
              589,115
              
              
              
              617,145Equipment
      financing agreement secured by equipment
              
              
              ---
              
              
              
              76,0587,065,419
              
              
              
              8,748,325Less
      current portion
              
              
              56,000
              
              
              
              130,000$
              7,009,419
              
              
              $
              8,618,325
 
 Pursuant to a December 3, 1999 loan
agreement through our subsidiary, DCA of Vineland, LLC, we 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 our real property in Easton,
Maryland.  The bank subsequently released DCA of Vineland, LLC’s
assets as security leaving us 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 $526,000 at December
31, 2007 and $555,000 at December 31, 2006.
 
 In April,
2001, we obtained a $788,000 five-year mortgage through April, 2006, on our
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 $589,000 at
December 31, 2007 and $617,000 at December 31, 2006.
  F-18
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
2--LONG-TERM DEBT--Continued
 
 The
equipment financing agreement represents financing for kidney dialysis machines
for our dialysis facilities.  There was no financing under this
agreement in 2007, 2006 or 2005.  Payments under the agreement were
pursuant to various schedules extending through August, 2007.  The
remaining principal balance under this financing amounted to approximately
$76,000 at December 31, 2006 and was paid during 2007.
 
 The prime
rate was 7.25% as of December 31, 2007 and 8.25% as of December 31,
2006.
 
 Scheduled maturities of long-term debt
outstanding at December 31, 2007 are approximately:
 
 2008
              
              $
              56,0002009
              
              
              6,011,0002010
              
              
              63,0002011
              
              
              66,0002012
              
              
              68,000Thereafter
              
              
              801,000$
              7,065,000
 
 On October 24, 2005, we entered into a
three year, $15,000,000 revolving line of credit with a maturity date of October
24, 2008 which has been extended for one year to October 24,
2009.  There were no borrowings under this agreement in
2005.  Each of our wholly-owned subsidiaries has guaranteed this
credit facility, as will any future wholly-owned
subsidiaries.  Further, the obligation under the revolving line of
credit is secured by our pledge of our ownership in our
subsidiaries.  The credit facility, which has provisions for both base
rate and LIBOR loans, is intended to provide funds for the development and
acquisition of new dialysis facilities, to meet general working capital
requirements, and for other general corporate purposes.  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.  We have 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.  We are in compliance with the requirements of
this credit facility at December 31, 2007 and December 31, 2006.  We
have $5,950,000 in outstanding borrowings under our line of credit at December
31, 2007, including three LIBOR loans totaling $5,800,000, and a $150,000 base
rate loan.  The interest rate on the individual LIBOR loans ranges
from 6.50% to 6.6875% and includes LIBOR at issuance plus an applicable margin
of 1.5%.  The base rate loan has an interest rate of 7.25% as of
December 31, 2007 and 8.25% as of December 31, 2006.  The LIBOR loans
are all three month loans including a $1,300,000 loan maturing February 23,
2008, a $3,500,000 loan maturing March 5, 2008, and a $1,000,000 loan maturing
March 10, 2008.  Pursuant to the one year line of credit extension to
October 24, 2009, the individual LIBOR loans are renewable upon at the end of
their respective three month terms and the base rate loan has no specific
maturity date other than the line of credit maturity on October 24,
2009.
  F-19
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
2--LONG-TERM DEBT--Continued
 
 Our 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 of
our assets, or other business combination to which we are a party, and require
maintenance of certain financial ratios.  The company was in
compliance with the debt covenants at December 31, 2007 and December 31,
2006.
 
 NOTE
3--INCOME TAXES
 
 Effective
January 1, 2007, we adopted the provisions of FIN 48.  FIN 48
clarifies the accounting for uncertain tax positions in accordance with FASB
Statement No. 109, Accounting for Income Taxes and prescribes a recognition
threshold and measurement attribute criteria for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return.  The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  We have evaluated our tax position in tax
returns filed, as well as un-filed tax positions to be taken in future returns
and the amounts comprising our deferred tax assets.  The adoption of
FIN 48 did not have a material impact on our financial condition, results of
operations or cash flows.
 
 We file
income tax returns in the U.S. federal jurisdiction and various state and local
jurisdictions.  Our federal income tax returns for 2003 through 2006
are open tax years.  State and local jurisdictions that remain subject
to examination range from 2002 to 2006.
 
 We may
from time to time be assessed interest or penalties by major tax jurisdictions,
although such assessments historically have been minimal and immaterial to our
financial results.  Our policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax
expense.
 
 The
income tax provision consists of the following income tax expense (benefit)
components:
 
 2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              1,238,000
              
              
              $
              1,970,000
              
              
              $
              1,241,000State
              
              
              207,000
              
              
              
              410,000
              
              
              
              240,000City
              
              
              38,000
              
              
              
              37,000
              
              
              
              10,0001,483,000
              
              
              
              2,417,000
              
              
              
              1,491,000Deferred:Federal
              
              
              72,000
              
              
              
              (317,000
              )
              
              
              (156,000
              )State
              
              
              60,000
              
              
              
              (14,000
              )
              
              
              92,000132,000
              
              
              
              (331,000
              )
              
              
              (64,000
              )$
              1,615,000
              
              
              $
              2,086,000
              
              
              $
              1,427,000
  F-20
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 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
our deferred tax liabilities and assets are as follows:
 
 December 31,2007
              
              
              2006Deferred
      tax liabilities:Depreciation
      and amortization
              
              $
              619,000
              
              
              $
              640,000Total
      deferred tax liabilities
              
              
              619,000
              
              
              
              640,000Deferred
      tax assets:Accrued
      expenses
              
              
              256,000
              
              
              
              207,000Bad
      debt allowance
              
              
              700,000
              
              
              
              898,000Startup
      costs and other intangibles
              
              
              45,000
              
              
              
              64,000Inventory
      costs capitalization
              
              
              42,000
              
              
              
              ---Subtotal
              
              
              1,043,000
              
              
              
              1,169,000Net
      operating loss carryforwards
              
              
              ---
              
              
              
              935,000Total
      deferred tax assets
              
              
              1,043,000
              
              
              
              2,104,000Net
      deferred tax asset
              
              $
              424,000
              
              
              $
              1,464,000
 
 No valuation allowance was recorded for
deferred tax assets at December 31, 2007 or December 31, 2006, due to our
anticipated prospects for future taxable income in an amount sufficient to
realize the deferred tax assets.
 
 As a result of our merger with our
former parent, we acquired a deferred tax asset of approximately $3,300,000,
representing tax benefits from our former parent’s net operating loss
carryforwards that we were able to utilize to satisfy income tax
liabilities.  We have fully utilized the available net operating loss
carryforwards as of December 31, 2007.
 
 The
reconciliation of income tax attributable to income before income taxes computed
at the U.S. federal statutory rate is:
 
 Year Ended December 31,2007
              
              
              2006
              
              
              2005Statutory
      tax rate (34%) applied to incomebefore
      income taxes, minority interest and equityn
      affiliate earnings
              
              $
              1,974,000
              
              
              $
              1,972,000
              
              
              $
              1,174,000Adjustments
      due to:State
      and city taxes, net of federal benefit
              
              
              162,000
              
              
              
              295,000
              
              
              
              193,000Excess
      of tax over book NOL carryforwards
              
              
              (239,000
              )
              
              
              ---
              
              
              
              ---Tax
      return accrual adjustment
              
              
              (84,000
              )
              
              
              ---
              
              
              
              ---Non-deductible
      items
              
              
              14,000
              
              
              
              13,000
              
              
              
              11,000Subsidiary
      minority ownership
              
              
              (254,000
              )
              
              
              (271,000
              )
              
              
              (131,000
              )Ownership
      in affiliate
              
              
              ---
              
              
              
              72,000
              
              
              
              112,000Other
              
              
              42,000
              
              
              
              5,000
              
              
              
              68,000$
              1,615,000
              
              
              $
              2,086,000
              
              
              $
              1,427,000
  F-21
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 
 NOTE
3--INCOME TAXES--Continued
 
 We have
equity positions in 31 limited liability companies (“LLC’s”), and one limited
partnership (“LP”) each possessing a finite life.  Based on their
limited liability status, members are not liable for the LLC’s and LP’s debts,
liabilities, or obligations.  Each LLC and LP has complied with the
criteria for tax treatment as a partnership.  As a result, taxable
income or loss is to be reported on each member’s respective tax
returns.  Income and losses attributable to our equity position in
subsidiary LLC’s and LP’s are included in our Consolidated Statements of Income
with the minority interest in the results of operations of subsidiary LLC’s and
LP’s shown separately on the Consolidated Statements of
Income.  Income attributable to our equity position in our 40% owned
affiliate prior to the affiliate’s consolidation as a subsidiary effective
August 1, 2006, is shown separately on the company’s Consolidated Statements of
Income.
 
 The exercise of 10,000 non-qualified
stock options during 2006 resulted in a tax deduction of $84,000, corresponding
to the difference in the market value of the shares obtained on exercise and the
exercise price of the options.  The reduction in income taxes payable
of approximately $31,000 resulted in a corresponding increase in additional
paid-in capital.
 
 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 was
reasonable.  The amount of expenses allocated by our former parent
totaled approximately $150,000 for the year ended December 31, 2005, with this
allocation ceasing when we merged with our former parent, 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, which bore interest at the
short-term Treasury Bill rate.  Interest expense on intercompany
advances payable was approximately $9,000 for the year ended December 31, 2005
with the interest ceasing when we merged with our former parent in September,
2005.  Interest was included in the intercompany advance
balance.  The intercompany advance was forgiven as a result of the
company’s merger with its former parent.
 
 We had a demand promissory note to our
former parent for up to $5,000,000 for equipment purchases, working capital and
other corporate needs, with annual interest of 1.25% over the prime
rate.
 
 The
outstanding note balance of approximately $4,531,000 was eliminated as a result
of our merger with our former parent.  The weighted average interest
rate on the note during the period it was outstanding during 2005 was
7.58%.  Interest expense on the note amounted to approximately
$149,000 for the year ended December 31, 2005 with the interest ceasing when we
merged with our former parent.  Accrued interest on the note of
approximately $64,000 was eliminated as a result of our merger with our former
parent.
  F-22
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
5--OTHER RELATED PARTY TRANSACTIONS
 
 In May 2001, we loaned our 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
for 2005.  The note and accrued interest of approximately $22,000 were
repaid in December, 2005.
 
 We have constructed dialysis facilities
which we sold upon completion to entities in which medical directors of the
related facilities have an interest.  Our subsidiaries that operate
those dialysis facilities lease the facilities from the purchasers on terms
which are as favorable as could be obtained from unaffiliated
parties.  The cost of the land and construction costs for any such
facilities are included in prepaid expenses and other current assets until the
sale of the facilities.
 
 NOTE
6--STOCK OPTIONS AND STOCK AWARDS
 
 In January, 2001, the board of
directors granted to our President and Chief Executive Officer 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.
 
 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.  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 our 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.
  F-23
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
   NOTE
6--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 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 our
stock.  7,500 options were exercised in May and June, 2006 and 3,750
options were exercised in August, 2006 with the company receiving a total of
$45,225 cash payments, leaving 18,750 options outstanding.
 
 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 with 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, our shareholders approved an amendment to our stock option plan to
allow for the grant of stock awards in addition to options.  The
employment agreement of Stephen W. Everett, our President, CEO and a director,
contains provisions for the receipt of up to 40,000 shares of our common stock
as described in Note 8, pursuant to which 10,000 shares were issued during 2006
resulting in $100,000 stock compensation expense, with an additional up to
10,000 performance based shares for both 2006 and 2007 not
earned.  The performance criterion relates to patient census increases
each year.  There remains an additional 10,000 shares available to be
earned on a pro-rata basis at the end of 2008, subject to the performance
criterion.  We granted stock awards of 1,000 shares each to each of
our 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, we granted stock awards of
64,000 shares to officers and key employees with the awards vesting in equal
yearly increments over four years commencing December 31, 2006.  One
of the June, 2006 stock awards for 30,000 shares, which contained performance
criteria, cancelled in November, 2006 upon resignation of the
officer.  8,500 of the June, 2006 stock awards vested during 2006
resulting in $94,180 stock compensation expense with the related shares being
issued during the first quarter of 2007.  One of the June, 2006 stock
awards for 8,000 shares was cancelled in July, 2007 upon resignation of the
employee for which the remaining 6,000 shares will therefore not
vest.  6,500 of the June, 2006 stock awards vested during 2007
resulting in $72,015 stock compensation expense with the related shares being
issued during the first quarter of 2008.  In November, 2006, we
entered a six-month contract with an individual to serve as our Chief Operating
Officer for which the compensation was 10,000 shares of our common stock to be
earned over the six month period, with 3,333 shares earned during 2006 resulting
in $43,598 stock compensation expense and the remaining 6,667 shares earned
during 2007 in $87,200 stock compensation expense.
  F-24
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
6--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 In April,
2007, the board of directors granted a five-year option to our newly retained
Vice President of Operations and Chief Operating Officer for 50,000 shares
exercisable at $12.18 through April 15, 2012.  The option vests in
equal increments of 12,500 shares every 12 months commencing April 15,
2008.  The grant date fair value of $329,000 is being expensed over
the five-year vesting period with approximately $58,000 expense recorded during
2007.
 
 A summary
of our stock option activity and related information for the years ended
December 31 follows:
 
 2007
              
              
              2006
              
              
              2005Weighted-
                Average
              
              
              
              
              
              Weighted-
                Average
              
              
              
              
              
              Weighted-
                AverageOptions
              
              
              Exercise Price
              
              
              Options
              
              
              Exercise Price
              
              
              Options
              
              
              Exercise PriceOutstanding-beginning
      of year
              
              
              18,750
              
              
              $
              4.02
              
              
              
              322,500
              
              
              
              
              
              
              694,616Granted
              
              
              50,000
              
              
              $
              12.18
              
              
              
              ---
              
              
              
              
              
              
              ---Cancellations
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              (41,500
              )
              
              $
              3.83Exercised
              
              
              ---
              
              
              
              
              
              
              
              (303,750
              )
              
              $
              2.42
              
              
              
              (330,616
              )
              
              $
              1.01Expired
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              ---Outstanding-end
      of year
              
              
              68,750
              
              
              
              
              
              
              
              18,750
              
              
              
              
              
              
              
              322,500Outstanding:April
      2007 options
              
              
              50,000
              
              
              $
              12.18June
      2004 options
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.02
              
              
              
              142,500
              
              
              $
              4.02January
      2004 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              15,000
              
              
              $
              3.09August
      2003 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              10,000
              
              
              $
              2.25June
      2003 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              50,000
              
              
              $
              1.80September
      2001 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              105,000
              
              
              $
              .7568,750
              
              
              
              
              
              
              
              18,750
              
              
              
              
              
              
              
              322,500Outstanding
      and exercisable end
      of year:June
      2004 options
              
              
              18,750
              
              
              $
              4.02
              
              
              
              18,750
              
              
              $
              4.02
              
              
              
              142,500
              
              
              $
              4.02January
      2004 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              15,000
              
              
              $
              3.09August
      2003
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              10,000
              
              
              $
              2.25June
      2003
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              50,000
              
              
              $
              1.80September
      2001 options
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              
              
              
              
              105,000
              
              
              $
              .7518,750
              
              
              
              
              
              
              
              18,750
              
              
              
              
              
              
              
              322,500Weighted-average
      fair value ofoptions
      granted during the year
              
              $
              6.58
 The remaining contractual life at
December 31, 2007 is 1.4 years for the June, 2004 options and 4.3 years for the
April, 2007 options.
 
 The total exercise price for stock
options exercised during 2006 was approximately $735,000 compared to a total
stock value on the dates of exercises of approximately $3,923,000, resulting in
an intrinsic value on these exercises of $3,188,000.  There were no
options exercised during 2007.
  F-25
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
6--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 A summary
of information on our stock compensation and nonvested shares for the years
ended December 31 follows:
 
 2007
              
              
              2006
              
              
              2005Total
              
              
              Weighted
                Average
              
              
              
              
              
              Total
              
              
              Weighted
                Average
              
              
              
              
              
              Total
              
              
              Weighted
                AverageShares
              
              
              Fair Value
              
              
              Fair Value
              
              
              Shares
              
              
              Fair Value
              
              
              Fair Value
              
              
              Shares
              
              
              Fair Value
              
              
              Fair ValueNonvested-beginning
      of year:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              ---Issued
              
              
              6,667
              
              
              $
              87,204
              
              
              $
              13.08
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Unissued
              
              
              45,500
              
              
              
              482,740
              
              
              
              10.61
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---52,167
              
              
              $
              569,944
              
              
              $
              10.93
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              -Shares
      granted:Issued
              
              
              ---
              
              
              $
              ---
              
              
              
              
              
              
              
              22,250
              
              
              $
              259,070
              
              
              $
              11.64
              
              
              
              ---
              
              
              
              ---Unissued
              
              
              ---
              
              
              
              ---
              
              
              
              
              
              
              
              94,750
              
              
              
              1,018,810
              
              
              $
              10.75
              
              
              
              ---
              
              
              
              ------
              
              
              $
              ---
              
              
              
              
              
              
              
              117,000
              
              
              $
              1,277,880
              
              
              $
              10.92
              
              
              
              ---
              
              
              $
              ---Shares
      vesting:Issued
              
              
              (6,667
              )
              
              $
              (87,204
              )
              
              $
              13.08
              
              
              
              (15,583
              )
              
              $
              (171,866
              )
              
              $
              11.03
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Unissued
              
              
              (6,500
              )
              
              
              (72,020
              )
              
              $
              11.08
              
              
              
              (9,250
              )
              
              
              (103,570
              )
              
              $
              11.20
              
              
              
              ---
              
              
              
              ---
              
              
              $
              ---(13,167
              )
              
              $
              (159,224
              )
              
              $
              12.09
              
              
              
              (24,833
              )
              
              $
              (275,436
              )
              
              $
              11.09
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Shares
      forfeited:Issued
              
              
              ---
              
              
              
              ---
              
              
              $
              0.00
              
              
              
              ---
              
              
              
              ---
              
              
              $
              0.00
              
              
              
              ---
              
              
              
              ---Unissued
              
              
              (16,000
              )
              
              
              (166,580
              )
              
              $
              10.41
              
              
              
              (40,000
              )
              
              
              (432,500
              )
              
              $
              10.81
              
              
              
              ---
              
              
              
              ---(16,000
              )
              
              
              (166,580
              )
              
              $
              10.41
              
              
              
              (40,000
              )
              
              
              (432,500
              )
              
              $
              10.81
              
              
              
              ---
              
              
              $
              ---Nonvested-end
      of year:Issued
              
              
              ---
              
              
              $
              ---
              
              
              $
              0.00
              
              
              
              6,667
              
              
              $
              87,204
              
              
              $
              13.08
              
              
              
              ---
              
              
              $
              ---
              
              
              $
              ---Unissued
              
              
              23,000
              
              
              
              244,140
              
              
              $
              10.61
              
              
              
              45,000
              
              
              
              482,740
              
              
              $
              10.61
              
              
              
              ---
              
              
              
              ---
              
              
              $
              ---23,000
              
              
              $
              244,140
              
              
              $
              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
              
              1.00
      years
              
              
              
              
              
              
              
              
              
              
              
              2.00 yearsNonperformance
      based
              
              2.00
      years
              
              
              
              
              
              
              
              
              
              
              
              3.00 yearsOverall
              
              1.09
      years
              
              
              
              
              
              
              
              
              
              
              
              1.64 years
  F-26
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
6--STOCK OPTIONS AND STOCK AWARDS--Continued
 
 The total grant date fair value of
stock awards vesting during 2007 and 2006 was approximately
 $159,000
and $275,000, respectively compared to a total stock value on the dates of
vesting of approximately $140,000 and $289,000 resulting in fair value
differentials of ($19,000) and $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.
 
 As of
December 31, 2007, we have 91,750 shares reserved for issuance, including:
50,000 shares for the April, 2007 options, 18,750 shares for the June, 2004
options, and 23,000 for outstanding non-vested and performance-based stock
awards.  All options were issued at fair market value on date of
grant.
 
 NOTE
7--COMMITMENTS
 
 We have
leases on facilities housing our dialysis, administrative and medical
operations, as well as equipment leases.  Total rent expense was
approximately $2,315,000, $1,727,000 and $1,466,000 for the years ended December
31, 2007, 2006, and 2005, respectively.  The aggregate lease
commitments at December 31, 2007 for our non-cancelable operating leases with a
term of one year or more are approximately:
 
 2008
              
              $
              2,524,0002009
              
              
              2,097,0002010
              
              
              1,803,0002011
              
              
              1,501,0002012
              
              
              1,258,000Thereafter
              
              
              2,012,000$
              11,195,000
 Effective January 1, 1997, we
established a 401(k) savings plan (salary deferral plan) with eligibility
requirements of one year of service and an age requirement of at least 21
years.  We and our 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, we will match
10% of an employee’s contribution resulting from any bonus paid during the year
and may make a discretionary contribution with the percentage of any
discretionary contribution to be determined each year with only employee
contributions up to 6% of annual compensation considered when determining
employer matching.  To date, employer matching expense has been
minimal.
 
 Stephen W. Everett, our President, CEO
and a director, had a five-year employment contract through December 31,
2005.  We finalized a five-year employment agreement with Mr. Everett
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 our common stock of which
10,000 shares was granted
 
 F-27
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  NOTE
7--COMMITMENTS--Continued
 
 upon
shareholder approval in June, 2006.  Issuance of the remaining 30,000
shares is based upon agreed upon performance criterion with the potential for
10,000 shares to be earned annually for 2006 - 2008.  No performance
shares were earned during 2007 or 2006, since the performance criterion was not
met. The agreement provides for certain fringe benefits, reimbursement of
reasonable out-of-pocket expenses, and a non-competition agreement with us
during the term of the agreement and for one year after
termination.
 
 NOTE
8--ACQUISITIONS
 
 We have made various acquisitions
commencing in 2001, as described below.  These acquisitions were made
either on the basis of existing profitability or expectation of future
profitability for the interest acquired based on our analysis of the potential
for each acquisition, and the value of the relationship with the physician
affiliated with the selling entity.  Each acquisition was intended to
either strengthen our market share within a geographic area or provide us with
the opportunity to enter a new geographic area and market.  Management
also reviews the purchase price and any resulting goodwill based on established
current per patient valuations for dialysis centers.  Also considered
are the synergistic effects of a potential acquisition, including potential
costs integration and the effect of the acquisition on our overall
valuation.
 
 These
transactions resulted in an aggregate of approximately $8,597,000 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, we 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.  We determined there is no
impairment of goodwill.
 
 During the first quarter of 2006, we
acquired a Virginia dialysis center and a Maryland company with two dialysis
centers.  These transactions resulted in approximately $326,000 of
goodwill amortizable over 15 years for tax purposes.  We determined
there is no impairment of goodwill  In December, 2006, we acquired the
remaining 60% interest in our 40% owned Toledo, Ohio dialysis facility pursuant
to a put option valued at $3,200,000 resulting in goodwill of approximately
$2,707,000 amortizable over 15 years for tax purposes.  We determined
there is no impairment of goodwill.
 
 During the first quarter of 2007 we
acquired the assets of an Ohio dialysis center and a Pennsylvania dialysis
center.  These transactions resulted in approximately $1, 705,000 of
goodwill amortizable over 15 years for tax purposes.  We determined
there is no impairment of goodwill.
  F-28
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
8--ACQUISITIONS--Continued
 
 Effective December 1, 2007, we
increased our ownership in DCA of West Baltimore, LLC from 60% to 75% by
acquiring a portion of the existing minority interest for $345,000 resulting in
goodwill of approximately $190,000 amortizable over 15 years for tax
purposes.  We determined there is no impairment of
goodwill.
 
 NOTE
9--LOAN TRANSACTIONS
 
 The company has and may continue to
provide funds in excess of capital contributions subsequent to financing
agreements with our subsidiaries to meet working capital requirements of our
dialysis facility subsidiaries, usually until they become
self-sufficient.  The operating agreements for the subsidiaries
provide for cash flow and other proceeds to first pay any such financing,
exclusive of any tax payment distributions.  Minority members of the
subsidiaries would be responsible for their respective portion of the financing
according to their ownership interests.
 
 NOTE
10--QUARTERLY FINANCIAL INFORMATION (Unaudited)
 
 The following summarizes certain
quarterly operating data (in thousands except per share data):
 
 Year Ended December 31,
2007March 31
              
              
              June 30
              
              
              Sept. 30
              
              
              Dec.31
              
              
              TotalNet
      sales
              
              $
              16,828
              
              
              $
              18,418
              
              
              $
              19,092
              
              
              $
              19,911
              
              
              $
              74,249Gross
      profit
              
              
              6,282
              
              
              
              7,342
              
              
              
              7,762
              
              
              
              8,017
              
              
              
              29,403Net
      income
              
              
              383
              
              
              
              753
              
              
              
              927
              
              
              
              1,023
              
              
              
              3,086Earnings
      per shares:Basic
              
              $
              .04
              
              
              $
              .08
              
              
              $
              .10
              
              
              $
              .11
              
              
              $
              .32Diluted
              
              $
              .04
              
              
              $
              .08
              
              
              $
              .10
              
              
              $
              .11
              
              
              $
              .32
 
 Year Ended December 31,
2006March 31
              
              
              June 30
              
              
              Sept. 30
              
              
              Dec.31
              
              
              TotalNet
      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
 
 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-29
 DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 NOTE
11--ACQUISITION OF FORMER PARENT COMPANY
 
 On June 2, 2005, we and our 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 our common
stock.  On September 21, 2005, both our and Medicore shareholders
approved the merger, the articles of merger were filed, and the merger was
completed.  Each Medicore shareholder received .68 shares of our
common stock for each share of Medicore common stock, and Medicore’s ownership
in the company of approximately 4,821,000 of our common stock was retired
resulting in our having approximately 9,116,000 shares outstanding after the
merger.
 
 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 our
former parent that could be utilized to satisfy our future income tax
liabilities.  Pursuant to Section 382 of the Internal Revenue Code,
utilization of the acquired net operating losses were limited to certain amounts
annually.  We have utilized all of the acquired net operating loss
carryforwards.
 
 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 our Chairman of the Board, was deferred and
reflected as a current liability on our consolidated balance sheet at December
31, 2005.  Payment of this liability was made in January,
2006.
  F-30
  DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
 
 NOTE
11--ACQUISITION OF FORMER PARENT COMPANY--Continued
 
 The merger simplified our corporate
structure and enabled the ownership of our controlling interest to be in the
hands of our public shareholders.  The merger provided us with
additional capital resources to continue to build our dialysis
business.
 
 The results of operations of our former
parent are included in our consolidated operating results effective with the
merger, September 21, 2005.  Pro forma results of operations if the
merger had completed as of January 1, 2005 are as follows (in thousands except
per share data):
 
 2005Operating
      revenues
              
              $
              46,008Net
      income
              
              $
              2,093Earnings
      per share:Basic
              
              $
              .23Diluted
              
              $
              .22
 NOTE
12--OTHER TRANSACTIONS
 
 Our
Toledo, Ohio subsidiary sold a 30% minority interest to the medical directors of
the facility for total consideration of $750,000 and non-compete
agreements.  This transaction resulted in a charge against capital of
approximately $303,000 due to a decrease in our equity position in that
subsidiary.
 
 NOTE
13--SUBSEQUENT EVENT
 
 Pursuant to a call option which was
exercised on January 11, 2007, one of our subsidiaries acquired, effective
January 1, 2008, the assets of a Georgia dialysis facility it had been managing
pursuant to a management services agreement.  Effective January 1,
2008, we have an 80% interest in the facility, which is operated through our
subsidiary with the former owner having a 20% interest.  The purchase
price included the 20% minority interest and approximately $2,541,000, one half
of which was paid at closing with the remaining portion subject to a one year
promissory note payable to the seller with interest at prime plus 1% on December
31, 2008.
 
 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 Accountants
 
 
 Cranford,
New Jersey
 March 13,
2008
 
 F-32
 
 Schedule
II - Valuation and Qualifying Accounts
 Dialysis
Corporation of America, Inc. and Subsidiaries
 December
31, 2007
 
  COL.
      A
              
              COL.
      B
              
              
              COL.
      C
              
              COL.
      D
              
              
              COL.
      EClassification
              
              Balance
      at
                Beginning
                Of
      Period
              
              
              Additions
      (Deductions)
                Charged
      (Credited) to
                Cost
      and Expenses
              
              
              Additions
                Charged
      to
                Other
      Accounts
                Describe
              
              Other
      Changes
                Add
      (Deduct)
                Describe
              
              
              Balance
                at
      End of
                Period
 YEAR
      ENDED DECEMBER 31, 2007:Reserves
      and allowances deductedfrom
      asset accounts:Allowance
      for uncollectible accounts
              
              $
              2,512,000
              
              
              $
              1,665,000
              
              
              
              
              $
              (2,063,00
              )(1)
              
              $
              2,114,000Reserve
      for inventory obsolescence
              
              
              78,000
              
              
              
              (53,000
              )
              
              
              
              
              --
              
              
              
              25,000$
              2,590,000
              
              
              $
              1,612,000
              
              
              
              
              $
              (2,063,000
              )
              
              $
              2,139,000YEAR
      ENDED DECEMBER 31, 2006:Reserves
      and allowances deductedfrom
      asset accounts:Allowance
      for uncollectible accounts
              
              $
              1,886,000
              
              
              $
              1,199,000
              
              
              
              
              $
              (573,000
              )(1)
              
              $
              2,512,000Reserve
      for inventory obsolescence
              
              
              77,000
              
              
              
              1,000
              
              
              
              
              
              
              
              
              
              78,000$
              1,963,000
              
              
              $
              1,200,000
              
              
              
              
              $
              (573,000
              )
              
              $
              2,590,000YEAR
      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
              )
              
              $
              1,963,000
 
 (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, 2007
 
 
 21
              Subsidiaries
      of the Company23.1
              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 193431.2
              Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
      Exchange Act of 193432.1
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Rule
      13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350