**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-K/A**


**(Amendment
      No. 1)**






(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, 2004ORo
              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:


None





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





Title
      of each class


common
      stock, $.01 par value





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 an accelerated filer (as defined in
      Exchange Act Rule 12b-2).


Yes o     
      No x.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the closing price at which the common
      equity was sold on June 30, 2004 was approximately $12,410,000.





As
      of
      March 25, 2005, the Company had 8,661,815 shares of its common stock
      outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Registrant’s
      Registration Statement on Form SB-2 dated December 22, 1995, as amended February
      9, 1996, April 2, 1996 and April 15, 1996, Registration No. 33-80877-A Part
      II,
      Item 27, Exhibits, incorporated in Part IV of this Annual Report,





Registrant’s
      Annual Report, Form 10-K for the year ended December 31, 1996 and for the seven
      years ended December 31, 2003, Part IV, Exhibits, incorporated in Part IV of
      this Annual Report.





Annual
      Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for the year ended
      December 31, 1994, Part IV, Exhibits, incorporated in Part IV of this Annual
      Report.


















DIALYSIS
      CORPORATION OF AMERICA







Index
      to
      Annual Report on Form 10-K/A, Amendment No. 1


Year
      Ended December 31, 2004








Page**PART
                  I**Cautionary
                Notice Regarding Forward-Looking Information
              1Item
                  1.
              Business
              2Item
                  2.
              Properties
              30Item
                  3.
              Legal
                  Proceedings
              32Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              32**PART
                  II**Item
                  5.
              Market
                  for the Registrant's Common Equity, Related Stockholder Matters
                  andIssuer
                  Purchases of Equity Securities
              32Item
                  6.
              Selected
                  Financial Data
              32Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Resultsof
                  Operations
              36Item
                  7A.
              Quantitative
                  and Qualitative Disclosure About Market Risk
              49Item
                  8.
              Financial
                  Statements and Supplementary Data
              50Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and FinancialDisclosure
              50Item
                  9A.
              Controls
                  and Procedures
              50Item
                  9B.
              Other
                  Information
              50**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the Registrant
              51Item
                  11.
              Executive
                  Compensation
              54
    i
  PageItem
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
              60Item
                  13.
              Certain
                  Relationships and Related Transactions
              63Item
                  14.
              Principal
                  Accountant Fees and Services
              64**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              66Signatures
              72





EXPLANATORY
      STATEMENT





We
      are
      amending our Annual Report on Form 10-K for the year ended December 31, 2004,
      filed on March 30, 2005 (“Original Form 10-K”) to revise certain disclosures,
      including matters relating to accounting for revenue and accounts receivable,
      billing system generation of contractual adjustments based on the fee schedules
      of patients’ insurance plans, clarification and additional information under
      Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
      of Operations,” including the sections entitled “Liquidity and Capital
      Resources”, “Aggregate Contractual Obligations” and “Critical Accounting
      Policies.” We have also made certain modifications to our Notes to Consolidated
      Financial Statements, including Note 1 relating to “Estimates” and “Accrued
      Expenses”, and Note 10, “Acquisitions” with respect to factors contributing to
      recognition of goodwill.





For
      the
      convenience of the reader, this Form 10K/A sets forth the Original Form 10-K
      in
      its entirety. In addition, pursuant to the rules of the SEC, Item 15 of Part
      IV
      of the Original Form 10-K has been amended to contain currently dated
      certifications from the company’s Chief Executive Officer and Chief Financial
      Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
      The certifications of the Chief Executive Officer and Chief Financial Officer
      are attached to this Form 10-K/A as exhibits 31.1, 31.2 and 32.1,
      respectively.





Except
      for the foregoing amended information, this Form 10-K/A continues to describe
      conditions as of the date of the Original Form 10-K, and the disclosures
      contained herein have not been updated to reflect events, results or
      developments that occurred at a later date. Among other things, forward looking
      statements made in the Original Form 10-K have not been revised to reflect
      events, results or developments that occurred or facts that became known to
      the
      company after the date of the Original Form 10-K, and such forward looking
      statements should be read in their historical context.










ii








**Part
      I**




**Cautionary
      Notice Regarding Forward-Looking Information**







The
      statements contained in this Annual Report on Form 10-K dated March 29, 2005
      (“Original Annual Report”) 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 proposed
      acquisition of our parent public company, Medicore, Inc. pursuant to a stock
      for
      stock merger transaction, 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, 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 “anticipate,”“estimate,”“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 to
      materially differ from those expressed in the statements, including the 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 the “Risk Factors” section beginning on page 21 of the
      Original Annual Report as amended by Amendment No. 1 (“Amended Annual Report”).
      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 the Original and Amended Annual Reports.
      You
      should read this Amended Annual Report, 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 the Original Annual
      Report, except as specifically amended by the Amended Annual Report, and except
      as required by law, we undertake no obligation to rewrite or update such
      statements to reflect subsequent events.













**Item
      1. Business**





**Historical**





We
      are a
      Florida corporation organized in 1976. We develop and operate outpatient kidney
      dialysis centers that provide quality dialysis and ancillary services to
      patients suffering from chronic kidney failure, generally referred to as end
      stage renal disease, or ESRD. We also provide acute inpatient dialysis
      treatments in hospitals, homecare services and dialysis center management
      services. We became a public company in 1977, and went private in 1979. We
      began
      construction of new centers in 1995, and in 1996 once again became a public
      company. We currently operate 23 outpatient dialysis facilities including a
      dialysis center in Ohio in which we hold a 40% interest and an unaffiliated
      center in Georgia, each of which we manage pursuant to management services
      agreements. During 2004, we opened five dialysis centers: one in each of
      Maryland, Pennsylvania, and South Carolina and two in Virginia and acquired
      a
      Pennsylvania dialysis company that had been operating two centers. We are in
      the
      process of developing five new centers: one in Maryland, one in Ohio and three
      in South Carolina.





Our
      principal executive offices are located at 1302 Concourse Drive, Suite 204,
      Linthicum, Maryland 21090, and you may contact us as follows:





telephone:
      (410) 694-0500


fax:
      (410) 694-0596


email:
      info@dialysiscorporation.com





Our
      internet website can be found at www.dialysiscorporation.com .
      You may
      obtain from our internet website, free of charge, our annual report on Form
      10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments
      to
      those reports filed with the SEC, press releases, corporate profiles and
      corporate governance materials. We also make those documents available to
      shareholders free of charge upon request.








**Recent
      Developments**





The
      company and its parent, Medicore, Inc., agreed to terms for a merger of Medicore
      into our company in a stock for stock merger transaction. This was announced
      in
      a joint release on March 15, 2005. We are currently working toward completion
      of
      an Agreement and Plan of Merger. Medicore, also a public company trading on
      the
      Nasdaq SmallCap Market (MDKI), currently owns approximately 56% of our company.
      The merger is subject to the receipt of satisfactory tax and fairness opinions,
      the filing of a registration statement including a proxy statement/prospectus
      with the SEC, and the approval of the shareholders of Medicore and our company.
      Assuming completion of the merger, we anticipate issuing .68 shares of our
      common stock for each share of Medicore common stock for an aggregate issuance
      of approximately 5,289,000 shares, which will result in approximately 9,000,000
      of our shares of common stock to be outstanding upon completion of the
      merger.





The
      bases
      for the merger are essentially to simplify the corporate structure, enable
      the
      ownership of the control interest in our company to be in the hands of the
      public rather than one entity, and provide to our company the Medicore assets,
      which include, among other assets, minimum cash of approximately $4,000,000
      to
      $5,000,000, the medical supply operations, and income producing realty in
      Hialeah, Florida, with an estimated value of at least $3,000,000. Indebtedness
      of approximately $2,435,000 at March 25, 2005 which we owe to Medicore under
      a
      financing arrangement provided by Medicore of up to




2


$5,000,000
      will be eliminated. The credit facility is for equipment financing, working
      capital and general corporate purposes. These assets to be obtained in the
      merger will enhance our liquidity and borrowing power, and provide our company
      with the ability to continue our business strategy of controlled growth, further
      build our dialysis business, and expand the acquired medical supply
      operations.





We
      are
      preparing for filing with the SEC in the near future a registration statement
      on
      Form S-4 containing a proxy statement/prospectus, as well as an information
      statement for our company in connection with the merger transaction. **Common
      stockholders are urged to read that filing when it becomes available, since
      it
      will contain important information about the merger, Medicore, and our company,
      including, but not limited to, each company’s management, risk factors,
      stockholder rights, and voting procedures.** When the
      registration statement and the proxy statement/prospectus is available,
      stockholders may obtain free copies and other documents filed with the SEC
      at
      the SEC’s website at www.sec.gov .
      In
      addition, stockholders and others may obtain free copies of the documents filed
      with the SEC by the company by contacting Lawrence E. Jaffe, Esq., our corporate
      Secretary, at 201-288-8282. Medicore and its directors and executive officers
      may be deemed to be participants in the solicitation of proxies from its
      stockholders in connection with the merger transaction. Our company is providing
      an information statement with respect to the annual meeting and which
      stockholder approval for the merger transaction will be sought, but we do not
      solicit proxies since a quorum for the stockholder meeting exists by virtue
      of
      Medicore’s controlling interest in our company.





Information
      regarding the special interests of the directors and executive officers of
      Medicore and our company in the merger transaction will be disclosed in the
      proxy statement/prospectus. Additional information regarding the directors
      and
      executive officers of Medicore is included in Medicore’s annual report on Form
      10-K for the year ended December 31, 2004, and as to our directors and executive
      officers in this annual report, Part III, below. These annual reports and
      related documents are available free of charge at the SEC’s website at www.sec.gov ,
      and
      from Lawrence E. Jaffe, corporate Secretary to Medicore and our company, as
      described above.





**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 nine hospitals and medical centers located in areas and
      states serviced by our outpatient dialysis facilities. Our homecare services,
      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
      growth depends primarily on the availability of suitable dialysis centers for
      development or acquisition in appropriate and acceptable areas, and our ability
      to develop new potential dialysis centers at costs within our budget. We opened
      five new dialysis centers during 2004: one in Virginia in January, 2004, one
      in
      South Carolina in February, 2004, one in Pennsylvania in March, 2004, one in
      Maryland in June, 2004 and another in Virginia in December, 2004. At the end
      of
      August, 2004 we acquired a dialysis company which owns and operates two dialysis
      centers in Pennsylvania. We are in the process of developing five additional
      dialysis centers: one in Maryland, one in Ohio and three in South
      Carolina.





Our
      medical service revenues are derived primarily from four sources: (i) outpatient
      hemodialysis services (46%, 47% and 48% of medical services revenues for 2004,
      2003 and 2002, respectively); (ii) home peritoneal dialysis services (7%, 4%,
      and 3% of medical services revenues for 2004, 2003 and 2002, respectively);
      (iii) inpatient hemodialysis services for acute patient care provided through




3


agreements
      with hospitals and medical centers (5%, 7% and 10% of medical services revenues
      for 2004, 2003 and 2002, 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), (42%, 42% and 39% of medical services revenue
      for
      2004, 2003 and 2002, respectively). Dialysis is an ongoing and necessary therapy
      to sustain life for kidney dialysis patients. ESRD patients normally receive
      156
      dialysis treatments each year.





Essential
      to our operations and income is Medicare reimbursement which is a fixed rate
      determined by the Center for Medicare and Medicaid Services (“CMS”) of the
      Department of Health and Human Services (“HHS”). The level of our revenues and
      profitability may be adversely affected by future legislation that could result
      in rate cuts. Further, our operating costs tend to increase over the years
      in
      excess of increases in the prescribed dialysis treatment rates. From
      commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
      composite rate was unchanged, and thereafter decreased over the years until
      January, 2000, when the rate was minimally increased by Congress, and further
      minimally increased in January, 2001. However, Congress has approved a 1.6%
      composite rate increase for 2005. For calendar 2005, Medicare is implementing
      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. Prepayment will be based on the
      average acquisition price as determined by the Office of Inspector General,
      referred to as OIG. In order to make this change budget-neutral, a drug add-on
      component has been included, which will increase our composite rate by an
      additional 8.7%. Further, Medicare intends to implement a case mix payment
      system, adjusting the composite rate for a limited number of patient
      characteristics. See under this Item 1, “Operations - Medicare Reimbursement”
      below. 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.








**Stock
      Split**





On
      January 28, 2004, the company effected a two-for-one stock split. All share
      and
      per share data, including option information, in this Annual Report on Form
      10-K
      for the year ended December 31, 2004, have been adjusted to reflect the stock
      split.





**Dialysis
      Industry**





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





Based
      upon information published by CMS, the number of ESRD patients requiring
      dialysis treatments in the United States at December 31, 2002 was approximately
      309,000, and continues to grow at a rate of approximately 7% a year. This is
      thought to be attributable primarily to the aging of the




4


population
      and greater patient longevity as a result of improved dialysis technology.
      The
      statistics further reflect approximately 4,443 dialysis facilities, with a
      current annual cost for treating ESRD patients in the United States at
      approximately $25 billion at December, 2002, of which Medicare accounted for
      approximately $17 billion.





*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; and/or (3) kidney transplant. A
      significant portion of ESRD patients receive treatments at non-hospital owned
      outpatient dialysis facilities (according to CMS, approximately 80%) 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. Our company does not currently
      provide home hemodialysis (non-peritoneal) services.





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 28 years’ experience in developing and operating
      dialysis treatment facilities. Our priority is to provide quality patient care.
      We intend to continue to establish




5


alliances
      with physicians and hospitals and attempt to initiate dialysis service
      arrangements with nursing homes and managed care organizations.





We
      continue to actively seek and negotiate with physicians and others to establish
      new outpatient dialysis facilities. We are in the process of developing five
      new
      dialysis centers; and 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. During fiscal 2004, we experienced approximately 9% growth in the
      total number of dialysis treatments at our 14 dialysis centers that were in
      existence as of December 31, 2003, and a 20% growth in medical services revenue
      for these centers. We had an increase of over 50% in peritoneal dialysis
      patients in fiscal 2004.





*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 approached primarily through the development of our own dialysis facilities.
      Acquisition of existing outpatient dialysis centers is a faster but more costly
      means of growth. The primary reason for physicians selling or participating
      in
      the development of independently owned centers is the avoidance of
      administrative and financial responsibilities, freeing their time to devote
      to
      their professional practice. Other motivating forces are the physician’s desire
      to be part of a larger organization allowing for economies of scale and the
      ability to realize a return on their investment if they have an interest in
      the
      dialysis entity.





To
      construct and develop a new facility ready for operation takes an average of
      six
      to eight months, and approximately 12 months or longer to generate income,
      all
      of which are subject to variables based on location, size and competitive
      elements. Some of our centers are in the developmental stage, since they have
      not reached the point where the patient base is sufficient to generate and
      sustain earnings. See Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.” Construction of a 15 station facility,
      typically the size of our dialysis facilities, costs in a range of $750,000
      to
      $1,000,000, including equipment and initial working capital requirements,
      depending on location, size and related services to be provided by the proposed
      facility. Acquisition of existing facilities can be substantially more
      expensive, and is usually based primarily upon the patient base and earnings,
      and to a lesser extent, location and competition. Any significant expansion,
      whether through acquisition or development of new facilities, is dependent
      upon
      existing funds or financing from other sources. We have a financing arrangement
      with our parent for up to $5,000,000 for equipment financing and working
      capital. At March 25, 2005, we had borrowed $2,435,000, which is under a demand




6


promissory
      note at an annual interest rate of prime plus 1.25%. Assuming completion of
      the
      merger with our parent, we would obtain, among other assets, approximately
      $4,000,000 to $5,000,000 in cash for building our dialysis operations. See
      “Recent Developments” above.





*Inpatient
      Services*





We
      also
      seek to increase acute dialysis treatments through contracts with hospitals
      for
      inpatient dialysis services. These contracts are sought with hospitals in areas
      serviced by our facilities. Hospitals are willing to enter into such inpatient
      care arrangements to eliminate the administrative burdens of providing dialysis
      services to their patients as well as the expense involved in maintaining
      dialysis equipment, supplies and personnel. We believe that these arrangements
      are beneficial to our operations, since the contract rates are individually
      negotiated with each hospital and are not fixed by government regulation as
      is
      the case with Medicare reimbursement fees for ESRD patient treatment.





There
      is
      no certainty as to when any additional centers or service contracts will be
      implemented, or, to the extent implemented, the number of dialysis stations
      or
      patient treatments these centers or service contracts may involve, or if they
      will ultimately be profitable. There is no assurance that we will be able to
      continue to enter into favorable relationships with physicians who would become
      medical directors of such \proposed dialysis facilities, or that we will be
      able
      to acquire or develop any new dialysis centers within a favorable geographic
      area. Newly established dialysis centers, although contributing to increased
      revenues, also adversely affect results of operations due to their start-up
      costs and expenses and to their having a smaller and slower developing patient
      base. See “Business Strategy,”“Operations” and “Competition” of this Item 1, and
      Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.”








**Operations**





*Location,
      Capacity and Use of Facilities*





We
      operate 23 outpatient dialysis facilities in Georgia, Maryland, New Jersey,
      Ohio, Pennsylvania, Virginia and South Carolina, including an Ohio dialysis
      center in which we hold a 40% interest and which we operate in conjunction
      with
      the majority owner, the medical director of that center, and an unaffiliated
      center in Georgia which we manage. These dialysis facilities have a total
      designed capacity of 331 licensed stations.





22
      of our
      23 dialysis facilities are owned through subsidiaries of which 13 are 100%
      owned
      by us, eight owned by us as a majority owner in conjunction with the medical
      directors of those centers who hold minority interests, and one of which we
      hold
      a minority 40% interest, and which we manage under contract. We also manage
      an
      unaffiliated dialysis center in Georgia. One of the Pennsylvania and one of
      the
      Georgia dialysis centers are located on properties that we own and lease to
      our
      subsidiaries. Our Cincinnati, Ohio dialysis center is leased from a corporation
      owned by the medical director of that center who, together with his wife, holds
      a minority interest in the subsidiary operating that center. See Item 2,
“Properties.”





We
      have
      given the non-affiliated owner of the facility in Georgia that we manage a
      put
      option to sell to one of our subsidiaries all the assets of that Georgia
      dialysis facility. Our subsidiary holds a call option to purchase the assets
      of
      the Georgia facility. Each of the put and call options are exercisable through
      September, 2005. See Note 7 to “Notes to Consolidated Financial
      Statements.”





Additionally,
      the company provides acute care inpatient dialysis services to nine hospitals
      in
      areas serviced by our dialysis facilities. We are in the process of negotiating
      additional acute dialysis services contracts in the areas surrounding our
      facilities and 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 149,000 hemodialysis treatments in 2004,
      an
      increase of approximately 31,000 treatments compared to fiscal
      2003.





7




We
      estimate that on average our centers were operating at approximately 54% of
      capacity as of December 31, 2004, based on the assumption that a dialysis center
      is able to provide up to three treatments a day per station, six days a week.
      We
      believe we can increase the number of dialysis treatments at our centers without
      making significant additional capital expenditures.







*Operations
      of Dialysis Facilities*





Our
      dialysis facilities are designed specifically for outpatient hemodialysis and
      generally contain, in addition to space for dialysis treatments, a nurses’
      station, a patient weigh-in area, a supply room, water treatment space used
      to
      purify the water used in hemodialysis treatments, a dialyzer reprocessing room
      (where, with both the patient’s and physician’s consent, the patient’s dialyzer
      is sterilized for reuse), staff work area, offices and a staff lounge. Our
      facilities also have a designated area for training patients in home dialysis.
      Each facility also offers amenities for the patients, such as a color television
      with headsets for each dialysis station, to ensure the patients are comfortable
      and relaxed.





We
      maintain a team of dialysis specialists to provide for the individual needs
      of
      each patient. In accordance with participation requirements under the Medicare
      ESRD program, each facility retains a medical director qualified and experienced
      in the practice of nephrology and the administration of a renal dialysis
      facility. See “Physician Relationships” below. Each facility is overseen by an
      administrator who supervises the daily operations and the staff, which consists
      of registered nurses, licensed practical nurses, patient care technicians,
      a
      social worker to assist the patient and family to adjust to dialysis treatment
      and to provide help in financial assistance and planning, and a registered
      dietitian. In addition, there are independent consultants who visit with our
      dialysis patients. These individuals supervise the patient’s needs and
      treatments. See “Employees” below. In furtherance of our business strategy, we
      strive to attract and retain skilled nurses and other staff, competition for
      whom is intense.





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 nine hospitals in Georgia,
      Ohio
      and Pennsylvania, 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





8


kidney
      failure resulting from trauma or similar causes, patients in the early stages
      of
      ESRD, and ESRD patients who require hospitalization for other
      reasons.





*Ancillary
      Services*





Our
      dialysis facilities provide certain ancillary services to ESRD patients,
      including the administration of certain prescription drugs, such as EPO upon
      a
      physician’s prescription. EPO is a bio-engineered protein which stimulates the
      production of red blood cells and is used in connection with dialysis to treat
      anemia, a medical complication frequently experienced by ESRD patients. EPO
      decreases the necessity for blood transfusions in ESRD patients. There is only
      one manufacturer of EPO in the United States and there are currently no
      alternative products that perform the functions of EPO available to dialysis
      treatment providers. Although we have a good relationship with this manufacturer
      and have not experienced any problems in receipt of our supply of EPO, any
      loss
      or limitation of supply of this product could have a material adverse effect
      on
      our operating revenue and income.





*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 eight of our centers have acquired a
      minority ownership interest in the center they service, and an Ohio affiliate
      is
      majority owned by the medical director of that facility. 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. We know of no limitations on physician ownership
      in our subsidiaries.





Agreements
      with medical directors typically range from a term of five to 10 years, with
      renewal provisions, usually two renewal options each for five years. Each
      agreement specifies the duties, responsibilities and compensation of the medical
      director. Under each agreement, the medical director or professional association
      maintains his, her or its own medical malpractice insurance. The agreements
      also
      typically provide for non-competition in a limited geographic area surrounding
      that particular dialysis center during the term of the agreement and upon
      termination for a limited period. These agreements, however, do not prohibit
      physicians providing services at our facilities from providing direct patient
      care services at other locations; and consistent with the federal and state
      law,
      such agreements do not require a physician to refer patients to our dialysis
      centers. Usually, physician’s professional fees for services are billed directly
      to the patient or to government payment authorities by the treating physician
      and paid directly to the physician or the professional association.





Our
      ability to establish and operate a dialysis facility in a particular area is
      substantially dependent on the availability of a qualified physician or
      nephrologist to serve as the medical director.





9


The
      loss
      of a medical director who could not be readily replaced would have a material
      adverse effect on the operations of that facility, most likely resulting in
      closure. Compensation of medical directors is separately negotiated for each
      facility and generally depends on competitive factors, the size of the facility,
      and the fair market value of the services to be provided.





*Quality
      Assurance*





Dialysis
      Corporation of America implements a quality assurance program to maintain and
      improve the quality of dialysis treatment and care we provide to our patients
      in
      each facility. Quality assurance activities involve the ongoing examination
      of
      care provided, the identification of therapy deficiencies, the need for any
      necessary improvements in the quality of care, and evaluation of improved
      technology. Specifically, this program requires each center’s staff, including
      its medical director and nurse administrator, to regularly review quality
      assurance data and initiate programs for improvement, including dialysis
      treatment services, equipment, technical and environmental improvements, and
      staff-patient and personnel relationships. These evaluations are in addition
      to
      assuring regulatory compliance with CMS and the Occupational Safety and Health
      Administration. Our Vice President of Clinical Services, a certified nephrology
      nurse, oversees this program in addition to ensuring that we meet federal and
      state compliance requirements for our dialysis centers. See “Government
      Regulation” below.





*Quality
      Clinical Results*





Our
      goal
      is to provide consistent quality clinical care to our patients from caring
      and
      qualified doctors, nurses, patient care technicians, social workers and
      dieticians. We have demonstrated an unwavering commitment to quality renal
      care
      through our continuous quality improvement initiatives. We strive to maintain
      a
      leadership position as a quality provider in the dialysis industry and often
      set
      our goals higher than the national average standards.





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. The national average for 2003, the most recent data
      available, indicated 92% of dialysis patients had a Kt/V level greater than
      1.2,
      while 95% of our patients had a Kt/V level greater than 1.2, for 2003 and 2004.





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. ** The
      national average for 2003 indicated 79% of dialysis patients had a hemoglobin
      level greater than 11, while 80% of our patients had a hemoglobin level greater
      than 11, for 2003 and 2004.





One
      indicator of the overall health of our patients is the number of days that
      are
      spent in the hospital. The crude hospitalization rate is the total number of
      hospital days during a given year per total population. Hospitalization of
      patients can be related or unrelated to chronic kidney disease. The national
      average for 2001, the most recent data available, was 14.5 hospital days per
      patient per year, while our average was 11 hospital days per patient per year,
      for 2003 and 2004.





10


*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. Each of our dialysis facilities is 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, the allowable rate for 2005 is $9.76 per 1000 units for amounts in excess
      of three units per patient per year, and certain physician-ordered tests
      provided to dialysis patients. Approximately 28% of our medical services revenue
      in 2004 was derived from providing dialysis patients with EPO. CMS limits the
      EPO reimbursement based upon patients’ hematocrit levels. Other ancillary
      services, mostly other drugs, account for approximately an additional 10% of
      our
      medical services revenue. We submit claims monthly and are usually paid by
      Medicare within 14 days of the submission.





There
      have been a variety of proposals to Congress for Medicare reform. We are unable
      to predict what, if any, future changes may occur in the rate of reimbursement.
      Congress has approved a 1.6% composite rate increase for 2005. Commencing this
      year, Medicare will reimburse dialysis providers for the ten most utilized
      ESRD
      drugs at an amount equal to the cost of such drugs as determined by the OIG,
      and
      for other ESRD drugs, Medicare will reimburse at an amount equal to the average
      sale price of the drug plus 6%, and the composite rate will be 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




11


composite
      has been included. Accordingly, it has been determined by CMS that the Medicare
      ESRD composite rate will increase by approximately 8.7% or $11 per treatment,
      and that payments for separately billable drugs will be reduced as described
      above. In addition, it is anticipated that CMS will begin as of April 1, 2005
      to
      reimburse providers using a case mix formula. CMS plans to adjust 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 for 2005 equal payments that would have been made
      without the case mix adjustments and the add-on composite for reimbursement
      of
      the drugs.. Management believes that there will be minimal impact on its average
      Medicare revenue per treatment as a result of these changes in Medicare
      reimbursement. This is the first increase in the Medicare ESRD composite rate
      since 2001. Any reduction in the Medicare composite reimbursement rate could
      have a material adverse effect on our business, revenues and net
      earnings.





*Medicaid
      Reimbursement*





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





**Sources
      of Medical Services Revenue**




Year
                  Ended December 31,2004
              
              
              2003
              
              
              2002Medicare
              
              
              48
              %
              
              
              54
              %
              
              
              49
              %Medicaid
                  and Comparable Programs
              
              
              8
              %
              
              
              8
              %
              
              
              9
              %Hospital
                  inpatient dialysis services
              
              
              6
              %
              
              
              7
              %
              
              
              10
              %Commercial
                  and private payors
              
              
              38
              %
              
              
              31
              %
              
              
              32
              %





*Management
      Services*





Dialysis
      Corporation of America has a management services agreement with each of its
      wholly- and majority-owned subsidiaries, with its 40% owned affiliate DCA of
      Toledo, LLC, and with an unaffiliated Georgia dialysis center, providing each
      of
      them with administrative and management services, including, but not limited
      to,
      assisting in procuring capital equipment, preparing budgets, bookkeeping,
      accounting, data processing, and other corporate based information services,
      materials and human resource management, billing and collection, and accounts
      receivable and payable processing. These services are provided for a percentage
      of net revenues of each particular facility.








**Corporate
      Integrity Program**





Dialysis
      Corporation of America has developed a Corporate Integrity Program to assure
      it
      continues to achieve its goal of providing the highest level of care and service
      in a professional and ethical manner consistent with applicable federal and
      state laws and regulations. This program is




12


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.





Our
      board
      of directors has established an audit committee consisting of three independent
      members of the board who oversee audits, accounting, financial reporting, and
      who have established


procedures
      for receipt, retention and resolution of complaints relating to those areas
      (none to date), among other responsibilities. The audit committee operates
      under
      a charter providing for its detailed responsibilities.





We
      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.





*Code
      of Ethics*





As
      part
      of our Corporate Integrity Program, we have established a Code of Ethics and
      Business Conduct covering management and all employees to assure all persons
      affiliated with our company and our operations act in an ethical and lawful
      manner. The Code of Ethics and Business Conduct covers relationships among
      and
      between affiliated persons, patients, payors, and relates to information
      processing, compliance, workplace conduct, environmental practices, training,
      education and development, among other areas. In our commitment to delivering
      quality care to dialysis patients, we have mandated rigorous standards of ethics
      and integrity.





Our
      Code
      of Ethics and Business Conduct is designed to provide:





·
            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


·
            accountability
                for adherence to the Code





The
      portion of our Code of Ethics and Business Conduct as it applies to our
      principal executive officer, principal financial officer, principal accounting
      officer, and persons performing similar functions, may be obtained without
      charge upon request to our corporate Secretary and counsel,
      Lawrence E. Jaffe, Esq., Jaffe & Falk, LLC, at 777 Terrace Avenue, Hasbrouck
      Heights, New Jersey 07604.





The
      Corporate Integrity Program is implemented, and reviewed and upgraded from
      time
      to time, to provide a highly professional work environment and lawful and
      efficient business operations to better serve our patients and our
      shareholders.








13


**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
      are very proud of the fact that, although we have been involved in chronic
      and
      acute kidney dialysis services for approximately 28 years, we have never been
      subject to any suit relating to the providing of dialysis treatments. 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 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 regarding charges, procedures and
      policies. Each dialysis facility is also subject to periodic inspections by
      federal and state agencies to determine if their operations meet the appropriate
      regulatory standards. Our operations are also subject to the Occupational Safety
      and Health Administration, known as OSHA, relating to workplace safety and
      employee exposure to blood and other potentially infectious
      material.





Many
      states have eliminated the requirement to obtain a certificate of need prior
      to
      the establishment or expansion of a dialysis center. There are no certificate
      of
      need requirements in the states in which we are presently
      operating.





Our
      record of compliance with federal, state and local governmental laws and
      regulations remains excellent. Nevertheless, we are unable to predict the scope
      and effect of any changes in government regulations, particularly any
      modifications in the reimbursement rate for medical services or requirements
      to
      obtain certification from CMS. Enforcement, both privately and by the
      government, has become more stringent, particularly in attempts to combat fraud
      and waste. Since our inception in 1976, we have maintained all of our licenses,
      including our Medicare and Medicaid and equivalent certifications. The loss
      of
      any licenses and certifications would have a material adverse effect on our
      operations, revenues and earnings.





We
      regularly review legislative and regulatory changes and developments and will
      restructure a business arrangement if we determine such might place our
      operations in material noncompliance with applicable laws or regulations. See
      “Fraud and Abuse” and “Stark II” below. To date, none of our business
      arrangements with physicians, patients or others have been the subject of
      investigation by any governmental authority. No assurance can be given, however,
      that our business arrangements will not be the subject of future investigation
      or prosecution by federal or state governmental authorities which could result
      in civil and/or criminal sanctions.





14


*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.” All of our dialysis centers are
      certified under the Medicare program and applicable state Medicaid programs.
      Coverage for ESRD services has been revised by CMS for 2005. See in this Item
      1,
“Operations - Medicare Reimbursement” above.





*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 also refer patients to those facilities for
      items and services reimbursed by federal and state health care programs.
      Financial relationships with patients who are federal program beneficiaries
      also
      implicate the fraud and abuse laws. Other financial relationships which bear
      scrutiny under the fraud and abuse laws include relationships with hospitals,
      nursing homes, and various vendors.





*Anti-Kickback
      Statutes*





The
      federal Anti-Kickback Statute, derived from certain provisions of the Social
      Securities Act of 1965, prohibits the knowing and willful solicitation, receipt,
      offer, or payment of any remuneration, directly or indirectly, in return for
      or
      to induce the referral of patients or the ordering or purchasing of items or
      services payable under the Medicare, Medicaid, or other federal health care
      program.





Sanctions
      for violations of the Anti-Kickback Statute include criminal penalties, such
      as
      imprisonment and fines of up to $25,000 per violation, and civil penalties
      of up
      to $50,000 per violation, as well as exclusion from Medicare, Medicaid, and
      other federal health care programs.





The
      language of the Anti-kickback Statute has been construed broadly by the courts.
      Over the years, the federal government has published regulations that
      established “safe harbors” to the Anti-Kickback Statute. An arrangement that
      meets all of the elements of the safe harbor is immunized from prosecution
      under
      the Anti-Kickback Statute. The failure to satisfy all elements, however, does
      not necessarily mean the arrangement violates the Anti-Kickback
      Statute.





Some
      states have enacted laws similar to the Anti-Kickback Statute. These laws may
      apply regardless of payor source, may include criminal and civil penalties,
      and
      may contain exceptions that differ from the safe harbors to the Anti-Kickback
      Statute.





As
      required by Medicare regulations, each of our dialysis centers is supervised
      by
      a medical director, who is a licensed nephrologist or otherwise qualified
      physician. The compensation of our company’s medical directors, who are
      independent contractors, is fixed by a medical director agreement and reflects
      competitive factors in each respective location, the size of the center, and
      the
      physician’s professional qualifications. The medical director’s fee is fixed in
      advance, typically for periods of one to




15


five
      years and does not take into account the volume or value of any referrals to
      the
      dialysis center. Eight of our outpatient dialysis centers are owned jointly
      between us and physicians who, in most cases, hold a minority position through
      a
      professional association. Our Ohio affiliate is majority-owned by the medical
      director of that facility. 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 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.





Management
      believes that the Anti-Kickback Statute and other fraud and abuse laws are
      primarily directed at abusive practices that increase the utilization and cost
      of services covered by governmentally funded programs. The dialysis services
      we
      provide generally cannot, by their very nature, be over-utilized since dialysis
      treatment is not elective, and is only indicated when there is temporary or
      permanent kidney failure. Medical necessity is capable of being supported by
      objective documentation, drastically reducing the possibility of
      over-utilization. Additionally, there are safe harbors for certain arrangements.
      Nevertheless, while relationships created by medical director ownership of
      minority interests in our facilities satisfy many but not all of the criteria
      for the safe harbor, there can be no assurance that these relationships will
      not
      subject us to investigation or prosecution by enforcement agencies. In an effort
      to further our compliance with the law, we have adopted a corporate Compliance
      Program that addresses medical necessity and medical chart audits to confirm
      medical necessity of referrals.





With
      respect to our inpatient dialysis services, we provide hospitals with dialysis
      services, including qualified nursing and technical personnel, supplies,
      equipment and technical services. In certain instances, the medical director
      of
      our dialysis center who has a minority interest in that facility may refer
      patients to hospitals with which we have an inpatient dialysis services
      arrangement. We believe our acute inpatient hospital services are in compliance
      with the law. See “Stark II” below.





We
      endeavor in good faith to comply with all governmental regulations. However,
      there can be no assurance that we will not be required to change our practices
      or experience a material adverse effect as a result of any such potential
      challenge. We cannot predict the outcome of the rule-making process, enforcement
      procedures, or whether changes in the safe harbor rules will affect our position
      with respect to the Anti-Kickback Statute, but we will continue to make every
      effort to remain in compliance.








*Stark
      II*





The
      Physician Ownership and Referral Act, known as Stark II, bans certain physician
      referrals, with exceptions for certain “designated health services” as defined
      in the statute, to entities in which a physician or an immediate family member
      has a “financial relationship” which includes an ownership or investment
      interest in, or a compensation arrangement between the physician and the entity.
      For purposes of Stark II, “designated health services” include, among others,
      clinical laboratory services, durable




16


medical
      equipment, parenteral and enteral nutrients, home health services, and inpatient
      and outpatient hospital services. Dialysis treatments are not included in the
      statutory list of “designated health services.”





This
      ban
      is subject to several exceptions, including personal service arrangements,
      employment relationships and group practices meeting specific conditions. If
      Stark II is found to be applicable to the facility, the entity is prohibited
      from claiming payment for such services under the Medicare or Medicaid programs,
      is liable for the refund of amounts received pursuant to prohibited claims,
      is
      subject to civil penalties of up to $15,000 per referral and can be excluded
      from participation in the Medicare and Medicaid programs.





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 indicates 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 the proposed rules
      and
      the industry practice, that Congress did not intend to include dialysis services
      and the services and items we provide that are incidental to dialysis services
      within the Stark II prohibitions.





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





Medical
      directors of our dialysis centers who hold a minority investment interest in
      the
      subsidiaries operating those centers may refer patients to hospitals with which
      we have an acute inpatient dialysis service arrangement. Although the
      regulations of Stark II may be interpreted to apply to these types of
      transactions, we believe that our contractual arrangements with hospitals for
      acute care inpatient dialysis services are in compliance with Stark
      II.





If
      CMS or
      any other government entity otherwise interprets the Stark II regulations,
      we
      may be required to restructure certain existing compensation or investment
      agreements with our medical directors, or, in the alternative, refuse to accept
      referrals for designated health services from certain physicians. Stark II
      prohibits Medicare or Medicaid reimbursement of items or services provided
      pursuant to a prohibited referral, and imposes substantial civil monetary
      penalties on facilities which submit claims for reimbursement. If such were
      to
      be the case, we could be required to repay amounts reimbursed for drugs,
      equipment and services that CMS determines to have been furnished in violation
      of Stark II, in addition to substantial civil monetary penalties, which could
      adversely affect our operations and financial results. We believe that if Stark
      II is interpreted by CMS or any other governmental entity to apply to our
      arrangements, it is possible that we could be permitted to bring our financial
      relationships




17


with
      referring physicians into material compliance with the provisions of Stark
      II on
      a prospective basis. However, prospective compliance may not eliminate the
      amounts or penalties, if any, that might be determined to be owed for past
      conduct, and there can be no assurance that the costs and expenses associated
      with such prospective compliance, if permissible, would not have a material
      adverse effect on the company.





*Health
      Insurance Reform Act*





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, which were expanded. 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, final regulations
      governing electronic transactions relating to healthcare information were
      published by HHS. These regulations require a party transmitting or receiving
      healthcare transactions electronically to send and receive data in single
      format. This regulation applies to our submissions and processing of healthcare
      claims and also applies to many of our payors. We believe that we are in
      compliance with the transactions standards rule.





HIPAA
      also includes provisions relating to the privacy of healthcare information.
      HHS’
      privacy rules cover all individually identifiable healthcare information known
      as “protected health information” and apply to healthcare providers, health
      plans, and healthcare clearing houses, known as “covered entities.” The
      regulations are quite extensive and complex, but basically require companies
      to:
      (i) obtain patient acknowledgement of receipt of a notice of privacy practices;
      (ii) obtain patient authorization before certain uses and disclosures of
      protected health information; (iii) respond to patient requests for access
      to
      their healthcare information; and (iv) develop policies and procedures with
      respect to uses and disclosures of protected health information. We 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.





The
      final
      HIPAA security regulations governing the security of health information that
      is
      maintained or transmitted electronically were published in February, 2003.
      These
      regulations generally require implementation of safeguards for ensuring the
      confidentiality of electronic health information. Most covered entities will
      have until April 21, 2005 to comply with the standards. Management believes
      it
      is currently in compliance with the HIPAA security standards.





HIPAA
      increases significantly the civil and criminal penalties for offenses related
      to
      healthcare fraud and abuse. HIPAA increased civil monetary penalties from $2,000
      plus twice the amount for each false claim to $10,000 plus three times the
      amount for each false claim. 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. However, HIPAA creates a tougher burden of
      proof for the government by requiring that the government




18


establish
      that the person “knew or should have known” a false or fraudulent claim was
      presented. The “knew or should have known” standard is defined to require
“deliberate ignorance or reckless disregard of the truth or falsity of the
      information,” thus merely negligent conduct or billing errors should not violate
      the Civil False Claims Act.





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.





*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 primarily responsible for compliance with such laws.





There
      are
      a variety of regulations promulgated under OSHA relating to employees exposed
      to
      blood and other potentially infectious materials requiring employers, including
      dialysis centers, to provide protection. 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*





There
      are
      also federal and state laws, such as the federal False Claims Act, prohibiting
      anyone from presenting false claims or fraudulent information to obtain payments
      from Medicare, Medicaid and other third-party payors. These laws provide for
      both criminal and civil penalties, exclusion from




19


Medicare
      and Medicaid participation, repayment of previously collected amounts and other
      financial penalties. The submission of Medicare cost reports and requests for
      payment by dialysis centers are covered by these laws. The False Claims Act
      has
      been used to prosecute for fraud, for coding errors, billing for services not
      provided, and billing for services at a higher than allowable billing rate.
      We
      believe we have the proper internal controls and procedures for issuance of
      accounts and complete cost reports and payment requests. Such reports and
      requests, however, are subject to a challenge under these laws.





Certain
      states have anti-kickback legislation and laws dealing with self-referral
      provisions similar to the federal Anti-Kickback Statute and Stark II. We have
      no
      reason to believe that we are not in compliance with such state
      laws.





Dialysis
      Corporation of America has developed a Compliance Program as part of its
      Corporate Integrity Program, designed to assure compliance with fraud and abuse
      laws and regulations. See above under the caption “Corporate Integrity Program.”
      The establishment and implementation of our Compliance Program, coupled with
      our
      existing policies and internal controls, could have the effect of mitigating
      any
      civil or criminal penalties for potential violations, of which we have had
      none
      since our inception in 1976. We will continue to use our best efforts to fully
      comply with federal and state laws, regulations and requirements as applicable
      to our operations and business.








**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 public companies, including Fresenius Medical
      Care, Inc., Gambro Healthcare, Inc., DaVita, Inc. and Renal Care Group, Inc.
      DaVita recently entered into an agreement to acquire Gambro. 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 and Gambro
      also manufacture and sell dialysis equipment and supplies, which may provide
      them with a greater competitive edge. We also face competition from hospitals
      and physicians that operate their own dialysis facilities.





Competitive
      factors most important in dialysis treatment are quality of care and service,
      convenience of location and pleasantness of the environment. Another significant
      competitive factor is the ability to attract and retain qualified nephrologists.
      These physicians are a substantial source of patients for the dialysis centers,
      are required as medical directors of the dialysis center for it to participate
      in the Medicare ESRD program, and are responsible for the supervision of the
      medical operations of the center. Our medical directors usually are subject
      to
      non-compete restrictions within a limited geographic area from the center they
      administer. Additionally, there is always substantial competition for obtaining
      qualified, competent nurses and technical staff at reasonable labor costs.
      There
      can be no assurance that we will compete effectively with any of our
      competitors.





Based
      upon advances in surgical techniques, immune suppression and computerized tissue
      typing, cross-matching of donor cells and donor organ availability, renal
      transplantation in lieu of dialysis is a competitive factor. It is presently
      the
      second most commonly used modality in ESRD therapy. With greater availability
      of
      kidney donations, currently the most limiting factor in the growth of this
      modality,




20


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.








**Employees**





As
      of
      February, 2005, our company had 301 full time employees, including
      administrators, licensed practical nurses, registered nurses, technical
      specialists, patient care technicians, clerical employees, social workers,
      dietitians and corporate staff. We retain 23 part-time employees consisting
      of
      registered nurses, patient care technicians and clerical employees. We also
      utilize 78 per diem personnel to supplement staffing.





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





We
      believe our relationship with our employees is excellent and we have not
      suffered any strikes or work stoppages. None of our employees is represented
      by
      any labor union. We are an equal opportunity employer.








**Risk
      Factors**





We
      have
      listed below certain of the risk factors relating to Dialysis Corporation of
      America and our securities. There may be other risks and uncertainties that
      we
      may face and of which we are currently unaware which could also adversely affect
      our business, operations and financial condition. If any of such risks or
      uncertainties arise, or the risks listed below occur, our operations, earnings
      and financial condition could be materially harmed, which, in turn, would most
      likely adversely affect the trading price of our common stock. Any such event
      could negatively impact a shareholder’s investment in the company.








**Until
      fiscal 2001, we had experienced operational losses**





Since
      1989, when we sold four of our five dialysis centers, we had experienced
      operational losses. Not until fiscal 2001 did we reflect net income. We
      initiated an expansion program in 1995, opening two new dialysis centers that
      year, and to date operate and/or manage 23 centers in the states of Georgia,
      Maryland, New Jersey, Ohio, Pennsylvania, Virginia and South Carolina, and
      we
      have five centers in development. Some of our dialysis centers have generated
      losses since their commencement of operations and, although typical to newly
      established facilities, some continue to generate losses after 12 months of
      operations. This is due to operational costs and time needed to reach maturity
      of dialysis treatments. See Item 7, “Management’s Discussion and Analysis of
      Financial Condition and Results of Operations.”








21


**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


·
            establishing
                standards for the exchange of electronic health information; electronic
                transactions and code sets; unique identifiers for providers, employers,
                health plans and individuals





Many
      of
      these laws and regulations are complex and open to further judicial and
      legislative interpretations. If we are forced to change our method of operations
      because of these regulations, our earnings, financial condition and business
      could be adversely affected. The imposition of additional licensing and other
      regulatory requirements may, among other things, increase our cost of doing
      business. In addition, any violation of these governmental regulations could
      involve substantial civil and criminal penalties and fines, revocation of our
      licenses, closure of one or more of our centers, and our exclusion from
      participating in Medicare and Medicaid programs. Any loss of federal or state
      certifications or licenses would materially adversely impact our
      business.








**Our
      arrangements with our physician medical directors do not meet the safe harbor
      provisions of federal and state laws, and may subject us to greater governmental
      scrutiny**





Neither
      our arrangements with the medical directors of our facilities, typically
      retained by us as independent contractors under a fixed fee medical director
      agreement, nor the minority ownership interests of referring physicians in
      certain of our dialysis facilities meet all of the requirements of published
      safe harbors to the illegal remuneration provisions of the Social Security
      Act
      and similar state laws. These laws impose civil and criminal sanctions on
      persons who receive or make payments for referring a patient for treatment
      that
      is paid for in whole or in part by Medicare, Medicaid or similar state programs.
      Transactions that do not fall within the safe harbor may be subject to greater
      scrutiny by enforcement agencies.








**Our
      operations are subject to Medicare and Medicaid audits with concurrent potential
      civil and criminal penalties for failure to comply**





We
      are
      subject to periodic audits by the Medicare and Medicaid programs, which have
      various rights and remedies if they assert that we have overcharged the programs
      or failed to comply with program requirements. Rights and remedies available
      under these programs include repayment of any amounts alleged to be overpayments
      or in violation of program requirements, or making deductions from




22


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.








**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 heath care fraud, including broader provisions for the exclusion of
      providers from the Medicaid program. 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
      2002, 2003 and 2004, approximately 49%, 54% and 48% of our patient revenues
      was
      derived from Medicare reimbursement and 9%, 8% and 8% of our patient revenues
      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


23
  ·
              inclusion
                  in the flat composite rate for dialysis treatments those ancillary
                  services which we currently bill
                  separately





This
      year
      the reimbursement rate will change, primarily increasing the composite rate
      by
      8.7% and reducing the reimbursement rate for certain drugs, including EPO.
      CMS
      is expanding the drug and ancillary services that are included in the composite
      rate. We will be reimbursed for other separately billable ESRD drugs at an
      average sale price plus 6% The regulations provide for budget-neutrality, case
      mix and geographic adjustments in the composite rate.





Management
      does not believe these changes in reimbursement coupled with a 1.6% increase
      in
      the Medicare composite rate will have a significant impact on our operations,
      expenses or earnings.








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





Any
      reduction in the rates paid by private insurers, hospitals and other
      non-governmental third-party organizations would adversely affect our business.
      Alternatively, any change in patient coverage, such as Medicare eligibility
      as
      opposed to higher private insurance coverage, would result in a reduction of
      revenue. We estimate approximately 42%, 38% and 44% of our patient revenues
      for
      2002, 2003 and 2004, 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. Any limitation on our ability to charge these
      higher rates, which may be affected by expanded coverage by Medicare under
      the
      fixed composite rate, or expanded coverage of dialysis treatments by managed
      care organizations, which commonly have lower rates than we charge, could
      adversely affect our business, results of operations, and financial
      condition.








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





EPO,
      the
      bio-engineered drug used for treating anemia in dialysis patients, is currently
      available from a single manufacturer, Amgen, Inc. In 2003, Amgen increased
      the
      price of EPO, and there is no assurance that there will not be further price
      increases. There currently is no alternative drug available to us for the
      treatment of anemia of our dialysis patients. The available supply of EPO could
      be delayed or reduced, whether by Amgen itself, through unforeseen
      circumstances, or as a result of excessive demand. This would adversely impact
      our revenues and profitability, since approximately 26%, 28% and 28%,
      respectively, of our medical revenues in 2002, 2003 and 2004 were based upon
      the
      administration of EPO to our dialysis patients. Most of our EPO reimbursement
      is
      from government programs.








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





CMS
      has
      adopted a case-mix adjustment for the ESRD composite rate, under which the
      Medicare composite rate will be adjusted based on a patient’s age, body mass
      index and body surface are. These regulations are scheduled to become effective
      in April, 2005. Management believes implementing these case-mix adjustments
      will
      require significant systems changes for the Medicare fiscal intermediaries
      that
      process and pay Medicare claims. If the required systems changes are not made
      on
      a timely basis, then




24


the
      Medicare fiscal intermediaries may delay the payment of claims or may not pay
      claims correctly, either of which could have an adverse effect on our cash
      flow,
      revenues and profitability. We are presently unable to predict the impact of
      this care-mix adjustment, since it depends on our patient mix.








**New
      Amgen drug could affect use of EPO, adversely impacting our
      profitability.**





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








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





Other
      than four center acquisitions over the period 2002 through 2004, expansion
      of
      our operations has been through construction of dialysis centers. We developed
      two dialysis centers and acquired one facility in 2003 and opened five new
      centers and acquired a company with two dialysis facilities in 2004. We seek
      areas with qualified and cost-effective nursing and technical personnel and
      a
      sufficient population to sustain a dialysis center. These opportunities are
      limited and we compete with much larger dialysis companies for appropriate
      locations. The time period from the beginning of construction through
      commencement of operations of a dialysis center generally takes four to six
      months and sometimes longer. Once the center is operable, it generates revenues,
      but usually does not operate at full capacity, and may incur losses for
      approximately 12 months or longer. Our growth strategy based on construction
      also involves the risks of our ability to identify suitable locations to develop
      additional centers. Those we do develop may never achieve profitability, and
      additional financing may not be available to finance future
      development.





Our
      inability to acquire or develop dialysis centers in a cost-effective manner
      would adversely affect our ability to expand our business and as a result,
      our
      profitability.





Growth
      places significant demands on our financial and management skills. Inability
      on
      our behalf to meet the challenges of expansion and to manage any such growth
      would have an adverse effect on our results of operations and financial
      condition.








**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 development of a dialysis
      center and by taking into consideration the potential geographic patient base,
      and the availability of a physician nephrologist to be our medical director
      and
      a skilled work force. Construction, equipment and initial working capital costs
      for a new dialysis center with 15 stations, typically the size of our dialysis
      facilities, range from $750,000 to $1,000,000. The cost of acquiring a center
      is
      usually much greater. We cannot assure you that we will be successful in
      developing or acquiring dialysis facilities, or otherwise




25


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 the few agreements which expired in 2004. All the
      medical director agreements provide for noncompetition restrictions. We have
      never had to attempt to enforce such restrictions, but there is no assurance
      that a particular jurisdiction in which the agreement is applicable would uphold
      such noncompetition agreement, which would increase the potential for
      competition with affiliated dialysis centers and could adversely impact our
      revenues and earnings.





Some
      of
      our medical directors or the medical groups with whom they are associated own
      minority interests in certain of our subsidiaries which operate dialysis
      centers. If these interests are deemed to violate applicable federal or state
      law, these physicians may be forced to dispose of their ownership interests.








**Industry
      changes could adversely affect our business**





Healthcare
      organizations, public and private, continue to change the manner in which they
      operate and pay for services. Our business is designed to function within the
      current healthcare financing and reimbursement system. In recent years, the
      healthcare industry has been subject to increasing levels of government
      regulation of reimbursement rates and capital expenditures, among other things.
      In addition, proposals to reform the healthcare system have been considered
      by
      Congress, and still remain a priority issue. Any new legislative initiatives,
      if
      enacted, may (i) further increase government regulation of or other involvement
      in healthcare, (ii) lower reimbursement rates, and (iii) otherwise change the
      operating environment for healthcare companies. We cannot predict the likelihood
      of those events or what impact they may have on our earnings, financial
      condition or business.








26


**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.
      Recently, DaVita, Inc. has proposed to acquire Gambro Healthcare US, which,
      if
      such transaction is completed, could result in that combined entity being one
      of
      the largest, if not the largest, dialysis provider in the United States. 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.








**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 could adversely impact
      earnings. The liability exposure of operations in the healthcare services
      industry has increased, resulting not only in increased premiums, but in limited
      liability on behalf of the insurance carriers. Our ability to obtain the
      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




27


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.








**Medicore,
      Inc., our parent, which owns approximately 56% of our voting securities, has
      some common officers and directors, which presents the potential for conflicts
      of interest**





Medicore
      owns approximately 56% of our common stock, and is able to elect all of our
      directors and otherwise control our management and operations. Such control
      is
      also complemented by the fact that Thomas K. Langbein is Chairman of the Board
      of both our company and Medicore, of which he is also the President and Chief
      Executive Officer; and Daniel R. Ouzts is Vice President and Treasurer of both
      companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our
      management. Peter D. Fischbein, who has been a director of Medicore since 1984,
      was elected as a director of our company in June, 2004. Lawrence E. Jaffe,
      Esq.,
      a member of Jaffe & Falk, LLC, our corporate counsel, is our corporate
      Secretary, as well as corporate Secretary and a director of Medicore. The costs
      of executive salaries and other shared corporate overhead for these companies
      are allocated on the basis of time spent. The amount of expenses charged to
      us
      by Medicore for 2004 amounted to approximately $200,000.





Additionally,
      there have been past and there are current transactions between our company
      and
      Medicore and their directors, including insurance coverage.





In
      March,
      2004, Medicore agreed to provide us with up to $1,500,000 in dialysis equipment
      financing under a demand promissory note with individual advances with interest
      at prime plus 1.25%. The note was subsequently modified to increase the maximum
      advances to $5,000,000, and its purpose expanded to include working capital.
      At
      March 25, 2005, there was $2,435,000 outstanding under this financing. See
      Note
      4 to “Notes to Consolidated Financial Statements.”





Since
      Medicore holds a majority interest in our company, there exists the potential
      for conflicts between Medicore and us, and the responsibilities of our
      management to our shareholders could conflict with the responsibilities owed
      by
      management of Medicore to its shareholders.








**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 our executive officers, Thomas K. Langbein,
      Chairman of the Board, who also holds that position with our parent, Medicore,
      of which company he is also President and Chief Executive Officer, and Stephen
      W. Everett, our President, Chief Executive Officer and a director. Mr. Langbein
      has been involved with Medicore since 1971, when his investment banking firm,
      Todd & Company, Inc., took it public, and with us since we became a public
      company in 1977 (originally a wholly-owned subsidiary of Medicore 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 25years. Mr. Langbein has an employment agreement with
      our parent through February 28, 2009, which provides for a one year from
      termination non-competition within 10 miles of Medicore’s medical products
      operations or then existing dialysis facilities owned by our company, with
      no




28


restrictions
      outside these limits. Mr. Everett has an employment agreement with us through
      December 31, 2005, with a one-year non-competition provision within the United
      States, which period is extended for the duration of any breach of the
      non-competition provisions. The covenant not to compete is inapplicable if
      we
      terminate Mr. Everett without cause or we materially breach the agreement .
      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 and officers and directors of our parent own
      approximately 1,247,000 shares of our common stock and vested options
      exercisable into an additional approximately 231,000 shares of common stock,
      for
      an aggregate of 1,478,000 shares or approximately 17% of the outstanding common
      stock. Most of the shares held by these officers and directors, upon satisfying
      the conditions of Rule 144 under the Securities Act, may be sold without
      complying with the registration provisions of the Securities Act. Rule 144
      conditions include:





·
            holding
                the shares for one year from
                acquisition;


·
            volume
                limits of selling every three months an amount of shares which does
                not
                exceed the greater of 1% of the outstanding common stock, or the
                average
                weekly volume of trading as reported by Nasdaq during the four calendar
                weeks prior to the sale;


·
            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 2,976,000
      shares. Common stock of the company owned by our officers and directors and
      the
      officers and directors of our parent represent approximately 42% 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 and several months, 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 SmallCap Market under the symbol “DCAI.” The
      market price of our common stock has exhibited significant volatility in 2004
      and early 2005. Given adjustment for a January, 2004 two-for-one stock split,
      the 52 week range was $2.50 to $31.50, reached on January 4, 2005. The first
      three quarters of 2004, the stock traded in the $4.00 to $5.75 range on limited
      volume. The volume and market substantially increased in the last quarter
      approximately as follows:




**Common
                      Stock**
                  
                  **Total****High**
                  
                  **Low**
                  
                  **Volume**October,
                      2004
                  
                  $
                  8.49
                  
                  
                  
                  $
                  4.82
                  
                  
                  596,589November,
                      2004
                  
                  $
                  16.59
                  
                  
                  
                  $
                  5.75
                  
                  
                  1,838,533December,
                      2004
                  
                  $
                  30.50
                  
                  
                  
                  $
                  14.07
                  
                  
                  6,391,571


29


The
      volume of trading of our common stock on December 31, 2004 was approximately
      3,139,000 shares. The range of market prices for our common stock and trading
      volume for the first quarter of 2005 through March 15, 2005, the date of the
      announcement of our anticipated merger with our parent (see “Recent
      Developments” above) is as reported by Nasdaq:




**Common
                      Stock**
                  
                  **Total****High**
                  
                  **Low**
                  
                  **Volume**January,
                        2005
                  
                  $
                  31.50
                  
                  
                  
                  $
                  19.12
                  
                  
                  12,165,712February,
                        2005
                  
                  $
                  33.50
                  
                  
                  
                  $
                  22.10
                  
                  
                  5,811,037March
                        15, 2005
                  
                  $
                  35.00
                  
                  
                  
                  $
                  23.00
                  
                  
                  3,824,814


For
      the
      few days subsequent to the merger announcement our common stock traded in the
      range of $19.25 to $25.80.





Other
      than the merger announcement on March 15, 2005, and the continued growth of
      the
      company, there was no information known to management that would cause the
      rise
      or significant fluctuation in the price of our common stock, or the increase
      in
      trading volume. The renal care industry has experienced continued and rapid
      consolidation, as evidenced by the proposed acquisition involving two of the
      major dialysis services providers, DaVita, Inc. and Gambro Healthcare U.S.,
      for
      an estimated $3 billion, and may have generated interest of the marketplace
      in
      our common stock.





Other
      factors that could continue to cause fluctuation in our common stock
      include:





·
            changes
                in government regulation, whether legislative, enforcement or
                reimbursement rates


·
            third
                party reports relating to the dialysis industry and our company
                (unsolicited by management)


·
            announcements
                by management relating to the company’s performance or other material
                events


·
            actions
                and announcements by our
                competitors


·
            the
                outlook for the healthcare industry
                generally





Investors
      should understand that in general, stock prices fluctuate for reasons unrelated
      to operating results. Any changes in the above discussed factors, the Medicare
      and Medicaid reimbursement rates in particular, or general economic, political,
      global and market conditions, could result in a decline in the market price
      and
      volume of trading in our common stock.








**Item
      2. Properties**





Dialysis
      Corporation of America owns three properties, one located in Lemoyne,
      Pennsylvania, a second in Easton, Maryland, and a third in Valdosta, Georgia.
      The Maryland property 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. We use approximately 600 square feet at that property for an
      administrative office.





30


The
      Lemoyne property consists of approximately 15,000 square feet and houses one
      of
      our dialysis centers which accounts for approximately 5,400 square feet, under
      a
      five year lease through December 22, 2008, with one additional renewal period
      of
      five years. The center is approved for 17 dialysis stations with space available
      for expansion. We use approximately 4,000 square feet of the Lemoyne property
      for administrative offices.





The
      Easton, Maryland property has a mortgage to secure a $700,000 development loan
      to our Vineland, New Jersey subsidiary at an annual interest rate of 1% over
      the
      prime rate, maturing in December 2007, which loan we guaranty. This loan had
      a
      remaining principal balance of approximately $610,000 at December 31, 2004.
      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
      acquired property in Valdosta, Georgia in 2000, which property is subject to
      a
      five year $788,000 mortgage obtained in April, 2001 with interest at the prime
      rate plus 1⁄2% with a minimum rate of 6%, maturing in April, 2006. This mortgage
      had a remaining principal balance of approximately $675,000 at December 31,
      2004. We constructed a dialysis center at this property comprising approximately
      6,000 square feet which we have leased to one of our subsidiaries for $90,600
      per year under a 10-year lease, with two additional renewal periods of five
      years each.





For
      our
      Cincinnati, Ohio facility, we purchased the property, and completed the
      construction of an approximately 5,000 square foot dialysis facility at a cost
      of approximately $740,000. In February, 2003, we sold the property to a
      corporation owned by the medical director of that facility, which, in turn,
      leased the facility to our Cincinnati subsidiary for an initial term of 10
      years
      from the commencement date of February 6, 2003, with two additional five-year
      renewal periods. Annual rental fees remain the same for the first four years
      of
      the lease, and thereafter increase annually based upon a percentage increase
      in
      the CPI for the Cincinnati, Ohio area. $75,000 of tenant improvements were
      funded by a loan by us to our majority owned Cincinnati subsidiary operating
      this center for which the subsidiary issued to us a five-year promissory note.
      The loan must be paid prior to that subsidiary paying any other of its
      indebtedness, and earlier if at such time the subsidiary has cash flow or other
      proceeds available for distribution to its members under its operating
      agreement, subject to tax payment distributions which have a priority. Should
      our subsidiary sell additional limited liability interests, the proceeds will
      first be used to repay the loan.





In
      addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio
      facilities, we presently have 19 other dialysis centers, including the facility
      in Toledo, Ohio in which we have a 40% interest, that lease their respective
      facilities from unaffiliated parties, most under five to ten year initial terms,
      usually with two additional renewal periods of five years each, for space
      ranging from approximately 3,000 to 7,000 square feet. We sublet a minimal
      amount of space at four of our dialysis centers to the physicians who are our
      medical directors at those centers for their medical offices. The subleases
      are
      on a commercially reasonable basis and are structured to comply with the safe
      harbor provisions of the “Anti-Kickback Statute.” See Item 1, “Business -
      Government Regulation - Fraud and Abuse.”





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





We
      are
      constructing or renovating facilities for three new centers in Maryland, Ohio
      and South Carolina under recently signed leases for those premises, and we
      have
      acquired two additional properties




31


in
      South
      Carolina for development of new facilities. Neither of the acquired South
      Carolina properties are subject to a mortgage. We continue to actively pursue
      the additional development and acquisition of dialysis facilities in other
      areas
      which would entail the acquisition or lease of additional property.





We
      construct most of our dialysis centers, which have state-of-the-art equipment
      and facilities. Dialysis stations at our centers are equipped with modern
      dialysis machines, most of which had been financed under a 1996 master
      lease/purchase agreement. We now acquire our equipment, currently from advances
      by our parent under a demand promissory note for up to $5,000,000 with annual
      interest on advances at 1.25% over the prime rate. See Item 7, “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations,” Item
      13, “Certain Relationships and Related Transactions,” and Note 4 to “Notes to
      Consolidated Financial Statements.”





None
      of
      our dialysis facilities are operating at full capacity. See “Business -
      Operations - Location, Capacity and Use of Facilities” above. The existing
      dialysis facilities could accommodate greater patient volume, particularly
      if we
      increase hours and/or days of operation without adding additional dialysis
      stations or any additional capital expenditures. We also have the ability and
      space at most of our facilities to expand to increase patient volume subject
      to
      obtaining appropriate governmental approval.





We
      maintain executive offices at 1302 Concourse Drive, Suite 204, Linthicum,
      Maryland 21090, and administrative offices at 27 Miller Street, Suite 2,
      Lemoyne, Pennsylvania 17043, as well as at our parent’s facility at 2337 West
      76 th Street,
      Hialeah, Florida 33016.








**Item
      3. Legal Proceedings**





None.








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





No
      matter
      was submitted during the fourth quarter of our fiscal year ended December 31,
      2004 to a vote of security holders through the solicitation of proxies or
      otherwise.








**PART
      II**





**Item
                5.**
            **Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities**





**Price
      Range**





Our
      common stock trades on the Nasdaq SmallCap Market under the symbol “DCAI.” The
      following table indicates the high and low bid prices for our common stock
      for
      each of the four quarters for the years ended December 31, 2003 and 2004 as
      reported by Nasdaq.




32







**Bid
                Price****2003**
            
            **High**
            
            **Low**1stQuarter
            
            $
            2.09
            
            $
            1.702ndQuarter
            
            
            2.21
            
            
            1.703rdQuarter
            
            
            2.66
            
            
            1.634thQuarter
            
            
            4.26
            
            
            2.37





**Bid
                Price****2004**
            
            **High**
            
            **Low**1stQuarter
            
            $
            6.00
            
            $
            2.502ndQuarter
            
            
            5.65
            
            
            3.753rdQuarter
            
            
            5.14
            
            
            3.814thQuarter
            
            
            30.42
            
            
            4.51





At
      March
      24, 2005, the high and low sales prices of our common stock were $21.40 and
      $19.11, respectively.





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








**Stockholders**





At
      March
      24, 2005, we had 123 shareholders of record as reported by our transfer agent.
      We have been advised by ADP, which organization holds securities for banks,
      brokers and depositories, that there are currently approximately 6,407
      beneficial owners of our common stock.








**Dividend
      Policy**





Dialysis
      Corporation of America does not anticipate that it will pay dividends in the
      foreseeable future. The board of directors intends to retain earnings for use
      in
      the business. Future dividend policy will be at the discretion of the board
      of
      directors, and will depend on our earnings, capital requirements, financial
      condition and other similar relevant factors. Assuming completion of the
      contemplated merger with our parent, Medicore, we will receive additional
      assets, including approximately $4 million to $5 million, which management
      intends to use for continued expansion and growth of our dialysis operations.
      See “Recent Developments” and “Business Strategy” under Item 1, “Business.” Any
      determination to pay a dividend is also subject to one of the covenants in
      the
      mortgage on our Valdosta, Georgia property (see Item 2, “Properties”) which
      restricts the payment of dividends above 25% of our net worth.








**Equity
      Compensation Plan**





The
      following table provides certain information with respect to the one equity
      compensation plan approved by shareholders in effect at December 31, 2004.
      There
      are no equity compensation plans outstanding that were not approved by
      shareholders.




33


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: (1)
            694,616
            $1.874
            742,654(1)


_______________


(1)
            The
                options are five years in duration (except for one three-year option
                for
                10,000 shares), 341,616vested
                and 353,000 non-vested, expire at various dates between January 1,
                2006
                and August 15, 2009, contain anti-dilution provisions providing for
                adjustments of the exercise price under certain circumstances and
                have
                termination provisions.








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





There
      were no sales of our securities, registered or unregistered, under the
      Securities Act of 1933, as amended (the “Securities Act”), except under option
      grants and option exercises which were exempt from the registration requirements
      of Section 5 of the Securities Act under the private placement exemption of
      Section 4(2) and/or Regulation D of the Securities Act, based on the limited
      number of optionees who are officers, directors and/or key employees. 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.” These sales of options and common stock upon
      option exercises were reported in our quarterly reports, Form 10-Q, for the
      periods ended March 31, 2004, June 30, 2004 and September 30, 2004. There were
      no option grants or exercises or other sales of our securities during the fourth
      quarter of fiscal 2004.








**Stock
      Repurchases**





In
      September, 2000, the board of directors authorized the company to buy back
      up to
      600,000 shares of its common stock. The company repurchased and cancelled
      approximately 360,000 shares of its common stock from the fourth quarter of
      2000
      through 2003. The only repurchases the company made during 2004 were upon option
      exercises for stock, which aggregated 71,375 shares, all during the first
      quarter of 2004. See Note 8 to “Notes to Consolidated Financial
      Statements.”








**Item
      6. Selected Financial Data**





The
      following selected financial data for the five years ended December 31, 2004
      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, 2004, 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.”





34





**Consolidated
                Statements of Operations Data**(in
                thousands except per share amounts)Years
                Ended December 31,2004
            
            2003
            
            2002
            
            2001
            
            2000Revenues(1)
            
            $
            40,986
            
            $
            29,997
            
            $
            25,354
            
            $
            19,035
            
            $
            8,769Net
                income (loss)
            
            
            2,214
            
            
            1,150
            
            
            1,242
            
            
            784
            
            
            (356
            )Earnings
                (loss) per share(2)Basic
            
            
            .27
            
            
            .15
            
            
            .16
            
            
            .10
            
            
            (.05
            )Diluted
            
            
            .25
            
            
            .13
            
            
            .14
            
            
            .10
            
            
            (.05
            )







**Consolidated
                Balance Sheet
                Data**(in
                thousands)December
                31,2004
            
            2003
            
            2002
            
            2001
            
            2000Working
                capital
            
            $
            3,644
            
            $
            3,773
            
            $
            4,593
            
            $
            3,883
            
            $
            3,869Total
                assets
            
            
            26,490
            
            
            19,604
            
            
            17,154
            
            
            15,683
            
            
            11,177Intercompany
                advance payable(receivable)
                from Medicore(non-current
                portion)
            
            
            449
            
            
            234
            
            
            ---
            
            
            (201
            )
            
            (414
            )Intercompany
                note and accrued interestpayable
                to Medicore
            
            
            1,462
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Long
                term debt, net of current portion
            
            
            1,586
            
            
            2,097
            
            
            2,727
            
            
            2,935
            
            
            1,755Stockholders’
                equity
            
            
            13,330
            
            
            10,970
            
            
            9,727
            
            
            8,485
            
            
            7,799


**_________________________**




(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.








35


**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***





Dialysis
      Corporation of America provides dialysis services, primarily kidney dialysis
      treatments through 23 outpatient dialysis centers, including a 40% owned Ohio
      affiliate and one unaffiliated dialysis center which it manages, to patients
      with chronic kidney failure, also know as end-stage renal disease or ESRD.
      We
      provide dialysis treatments to dialysis patients of nine hospitals and medical
      centers through acute inpatient dialysis services agreements with those
      entities. We provide homecare services, including home peritoneal
      dialysis.





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 the two centers we manage, one in which we have a 40% ownership
      interest, and those hospitals and medical centers with which we have inpatient
      acute service agreements for the periods presented:





**Year
                Ended December 31,****2004**
            
            **2003**
            
            **2002**In
                center
            
            
            127,293
            
            
            103,025
            
            
            86,475Home
                peritoneal
            
            
            13,311
            
            
            7,193
            
            
            4,504Acute
            
            
            8,387
            
            
            8,010
            
            
            9,116148,991
            (1)
            
            118,228
            (1)
            
            100,095
            (1)


_______________





(1)
            Treatments
                by the two managed centers included: in-center treatments of 13,196,
                11,081 and 6,563, respectively, for 2004, 2003 and 2002; no home
                peritoneal treatments; and acute treatments of 128, 156 and 87,
                respectively, for 2004, 2003 and
                2002.





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 increased its




36


price
      in
      early 2003, and could implement further price increases which would adversely
      affect our net income.
      This manufacturer has developed another anemia drug that could possibly
      substantially reduce our revenues and profit from the treatment of anemia in
      our
      patients.





ESRD
      patients must either obtain a kidney transplant or obtain regular dialysis
      treatments for the rest of their lives. Due to a lack of suitable donors and
      the
      possibility of transplanted organ rejection, the most prevalent form of
      treatment for ESRD patients is hemodialysis through a kidney dialysis machine.
      Hemodialysis patients usually receive three treatments each week with each
      treatment lasting between three and five hours on an outpatient basis. Although
      not as common as hemodialysis in an outpatient facility, home peritoneal
      dialysis is an available treatment option, representing the third most common
      type of ESRD treatment after outpatient hemodialysis and kidney
      transplantation.





Approximately
      56% of our medical service revenues are derived from Medicare and Medicaid
      reimbursement with rates established by CMS, and which rates are subject to
      legislative changes. Over the last two years, Medicare reimbursement rates
      have
      not increased. Congress has approved a 1.6% composite rate increase for 2005.
      Also for 2005, Medicare is implementing 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 is to implement a case mix payment system as an adjustment to the composite
      rate. See Item 1, “Business - Operations - Medicare Reimbursement.” Dialysis is
      typically reimbursed at higher rates from private payors, such as a patient’s
      insurance carrier, as well as higher payments received under negotiated
      contracts with hospitals for acute inpatient dialysis services.





The
      following table shows the breakdown of our revenues by type of payor for the
      periods presented:




**Year
                  Ended December 31,****2004**
              
              **2003**
              
              **2002**Medicare
              
              
              48
              %
              
              
              
              54
              %
              
              
              
              49
              %Medicaid
                  and comparable programs
              
              
              8
              %
              
              
              
              8
              %
              
              
              
              9
              %Hospital
                  inpatient dialysis services
              
              
              6
              %
              
              
              
              7
              %
              
              
              
              10
              %Commercial
                  insurers and other private payors
              
              
              38
              %
              
              
              
              31
              %
              
              
              
              32
              %100
              %
              
              
              
              100
              %
              
              
              
              100
              %





Our
      medical service revenues are 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 service revenues (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,****2004**
              
              **2003**
              
              **2002**Outpatient
                  hemodialysis services
              
              $
              18,599
              
              
              46
              %
              
              $
              13,873
              
              
              47
              %
              
              $
              12,118
              
              
              48
              %Home
                  peritoneal dialysis services
              
              
              2,691
              
              
              7
              %
              
              
              1,294
              
              
              4
              %
              
              
              823
              
              
              3
              %Inpatient
                  hemodialysis services
              
              
              2,261
              
              
              5
              %
              
              
              2,114
              
              
              7
              %
              
              
              2,545
              
              
              10
              %Ancillary
                  services
              
              
              16,899
              
              
              42
              %
              
              
              12,395
              
              
              42
              %
              
              
              9,676
              
              
              39
              %$
              40,450
              
              
              100
              %
              
              $
              29,676
              
              
              100
              %
              
              $
              25,162
              
              
              100
              %








37


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.”





Dialysis
      Corporation of America ’s
      future
      growth depends primarily on the availability of suitable dialysis centers for
      development or acquisition in appropriate and acceptable areas, and our ability
      to manage the development costs for these potential dialysis centers while
      competing with larger companies, some of which are public companies or divisions
      of public companies with greater numbers of personnel and financial resources
      available for acquiring and/or developing dialysis centers in areas targeted
      by
      us. Additionally, there is intense competition for qualified nephrologists
      who
      would serve as medical directors of dialysis facilities, and be responsible
      for
      the supervision of those dialysis centers. 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. 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.











**Results
      of Operations**





The
      following table shows our results of operations (in thousands) and the
      percentage of medical service revenue represented by each line item for the
      periods presented:




38


**Year
                      Ended December 31,****2004**
                  
                  **2003**
                  
                  **2002**Medical
                      service revenue
                  
                  $
                  40,450
                  
                  
                  100.0
                  %
                  
                  $
                  29,676
                  
                  
                  100.0
                  %
                  
                  $
                  25,162
                  
                  
                  100.0
                  %Other
                      income
                  
                  
                  536
                  
                  
                  1.3
                  %
                  
                  
                  321
                  
                  
                  1.1
                  %
                  
                  
                  191
                  
                  
                  .8
                  %Total
                      operating revenues
                  
                  
                  40,986
                  
                  
                  101.3
                  %
                  
                  
                  29,997
                  
                  
                  101.1
                  %
                  
                  
                  25,353
                  
                  
                  100.8
                  %Cost
                      of medical services
                  
                  
                  23,546
                  
                  
                  58.2
                  %
                  
                  
                  18,221
                  
                  
                  61.4
                  %
                  
                  
                  15,067
                  
                  
                  59.9
                  %Selling,
                      general and administrative expenses
                  
                  
                  12,089
                  
                  
                  29.9
                  %
                  
                  
                  9,357
                  
                  
                  31.5
                  %
                  
                  
                  7,500
                  
                  
                  29.8
                  %Provision
                      for doubtful accounts
                  
                  
                  1,198
                  
                  
                  3.0
                  %
                  
                  
                  290
                  
                  
                  1.0
                  %
                  
                  
                  720
                  
                  
                  2.9
                  %Total
                      operating costs and expenses
                  
                  
                  36,833
                  
                  
                  91.1
                  %
                  
                  
                  27,868
                  
                  
                  93.9
                  %
                  
                  
                  23,287
                  
                  
                  92.6
                  %Operating
                      income
                  
                  
                  4,153
                  
                  
                  10.3
                  %
                  
                  
                  2,129
                  
                  
                  7.2
                  %
                  
                  
                  2,066
                  
                  
                  8.2
                  %Other,
                      net
                  
                  
                  35
                  
                  
                  .1
                  %
                  
                  
                  78
                  
                  
                  .3
                  %
                  
                  
                  33
                  
                  
                  .1
                  %Income
                      before income taxes, minority interestand
                      equity in affiliate earnings
                  
                  
                  4,188
                  
                  
                  10.4
                  %
                  
                  
                  2,207
                  
                  
                  7.4
                  %
                  
                  
                  2,099
                  
                  
                  8.3
                  %Income
                      tax provision
                  
                  
                  1,576
                  
                  
                  3.9
                  %
                  
                  
                  878
                  
                  
                  3.0
                  %
                  
                  
                  771
                  
                  
                  3.1
                  %Income
                      before minority interest andequity
                      in affiliate earnings
                  
                  
                  2,612
                  
                  
                  6.5
                  %
                  
                  
                  1,329
                  
                  
                  4.5
                  %
                  
                  
                  1,328
                  
                  
                  5.3
                  %Minority
                      interest in income ofconsolidated
                      subsidiaries
                  
                  
                  (681
                  )
                  
                  (1.7
                  %)
                  
                  
                  (223
                  )
                  
                  (.8
                  )%
                  
                  
                  (155
                  )
                  
                  (.6
                  )%Equity
                      in affiliate earnings
                  
                  
                  283
                  
                  
                  .7
                  %
                  
                  
                  44
                  
                  
                  .1
                  %
                  
                  
                  69
                  
                  
                  .3
                  %Net
                      income
                  
                  $
                  2,214
                  
                  
                  5.5
                  %
                  
                  $
                  1,150
                  
                  
                  3.9
                  %
                  
                  $
                  1,242
                  
                  
                  4.9
                  %





**2004
      Compared to 2003**





Operating
      income increased approximately $2,025,000 (95%) for the year ended December
      31,
      2004, compared to the preceding year. For this same period, income before income
      taxes, minority interest and equity in affiliate earnings increased $1,982,000
      (90%), and net income increased $1,064,000 (93%).







Medical
      service revenues increased approximately $10,773,000 (36%) for the year ended
      December 31, 2004, compared to the preceding year with the increase largely
      attributable to a 27% increase in total dialysis treatments performed by the
      company from 106,991 in 2003 to 135,667 in 2004. The increase in treatments
      resulted in an increase of approximately $6,270,000 (36%) in treatment revenues
      with a related increase of approximately $4,503,000 (36%) in ancillary service
      revenues. The five new centers we opened during 2004 and two Pennsylvania
      centers acquired in late August, 2004 contributed approximately $5,027,000
      of
      the increase in medical services revenues. The aggregate increase in medical
      service revenue reflects increased revenues of approximately $2,500,000 for
      our
      Pennsylvania dialysis centers, including revenues of $782,000 for our new
      Pottstown center and revenues of $750,000 for the two centers included in our
      acquisition of Keystone Kidney Care; increased revenues of $1,064,000 for our
      New Jersey centers; increased revenues of $1,548,000 for our Georgia centers;
      increased revenues of approximately $1,109,000 for our Maryland centers,
      including revenues of $305,000 for our new Rockville, Maryland center; increased
      revenues of approximately $1,361,000 for






39


our
      Ohio
      center; revenues of approximately $1,089,000 for our two new Virginia centers;
      and revenues of approximately $2,101,000 for our new South Carolina center.
      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 2003 made during 2004 were approximately
      $508,000 and adjustments for 2002 made in 2003 were approximately $59,000.
      Based
      on additional historical data, we would anticipate that a change in estimates
      would impact our December 31, 2004 accounts receivable by no more than 5%,
      which
      would not significantly impact our financial condition or results of
      operations.







Other
      operating income increased by approximately $216,000 for the year ended December
      31, 2004, compared to the preceding year. This includes a litigation settlement
      of $134,000 during 2004 and an increase in management fee income of $82,000,
      pursuant to management services agreements with our 40% owned Toledo, Ohio
      affiliate and an unaffiliated Georgia center.





Cost
      of
      medical services sales as a percentage of sales decreased to 58% for the year
      ended December 31, 2004, compared to 61% 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 revenues for the year ended December 31, 2004,
      and
      for the preceding year was derived from the administration of EPO to our
      dialysis patients. This drug is only available from one manufacturer in the
      United States. Price increases for this product without our ability to increase
      our charges would increase our costs and thereby adversely impact our earnings.
      We cannot predict the timing, if any, or extent of any future price increases
      by
      the manufacturer, or our ability to offset any such increases. Beginning this
      year, Medicare will reimburse dialysis providers for the top ten most utilized
      ESRD drugs at an amount equal to the cost of such drugs as determined by the
      Inspector General of HHS, with complimentary increases in the composite rate.
      Management believes these changes will have little impact on the company’s
      average Medicare revenue per treatment. See Item 1, “Business - Operations -
      Medicare Reimbursement.”





Selling,
      general and administrative expenses, those corporate and facility costs not
      directly related to the care of patients, including, among others,
      administration, accounting and billing, increased by approximately $2,731,000
      (29%) for the year ended December 30, 2004, compared to the preceding year.
      This
      increase reflects operations of our new dialysis centers in Pennsylvania, South
      Carolina, Virginia, and Maryland, and increased support activities resulting
      from expanded operations. Selling, general and administrative expenses as a
      percentage of medical services revenues decreased to approximately 30% for
      the
      ended December 31, 2004, compared to 31% for the preceding year, including
      expenses of new centers incurred prior to Medicare approval for which there
      were
      no corresponding medical service revenues. Selling, general and administrative
      expenses include bonuses for officers, directors and corporate counsel amounting
      to $475,000 for the year ended December 31, 2004 compared to $220,000 for the
      preceding year. See Item 11, “Executive Compensation.”




40


Provision
      for doubtful accounts increased approximately $908,000 for year ended December
      31, 2004, compared to the preceding year. Medicare bad debt recoveries of
      $213,000 were recorded during the year ended December 31, 2004, compared to
      approximately $326,000 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, 2004 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.






Largely
      due to collection delays resulting from the State of Georgia’s Medicaid program
      implementing a new computer system during 2003, we experienced a deterioration
      in our accounts receivable aging for our Georgia dialysis facilities resulting
      in an increase in days sales outstanding from 58 as of December 31, 2003 to
      70
      as of December 31, 2004. Days sales outstanding were also impacted by slower
      receivable turnover at our new centers opened during 2004, which was expected
      and is typical of new centers. Based on a detailed review, we determined that
      it
      was probable that we would not collect a portion of our Georgia Medicaid
      receivables. Our analysis enabled us to reasonably estimate that we would not
      collect approximately $413,000 of these receivables, which we therefore included
      in or allowance for doubtful accounts as of December 31, 2004.





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.





**Account
      Receivable Aging Schedule**





Fiscal
      2004





Dialysis
      Corporation of America and Subsidiaries





Classification
              
              December
              
              November
              
              October
              
              September
              
              August
                  plus
              
              prepayments
              
              TotalBLUE
                  CROSS
              
              $
              493,730.63
              
              $
              519,664.13
              
              $
              226,711.14
              
              $
              168,275.60
              
              $
              466,412.66
              
              
              
              
              $
              1,874,794.16COMMERCIAL
              
              
              436,252.77
              
              
              508,952.17
              
              
              280,125.13
              
              
              135,877.24
              
              
              454,164.84
              
              
              
              
              
              1,815,372.15HMO
              
              
              47,706.22
              
              
              54,905.99
              
              
              8,845.44
              
              
              -1,938.34
              
              
              -13,001.50
              
              
              
              
              
              96,517.81MEDICAID
              
              
              132,142.11
              
              
              259,339.87
              
              
              182,152.60
              
              
              73,130.23
              
              
              1,661,193.18
              
              
              
              
              
              2,307,957.99MEDICARE
              
              
              2,361,994.36
              
              
              274,399.52
              
              
              353,983.19
              
              
              132,543.98
              
              
              254,685.65
              
              
              
              
              
              3,377,606.70SELF
                  PAY
              
              
              6,642.85
              
              
              33,189.65
              
              
              36,383.07
              
              
              15,121.55
              
              
              371,459.83
              
              
              -27,642.74
              
              
              435,154.21HOSPITAL
              
              
              204,094.67
              
              
              114,864.13
              
              
              1,965.00
              
              
              
              
              
              
              
              
              
              
              
              320,923.80Total
              
              $
              3,682,563.61
              
              $
              1,765,315.46
              
              $
              1,090,165.57
              
              $
              523,010.26
              
              $
              3,194,914.66
              
              $
              -27,642.74
              
              $
              10,228,326.82


41




Fiscal
      2003





Dialysis
      Corporation of America and Subsidiaries





Classification
            
            December
            
            November
            
            October
            
            September
            
            August
                plus
            
            prepayments
            
            TotalBLUE
                CROSS
            
            $
            275,880.64
            
            $
            180,594.15
            
            $
            123,464.61
            
            $
            51,940.94
            
            $
            317,454.41
            
            $
            0.00
            
            $
            949,334.74COMMERCIAL
            
            
            306,016.35
            
            
            300,424.18
            
            
            63,135.12
            
            
            29,384.17
            
            
            227,314.19
            
            
            0.00
            
            
            926,274.01HMO
            
            
            13,194.48
            
            
            18,846.78
            
            
            2,703.46
            
            
            4,361.72
            
            
            46,052.28
            
            
            0.00
            
            
            85,158.72MEDICAID
            
            
            78,699.83
            
            
            144,327.98
            
            
            126,752.14
            
            
            95,538.25
            
            
            442,740.17
            
            
            0.00
            
            
            888,058.37MEDICARE
            
            
            1,767,821.02
            
            
            150,658.80
            
            
            98,366.05
            
            
            26,306.26
            
            
            224,882.90
            
            
            0.00
            
            
            2,268,035.03SELF
                PAY
            
            
            -427.56
            
            
            4,171.84
            
            
            22,836.34
            
            
            19,559.51
            
            
            201,593.36
            
            
            -15,398.39
            
            
            232,335.10OMNICARE
            
            
            72,417.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            72,417.00HOSPITAL
            
            
            180,915.08
            
            
            95,145.72
            
            
            3,834.20
            
            
            -2,835.10
            
            
            0.00
            
            
            0.00
            
            
            277,059.90Total
            
            $
            2,694,516.84
            
            $
            894,169.45
            
            $
            441,091.92
            
            $
            224,255.75
            
            $
            1,460,037.31
            
            $
            -15,398.39
            
            $
            5,698,672.87







Other
      non-operating income (expense) decreased approximately $11,000 for the year
      ended December 31, 2004, compared to the preceding year. This includes a
      decrease in interest income of $15,000, an increase in rental income of $1,000,
      a decrease in miscellaneous other income of $14,000 and a decrease in interest
      expense of $39,000 with the effect of reduced average non-inter-company
      borrowings more than offsetting an increase in average interest rates. Interest
      expense to our parent, Medicore, Inc., increased $54,000 for the year ended
      December 31, 2004 compared to the preceding year as a result of an increase
      in
      the intercompany advance payable to our parent and borrowings under a demand
      promissory note payable to our parent. The prime rate was 5.25% at December
      31,
      2004, and 4% at December 31, 2003. See Notes 1, 3 and 4 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 developmental 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.





We
      experienced same-center growth in total treatments of approximately 9% for
      the
      year ended December 31, 2004, compared to the preceding year, and same-center
      revenues grew approximately 20%. Management continues to search for ways to
      operate more efficiently and reduce costs through process improvements. In
      addition, we are reviewing technological improvements and intend to make capital
      investments to the extent we are confident such improvements will improve
      patient care and operating performance.





Minority
      interest represents the proportionate equity interests of minority owners of
      our
      subsidiaries whose financial results are included in our consolidated results.
      Equity in affiliate earnings represents our proportionate interest in the
      earnings of our 40% owned Ohio affiliate whose operating results improved for
      the year ended December 31, 2004, compared to the preceding year. See Notes
      1
      and 15 to “Notes to Consolidated Financial Statements.”








***2003
      Compared to 2002***





Medical
      service revenues increased approximately $4,514,000 (18%) for the year ended
      December 31, 2003, compared to the preceding year with the increase largely
      attributable to a 14% increase in total dialysis treatments performed by us
      from
      93,445 in 2002 to 106,991 in 2003. This




42


increase
      reflects increased revenues of approximately $1,998,000 for our Pennsylvania
      dialysis centers, decreased revenues of $95,000 for our New Jersey centers
      reflecting termination of our two New Jersey acute care contracts during 2002;
      increased revenues of $674,000 for our Georgia centers, revenues of
      approximately $1,255,000 for our new Maryland center; revenues of approximately
      $709,000 for our new Ohio center; and a decrease in consulting and license
      income of approximately $27,000.





Other
      operating income increased by approximately $129,000 for the year ended December
      31, 2003, compared to the preceding year. This increase represents increased
      management fee income pursuant to management services agreements with our 40%
      owned Toledo, Ohio affiliate and unaffiliated Georgia center with which we
      entered a management services agreement effective September 2002.





Cost
      of
      medical services sales as a percentage of sales increased to 61% for the year
      ended December 31, 2003, compared to 60% for the preceding year which increase
      is primarily attributable to costs for treatments at new dialysis centers prior
      to Medicare approval of those centers for which there were no corresponding
      medical service revenues; increases in the cost of EPO as a percentage of EPO
      sales revenues; and increases in the cost of professional liability
      insurance.





The
      cost
      of our professional liability insurance coverage increased by $43,000 or 62%
      for
      the year ended December 31, 2003, compared to the preceding year. While a
      portion of this increase is attributable to our new centers and overall increase
      in treatments, a substantial portion of the cost increase relates to the general
      market conditions for professional liability coverage of reduced availability
      and higher costs for this coverage. Continued cost increases for professional
      liability coverage could adversely impact our earnings.





Approximately
      28% of our medical services revenues for the year ended December 31, 2003 was
      derived from the administration of EPO to our dialysis patients compared to
      26%
      for the preceding year. This drug is only available from one manufacturer in
      the
      United States which raised the price for its product in January, 2003. Continued
      price increases for this product without our ability to increase our charges
      would increase our costs and thereby adversely impact our earnings. We cannot
      predict the timing, if any, or extent of any future price increases by the
      manufacturer, or our ability to offset any such increases.





Selling,
      general and administrative expenses, those corporate and facility costs not
      directly related to the care of patients, including, among others,
      administration, accounting and billing, increased by approximately $1,857,000
      for the year ended December 31, 2003, compared to the preceding year. This
      increase reflects operations of our new dialysis centers in Ohio and Maryland,
      and increased support activities resulting from expanded operations. Selling,
      general and administrative expenses as a percentage of medical services revenues
      increased to approximately 32% for the year ended December 31, 2003, compared
      to
      30% for the preceding year, including patient treatment expenses of new centers
      incurred prior to Medicare approval for which there were no corresponding
      medical service revenues.





Provision
      for doubtful accounts decreased approximately $430,000, largely as a result
      of
      Medicare bad debt recoveries of approximately $341,000 during 2003 compared
      to
      approximately $52,000 for the preceding year. Without the effect of the Medicare
      bad debt recoveries the provision would have amounted to 2% of sales for the
      year ended December 31, 2003 compared to 3% for the preceding year. This change
      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




43


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.





Other
      non-operating income (expense) increased approximately $52,000 for the year
      ended December 31, 2003, compared to the preceding year. This includes an
      increase in interest income of $10,000, an increase in rental income of $16,000,
      an increase in miscellaneous other income of $6,000 and a decrease in interest
      expense of $20,000 reflecting reduced average interest rates and reduced average
      non-inter-company borrowings during the year ended December 31, 2003, compared
      to the preceding year. The prime rate was 4.00% at December 31, 2003 and 4.25%
      at December 31, 2002. See Notes 1,3, and 4 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 developmental stage and, accordingly, their
      operating results adversely impact our overall results of operations until
      they
      achieve a patient count sufficient to sustain profitable
      operations.





We
      experienced same-center growth in total treatments of approximately 7% in 2003,
      and same-center revenues grew approximately 9% in fiscal 2003. Management
      continues to search for ways to operate more efficiently and reduce costs
      through process improvements. In addition, we are reviewing technological
      improvements and intend to make capital investments to the extent we are
      confident such improvements will improve patient care and operating
      performance.





Interest
      expense decreased by approximately $17,000 for the year ended December 31,
      2003,
      compared to the preceding year, reflecting lower interest rates on variable
      rate
      debt and reduced average borrowings by us.





Minority
      interest represents the proportionate equity interests of minority owners of
      our
      subsidiaries whose financial results are included in our consolidated results.
      The increase in minority interest resulted from financial improvements of the
      related subsidiaries.





Equity
      in
      affiliate earnings represents our proportionate interest in the earnings of
      our
      40% owned Ohio affiliate.





The
      prime
      rate was 4.00% at December 31, 2003 and 4.25% at December 31, 2002.





Accrued
      compensation of $186,000 was bonused to the board of directors relating to
      the
      exercise of a portion of their outstanding stock options, amounting to an
      aggregate of 95,619 shares acquired at exercise prices ranging from $1.25 to
      $1.50.








**Liquidity
      and Capital Resources**





Working
      capital totaled approximately $3,644,000 at December 31, 2004, which reflected
      a
      decrease of $129,000 (3%) during the current year. Included in the changes
      in
      components of working capital was a decrease in cash and cash equivalents of
      $914,000, which included net cash provided by operating activities of
      $3,015,000; net cash used in investing activities of $4,605,000 (including
      additions to property and equipment of $3,132,000, acquisition payments to
      a
      minority member in two of our subsidiary dialysis centers for the remaining
      balance due of $670,000 to acquire an aggregate of 30% of




44


such
      member’s interest in each of such subsidiaries, a net cash expenditure of
      $758,000 on acquisition of Keystone Kidney Care, distributions of $97,000
      received from our 40% owned Ohio affiliate, and loans of $125,000 to physician
      affiliates); and net cash provided by financing activities of $677,000
      (including an increase in advances payable to our parent of $215,000, notes
      payable to our parent of $1,435,000, debt repayments of $715,000, distributions
      to subsidiary minority members of $436,000, receipts of $5,000 from the exercise
      of stock options and capital contributions of $172,000 by a subsidiary minority
      member). See Notes 1 and 13 to “Notes to Consolidated Financial
      Statements.”







Net
      cash
      provided by operating activities consists of net income before non-cash items
      consisting of depreciation and amortization of $1,499,000, bad debt expense
      of
      $1,198,000, deferred income taxes of $192,000, income applicable to minority
      interest of $681,000, and equity in affiliate earnings of $283,000, as adjusted
      for changes in components of working capital, primarily an increase in accounts
      receivable of $4,661,000, and an increase in accrued expenses of $1,839,000
      (including an increase of $1,167,000 in “due to insurance companies”). 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 development loan for our
      Vineland, New Jersey subsidiary, which loan is guaranteed by us. This loan
      had a
      remaining principal balance of $610,000 at December 31, 2004 and $636,000 at
      December 31, 2003. In April, 2001, we obtained a $788,000 five-year mortgage
      on
      our building in Valdosta, Georgia, which had an outstanding principal balance
      of
      approximately $675,000 at December 31, 2004 and $715,000 at December 31, 2003.
      See Note 2 to “Notes to Consolidated Financial Statements.”





We
      have
      an equipment financing agreement for kidney dialysis machines for our
      facilities, which had an outstanding balance of approximately $814,000 at
      December 31, 2004, and $1,321,000 at December 31, 2003. There was no additional
      equipment financing under this agreement during 2004. See Note 2 to “Notes to
      Consolidated Financial Statements.”





During
      2004, we borrowed approximately $1,435,000 under a demand promissory note to
      our
      parent primarily to develop new dialysis centers, for dialysis equipment
      purchases and for the initial payment of our acquisition of Keystone Kidney
      Care. See Note 4 to “Notes to Consolidated Financial Statements.”





We
      opened
      centers in Ashland, Virginia; Warsaw, Virginia; Aiken, South Carolina;
      Pottstown, Pennsylvania; and Rockville, Maryland during 2004, and acquired
      Keystone Kidney Care effective as of the close of business on August 31, 2004.
      We are in the process of developing a new dialysis center in each of Maryland
      and Ohio, and three new dialysis centers in South Carolina. Payment of the
      balance due of $670,000 on the purchase of minority interests in two of our
      Georgia dialysis centers was made during the second quarter of 2004. Payment
      of
      $761,000 was made September 1, 2004 on our Keystone Kidney Care acquisition.
      See
      Note 10 to “Notes to Consolidated Financial Statements.”





On
      March
      15, 2005, the company and its parent, Medicore, Inc., issued a joint press
      release announcing their agreement to terms for a merger of Medicore into the
      company. The proposed merger is subject to finalizing an Agreement and Plan
      of
      Merger, the receipt of satisfactory tax and fairness opinions, the filing of
      a
      registration statement containing a proxy statement/prospectus with the SEC,
      and
      the approval of shareholders of each of Medicore and our company. This
      transaction will enable the control interest in the company to be in the hands
      of the public stockholders and provide the company with additional capital
      resources to expand. See Item 1, “Business - Recent Developments,” and Note 16
      to “Notes to Consolidated Financial Statements.”





45


Capital
      is needed primarily for the development of outpatient dialysis centers. The
      construction of a 15 station facility, typically the size of our dialysis
      facilities, costs in the range of $750,000 to $1,000,000, depending on location,
      size and related services to be provided, which includes equipment and initial
      working capital requirements. Acquisition of an existing dialysis facility
      is
      more expensive than construction, although acquisition would provide us with
      an
      immediate ongoing operation, which most likely would be generating income.
      Although our expansion strategy focuses primarily on construction of new
      centers, we have expanded through acquisition of dialysis facilities and
      continue to review potential acquisitions. Development of a dialysis facility
      to
      initiate operations takes four to six months and usually up to 12 months or
      longer to generate income. We consider some of our centers to be in the
      developmental stage since they have not developed a patient base sufficient
      to
      generate and sustain earnings.





We
      are
      seeking to expand our outpatient dialysis treatment facilities and inpatient
      dialysis care and are presently in different phases of negotiations with
      physicians for the development of additional outpatient centers. Such expansion
      requires capital. We have been funding our expansion through internally
      generated cash flow and financing from our parent, Medicore, Inc. See Notes
      3
      and 5 to “Notes to Consolidated Financial Statements.” Our future expansion may
      require us to seek outside financing. While we anticipate that financing will
      be
      available either from a financial institution or our parent company, including
      the proposed merger of our parent with our company providing us with cash of
      at
      least approximately $4 million to $5 million (see Item 1, “Business - Recent
      Developments”), no assurance can be given that we will be successful in
      implementing our growth strategy or that adequate financing will be available
      to
      support our expansion. See Item 1, “Business-Business Strategy.”








**Aggregate
      Contractual Obligations**





As
      of
      December 31, 2004, the Company’s 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
              
              $
              2,099
              
              $
              513
              
              $
              1,586
              
              $
              ---
              
              $
              ---Note
                  payable to Medicore
              
              
              1,435
              
              
              1,435
              
              
              ---
              
              
              ---
              
              
              ---Operating
                  leases
              
              
              8,841
              
              
              1,426
              
              
              2,857
              
              
              2,408
              
              
              2,150Advances
                  from parent
              
              
              449
              
              
              ---
              
              
              449
              
              
              ---
              
              
              ---Acquisition
                  liability:Current
              
              
              380
              
              
              380
              
              
              ---
              
              
              ---
              
              
              ---Non-current
              
              
              380
              
              
              ---
              
              
              380
              
              
              ---
              
              
              ---Total
                  acquisition liability
              
              
              760
              
              
              380
              
              
              380
              
              
              ---
              
              
              ---Expected
                  interest payments:Long-term
                  debt
              
              
              243
              
              
              132
              
              
              111
              
              
              ---
              
              
              ---Note
                  payable to Medicore
              
              
              108
              
              
              108
              
              
              ---
              
              
              ---
              
              
              ---Advances
                  from parent
              
              
              14
              
              
              ---
              
              
              14
              
              
              ---
              
              
              ---365
              
              
              240
              
              
              125
              
              
              ---
              
              
              ---Purchase
                  obligations:Medical
                  services
              
              
              5,405
              
              
              1,037
              
              
              1,556
              
              
              1,392
              
              
              1,420Construction
                  contracts
              
              
              28
              
              
              28
              
              
              ---
              
              
              ---
              
              
              ---Total
                  purchase obligations
              
              
              5,433
              
              
              1,065
              
              
              1,556
              
              
              1,392
              
              
              1,420Total
                  contractual obligations
              
              $
              19,382
              
              $
              5,059
              
              $
              6,953
              
              $
              3,800
              
              $
              3,570







46


**New
      Accounting Pronouncements**





In
      November , 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      151, “Inventory Costs”, an amendment of ARB No. 43, Chapter 4 (“FAS 151”). FAS
      151 requires companies to recognize as current-period charges abnormal amounts
      of idle facility expense, freight, handling costs, and wasted materials
      (spoilage). FAS 151 is effective for inventory costs incurred during fiscal
      years beginning after June 15, 2005. The company does not expect FAS 151 to
      have
      a significant effect on its consolidated financial statements. See Note 1 to
      “Notes to Consolidated Financial Statements.”





In
      December, 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      153, “Exchanges of Non-monetary Assets”, an amendment of APB Opinion No. 29
      (“FAS 153”). The amendments made by FAS 153 are intended to assure that
      non-monetary exchanges of assets that are commercially substantive are based
      on
      the fair value of the assets exchanged. FAS 153 is effective for non-monetary
      assets exchanges occurring in fiscal periods beginning after June 15, 2004.
      The
      company does no expect FAS 153 to have a significant effect on its financial
      statements.





In
      December 16, 2004, the Financial Accounts Standards Board (FASB) issued
      Statement of Financial Accounting Standards No. 123 (revised), “Share-Based
      Payment” (FAS 123®”). FAS 123® requires companies to recognized the fair value
      of stock option grants as a compensation costs in their financial statements.
      Public entities, other than small business issuers, will be required to apply
      FAS 123® in the first interim or annual reporting period that begins after June
      15, 2005. The company will be subjects to the provisions of FAS 123® effective
      July 1, 2005. In addition to stock options granted after the effective date,
      companies will be 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 (as previously disclosed in the notes to the
      financial statements) with the cost invested options later recognized over
      the
      vesting period of the options. The company is in the process of determining
      the
      impact that FAS 123® will have on its consolidated financial
      statements.








**Critical
      Accounting Policies and Estimates**





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





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      judgments and estimates. On an on-going basis, we evaluate our estimates, the
      most significant of which include establishing allowances for doubtful accounts,
      a valuation allowance for our deferred tax assets and determining the
      recoverability of our long-lived assets. The basis for our estimates are
      historical experience and various assumptions that are believed to be reasonable
      under the circumstances, given the available information at the time of the
      estimate, the results of which form the basis for making judgments about the
      carrying values of assets and liabilities that are not readily available from
      other sources. Actual results may differ from the amounts estimated and recorded
      in our financial statements.





We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements.





47


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 ERSD 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.







In
      those
      situations where a patient’s insurance fee schedule cannot be readily
      determined, which typically occurs with out of network providers, we estimate
      fees based on our knowledge base of historical data for patients with similar
      insurance plans. Our internal controls, including an ongoing review and
      follow-up on estimated fees, allows us to make necessary changes to estimated
      fees on a timely basis. When the actual fee schedule is determined, we adjust
      the amounts originally estimated, and then use the actual fees to estimate
      fees
      for similar future situations. We adhere to the guidelines of SAB Topic 13
      (SAB
      104) in regard to recording reasonable estimates of revenue based on our
      historical experience and identifying on a timely basis necessary changes to
      estimates.





Allowance
      for Doubtful Accounts : We
      maintain an allowance for doubtful accounts for estimated losses resulting
      from
      the inability of our patients or their insurance carriers to make required
      payments. Based on historical information, we believe that our allowance is
      adequate. Changes in general economic, business and market conditions could
      result in an impairment in the ability of our patients and the insurance
      companies to make their required payments, which would have an adverse effect
      on
      cash flows and our results of operations. The allowance for doubtful accounts
      is
      reviewed monthly and changes to the allowance are updated based on actual
      collection experience. We use a combination of percentage of sales and the
      aging
      of accounts receivable to establish an allowance for losses on accounts
      receivable. We adhere to the guidelines of SFAS 5 in determining reasonable
      estimates of accounts for which uncollectibility is possible.







Valuation
      Allowance for Deferred Tax Assets: The carrying value of deferred tax assets
      assumes that we will be able to generate sufficient future taxable income to
      realize the deferred tax assets based on estimates and assumptions. If these
      estimates and assumptions change in the future, we may be required to adjust
      our
      valuation allowance for deferred tax assets which could result in additional
      income tax expense.





Long-Lived
      Assets: We state our property and equipment at acquisition cost and compute
      depreciation for book purposes by the straight-line method over estimated useful
      lives of the assets. In accordance with SFAS No. 144, “Accounting for the
      Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for
      impairment whenever events or changes in circumstances indicate the carrying
      amount of the asset may not be recoverable. Recoverability of assets to be
      held
      and used is measured by comparison of the carrying amount of an asset to the
      future cash flows expected to be generated by the asset. If the carrying amount
      of the asset exceeds its estimated future cash flows, an impairment charge
      is
      recognized to the extent the carrying amount of the asset exceeds the fair
      value
      of the asset. These computations are complex and subjective.





48


Goodwill
      and Intangible Asset Impairment: In assessing the recoverability of our goodwill
      and other intangibles we must make assumptions regarding estimated future cash
      flows and other factors to determine the fair value of the respective assets.
      This impairment test requires the determination of the fair value of the
      intangible asset. If the fair value of the intangible asset is less than its
      carrying value, an impairment loss will be recognized in an amount equal to
      the
      difference. If these estimates or their related assumptions change in the
      future, we may be required to record impairment charges for these assets. We
      adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets,” (FAS 142) effective January 1, 2002, and are required to
      analyze goodwill and indefinite lived intangible assets for impairment on at
      least an annual basis.








**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 $592,000 at December 31, 2004.





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 $1,285,000 at December 31, 2004, and our demand
      promissory note payable to our parent, Medicore, which amounted to approximately
      $1,435,000 at December 31, 2004 and $2,435,000 at March 25, 2005.





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 $17,000 on our results of
      operations for the year ended December 31, 2004.





We
      do not
      utilize financial instruments for trading or speculative purposes and do not
      currently use interest rate derivatives.








49


**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.”








**Item
      9. Changes in and Disagreements With Accountants on Accounting and Financial
      Disclosure**





None








**Item
      9A. Controls and Procedures**





(a)  Evaluation
      of Disclosure Controls and Procedures .







As
      of the
      end of the period covered by this Annual Report on Form 10-K for the year ended
      December 31, 2004, we carried out an evaluation, under the supervision and
      with
      the participation of our management, including our President and Chief Executive
      Officer, and the Chief Financial Officer, of the effectiveness of the design
      and
      operation of our disclosure controls and procedures pursuant to Rule 13a-15
      of
      the Securities Exchange Act of 1934 (the “Exchange Act”), which 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 Chief Executive Officer, and our Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure. Based upon such evaluation, our President and Chief Executive
      Officer, 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.







(b)  Changes
      in Internal Control .





There
      were no changes in our internal control over financial reporting that occurred
      during fiscal 2004 or subsequent to the evaluation as described in subparagraph
      (a) above that materially affected, or are reasonably likely to materially
      affect, our control over financial reporting.








**Item
      9B. Other Information**





To
      the
      best of our knowledge, we have reported all information required to be disclosed
      in our current reports on Form 8-K during the fourth quarter of our fiscal
      year,
      2004.








50


**PART
      III**





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





Below
      are
      the names, ages, positions held with the company, business experience and
      related information for our directors and executive officers. Executive officers
      are appointed each year by our board of directors at its first meeting following
      the annual meeting of shareholders, to serve during the ensuing year. There
      are
      no family relationships between any of our executive officers and
      directors.





Name
              
              Age
              
              Position
              
              Held
                  SinceThomas
                  K. Langbein
              
              59
              
              Chairman
                  of the Board
              
              1980Stephen
                  W. Everett
              
              48
              
              Chief
                  Executive Officer
              
              2003President
                  and director
              
              2000J.
                  Michael Rowe
              
              43
              
              Vice
                  President of Operations
              
              2002Don
                  Waite
              
              50
              
              Vice
                  President of Finance andChief
                  Financial Officer
              
              August
                  16, 2004Daniel
                  R. Ouzts
              
              58
              
              Vice
                  President, Treasurer and
              
              1996Chief
                  Accounting OfficerRobert
                  W. Trause*
              
              62
              
              Director
              
              1998Alexander
                  Bienenstock*
              
              67
              
              Director
              
              2001Peter
                  D. Fischbein*
              
              65
              
              Director
              
              June
                  3, 2004


_______________


*  Member
      of
      the company’s Audit, Compensation and Nominating Committees





*Thomas
      K. Langbein* has been
      affiliated with the company since 1980. He is Chairman of the Board and was
      Chief Executive Officer of the company until May 29, 2003, when that position
      was relinquished to Stephen W. Everett, President of the company. Mr. Langbein
      is the Chairman of the Board, Chief Executive Officer and President of Medicore,
      our parent. Mr. Langbein is President, sole shareholder and director of Todd
      & Company, Inc., a broker-dealer, currently not active, registered with the
      SEC and a member of the NASD. Mr. Langbein was appointed as a director of Linux
      Global Partners, Inc. a private Linux software company in which Medicore, in
      January, 2000, acquired an ownership interest and to which company our parent
      provided loans, with funding from our company. He resigned as a Linux director
      in November, 2002. See Item 13, “Certain Relationships and Related
      Transactions.”





*Stephen
      W. Everett* has been
      involved in the healthcare industry for over 25 years, primarily responsible
      for
      oversight, deal structuring, physician recruitment and practice management
      in
      the renal healthcare field. He joined the company in November, 1998 as Vice
      President, became Executive Vice President in June, 1999, President on March
      1,
      2000, and Chief Executive Officer on May 29, 2003.




51


*Michael
      Rowe* became
      affiliated with the company on June 1, 2001. Mr. Rowe has been involved in
      the
      healthcare field for 21 years, recently, from January, 2000 to March, 2001,
      with
      Advanced Orthopedic Centers, Inc., a large orthopedic surgery group, as
      administrator, and from February, 1997 to December, 1999, he was Executive
      Director and Vice President of Virginia Physicians/PhyCor of Richmond, a
      division of PhyCor, Inc., a national practice management company.





*Don
      Waite* joined
      the company on August 16, 2004. From 1999 to 2004, Mr. Waite was Vice President
      and Partner of Nephrology Specialty Group, Inc., which established and operated
      a small chain of outpatient dialysis clinics, which it sold in 2004 to an
      international dialysis services company.







*Daniel
      R. Ouzts* served
      as controller of the company from 1983 through January, 2002, and Vice President
      and Treasurer from 1996 to January, 2002, and July, 2003 to August 16, 2004,
      on
      which date he ceased being the company’s Chief Financial Officer. Mr. Ouzts is
      the Chief Accounting Officer of the company. He serves as Vice President of
      Finance (since 1986), Treasurer (since 1983) and Principal Financial Officer
      (since 1995) of Medicore. Mr. Ouzts is a certified public accountant. See Item
      13, “Certain Relationships and Related Transactions.”







*Robert
      W. Trause* is a
      senior commercial account specialist engaged in the marketing of commercial
      insurance specializing in property and casualty insurance sales to mid-to-large
      range companies. He has been affiliated with an insurance agency in New Jersey
      since 1991.





*Alexander
      Bienenstock* is an
      attorney who has specialized in securities and corporate matters for over 30
      years. From September, 2000 through October, 2001 he was a legal consultant
      with
      IDT Corp., a NYSE telecommunications company. He had been affiliated with
      several law firms, and is currently a sole practitioner and real estate broker.
      Mr. Bienenstock’s background includes having been an adjunct assistant professor
      in accounting and management at New York University, and, for approximately
      10
      years, Chief Attorney, Branch of Small Issues of the New York Regional Office
      of
      the SEC.





*Peter
      D. Fischbein* is an
      attorney and is a director of Medicore, which position he has held since 1984.
      He is a member of Medicore’s Audit, Nominating and Compensation Committees. Mr.
      Fischbein was a director of Viragen, Inc., a public company and former
      subsidiary of Medicore from 1981 to 2002. See Item 13, “Certain Relationships
      and Related Transactions.”





There
      are
      no family relationships among any of the officers or directors of the
      company.








**Corporate
      Governance**





Our
      board
      of directors oversees the business and affairs of the company and monitors
      the
      performance of management. The board does not involve itself in day-to-day
      operations. The board is kept apprised through discussions with the Chairman,
      other directors, executives, the Audit, Nominating and Compensation Committees,
      division heads, advisors, including counsel, outside auditors, investment
      bankers and other consultants, by reading reports, contracts, rules and
      legislation, and other materials sent to them, and by participating in board
      and
      committee meetings.





52


Our
      board
      and management have a commitment to sound and effective corporate governance
      practices. We have established and maintain a Compliance Program to prevent
      and
      detect violations commonly known in healthcare industry as “fraud and abuse”
      laws. We also have established a Code of Ethics and Business Conduct to continue
      our tradition of adhering to the most rigorous standards of ethics and
      integrity. Our Code of Ethics applies to all our employees as well as to our
      principal executive officers, chief financial officer, principal accounting
      officer, and persons performing similar functions. Our Code of Ethics is
      reviewed and updated as necessary. We will provide to any person, without
      charge, upon request, a copy of our Code of Ethics by contacting our corporate
      Secretary, Lawrence E. Jaffe, Esq., at Jaffe & Falk, LLC, 777 Terrace
      Avenue, Hasbrouck Heights, New Jersey 07604, telephone no. (201) 288-8282 or
      email, lej@jaffefalkllc.com.





The
      board
      of directors has an Audit Committee, Nominating and Compensation Committees,
      each of which consists of the same independent directors. The board has two
      other non-independent members and our by-laws provide for up to nine directors
      in order to have positions available for other independent directors. We are
      a
      Controlled Company as that term is defined in The Nasdaq Stock Market Rule
      4350(c)(5), since our parent, Medicore, owns approximately 56% of our voting
      securities. Therefore, we are exempt from the Nasdaq listing requirements to
      have a board composed of a majority of independent directors, and compensation
      and nominating committees comprised solely of independent directors. However,
      we
      believe in the corporate governance provisions of the SEC and Nasdaq, and,
      therefore, we have established these committees consisting of independent
      directors.





*Audit
      Committee*





In
      accordance with Nasdaq Stock Market Rule 4350(d), we have an Audit Committee
      of
      three members, all of whom are independent as defined in Nasdaq Stock Market
      Rule 4200(a)(15) and who meet the criteria of independence set forth in Rule
      10A-3(b)(1) under the Exchange Act, have not participated in the preparation
      of
      the company’s financial statements at any time during the past three years, and
      are able to read and understand fundamental financial statements, including
      the
      company’s balance sheet, income statement and cash flow statement. Alex
      Bienenstock, Chairman of the Audit Committee, has experience in finance and
      accounting, and the background which was the basis for the board’s determination
      that Mr. Bienenstock is an “audit committee financial expert” as defined in Item
      401(h) of Regulation S-K under the Exchange Act. To review Mr. Bienenstock’s
      credentials, reference is made to “Directors and Executive Officers of the
      Registrant” above. The designation of Mr. Bienenstock as the Audit Committee
      financial expert does not impose on him any duty, obligation or liability that
      is greater than any duty, obligation or liability imposed on such person as
      a
      member of the Audit Committee and board of directors. The other members of
      our
      Audit Committee are Robert Trause, and Peter D. Fischbein. Mr. Fischbein is
      an
      independent board member of our parent and is a member of Medicore’s Audit and
      Compensation Committees.





The
      Audit
      Committee, a very essential oversight committee, pursuant to its charter
      provides assistance to the board in fulfilling its responsibilities to our
      shareholders and the investment community relating to accounting, reporting
      practices, the quality and integrity of our financial reports, and surveillance
      of internal controls and accounting and auditing services. The charter
      specifies:





·
            the
                scope of the Audit Committee’s
                responsibilities


·
            how
                the Audit Committee carries out those
                responsibilities


·
            structure,
                processes and membership
                requirements





The
      Audit
      Committee does not prepare financial statements or perform audits, and its
      members are not auditors or certifiers of the company’s financial statements.





53


*Shareholder
      Nominee Procedure*





There
      have been no material changes to the procedures by which security holders may
      recommend nominees to our board of directors as we have described in our
      information statement dated April 27, 2004, under the caption “Information About
      Directors and Executive Officers - Other Nominees.”





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our directors, executive officers and 10%
      shareholders to file reports with the SEC, the Nasdaq Stock Market and our
      company, indicating their beneficial ownership of common stock of the company
      and any changes in their beneficial ownership. As a matter of practice, our
      counsel usually assists the officers and directors in preparing the beneficial
      ownership reports and reporting changes in beneficial ownership. Counsel will
      usually handle the filing of those beneficial ownership reports. The rules
      of
      the SEC require that we disclose failed or late filings of reports of company
      stock ownership by our directors and executive officers. To the best of our
      knowledge, and based solely on review of such forms filed with the company,
      all
      beneficial ownership reports by these reporting persons for the year 2004 were
      filed on a timely basis, except one report by Alexander Bienenstock, filed
      two
      days late, and two reports by Bart Pelstring, both filed late, one report by
      one
      day. Mr. Pelstring resigned as a director effective January 1,
      2005.





**Item
      11. Executive Compensation**





The
      Summary Compensation Table below sets forth compensation paid by the company
      and
      its subsidiaries for the last three fiscal years ended December 31, 2004 for
      services in all capacities for its Chairman of the Board, who was Chief
      Executive Officer through May 29, 2003, and for its Chief Executive Officer
      and
      each of its executive officers whose total annual salary, bonus or other
      compensation exceeded $100,000.





**Summary
      Compensation Table**




Long
                  TermAnnual
                  Compensation
              
              Compensation
                  Awards(a)
              
              
              (b)
              
              
              (c)
              
              (d)
              
              (e)
              
              (g)SecuritiesOther
                  Annual
              
              UnderlyingName
                  and
              
              
              
              
              
              Salary
              
              Bonus
              
              Compensation
              
              Options/SARs
                  (#)Principal
                  Position
              
              
              Year
              
              
              ($)
              
              ($)
              
              ($)
              
              Company
              
              MedicoreThomas
                  K. Langbein, CEO(1)
              
              
              2004
              
              
              
              86,960
              (2)
              
              
              100,000
              (3)
              
              
              5,987
              (4)
              
              
              50,000
              (5)2003
              
              
              
              83,308
              (2)
              
              
              87,200
              (6)
              
              
              5,611
              (4)2002
              
              
              
              73,367
              (2)
              
              
              58,929
              (7)
              
              
              7,687
              (4)Stephen
                  W. Everett, Pres.
              
              
              2004
              
              
              
              179,692
              (8)
              
              
              250,000
              (9)
              
              
              7,783
              (10)
              
              
              50,000
              (5)and
                  CEO(1)
              
              
              2003
              
              
              
              168,923
              (8)
              
              
              117,078
              (11)
              
              
              2,338
              (10)2002
              
              
              
              129,808
              (8)
              
              
              85,714
              (12)
              
              
              4,179
              (10)J.
                  Michael Rowe, Vice
              
              
              2004
              
              
              
              147,754
              (8)
              
              
              50,000
              (9)
              
              
              811
              (13)
              
              
              25,000
              (14)President
                  (Operations)
              
              
              2003
              
              
              
              139,462
              (8)
              
              
              25,000
              (15)
              
              
              768
              (13)
              
              
              50,000
              (16)2002
              
              
              
              115,539
              (8)
              
              
              20,000
              (17)
              
              
              740
              (13)Don
                  Waite, Vice President
              
              
              2004
              
              
              
              41,538
              (8)
              
              
              8,000
              (9)
              
              
              -0-
              
              
              
              50,000
              (19)(Finance)
                  and ChiefFinancial
                  Officer(18)






54


_______________





(1)
            Thomas
                K. Langbein was CEO until May 29, 2003, at which time Stephen W.
                Everett
                assumed that position.





(2)
            Annual
                compensation paid by Medicore, which was $347,838, $333,200 and $293,500,
                respectively, for fiscal 2004, 2003 and 2002. Amounts included in
                the
                Summary Compensation Table reflect the compensation allocated to
                the
                company in proportion to the time spent on its
                behalf.





(3)
            Director
                fee accrued in 2004 and paid in February,
                2005





(4)
            Automobile
                allowance and related expenses, and life and disability insurance
                premiums
                paid by Medicore amounted to $33,626, $30,200 and $30,700, respectively
                for 2004, 2003 and 2002. As part of the general corporate overhead
                allocation, the amounts in the Summary Compensation Table reflect
                the
                portion of such payment which is allocated to the
                company.




(5)
              Vests 12,500 shares every June 7, commencing June
                7, 2005
                to June 7, 2008.





(6)
            Accrued
                in 2003 and paid in February, 2004 as a director fee. Includes $56,258
                for
                the partial exercise of options and $30,942 cash.





(7)
            Includes
                (i) $46,429 accrued in 2002 and paid in March, 2003 for the partial
                exercise of options; and (ii) $12,500, the general corporate overhead
                allocable portion of Medicore’s bonus of $50,000 accrued in 2002 and paid
                in January, 2003.




(8)
              All compensation paid by the
                company.




(9)
              Accrued
                  in 2004 and paid in February,
                  2005.




(10)
            Includes
                automobile related expenses of $5,329 and $1,957, respectively for
                2004
                and 2002, and life insurance premiums of $2,454, $2,338 and $2,000,
                respectively, in 2004, 2003 and 2002, all of which were paid by the
                company.





(11)
            Includes
                (i) a bonus accrued in 2003 and paid in February, 2004 relating to
                the
                exercise of director stock options which included the payment of
                the $.625
                exercise price for 69,242 shares exercised under Mr. Everett’s options
                (valued at $43,276) together with a related cash distribution to
                Mr.
                Everett of $23,802; and (ii) a cash bonus of $50,000 accrued in 2003
                and
                paid in January, 2004.





(12)
            Includes
                (i) $35,714 accrued in 2002 and paid in March, 2003 for the partial
                exercise of options; and (ii) bonus of $50,000 accrued in 2002 and
                paid in
                January, 2003.


(13)
              Life insurance
                premiums.


55
 (14)
              Vests 6,250 shares every June 7, commencing June
                7, 2005
                to June 7, 2008.
 
 (15)
              Accrued
                  in 2003 and paid in January,
                  2004.


(16)
              Vests
                12,500 shares every June 4, commencing June 4, 2004 to June 4,
                2007.


(17)
              Accrued
                  in 2002 and paid in January, 2003.
 
 (18)
              Joined
                  the company effective August 16,
                  2004.





(19)
            Vests
                12,500 shares every August 15, commencing August 15, 2005 to August
                15,
                2008; any accelerated vesting for change in control prior to August
                15,
                2005, this option accelerates only for 12,500
                shares.







**Option/SAR
      Grants In Last Fiscal Year**




Individual
                  Grants
              
              
              Potential
                  RealizableNumber
                  of
              
              
              %
                  of Total
              
              
              
              
              
              
              
              
              Value
                  at AssumedSecurities
              
              
              Options/SARs
              
              
              Exercise
              
              
              
              
              
              Annual
                  Rates of StockUnderlying
              
              
              Granted
                  to
              
              
              or
                  Base
              
              
              
              
              
              Price
                  AppreciationOptions/SARs
              
              
              Employees
                  in
              
              
              Price
              
              
              Expiration
              
              
              For
                  Option TermName
              
              
              Granted
                  (#)
              
              
              Fiscal
                  Year
              
              
              ($/Sh)
              
              
              Date
              
              
              5%($)
              
              
              10%($)(a)
              
              
              (b)
              
              
              (c)
              
              
              (d)
              
              
              (e)
              
              
              (f)
              
              
              (g)Thomas
                  K. Langbein
              
              
              50,000
              (1)
              
              
              21.7
              
              $
              4.02
              
              
              6/6/09
              
              
              55,533
              
              
              122,713Stephen
                  W. Everett
              
              
              50,000
              (1)
              
              
              21.7
              
              $
              4.02
              
              
              6/6/09
              
              
              55,533
              
              
              122,713J.
                  Michael Rowe
              
              
              25,000
              (2)
              
              
              10.9
              
              $
              4.02
              
              
              6/6/09
              
              
              27,766
              
              
              61,356Don
                  Waite
              
              
              50,000
              (3)
              
              
              21.7
              
              $
              4.02
              
              
              8/15/09
              
              
              55,533
              
              
              122,713


_______________





(1)
            12,500
                shares vest each June 7, from June 7, 2005 to June 7,
                2008.





(2)
            6,250
                shares vest each June 7, from June 7, 2005 to June 7,
                2008.





(3)
            12,500
                shares vest each August 16, from August 16, 2005 to August 16,
                2008.







56





**Aggregated
      Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
      Values**





(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)Number
                ofSecurities
            
            Value
                ofUnderlying
            
            UnexercisedUnexercised
            
            In-the-MoneyOptions/SARs
            
            Options/SARs
                atat
                FY-End (#)
            
            Fiscal
                Year End($)Shares
                Acquired
            
            Value
                Realized
            
            Exercisable/
            
            Exercisable/Name
            
            on
                Exercise (#)
            
            ($)
            
            Unexercisable
            
            Unexercisable($)CEOThomas
              K.LangbeinCompany
                Options
            
            
            90,012
            
            
            231,780
            
            
            50,000
            (unexer.)(1)
            
            1,020,500355,702
            
            
            1,236,064Medicore
                Options
            
            
            100,000
            
            
            77,000
            
            
            100,000
            (exer.)
            
            787,000Stephen
                W. EverettCompany
                Options
            
            
            69,242
            
            
            178,298
            
            
            273,616
            (exer.)(2)
            
            6,513,42950,000
            (unexer.)(1)
            
            1,020,500Medicore
                Options
            
            
            8,334
            
            
            6,417
            
            
            8,333
            (exer.)
            
            65,581J.
                Michael RoweCompany
                Options
            
            
            -0-
            
            
            -0-
            
            
            87,500
            (exer.)
            
            2,058,87587,500
            (unexer.)(3)
            
            1,950,875Medicore
                Options
            
            
            -0-
            
            
            -0-
            
            
            -0-
            
            
            -0-Don
                WaiteCompany
                Options
            
            
            -0-
            
            
            -0-
            
            
            50,000
            (unexer.)(4)
            
            1,020,500


__________


(1)
              Vests
                  in equal amounts of 12,500 shares each June 7, from June 7, 2005
                  to June
                  7, 2008.





(2)
            Includes
                options for 66,000 shares, exercisable at $.625 per share through
                January
                1, 2006, which options vested on January 1, 2005. An aggregate of
                150,000
                of these options were exercised after December 31,
                2004.





(3)
            Non-vested
                incentive options including (i) 25,000 options exercisable at $.75
                per
                share; (ii) 37,500 options exercisable at $1.80 per share; and (iii)
                25,000 options exercisable at $4.02 per
                share.




(4)
              Non-vested incentive options exercisable at $4.02
                per
                share
 
 57


**Compensation
      of Directors**





There
      are
      no standard arrangements for compensating directors for services as directors
      or
      for participating on any committee. We reimburse directors for travel and
      related out-of-pocket expenses incurred in attending shareholder, board and
      committee meetings, which expenses have been minimal. In lieu of any cash
      compensation or per meeting fees to directors for acting as such, we have
      provided directors, among others, with options to purchase common stock of
      the
      company at exercise prices no less than the fair market value as of the date
      of
      grant. In January, 2004, bonuses were granted to the board members, including
      $131,000 bonused for exercise of a portion of their options, amounting to
      205,892 shares at exercise prices ranging from $.625 to $.75, and a cash award
      aggregating $66,000. At the annual meeting in June, 2004, incentive and
      non-qualified options for 145,000 shares were granted to the board members
      exercisable at $4.02 per share, the fair market value at the time of grant,
      of
      which 130,000 vest over four years commencing June 7, 2005. See Item 12,
“Security Ownership of Certain Beneficial Owners and Management.”





In
      February, 2005, the company provided director fees of $20,000 to each director,
      except to Thomas K. Langbein, who received a $100,000 fee in recognition of
      his
      services as Chairman of the Board. He received a $150,000 bonus from Medicore
      for his services as Chairman of the Board, Chief Executive Officer and President
      of our Parent. Stephen W. Everett, director, President and Chief Executive
      Officer, received a $250,000 bonus for his efforts on behalf of the company.
      He
      also received a salary increase. See below, “Employment Contracts and
      Termination of Employment and Change-In-Control Arrangements.”








**Employment
      Contracts and Termination of Employment and Change-In-Control
      Arrangements**





Stephen
      W. Everett, President and director of the company, has a five-year employment
      contract through December 31, 2005. Effective for 2005, his annual compensation
      was increased from $180,000 to $250,000. Mr. Everett’s employment agreement also
      provides:





·
            employee
                and fringe benefits to the extent available by the company to other
                similarly situated executive
                employees


·
            reimbursement
                for reasonable out-of-pocket expenses incurred in connection with
                his
                duties


·
            vacations
                normally taken by senior management


·
            termination


-
              death;
                three months’ severance pay


-
            for
                cause; salary and expenses to date of termination (“cause” includes
                conviction for fraud or criminal conduct, habitual drunkenness or
                drug
                addition, embezzlement, regulatory agency sanctions against Mr. Everett
                or
                the company due to his wrongful acts, material breach of the agreement,
                dishonesty, or resignation, except if due to breach by the
                company)


-
                    by
                      the company after 13 weeks of disability; three months’ severance
                      pay


-
            by
                Mr. Everett upon breach by the company; severance pay equal to the
                greater
                of six months of his then compensation or his remaining compensation
                under
                the agreement






58




·
            confidentiality
                restrictions two years from
                termination


·
            non-competition
                for one year from termination within the United States; provided,
                non-competition eliminated if the company terminates Mr. Everett
                without
                cause or due to the company’s material breach of the
                agreement


·
            Mr.
                Everett to assign any patents, property rights, discovery or idea
                to the
                company





Certain
      executive and accounting personnel and administrative facilities of the company
      and Medicore were common for fiscal 2004. The costs of executive and accounting
      salaries and other shared corporate overhead for these companies were charged
      on
      the basis of time spent. Mr. Langbein, as Chairman of the Board of the Company
      and Chairman of the Board, CEO and President of Medicore, and Mr. Ouzts, as
      an
      officer, of the company and Medicore, divided their time and efforts among
      these
      companies. See Item 13, “Certain Relationships and Related Transactions.” These
      executive and accounting salaries and other shared corporate overhead will
      be
      eliminated in the merger of its parent with the company, should it be
      successfully completed. See Item 1, “Business - Recent
      Developments.”








**Options,
      Warrants or Rights**





*1999
      Dialysis Corporation of America Stock Option Plan*





·
            expires
                April 20, 2009


·
            grants
                available to officers, directors, consultants, key employees, advisors
                and
                similar parties


·
            options
                (non-qualified and incentive) may be up to five years, may require
                vesting, exercise price determined by board of
                directors


·
            options
                may, at discretion of board, be exercised either with cash, common
                stock
                with fair market value equal to cash exercise price, optionee’s personal
                non-recourse or recourse note, at the discretion of the board, or
                assignment to the company if sufficient proceeds from the sale of
                common
                stock acquired upon exercise of the option with an authorization
                to the
                broker to pay that amount to the company, or any combination of such
                payments


·
            termination
                of optionee’s affiliation with the company
                by


-
            death,
                disability or retirement after age 65, exercisable for nine months
                but not
                beyond option expiration date


-
              termination
                  for cause, right to exercise terminates
                  immediately
 -
              any
                  other termination, 30 day
                  exercise


·
            options
                are non-transferable






59




·
            forced
                redemption at formulated prices upon change in control of the company
                which includes (i) sale of substantially all of the assets of the
                company
                or its merger or consolidation; (ii) majority of the board changes
                other
                than by election of shareholders pursuant to board solicitations
                or
                vacancies filled by board caused by death or resignation; or (iii)
                a
                person or group acquires or makes a tender offer for at least 25%
                of the
                company’s common stock


·
            1999
                Plan history to March 25, 2005 (adjusted for two-for-one split on
                January
                28, 2004)




authorized:
            3,000,000issued:
            2,241,000vested:
            232,116non-vested:
            282,500exercised:
            1,742,730cancelled:
            193,654available:
            742,654exercise
                prices:
            range
                from $.625 to $4.02exercise
                periods:
            range
                from 1/1/06 to 8/15/09





The
      exercise price of options is no less than 100% of the fair market value of
      the
      common stock on the date of grant.








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





The
      following table sets forth as of March 25, 2005, the names and beneficial
      ownership of the equity securities of Dialysis Corporation of America and its
      parent, Medicore, for directors of the company, individually itemized, and
      for
      directors and executive officers of Dialysis Corporation of America as a group,
      without naming them, and for each of the current executive officers described
      in
      the Summary Compensation Table (see Item 11, “Executive Compensation”), and for
      shareholders known to Dialysis Corporation of America to beneficially own more
      than 5% of our voting securities.





**All
      shares and per share data, including option information, in this annual report
      on Form 10-K have been adjusted to reflect a two-for-one stock split effected
      by
      the company on January 28, 2004.**






60


Amount
                and Nature of Beneficial OwnershipDialysis
            
            
            
            MedicoreCommon
            
            
            
            CommonName
            
            Stock(1)
            
            %(2)
            
            Stock
            
            %(3)Medicore
            
            
            4,821,244
            
            
            55.7
            
            
            -----
            
            
            -----2337
                W. 76thStreetHialeah,
                FL 33016Thomas
                K. Langbein
            
            
            445,714
            (4)
            
            5.2
            
            
            1,356,014
            (5)
            
            18.8c/o
                Medicore777
                Terrace AvenueHasbrouck
                Heights, NJ 07604Stephen
                W. Everett
            
            
            400,000
            (6)
            
            4.6
            
            
            25,000
            (7)
            
            0.4c/o
                Dialysis Corporation of America1302
                Concourse Drive, Suite 204Linthicum,
                MD 21090J.
                Michael Rowe
            
            
            87,500
            (8)
            
            1.0
            
            
            -0-
            
            
            -0-c/o
                Dialysis Corporation of America1302
                Concourse Drive, Suite 204Linthicum,
                MD 21090Don
                Waite
            
            
            -0-
            (9)
            
            -0-
            
            
            -0-
            
            
            -0-c/o
                Dialysis Corporation of America1302
                Concourse Drive, Suite 204Linthicum,
                MD 21090Robert
                W. Trause
            
            
            58,428
            (10)
            
            0.7
            
            
            -0-
            
            
            -0-431C
                Hackensack StreetCarlstadt,
                NJ 07072Peter
                D. Fischbein
            
            
            39,600
            (10)
            
            0.5
            
            
            178,609
            (11)
            
            5.3430
                East 86thStreetNew
                York, NY 10028Alexander
                Bienenstock
            
            
            20,000
            (12)
            
            0.2
            
            
            -0-
            
            
            -0-766
                West BroadwayWoodmere,
                NY 11598All
                directors and executive
            
            
            1,095,742
            (13)
            
            12.3
            
            
            1,892,115
            (14)
            
            26.0officers
                as a group (8 persons)





__________





(1)
            Medicore
                owns 4,821,244 shares (approximately 56%) of our common stock. Officers
                and directors of Dialysis Corporation of America, who may also be
                officers
                and/or directors of Medicore and shareholders of each company, disclaim
                any indirect beneficial ownership of
                Dialysis




61
 
 Corporation
                  of America common stock through Medicore’s approximately 56% ownership of
                  Dialysis Corporation of America. Thomas K. Langbein, by virtue
                  of his
                  positions with Dialysis Corporation of America and Medicore and
                  his stock
                  ownership of Medicore, may be deemed to have indirect beneficial
                  ownership
                  of such shares through shared voting and investment power with
                  respect to
                  Medicore’s ownership of Dialysis Corporation of America. Mr. Langbein
                  disclaims such entire indirect beneficial ownership, but for his
                  proportionate indirect interest, approximately 848,539 shares of
                  the
                  company or approximately
                  9.8%.


(2)
            Based
                on 8,661,815 shares outstanding, but exclusive of common stock issuable
                under (i) 232,116 currently exercisable options at prices ranging
                from
                $.625 to $4.02 per share; and (ii) 282,500 non-vested options which
                vest
                over periods ranging from June 4, 2005 to August 16, 2008, exercisable
                at
                prices ranging from $.75 to $4.02 per
                share.


(3)
              Based
                  on 7,132,434 shares outstanding exclusive of (i) 231,995 shares
                  underlying
                  outstanding options under Medicore’s 1989 Stock Option Plan (14,000
                  non-vested options not included); (ii) 400,000 shares available
                  for
                  issuance under certain conditions of Thomas K. Langbein’s employment
                  agreement; and (iii) 98,000 shares reserved for issuance under
                  a key
                  employee stock plan.
  (4)
              Does
                  not include (i) a five-year incentive option for 50,000 shares
                  exercisable
                  at $4.02 per share to June 6, 2009, vesting in equal amounts of
                  12,500
                  shares each June 7, 2005 through 2008; and (ii) Medicore’s 4,821,244 share
                  ownership of the company of which Mr. Langbein disclaims beneficial
                  ownership except to the extent of his indirect beneficial ownership
                  through his 17.6% direct ownership of Medicore. See Note (1)
                  above.
  (5)
              Includes
                  an option for 100,000 shares of Medicore common stock exercisable
                  at $1.38
                  per share to July 26, 2005. Does not include 400,000 shares reserved
                  under
                  Mr. Langbein’s employment agreement issuable under certain circumstances,
                  such as a change in control, termination and
                  retirement.
  (6)
              Includes
                  an incentive option for 123,616 shares exercisable at $.625 per
                  share to
                  January 1, 2006. Does not include an incentive option for 50,000
                  shares
                  exercisable at $4.02 per share to June 6, 2009, vesting in equal
                  amounts
                  of 12,500 shares each June 7, 2005 through June 7,
                  2008.
  (7)
              Includes
                  an option for 8,333 shares of Medicore common stock exercisable
                  at $1.38
                  per share to July 26, 2005.
  (8)
              Includes
                  (i) 75,000 vested incentive options exercisable at $.75 to September
                  5,
                  2006; and (ii) 12,500 vested incentive options exercisable at $1.80
                  to
                  June 3, 2008. Does not include (i) 25,000 of the same incentive
                  options as
                  (i) above vesting September 5, 2005; (ii) 37,500 of the same incentive
                  options as (ii) above vesting 12,500 shares each June 4 over the
                  next
                  three years, 2005, 2006 and 2007; and (iii) a five-year incentive
                  option
                  for 25,000 shares exercisable at $4.02 to June 6, 2009, and vesting
                  in
                  equal amounts of 6,250 shares each June 7, 2005 through June 7,
                  2008.
 (9)
                  Does
                      not include a five-year incentive option for 50,000 shares
                      exercisable at
                      $4.02 per share to August 15, 2009, vesting in equal amounts
                      of 12,500
                      shares each August 16, 2005 to August 16,
                      2008.
 (10)
                Includes
                    a non-qualified option for 5,000 shares exercisable at $4.02
                    per share
                    through June 6, 2009.




62




(11)
                Includes
                      (i) an option for 16,666 shares of Medicore common stock exercisable
                      at
                      $1.38 per share to July 26, 2005; and (ii) 7,350 shares Mr.
                      Fischbein
                      holds as trustee for his daughter, who is of majority age and
                      lives
                      independently of her father. Does not include (i) 196,382 shares
                      (2.8%)
                      owned by his wife, Susan Kaufman, who is economically independent
                      of Mr.
                      Fischbein, and who maintains separate banking and brokerage
                      accounts; and
                      (ii) 100,000 shares (1.4%) held in trust for their minor son
                      by his wife,
                      over which trust Mr. Fischbein has no control nor in which
                      he has any
                      interest.
  (12)
                  Includes
                      non-qualified options (i) for 5,000 shares exercisable at $2.25
                      per share
                      to August 18, 2006; and (ii) for 5,000 shares exercisable at
                      $4.02 per
                      share to June 6, 2009. Does not include a non-qualified option
                      for 5,000
                      shares vesting August 19, 2005, exercisable at $2.25 per share
                      to August
                      18, 2006.
 (13)
                    Includes
                        231,116 vested options. Does not include Medicore’s ownership or any
                        indirect beneficial ownership through Medicore’s ownership. See Note (1)
                        above.
 (14)
                      Includes
                          options for 139,999 shares of Medicore common
                          stock.






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





Our
      parent, Medicore, owns approximately 56% of our common stock. See Item 12,
      “Security Ownership of Certain Beneficial Owners and Management.”





George
      Langbein, formerly an employee of Medicore and brother of Thomas K. Langbein,
      obtains the group health insurance coverage for Medicore’s employees as well as
      personal life insurance policies for several executives and key employees.
      Medicore pays for the $1,600,000 of life insurance owned by Thomas K. Langbein,
      and $100,000 life insurance covering Daniel R. Ouzts. See Item 11, “Executive
      Compensation.” The premiums paid by Medicore on the life insurance and group
      health insurance for its employees for fiscal 2004 aggregated approximately
      $157,000. We are of the opinion that the cost and coverage of the insurance
      are
      as favorable as can be obtained from unaffiliated parties.





Certain
      of the officers and directors of the company are officers and/or directors
      of
      Medicore and its affiliates. Thomas K. Langbein is Chairman of the Board of
      the
      company and Medicore and Chief Executive Officer and President of the latter.
      Daniel R. Ouzts is Vice President and Treasurer of the company and Vice
      President (Finance), Principal Financial Officer and Treasurer of Medicore.
      Peter D. Fischbein is a director of the company and of Medicore. See Item 10,
      “Directors and Executive Officers of the Registrant.” Mr. Langbein beneficially
      owns 5.2% of our company, and 18.8% of our parent, which includes an option
      for
      100,000 Medicore shares. Mr. Ouzts has a less than 1% interest in our company,
      and approximately 2% interest in Medicore, which includes an option for 15,000
      shares. Peter D. Fischbein owns less than 1% of the stock of our company and
      5.3% of Medicore shares, which includes an option for 16,666 Medicore shares.
      Lawrence E. Jaffe is corporate Secretary and counsel to our company and our
      parent, of which company he is a director. Mr. Jaffe has an approximately 3%
      interest in our company and in our parent, which for the latter includes an
      option for 33,333 Medicore shares. See Item 12, “Security Ownership of Certain
      Beneficial Owners and Management.” Mr. Jaffe and his son, Joshua M. Jaffe,
      devote a substantial portion of their professional services to our company
      and
      our parent, from which companies their law firm, Jaffe & Falk, LLC, receives
      approximately 60% of their professional fees (including bonuses), which for
      fiscal 2004 aggregated approximately $413,000, of which $236,000 was for our
      company.





63


Certain
      of the executive and accounting personnel and administrative facilities of
      our
      company and our parent, are common. The costs of executive, financial and
      administrative salaries and other shared corporate overhead for these companies
      are charged on the basis of time spent. Since the shared expenses are allocated
      on a cost basis, there is no intercompany profit involved. The amount of
      expenses charged to us by Medicore amounted to approximately $200,000 for the
      year ended December 31, 2004. Utilization of personnel and administrative
      facilities in this manner enables Medicore to share the cost of qualified
      individuals with its subsidiaries rather than duplicating the cost for various
      entities. It is our opinion that these services are on terms as favorable as
      we
      could receive from unaffiliated parties.





On
      March
      17, 2004, we issued a demand promissory note to our parent, Medicore, for up
      to
      $1,500,000 of financing for equipment purchases. The financing carries an annual
      interest rate of 1.25% over the prime rate. The financing was increased in
      June,
      2004, to $5,000,000 and its purposes extended for working capital and other
      corporate purposes. At March 25, 2005, the outstanding balance on this financing
      was approximately $2,435,000 at an interest rate of 7.0%, with accrued interest
      payable on the note of approximately $30,000.





The
      relationships and related transactions discussed in this Item 13 will be
      eliminated assuming and upon completion of the merger of Medicore with our
      company. See Item 1, “Business - Recent Developments.”





In
      May,
      2001, the company loaned Stephen W. Everett, its President and Chief Executive
      Officer, $95,000 at an annual interest of prime plus 1% (floating) payable
      on
      demand but no later than May 11, 2006. Accrued interest aggregated approximately
      $13,000 at December 31, 2004. The demand loan is collateralized by all of Mr.
      Everett’s options and underlying common stock of the company, as well as any
      proceeds from the sale of such common stock.





Certain
      directors of our parent, Medicore, Messrs. Anthony C. D’Amore, Peter D.
      Fischbein, Seymour Friend, Robert Magrann, and Lawrence E. Jaffe, our corporate
      Secretary and counsel (plus options he gifted to his children, each of majority
      age and independent of their father), in April, 2000, exercised their options
      granted under our 1999 Stock Option Plan for 680,000 shares. The exercise was
      effected with cash for the par value, and the balance, an aggregate of $421,600,
      based on the number of underlying shares on the date of exercise, in the form
      of
      three-year non-recourse promissory notes at a rate of interest of 6.2% per
      annum, due April 20, 2003, and extended to April 20, 2004. These loans,
      principal and interest, were repaid through the sale to the company of shares
      of
      the company’s common stock owned by the noteholders at fair market value on
      February 9, 2004.








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





*Audit
      Fees*





Moore
      Stephens, P.C. performed the audit of our annual financial statements as of
      and
      for the years ended December 31, 2003 and 2004, and reviewed the financial
      statements included in our quarterly reports on Form 10-Q for 2004. The fees
      of
      Moore Stephens, P.C. for professional services rendered for the audit of our
      financial statements for fiscal 2003 were $27,000 and for fiscal 2004 are
      anticipated to be $32,000.





64


Moore
      Stephens’ fees for professional services for review of the financial statements
      in our quarterly reports on Form 10-Q for fiscal 2004 were $8,800. The review
      of
      the financial statements included in our Forms 10-Q for 2003 was performed
      by
      our former accountants, Wiss & Company, LLP, for an aggregate fee of
      $4,500.








**Audit
      Related Fees**





Neither
      of Moore Stephens, P.C. nor Wiss & Company, LLP performed any assurance and
      related services for Dialysis Corporation of America, or any other services
      reasonably related to the performance of the audit or review of our financial
      statements during fiscal 2004 and 2003 that were not otherwise audit services
      as
      described above.








**Tax
      Fees**





Moore
      Stephens, P.C. handled the calculation and preparation of materials related
      to
      estimated taxes and the preparation of tax returns for 2003 and 2004. The tax
      fees for 2003 were $18,000, and the fees for such services for 2004 to be billed
      in 2005 are $22,000.








**All
      Other Fees**





In
      addition to the professional services and fees billed as described above under
      “Audit Fees” and “Tax Fees,” in 2004, Moore Stephens, P.C. performed research on
      accounting and tax matters for a $3,500 fee. Wiss & Company did not provide
      any other services or bill other fees to our company or any of our
      subsidiaries.





Our
      Audit
      Committee has established its pre-approval policies and procedures, pursuant
      to
      which it approved the foregoing audit and permissible non-audit services
      provided by Moore Stephens, P.C. in 2004. The Audit Committee’s pre-approval
      policy provides each audit and permitted non-audit service to be reviewed for
      a
      determination of approval by the Audit Committee. Requests or applications
      for
      specific services to be provided by the independent auditor are also submitted
      to our Vice President of Finance and Chief Financial Officer, and must include
      a
      detailed description of the services to be rendered. Our Vice President of
      Finance and Chief Financial Officer shall provide the Audit Committee with
      a
      written report as to the scope and applicability of the proposed services with
      further communications between and among the auditors, the Vice President of
      Finance and Chief Financial Officer, and the Audit Committee, as necessary
      for
      further clarification and evaluation. The Audit Committee will make the
      determination that any requested audit and/or non-audit services, upon the
      above
      mentioned review process, are necessary and within the scope of the company’s
      operations and reporting responsibilities, will not, in its opinion and
      evaluation, impair the auditor’s independence, nor be considered a prohibited
      non-audit service consistent with the SEC’s rules relating to these issues. The
      Audit Committee will provide a report of its approval or disapproval of our
      requested audit and non-audit services to management and the board for
      implementation. The Audit Committee will monitor the performance of all services
      provided by the independent auditors and determine whether such services are
      in
      compliance with its approval policies. The Audit Committee will report to
      management on a periodic basis on the results of its monitoring, and recommend
      appropriate action, including termination of the independent accountants for
      breaches of the approved policies or the deficiency in providing services to
      the
      company.





65


**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.





3.  Refer
      to
      subparagraph (c) below.





(b)  Exhibits
      +




3.1
                    Articles
                        of Incorporation
                        ‡
 3.2
                      By-Laws
                            of the Company ‡
 4.1
                      Form of Common Stock Certificate of the
                        Company
                        ‡


10
                Material Contracts
 10.1
              Lease
                  between DCA of Wellsboro, Inc. (formerly Dialysis Services of
                  Pennsylvania, Inc. - Wellsboro)*(1)*and James and Roger Stager dated January 15, 1995 (incorporated
                  by
                  reference to Medicore, Inc.’s*(2)*Annual Report on Form 10-K for the year ended December 31, 1994
                  (“1994
                  Medicore Form 10-K”), Part IV, Item 14(a) 3 (10)(lxii)).


10.2
            Lease
                between the Company and DCA of Lemoyne, Inc. (formerly Dialysis Services
                of Pennsylvania, Inc. - Lemoyne)*(1)*dated December 23, 1998 (incorporated by reference to the Company’s Annual
                Report on Form 10-K for the year ended December 31, 1998 (“1998 Form
                10-K”), Part IV, Item
                14(c)(10)(ii)).





10.3
            Renewal
                of Lease between the Company and DCA of Lemoyne, Inc.*(1)*dated December 30, 2003 (incorporated by reference to the Company’s Annual
                Report on Form 10-K for the year ended December 31, 2003 (“2003 Form
                10-K”), Part IV, Item 15(c)10.3).





10.4
            Medical
                Director Agreement between DCA of Wellsboro, Inc. (formerly Dialysis
                Services of Pennsylvania, Inc. - Wellsboro)*(1)*and George Dy, M.D. dated September 29, 1994 [*] (incorporated by
                reference to Medicore, Inc.’s*(2)*Quarterly Report on Form 10-Q for the quarter ended September 30,
                1994 as
                amended January, 1995 (“September, 1994 Medicore*(2)*Form 10-Q”), Part II, Item 6(a)(10)(i)).*(3)*




66




10.5
            Agreement
                for In-Hospital Dialysis Services*(4)*between Dialysis Services of Pennsylvania, Inc. - Wellsboro*(1)*and Soldiers & Sailors Memorial Hospital dated September 28, 1994 [*]
                (incorporated by reference to September, 1994 Medicore*(2)*Form 10-Q, Part II, Item 6(a)(10)(ii)).





10.6
            Lease
                between DCA of Carlisle, Inc. (formerly Dialysis Services of PA.,
                Inc. -
                Carlisle)*(5)*and
                Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November
                1, 1996
                (incorporated by reference to the Company’s Annual Report on Form 10-K for
                the year ended December 31, 1996 (“1996 Form 10-K”), Part IV, Item 14(a) 3
                (10)(xxiii)).





10.7
            Lease
                between DCA of Manahawkin, Inc. (formerly Dialysis Services of NJ.,
                Inc. -
                Manahawkin)*(5)*and William P. Thomas dated January 30, 1997 (incorporated by reference
                to
                the Company’s 1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiv)).





10.8
            Renewal
                of Lease between DCA of Manahawkin, Inc.*(5)*and William P. Thomas dated February 20, 2004 (incorporated by reference
                to the Company’s 2003 Form 10-K, Part IV, Item
                14(c)10.8).





10.9
            Equipment
                Master Lease Agreement BC-105 between the Company and B. Braun Medical,
                Inc. dated November 22, 1996 (incorporated by reference to the Company’s
                1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxvii)).





10.10
            Schedule
                of Leased Equipment 0597 commencing June 1, 1997 to Master Lease
                BC-105
                (incorporated by reference to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended June 30, 1997 (“June, 1997 10-Q”), Part II, Item
                6(a), Part II, Item 10(i)).*(6)*





10.11
            Lease
                between DCA of Chambersburg, Inc. (formerly Dialysis Services of
                Pa., Inc.
                - Chambersburg)*(5)*and BPS Development Group dated April 13, 1998 (incorporated by reference
                to the Company’s March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
                10(i)).





10.12
            1999
                Stock Option Plan of the Company (May 21, 1999) (incorporated by
                reference
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 1999 (“1999 Form 10-K”), Part IV, Item
                14(c)(10)(xxiii)).





10.13
            Form
                of Stock Option Certificate under the 1999 Stock Option Plan (May
                21,
                1999) (incorporated by reference to the Company’s 1999 Form 10-K, Part IV,
                Item 14(c)(10)(xxiv)).





10.14
            Lease
                between DCA of Vineland, LLC*(7)*and Maintree Office Center, L.L.C. dated May 10, 1999 (incorporated
                by
                reference to the Company’s 1999 Form 10-K, Part IV, Item
                14(c)(10)(xxv)).





10.15
            Management
                Services Agreement*(8)*between the Company and DCA of Vineland, LLC*(7)*dated April 30, 1999 (incorporated by reference to the Company’s 1999 Form
                10-K, Part IV, Item
                14(c)(10)(xxviii)).





10.16
            Amendment
                No. 1 to Management Services Agreement between the Company and DCA
                of
                Vineland, LLC*(7)*dated October 27, 1999 (incorporated by reference to the Company’s 1999
                Form 10-K, Part IV, Item
                14(c)(10)(xxix)).




67




10.17
            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)).





10.18
            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)).





10.19
            Lease
                between the Company and DCA of So. Ga., LLC*(1)*dated November 8, 2000 (incorporated by reference to the Company’s Current
                Report on Form 8-K dated January 3, 2001 (“January 2001 Form 8-K”), Item
                7(c)(10)(i)).





10.20
            Lease
                between DCA of Fitzgerald, LLC*(1)*and Hospital Authority of Ben Hill County, d/b/a Dorminy Medical
                Center,
                dated February 8, 2001 (incorporated by reference to the Company’s Current
                Report on Form 8-K dated March 5, 2001, Item
                7(c)(10)(i)).





10.21
            Employment
                Agreement between Stephen W. Everett and the Company dated December
                29,
                2000 (incorporated by reference to the Company’s Annual Report on Form
                10-K for the year ended December 31, 2000 (“2000 Form 10-K”), Part IV,
                Item 14(c)(10)(xii)).**





10.22
            Lease
                between the Company and Renal Treatment Centers - Mid-Atlantic, Inc.
                dated
                July 1, 1999 (incorporated by reference to the Company’s 2000 Form 10-K,
                Part IV, Item 14(c)(10((xlii)).





10.23
            Commercial
                Loan Agreement between the Company and Heritage Community Bank, dated
                April 3, 2001 (incorporated by reference to the Company’s Current Report
                on Form 8-K dated June 14, 2001 (“June, 2001 Form 8-K”), Item
                7(c)(i)).





10.24
            Promissory
                Note by the Company to Heritage Community Bank, dated April 3, 2001
                (incorporated by reference to the Company’s June, 2001 Form 8-K, Item
                7(c)(ii)).





10.25
            Modification
                Agreement to Promissory Note to Heritage Community Bank dated December
                16,
                2002 (incorporated by reference to the Company’s Annual Report on Form
                10-K for the year ended December 31, 2002 (“2002 Form 10-K”), Part IV,
                Item 15(c)10.25).





10.26
            Lease
                between DCA of Mechanicsburg, LLC*(1)*and Pinnacle Health Hospitals dated July 24, 2001 (incorporated by
                reference to the Company’s Quarterly Report on Form 10-Q for the Quarter
                Ended June 30, 2001, Part II, Item
                6(a)(10)(ii)).





10.27
            Lease
                between DCA of Central Valdosta, LLC*(1)*and W. Wayne Fann dated March 20, 2001 (incorporated by reference
                to the
                Company’s Annual Report on Form 10-K for the year ended December 31, 2001,
                Part IV, Item 14(c) 10.38).





10.28
            Promissory
                Note Modification Agreement between DCA of Vineland, LLC*(7)*and St. Michaels Bank dated December 27, 2002 (incorporated by reference
                to the Company’s 2002 Form 10-K, Part IV, Item
                15(c)10.30).




68


10.29
            Lease
                between the Company and Dr. Gerald Light dated February 15, 2002
                (incorporated by reference to the Company’s Quarterly Report on Form 10-Q
                for the quarter ended March 31, 2002, Part II, Item
                6(a)(99)(i)).





10.30
            Lease
                between DCA of Royston, LLC*(1)*and Ty Cobb Healthcare System, Inc. dated March 15, 2002 (incorporated
                by
                reference to the Company’s Current Report on Form 8-K dated April 22,
                2002, Item 7(c)(10)(i)).





10.31
            Lease
                Agreement between DCA of Chevy Chase, LLC*(5)*and BRE/Metrocenter LLC and Guaranty of the Company dated August
                8, 2002
                (incorporated by reference to the Company’s Current Report on Form 8-K
                dated September 25, 2002, Item
                7(c)(10)(i)).





10.32
            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)).





10.33
              Lease
                  Agreement between Pupizion, Inc. and DCA of Cincinnati, LLC*(9)*dated December 11, 2002 (incorporated by reference to the Company’s 2002
                  Form 10-K, Part IV, Item
                  15(c)10.35).





10.34
            Promissory
                Note from DCA of Cincinnati, LLC*(9)*to
                the Company dated February 3, 2003 (incorporated by reference to
                the
                Company’s 2002 Form 10-K, Part IV, Item
                15(c)10.36).





10.35
            Loan
                Agreement between the Company and a Physician dated April 22, 2003
                [*]
                (incorporated by reference to the Company’s Current Report on Form 8-K
                dated July 15, 2003 (“July, 2003 Form 8-K”), Item
                7(c)(10)(i)).





10.36
            Promissory
                Note and Security Agreement from a Physician dated April 22, 2003
                [*]
                (incorporated by reference to the Company’s July, 2003 Form 8-K, Item
                7(c)(10((ii)).





10.37
            Lease
                Agreement between DCA of Warsaw, LLC*(1)*and Warsaw Village, L.P. dated July 23, 2003 (incorporated by reference
                to
                the Company’s Current Report on Form 8-K dated August 5, 2003, Item
                7(c)(10)(i)).





10.38
            Lease
                Agreement between DCA of Pottstown, LLC*(5)*and Fisher Scheler, LLC dated August 19, 2003 (incorporated by reference
                to the Company’s Current Report on Form 8-K dated August 27, 2003, Item
                7(c)(iv)(i)).





10.39
            Demand
                Promissory Note from the Company to Medicore, Inc.*(2)*dated March 1, 2004 (incorporated by reference to the Company’s 2003 Form
                10-K, Part IV, Item 14(c)10.46).





10.40
            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)).





69




16
                Letter
                    re: Change in Certifying Accountant
 
 16.1
                Letter
                    of Wiss & Company, LLP addressed to the Securities and Exchange
                    Commission dated November 7, 2003 (incorporated by reference
                    to the
                    Company’s Quarterly Report on Form 10-Q for the third quarter ended
                    September 30, 2003, Part II, Item
                    6(a)(16)).
 21
                Subsidiaries
                    of the Company (previously
                    provided)
  23
              Consent
                  of experts and counsel
  23.1
              Consent
                  of Wiss & Company, LLP
  23.2
                Consent
                    of Moore Stephens, P.C.
  31
                Rule
                    13a-14(a)/15d-14(a) Certifications.


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





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





32
            Section
                1350 Certifications





32.1
            Certification
                of the Chief Executive Officer and the Principal Financial Officer
                pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934
                and 18
                U.S.C. Section 1350.##





_________________________





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


+
              Documents
                  incorporated by reference not included in Exhibit
                  Volume.


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





**
            Management
                contract or compensatory plan or
                arrangement.





##
            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.





*(1)*
            Wholly-owned
                subsidiary.




70


*(2)*
            Parent
                of the company owning approximately 56% of the company’s outstanding
                common stock. Medicore is subject to Section 13(a) reporting requirements
                of the Exchange Act, with its common stock listed for trading on
                the
                Nasdaq SmallCap Market.





*(3)*
            Each
                subsidiary has a Medical Director Agreement which is substantially
                similar
                to the exhibit filed but for area of non-competition and compensation.
                Our
                affiliate, DCA of Toledo, LLC (40% owned), has a substantially similar
                Medical Director Agreement.





*(4)*
            The
                acute inpatient services agreements referred to as Agreement for
                In-Hospital Dialysis Services are substantially similar to the exhibit
                filed, but for the hospital involved, the term and the service
                compensation rates. Agreements for In-Hospital Dialysis Services
                include
                the following areas: Valdosta and Fitzgerald, Georgia; Bedford, Carlisle,
                Chambersburg, Harrisburg, Mechanicsburg and Wellsboro, Pennsylvania;
                Toledo, Ohio.





*(5)*
            80%
                owned subsidiary.





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





*(7)*
            51%
                owned subsidiary.





*(8)*
            The
                Company has a Management Services Agreement with each of its subsidiaries
                each of which is substantially similar to the exhibit filed but for
                the
                name of the particular subsidiary which entered into the Agreement
                and the
                compensation. The Company has a Management Services Agreement with
                DCA of
                Toledo, LLC in which it holds a 40%
                interest.




*(9)*
              60%
                  owned subsidiary.
  
 71








**SIGNATURES**







Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused amendment no. 1 to this report to be signed
      on its behalf by the undersigned, thereunto duly authorized.






DIALYSIS
                CORPORATION OF AMERICABy:
              /s/ STEPHEN
                W. EVERETTStephen
                W. Everett*President and Chief Executive
                Officer*
  August 9, 2005





Pursuant
      to the requirements of the Securities Exchange Act of 1934, amendment no. 1
      to
      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
                
                August
                    9, 2005Thomas
                    K. Langbein/s/
                    STEPHEN W. EVERETT
                
                President,
                    Chief Executive Officer
                
                August
                    9, 2005Stephen
                    W. Everett
                
                and
                    Director/s/
                    DON WAITE
                
                Vice
                    President of Finance
                
                August
                    9, 2005Don
                    Waite
                
                (Chief
                    Financial Officer)/s/
                    DANIEL R. OUZTS
                
                Vice
                    President, Treasurer and
                
                August
                    9, 2005Daniel
                    R. Ouzts
                
                Chief
                    Accounting Officer/s/
                    PETER D. FISCHBEIN
                
                Director
                
                August
                    9, 2005Peter
                    D. Fischbein/s/
                    ROBERT W. TRAUSE
                
                Director
                
                August
                    9, 2005Robert
                    W. Trause/s/
                    ALEXANDER BIENENSTOCK
                
                Director
                
                August
                    9, 2005Alexander
                    Bienenstock








72




**ANNUAL
          REPORT ON FORM 10-K**
 **ITEM
          8, ITEM 15(a) (1) and (2), and (d)**
 **LIST
          OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES**
 **FINANCIAL
          STATEMENTS AND SUPPLEMENTAL DATA**
 **FINANCIAL
          STATEMENT SCHEDULES**
 **YEAR
          ENDED DECEMBER 31, 2004**
 **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:
  PageConsolidated
                        Balance Sheets as of December 31, 2004 and 2003
                    F-4Consolidated
                        Statements of Operations - Years ended December 31, 2004,
                        2003, and
                        2002
                    F-5Consolidated
                        Statements of Stockholders’ Equity - Years ended December 31,
                        2004,2003
                        and 2002
                    F-6Consolidated
                        Statements of Cash Flows - Years ended December 31, 2004,2003
                        and 2002
                    F-7Notes
                        to Consolidated Financial Statements - December 31, 2004
                    F-8The
                        following financial statement schedule of Dialysis Corporation
                        of America
                        and subsidiaries is included in Item 15(d):Schedule
                        II - Valuation and qualifying accounts
                    F-32
 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 of
 Dialysis
          Corporation of America
 Linthicum,
          Maryland
  We
          have
          audited the accompanying consolidated balance sheets of Dialysis Corporation
          of
          America and its subsidiaries as of December 31, 2004 and 2003, and the
          related
          consolidated statements of operations, stockholders' equity, and cash flows
          for
          each of the two years in the period ended December 31, 2004. These consolidated
          financial statements are the responsibility of the Company's management.
          Our
          responsibility is to express an opinion on these consolidated financial
          statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          consolidated financial statements are free of material misstatement. An
          audit
          includes examining, on a test basis, evidence supporting the amounts and
          disclosures in the consolidated financial statements. An audit also includes
          assessing the accounting principles used and significant estimates made
          by
          management, as well as evaluating the overall consolidated financial statement
          presentation. We believe that our audits provide a reasonable basis for
          our
          opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of Dialysis
          Corporation of America and its subsidiaries as of December 31, 2004 and
          2003,
          and the consolidated results of their operations and their cash flows for
          each
          of the two years in the period ended December 31, 2004, in conformity with
          accounting principles generally accepted in the United States of
          America.
  
 MOORE
          STEPHENS, P. C.
 Certified
          Public Accountants.
 
 Cranford,
          New Jersey
 February
          18, 2005 except for Note 16,
 for
          which
          the date is March 15, 2005
  F-2
  **REPORT
          OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**
  
 Stockholders
          and Board of Directors
 Dialysis
          Corporation of America
   We
          have
          audited the consolidated balance sheet (not presented herein) at December
          31,
          2002 and the accompanying consolidated statements of income, stockholders’
          equity and cash flows of Dialysis Corporation of America and subsidiaries
          for
          the year ended December 31, 2002. Our audit also included the information
          related to the year ended December 31, 2002 on the financial statement
          schedule
          listed in the Index at Item 15(a). These financial statements and schedule
          are
          the responsibility of the company’s management. Our responsibility is to express
          an opinion on these financial statements and schedule based on our
          audits.
  We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audit provide a reasonable
          basis for our opinion.
  
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of Dialysis
          Corporation of America and subsidiaries for year ended December 31, 2002,
          in
          conformity with accounting principles generally accepted in the United
          States of
          America. Also, in our opinion, the related financial statement schedule
          for the
          year ended December 31, 2002, when considered in relation to the basic
          financial
          statements taken as a whole, presents fairly in all material respects the
          information set forth therein.
 
 /s/
          WISS & COMPANY, LLP
 WISS
          & COMPANY, LLP
 
  February
          7, 2003
  Livingston,
          New Jersey
 
 F-3
  **DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **CONSOLIDATED
          BALANCE SHEETS**
 
 **December
                    31,**
                
                **December
                    31,****2004**
                
                **2003********ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                601,603
                
                $
                1,515,202Accounts
                    receivable, less allowanceof
                    $1,636,000 at December 31, 2004;$785,000
                    at December 31, 2003
                
                
                8,592,476
                
                
                4,913,318Inventories
                
                
                1,297,782
                
                
                1,043,710Deferred
                    income tax asset
                
                
                720,000
                
                
                412,000Officer
                    loan and interest receivable
                
                
                111,696
                
                
                107,503Prepaid
                    expenses and other current assets
                
                
                1,223,023
                
                
                1,392,721Total
                    current assets
                
                
                12,546,580
                
                
                9,384,454Property
                    and equipment:Land
                
                
                376,211
                
                
                376,211Buildings
                    and improvements
                
                
                2,352,191
                
                
                2,332,904Machinery
                    and equipment
                
                
                8,087,349
                
                
                6,039,256Leasehold
                    improvements
                
                
                4,674,704
                
                
                3,548,87515,490,455
                
                
                12,297,246Less
                    accumulated depreciation and amortization
                
                
                6,496,571
                
                
                5,030,5508,993,884
                
                
                7,266,696Goodwill
                
                
                3,649,014
                
                
                2,291,333Other
                    assets
                
                
                1,300,236
                
                
                661,891Total
                    other assets
                
                
                4,949,250
                
                
                2,953,224$
                26,489,714
                
                $
                19,604,374**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                1,625,930
                
                $
                1,167,213Accrued
                    expenses
                
                
                4,921,769
                
                
                3,170,269Note
                    payable and accrued interest payable to parent
                
                
                1,461,647
                
                
                ---Current
                    portion of long-term debt
                
                
                513,000
                
                
                575,000Income
                    taxes payable
                
                
                ---
                
                
                28,949Acquisition
                    liabilities - current portion
                
                
                380,298
                
                
                670,000Total
                    current liabilities
                
                
                8,902,644
                
                
                5,611,431Advances
                    from parent
                
                
                449,117
                
                
                234,094Long-term
                    debt, less current portion
                
                
                1,585,936
                
                
                2,097,355Acquisition
                    liabilities, net of current portion
                
                
                380,297
                
                
                ---Deferred
                    income tax liability
                
                
                559,000
                
                
                59,000Total
                    liabilities
                
                
                11,876,994
                
                
                8,001,880Minority
                    interest in subsidiaries
                
                
                1,282,924
                
                
                632,177Commitments
                    and ContingenciesStockholders'
                    equity:Common
                    stock, $.01 par value, authorized 20,000,000 shares:
                  8,485,815
                    shares issued and outstanding at December 31, 2004;
                  7,937,544
                    shares issued and outstanding at December 31, 2003
                
                
                84,858
                
                
                79,376Additional
                    paid-in capital
                
                
                4,957,146
                
                
                5,238,952Retained
                    earnings
                
                
                8,287,792
                
                
                6,073,589Notes
                    receivable from options exercised
                
                
                ---
                
                
                (421,600
                )Total
                    stockholders' equity
                
                
                13,329,796
                
                
                10,970,317$
                26,489,714
                
                $
                19,604,374
  See
          notes
          to consolidated financial statements.
   F-4
  
 **DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
  **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Operating
                    revenues:Medical
                    service revenue
                
                $
                40,449,562
                
                $
                29,676,388
                
                $
                25,162,380Other
                    income
                
                
                536,434
                
                
                320,580
                
                
                191,21340,985,996
                
                
                29,996,968
                
                
                25,353,593Cost
                    and expenses:Cost
                    of medical services
                
                
                23,545,586
                
                
                18,220,891
                
                
                15,066,551Selling,
                    general and administrative expenses
                
                
                12,088,521
                
                
                9,357,552
                
                
                7,500,029Provision
                    for doubtful accounts
                
                
                1,197,905
                
                
                289,582
                
                
                720,50036,832,012
                
                
                27,868,025
                
                
                23,287,080Operating
                    income
                
                
                4,153,984
                
                
                2,128,943
                
                
                2,066,513Other
                    income (expense):Interest
                    income officer/director note
                
                
                4,193
                
                
                3,972
                
                
                4,575Interest
                    income parent company
                
                
                ---
                
                
                ---
                
                
                2,957Interest
                    expense parent company
                
                
                (55,996
                )
                
                (1,633
                )
                
                ---Other
                    income, net
                
                
                86,753
                
                
                75,850
                
                
                25,11134,950
                
                
                78,189
                
                
                32,643Income
                    before income taxes, minority interestand
                    equity in affiliate earnings
                
                
                4,188,934
                
                
                2,207,132
                
                
                2,099,156Income
                    tax provision
                
                
                1,576,292
                
                
                878,211
                
                
                771,180Income
                    before minority interest and equity inaffiliate
                    earnings
                
                
                2,612,642
                
                
                1,328,921
                
                
                1,327,976Minority
                    interest in incomeof
                    consolidated subsidiaries
                
                
                (681,385
                )
                
                (223,291
                )
                
                (155,412
                )Equity
                    in affiliate earnings
                
                
                282,946
                
                
                44,354
                
                
                69,533Net
                    income
                
                $
                2,214,203
                
                $
                1,149,984
                
                $
                1,242,097Earning
                    per share:Basic
                
                $
                .27
                
                $
                .15
                
                $
                .16Diluted
                
                $
                .25
                
                $
                .13
                
                $
                .14
  
 See
          notes
          to consolidated financial statements.
  F-5
 **DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS’ EQUITY**
  **Capital
                    in****Common**
                
                **Excess
                    of**
                
                **Retained**
                
                **Notes****Stock**
                
                **Par
                    Value**
                
                **Earnings**
                
                **Receivable**
                
                **Total**Balance
                    at January 31, 2002
                
                $
                77,746
                
                $
                5,147,707
                
                $
                3,681,508
                
                $
                (421,600
                )
                $
                8,485,361Net
                    income
                
                
                
                
                
                
                
                
                1,242,097
                
                
                
                
                
                1,242,097Balance
                    at December 21, 2002
                
                
                77,746
                
                
                5,147,707
                
                
                4,923,605
                
                
                (421,600
                )
                
                9,727,458Net
                    income
                
                
                
                
                
                
                
                
                1,149,984
                
                
                
                
                
                1,149,984Repurchase
                    and cancellation of 21,428 shares
                
                
                (214
                )
                
                (41,786
                )
                
                
                
                
                
                
                
                (42,000
                )Exercise
                    of stock options for 184,284shares
                    of common stock
                
                
                1,844
                
                
                133,031
                
                
                
                
                
                
                
                
                134,875Balance
                    December 31, 2003
                
                
                79,376
                
                
                5,238,952
                
                
                6,073,589
                
                
                (421,600
                )
                
                10,970,317Net
                    income
                
                
                
                
                
                
                
                
                2,214,203
                
                
                
                
                
                2,214,203Exercise
                    of stock options for 712,446shares
                    of common stock, net of 72,375shares
                    tendered in payment; includes tax effect
                  of
                    $119,611 (Notes 3 and 6)
                
                
                6,400
                
                
                238,706
                
                
                
                
                
                
                
                
                245,106Notes
                    receivable paid with 91,800shares
                    of common stock (Note 6)
                
                
                (918
                )
                
                (520,512
                )
                
                
                
                
                421,600
                
                
                (99,830
                )Balance
                    December 31,2004
                
                $
                84,858
                
                $
                4,957,146
                
                $
                8,287,792
                
                $
                ---
                
                $
                13,329,796
 
  See
          notes
          to consolidated financial statements.
 F-6
  **DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 
 
 **Year
                    Ended December
                    31,****2004**
                
                **2003**
                
                **2002**Operating
                    activities:Net
                    income
                
                $
                2,214,203
                
                $
                1,149,984
                
                $
                1,242,097Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Depreciation
                
                
                1,492,744
                
                
                1,183,920
                
                
                1,059,697Amortization
                
                
                6,243
                
                
                2,314
                
                
                6,190Bad
                    debt expense
                
                
                1,197,905
                
                
                289,582
                
                
                720,500Deferred
                    income tax provision
                
                
                192,000
                
                
                11,000
                
                
                54,000Minority
                    interest
                
                
                681,385
                
                
                223,291
                
                
                155,412Equity
                    in affiliate earnings
                
                
                (282,946
                )
                
                (44,354
                )
                
                (69,533
                )Increase
                    (decrease) relating to operating activities from:Accounts
                    receivable
                
                
                (4,661,238
                )
                
                (1,686,942
                )
                
                (216,880
                )Inventories
                
                
                (193,486
                )
                
                (166,652
                )
                
                (137,937
                )Interest
                    receivable on officer loan
                
                
                (4,193
                )
                
                (3,972
                )
                
                (4,575
                )Prepaid
                    expenses and other current assets
                
                
                85,183
                
                
                238,749
                
                
                (1,090,143
                )Accounts
                    payable
                
                
                330,112
                
                
                (205,977
                )
                
                (231,946
                )Accrued
                    interest on note payable to parent
                
                
                26,639
                
                
                ---
                
                
                ---Accrued
                    expenses
                
                
                1,839,390
                
                
                676,203
                
                
                1,064,223Income
                    taxes payable
                
                
                90,662
                
                
                28,949
                
                
                (455,000
                )Net
                    cash provided by operating activities
                
                
                3,014,603
                
                
                1,696,095
                
                
                2,096,105Investing
                    activities:Loans
                    to physician affiliates
                
                
                (125,000
                )
                
                (150,000
                )
                
                ---Payments
                    received on physician affiliate loans
                
                
                5,987
                
                
                ---
                
                
                ---Additions
                    to property and equipment, net of minor disposals
                
                
                (3,131,701
                )
                
                (1,655,909
                )
                
                (927,352
                )Acquisition
                    of dialysis centers
                
                
                (757,616
                )
                
                (75,000
                )
                
                (550,000
                )Distributions
                    from affiliate
                
                
                96,633
                
                
                77,000
                
                
                22,800Purchase
                    of minority interests in subsidiaries
                
                
                (670,000
                )
                
                (670,000
                )
                
                (300,000
                )Other
                    assets
                
                
                (23,389
                )
                
                (4,846
                )
                
                (19,048
                )Net
                    cash used in investing activities
                
                
                (4,605,086
                )
                
                (2,478,755
                )
                
                (1,773,600
                )Financing
                    activities:Advances
                    from parent
                
                
                215,023
                
                
                234,094
                
                
                200,728Notes
                    payable to parent
                
                
                1,435,008Repurchase
                    of stock
                
                
                ---
                
                
                (42,000
                )
                
                ---Payments
                    on long-term debt
                
                
                (715,037
                )
                
                (586,750
                )
                
                (431,334
                )Exercise
                    of stock options
                
                
                5,400
                
                
                34,875
                
                
                ---Capital
                    contributions by subsidiaries’ minority members
                
                
                172,000
                
                
                204,382
                
                
                10,570Distribution
                    to subsidiary minority members
                
                
                (435,510
                )
                
                (118,655
                )
                
                (10,000
                )Net
                    cash provided by (used in) financing activities
                
                
                676,884
                
                
                (274,054
                )
                
                (230,036
                )Decrease
                    (increase) in cash and cash equivalents
                
                
                (913,599
                )
                
                (1,056,714
                )
                
                92,469Cash
                    and cash equivalents at beginning of year
                
                
                1,515,202
                
                
                2,571,916
                
                
                2,479,447Cash
                    and cash equivalents at end of year
                
                $
                601,603
                
                $
                1,515,202
                
                $
                2,571,916
  See
          notes
          to consolidated financial statements.
 
 F-7
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 ***Business***
 
 The
          company is in one business segment, kidney dialysis operations, providing
          outpatient hemodialysis services, home dialysis services, inpatient dialysis
          services and ancillary services associated with dialysis treatments. The
          company
          owns 21 operating dialysis centers located in Georgia, Maryland, New Jersey,
          Ohio, Pennsylvania, South Carolina and Virginia, manages two other dialysis
          facilities, one a 40% owned Ohio affiliate and the other an unaffiliated
          Georgia
          center, and has five dialysis facilities under development; has agreements
          to
          provide inpatient dialysis treatments to nine hospitals; and provides supplies
          and equipment for dialysis home patients. See “Consolidation.”
 
  ***Medical
          Service Revenue***
  Our
          revenues by payor are as follows:
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Medicare
                
                
                48%
                
                
                54%
                
                
                49%Medicaid
                    and comparable programs
                
                
                8%
                
                
                8%
                
                
                9%Hospital
                    inpatient dialysis services
                
                
                6%
                
                
                7%
                
                
                10%Commercial
                    insurers and other private payors
                
                
                38%
                
                
                31%
                
                
                32%100%
                
                
                100%
                
                
                100%
 
 Our
          sources of revenue (in thousands) are as follows:
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Outpatient
                    hemodialysis services
                
                $
                18,599
                
                
                47%
                
                $
                13,873
                
                
                47%
                
                $
                12,118
                
                
                48%Home
                    peritoneal dialysis services
                
                
                2,691
                
                
                7%
                
                
                1,294
                
                
                4%
                
                
                823
                
                
                3%Inpatient
                    hemodialysis services
                
                
                2,261
                
                
                5%
                
                
                2,114
                
                
                7%
                
                
                2,545
                
                
                10%Ancillary
                    services
                
                
                16,899
                
                
                42%
                
                
                12,395
                
                
                42%
                
                
                9,676
                
                
                39%$
                40,450
                
                
                100%
                
                $
                29,676
                
                
                100%
                
                $
                25,162
                
                
                100%
 
 ***Consolidation***
 
 The
          consolidated financial statements include the accounts of Dialysis Corporation
          of America and its subsidiaries, collectively referred to as the “company.” All
          material intercompany accounts and transactions have been eliminated in
          consolidation. The company is a 57% owned subsidiary of Medicore, Inc.,
          our
          parent, as of December 31, 2004. We have a 40% interest in an Ohio dialysis
          center which we manage, which is accounted for on the equity method and
          not
          consolidated for financial reporting purposes.
 
 F-8
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 ***Stock
          Split***
 
 On
          January 28, 2004, the company effected a two-for-one stock split. All share
          and
          per share data in the consolidated financial statements and notes have
          been
          adjusted to reflect the two-for-one split. See Note 14.
 
 ***Estimates***
 
 The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America requires management
          to make
          estimates and assumptions that affect the amounts reported in the financial
          statements and accompanying notes. Actual results could differ from those
          estimates.
 
  The
          company’s principal estimates are for estimated uncollectible accounts
          receivable as provided for in our allowance for doubtful accounts, estimated
          useful lives of depreciable assets, estimates for patient revenues from
          non-contracted payors, and the valuation allowance for deferred tax assets
          based
          on the estimated realizability of deferred tax assets. Our estimates are
          based
          on historical experience and assumptions believed to be reasonable given
          the
          available evidence at the time of the estimates. Actual results could differ
          from those estimates.
  ***Vendor
          Volume Discounts***
 
 The
          company has contractual arrangements with certain vendors pursuant to which
          it
          receives discounts based on volume of purchases. These discounts are recorded
          in
          accordance with paragraph 4 of EITF 02-16 as a reduction in inventory costs
          resulting in reduced costs of sales as the related inventory is
          utilized.
  ***Government
          Regulation***
 
 A
          substantial portion of the company’s revenues are attributable to payments
          received under Medicare, which is supplemented by Medicaid or comparable
          benefits in the states in which the company operates.
 
  Reimbursement
          rates under these programs are subject to regulatory changes and governmental
          funding restrictions. Laws and regulations governing the Medicare and Medicaid
          programs are complex and subject to interpretation. The company believes
          that it
          is in compliance with all applicable laws and regulations and is not aware
          of
          any pending or threatened investigations involving allegations of potential
          wrongdoing. While no such regulatory inquiries have been made, compliance
          with
          such laws and regulations can be subject to future government review and
          interpretation as well as significant regulatory action including fines,
          penalties, and exclusions from the Medicare and Medicaid programs.
  
 F-9
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 ***Cash
          and Cash Equivalents***
 
 The
          company considers all highly liquid investments with a maturity of three
          months
          or less when purchased to be cash equivalents. The carrying amounts reported
          in
          the balance sheet for cash and cash equivalents approximate their fair
          values.
          Although cash and cash equivalents are largely not federally insured, the
          credit
          risk associated with these deposits that typically may be redeemed upon
          demand
          is considered low due to the high quality of the financial institutions
          in which
          they are invested.
 
 ***Credit
          Risk***
 
 The
          company’s primary concentration of credit risk is with accounts receivable,
          which consist of amounts owed by governmental agencies, insurance companies
          and
          private patients. Receivables from Medicare and Medicaid comprised 52%
          of
          receivables at December 31, 2004 and 59% at December 31, 2003.
 
 ***Inventories***
 
 Inventories,
          which consist primarily of supplies used in dialysis treatments, are valued
          at
          the lower of cost (first-in, first-out method) or market value.
 
 ***Prepaid
          Expenses and Other Current Assets***
 
 Prepaid
          expenses and other current assets is comprised as follows:
 
 **December
                    31,****2004**
                
                **2003**Vendor
                    volume discounts receivable
                
                $
                382,757
                
                $
                610,150Prepaid
                    expenses
                
                
                607,398
                
                
                478,079Prepaid
                    income taxes
                
                
                58,913
                
                
                ---Other
                
                
                173,955
                
                
                304,492$
                1,223,023
                
                $
                1,392,721
 
 ***Accrued
          Expenses***
 
 Accrued
          expenses is comprised as follows:
  **December
                    31,****2004**
                
                **2003**Accrued
                    compensation
                
                $
                1,306,892
                
                $
                985,330Due
                    to insurance companies
                
                
                2,926,711
                
                
                1,759,397Other
                
                
                688,166
                
                
                425,542$
                4,921,769
                
                $
                3,170,269
 
 F-10
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
  Due
          to
          insurance companies represents amounts paid by insurance companies in excess
          of
          the amounts billed by the company to the insurers. The company communicates
          with
          the payors regarding these amounts, which can result from duplicate payments,
          payments in excess of contractual agreements, payments as primary when
          payor is
          secondary, and underbillings by the company based on estimated fee schedules.
          These amounts remain in due to insurance companies until
          resolution.
  
 ***Vendor
          Concentration***
 
 The
          company purchases erythropoietin (EPO) from one supplier which comprised
          36% in
          2004, 37% in 2003 and 34% in 2002 of the company’s cost of sales. There is only
          one supplier of EPO in the United States, and this supplier has recently
          received FDA approval for an alternative product available for dialysis
          patients; but there are no other suppliers of any similar drug available
          to
          dialysis treatment providers. Revenues from the administration of EPO,
          which
          amounted to approximately $11,381,000 in 2004, $8,308,000 in 2003, and
          $6,447,000 in 2002, comprised 28% in 2004, 28% in 2003 and 26% in 2002
          of
          medical service revenue.
 
 ***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 on loss is recognized.
          See
          Note 9.
 
 ***Long-Lived
          Asset Impairment***
 
 Pursuant
          to Financial Accounting Standards Board Statement No. 121, “Accounting for the
          Impairment of Long-Lived Assets to be Disposed of,” impairment of long-lived
          assets, including intangibles related to such assets, is recognized whenever
          events or changes in circumstances indicate that the carrying amount of
          the
          asset, or related groups of assets, may not be fully recoverable from estimated
          future cash flows and the fair value of the related assets is less than
          their
          carrying value. Financial Accounting Standards Board Statement No. 144,
          “Accounting for the Impairment of Disposal of Long-lived Assets” (FAS 144)
          clarified when a long-lived asset held for sale should be classified as
          such. It
          also clarifies previous guidance under FAS 121. The company, based on current
          circumstances, does not believe any indicators of impairment are
          present.
 
 ***Comprehensive
          Income***
 
 The
          company follows Financial Accounting Standards Board Statement No. 130,
          “Reporting Comprehensive Income” (FAS 130) which contains rules for the
          reporting of comprehensive income and its components. Comprehensive income
          (loss) consists of net income (loss).
  F-11
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 ***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. Currently,
          there are no approvals pending from third party payors. The company occasionally
          provides dialysis treatments on a charity basis to patients who cannot
          afford to
          pay. The amount is not significant.
 
  ***Goodwill***
 
 Goodwill
          represents cost in excess of net assets acquired. The company adopted Statement
          of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
          Assets” (FAS 142) effective January 1, 2002. Under FAS 142, goodwill and
          intangible assets with indefinite lives are no longer amortized but are
          reviewed
          annually (or more frequently if impairment indicators are present) for
          impairment. Pursuant to the provisions of FAS 142, the goodwill resulting
          from
          the company's acquisition of minority interests in August, 2001 and June,
          2003,
          and the acquisition of Georgia dialysis centers in April, 2002 and April,
          2003,
          and acquisition of a Pennsylvania dialysis business at the close of business
          on
          August 31, 2004, are not being amortized for book purposes and are subject
          to
          the annual impairment testing provisions of FAS 142, which testing indicated
          no
          impairment for goodwill. See Note 10.
 
 ***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
          $80,000 at December 31, 2004 and $4,000 at December 31, 2003 are included
          in
          other assets. Amortization expense was $6,243 for 2004, $2,314 for 2003,
          and
          $6,190 for 2002.
 
 ***Income
          Taxes***
 
 Deferred
          income taxes are determined by applying enacted tax rates applicable to
          future
          periods in which the taxes are expected to be paid or recovered to differences
          between financial accounting and tax basis of assets and
          liabilities.
 
 ***Stock-Based
          Compensation***
 
 The
          company follows the intrinsic method of Accounting Principles Board Opinion
          No.
          25, “Accounting for Stock Issued to Employees” (APB 25) and related
          Interpretations in accounting for its employee stock options because, as
          discussed below, Financial Accounting Standards Board Statement No. 123,
          “Accounting for Stock-Based Compensation” (FAS 123) requires use of option
          valuation models that were not developed for use in valuing employee stock
          options. FAS 123 permits a company to elect to follow the intrinsic method
          of
          APB 25 rather than the alternative fair value accounting provided under
          FAS 123,
          but requires pro forma net income and earnings per share disclosures as
          well as
          various other disclosures not required under APB 25 for companies following
          APB
          25. The company has
 F-12
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  
 **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 adopted
          the disclosure provisions required under Financial Accounting Standards
          Board
          Statement No. 148, “Accounting for Stock-Based Compensation - Transition and
          Disclosure” (FAS 148). Under APB 25, because the exercise price of the company’s
          stock options equals the market price of the underlying stock on the date
          of
          grant, no compensation expense was recognized. See “New
          Pronouncements.”
 
 Pro
          forma
          information regarding net income and earnings per share is required by
          FAS 123
          and FAS 148, and has been determined as if the company had accounted for
          its
          employee stock options under the fair value method of that Statement. The
          fair
          value for these options was estimated at the date of grant using a Black-Scholes
          option pricing model with the following weighted-average assumptions for
          options
          granted during 2004, 2003, 2002 and 2001, respectively: risk-free interest
          rate
          of 3.83%, 1.44%, 3.73%, and 5.40%; no dividend yield; volatility factor
          of the
          expected market price of the company’s common stock of 1.31, 1.07, 1.15, and
          1.14, and a weighted-average expected life of 5 years, 4.7 years, 5 years,
          and 4
          years.
 
 The
          Black-Scholes option valuation model was developed for use in estimating
          the
          fair value of traded options which have no vesting restrictions and are
          fully
          transferable. In addition, option valuation models require the input of
          highly
          subjective input assumptions including the expected stock price volatility.
          Because the company’s employee stock options have characteristics significantly
          different from those of traded options, and because changes in the subjective
          input assumptions can materially affect the fair value estimate, in management’s
          opinion, the existing models do not necessarily provide a reliable measure
          of
          the fair value of its employee stock options.
 
 For
          purposes of pro forma disclosures, the estimated fair value of options
          is
          amortized to expense over the options’ vesting period. The company’s pro forma
          information follows:
 
 **2004**
                
                **2003**
                
                **2002**Net
                    income, as reported
                
                $
                2,214,203
                
                $
                1,149,984
                
                $
                1,242,097Stock-based
                    employee compensation expenseunder
                    fair value method, net of relatedtax
                    effects
                
                
                (170,000
                )
                
                (64,000
                )
                
                (46,000
                )Pro
                    forma net income
                
                $
                2,044,203
                
                $
                1,085,984
                
                $
                1,196,097Earnings
                    per share:Basic,
                    as reported
                
                $
                .27
                
                $
                .15
                
                $
                .16Basic,
                    pro forma
                
                $
                .25
                
                $
                .14
                
                $
                .15Diluted,
                    as reported
                
                $
                .25
                
                $
                .13
                
                $
                .14Diluted,
                    pro forma
                
                $
                .23
                
                $
                .12
                
                $
                .14
 F-13
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  
 **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,****2004**
                
                **2003**
                
                **2002**Net
                    income
                
                $
                2,214,203
                
                $
                1,149,984
                
                $
                1,242,097Weighted
                    average shares-denominator basic computation
                
                
                8,256,282
                
                
                7,904,874
                
                
                7,774,688Effect
                    of dilutive stock options
                
                
                527,575
                
                
                830,612
                
                
                892,366Weighted
                    average shares, as adjusted-denominator dilutedcomputation
                
                
                8,783,857
                
                
                8,735,486
                
                
                8,667,054Earnings
                    per share:Basic
                
                $
                .27
                
                $
                .15
                
                $
                .16Diluted
                
                $
                .25
                
                $
                .13
                
                $
                .14
  The
          company had various potentially dilutive securities during the periods
          presented, including stock options and warrants. See Notes 6 and 7.
 
 **Other
          Income**
 
 Operating:
 
 Other
          operating income is comprised as follows:
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Management
                    fee income
                
                $
                402,251
                
                $
                320,580
                
                $
                191,213Litigation
                    settlement
                
                
                134,183
                
                
                ---
                
                
                ---$
                536,434
                
                $
                320,580
                
                $
                191,213
 
 F-14
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
 
 **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 Non-operating:
 
 Other
          non-operating income (expense) is comprised as follows:
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Rental
                    income
                
                $
                191,350
                
                $
                190,308
                
                $
                174,227Interest
                    income
                
                
                35,402
                
                
                49,914
                
                
                40,314Interest
                    expense
                
                
                (162,791
                )
                
                (201,316
                )
                
                (220,441
                )Other
                
                
                22,792
                
                
                36,944
                
                
                31,011Other
                    income, net
                
                $
                86,753
                
                $
                75,850
                
                $
                25,111
   **Estimated
          Fair Value of Financial Instruments**
 
 The
          carrying value of cash, accounts receivable and debt in the accompanying
          financial statements approximate their fair value because of the short-term
          maturity of these instruments, and in the case of debt because such instruments
          either bear variable interest rates which approximate market or have interest
          rates approximating those currently available to the company for loans
          with
          similar terms and maturities.
 
 ***Reclassification***
 
 Certain
          prior year amounts have been reclassified to conform with the current year’s
          presentation.
 
 ***New
          Pronouncements***
 
 On
          November 24, 2004, the Financial Accounting Standards Board (FASB) issued
          Statement of Financial Accounting Standards No. 151, “Inventory Costs” an
          amendment of ARB No. 43, Chapter 4 (“FAS 151). FAS 151 requires companies to
          recognize as current period changes abnormal amounts of idle facility expense,
          freight, handling costs and wasted materials (spoilage). FAS 151 also requires
          manufacturers to allocate fixed production overheads to inventory based
          on
          normal capacity of their production facilities. FAS 151 is effective for
          inventory costs incurred during fiscal years beginning after June 15, 2005.
          The
          company does not expect FAS 151 to have a significant effect on its consolidated
          financial statements.
 
 On
          December 16, 2004, the FASB issued Statement of Financial Accounting Standards
          No. 153, “Exchange of Nonmonetary Assets’, an amendment of APB Opinion No. 29
          (“FAS 153”). The amendments made by FAS 153 are based on the principle that
          exchanges of nonmonetary assets should be measured based on the fair value
          of
          the assets exchanged. The amendments eliminate the narrow exception for
          nonmonetary exchanges of similar productive assets and replace it with
          an
          exception for exchanges of nonmonetary assets that do not have commercial
          substance. Previous to FAS 153 some nonmonetary exchanges, although commercially
          substantive were recorded on a carryover basis rather
 F-15
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
 
 **NOTE
          1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued**
 
 than
          being based on the fair value of the assets exchanged. FAS 153 is effective
          for
          nonmonetary assets exchanges occurring in fiscal periods beginning after
          June
          15, 2005. The company does not expect FAS 153 to have a significant effect
          on
          its financial statements.
 
 On
          December 16, 2004, the FASB issued Statement of Financial Accounting Standards
          No. 123 (revised), “Share-Based Payment” (“FAS 123(R)”). Provisions of FAS
          123(R) requires companies to recognize the fair value of stock option grants
          as
          a compensation costs in their financial statements. Public entities, other
          than
          small business issuers, will be required to apply FAS 123(R) in the first
          interim or annual reporting period that beginning after June 15, 2005.
          The
          company will be subject to the provisions of FAS 123(R) effective July
          1, 2005.
          In addition to stock options granted after the effective date, companies
          will be
          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 (as previously disclosed in the notes to the financial
          statements) with the cost related to the unvested options to be recognized
          over
          the vesting period of the options. The company is in the process of determining
          the impact that FAS 123(R) will have on its consolidated financial
          statements.
 
 **NOTE
          2--LONG-TERM DEBT**
 
 Long-term
          debt is as follows:
 
 **December
                    31,****2004**
                
                **2003**Development
                    loan secured by land and buildingwith
                    a net book value of $319,000 atDecember
                    31, 2004. Monthly principalpayments
                    of $2,217 plus interest at 1% overthe
                    prime rate effective December 16, 2002with
                    remaining balance due December 2, 2007.
                
                $
                609,580
                
                $
                636,182Mortgage
                    note secured by land and buildingwith
                    a net book value of $868,000 atDecember
                    31, 2004. Interest ofprime
                    plus 1⁄2% with a minimum rate of 6.0%effective
                    December 16, 2002. Monthlypayments
                    of $6,800 including principal andinterest
                    with remaining balance due April, 2006.
                
                
                675,018
                
                
                714,979Equipment
                    financing agreement secured by equipmentwith
                    a net book value of $977,000 at December 31,2004.
                    Monthly payments totaling approximately $46,000 as ofDecember
                    31, 2004, including principal and interest,as
                    described below, pursuant to various schedulesextending
                    through August, 2007 with interest at ratesranging
                    from 4.13% to 10.48%.
                
                
                814,338
                
                
                1,321,1942,098,936
                
                
                2,672,355Less
                    current portion
                
                
                513,000
                
                
                575,000$
                1,585,936
                
                $
                2,097,355
 F-16
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          2--LONG-TERM DEBT--Continued**
 
 The
          company through its subsidiary, DCA of Vineland, LLC, pursuant to a December
          3,
          1999 loan agreement obtained a $700,000 development loan with interest
          at 8.75%
          through December 2, 2001, 11⁄2% over the prime rate thereafter through December
          15, 2002, and 1% over prime thereafter secured by a mortgage on the company’s
          real property in Easton, Maryland. 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,
          and monthly payments thereafter of $2,217 plus interest with any remaining
          balance due December 2, 2007. This loan had an outstanding principal balance
          of
          approximately $610,000 at December 31, 2004 and $636,000 December 31,
          2003.
 
 In
          April
          2001, the company obtained a $788,000 five-year mortgage through April,
          2006, on
          its building in Valdosta, Georgia with interest at 8.29% until March, 2002,
          7.59% thereafter until December 16, 2002, and prime plus 1⁄2% with a minimum of
          6.0% effective December 16, 2002. Payments are $6,800 including principal
          and
          interest commencing May, 2001, with a final payment consisting of a balloon
          payment and any unpaid interest due April, 2006. The remaining principal
          balance
          under this mortgage amounted to approximately $675,000 at December 31,
          2004 and
          $715,000 at December 31, 2003.
 
 The
          equipment financing agreement is for financing for kidney dialysis machines
          for
          the company’s dialysis facilities. Additional financing totaled approximately
          $399,000 in 2002, with no such financing in 2003 or 2004. Payments under
          the
          agreement are pursuant to various schedules extending through August, 2007.
          Financing under the equipment purchase agreement is a noncash financing
          activity, which is a supplemental disclosure required by Financial Accounting
          Standards Board Statement No 95, “Statement of Cash Flows.” See Note 13. The
          remaining principal balance under this financing amounted to approximately
          $814,000 at December 31, 2004 and $1,321,000 at December 31, 2003.
 
 The
          prime
          rate was 5.25% as of December 31, 2004 and 4.00% as of December 31, 2003.
          For
          interest payments, see Note 13.
 
 Scheduled
          maturities of long-term debt outstanding at December 31, 2004 are
          approximately:
  2005
                  
                  $
                  513,0002006
                  
                  
                  956,0002007
                  
                  
                  630,0002008
                  
                  
                  ---2009
                  
                  
                  ---Thereafter
                  
                  
                  ---$
                  2,099,000
 F-17
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          2--LONG-TERM DEBT--Continued**
 
 The
          company’s two mortgage agreements contain certain restrictive covenants that,
          among other things, restrict the payment of dividends above 25% of the
          company’s
          net worth, require lenders’ approval for a merger, sale of substantially all the
          assets, or other business combination of the company, and require maintenance
          of
          certain financial ratios. The company was in compliance with the debt covenants
          at December 31, 2004 and December 31, 2003.
 
 **NOTE
          3--INCOME TAXES**
 
 The
          income tax provision consists of the following income tax expense (benefit)
          components:
 
 **2004**
                
                **2003**
                
                **2002**Current:Federal
                
                $
                1,052,576
                
                $
                602,906
                
                $
                601,967State
                
                
                323,731
                
                
                264,305
                
                
                115,213City
                
                
                7,985
                
                
                ---
                
                
                ---1,384,292
                
                
                867,211
                
                
                717,180Deferred:Federal
                
                
                227,000
                
                
                28,000
                
                
                274,000State
                
                
                (35,000
                )
                
                (17,000
                )
                
                (220,000
                )192,000
                
                
                11,000
                
                
                54,000$
                1,576,292
                
                $
                878,211
                
                $
                771,180
 
 Deferred
          income taxes reflect the net tax effect of temporary differences between
          the
          carrying amounts of assets and liabilities for financial reporting purposes
          and
          the amounts used for income tax purposes. Significant components of the
          company’s deferred tax liabilities and assets are as follows:
 
 **December
                    31,****2004**
                
                **2003**Deferred
                    tax liabilities:Depreciation
                    and amortization
                
                $
                852,000
                
                $
                285,000Total
                    deferred tax liabilities
                
                
                852,000
                
                
                285,000Deferred
                    tax assets:Accrued
                    expenses
                
                
                118,000
                
                
                111,000Bad
                    debt allowance
                
                
                602,000
                
                
                306,000Startup
                    costs
                
                
                126,000
                
                
                47,000Subtotal
                
                
                846,000
                
                
                464,000State
                    net operating loss carryforwards
                
                
                167,000
                
                
                226,000Total
                    deferred tax assets
                
                
                1,013,000
                
                
                690,000Valuation
                    allowance for deferred tax assets
                
                
                ---
                
                
                (52,000
                )Deferred
                    tax asset, net of valuation allowance
                
                
                1,013,000
                
                
                638,000Net
                    deferred tax asset
                
                $
                161,000
                
                $
                353,000
 
 F-18
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          3--INCOME TAXES--Continued**
 
 A
          valuation allowance of $52,000 was provided that offsets a portion of the
          deferred tax assets recorded at December 31, 2003, as management believed
          that
          it was more likely than not that, based on the weight of the available
          evidence,
          that this portion of deferred tax assets would not be realized. No valuation
          allowance was recorded at December 31, 2004, due to the company’s anticipated
          prospects for future taxable income in an amount sufficient to realize
          the
          deferred tax assets.
 
 The
          reconciliation of income tax (benefit) attributable to income (loss) before
          income taxes computed at the U.S. federal statutory rate is:
 
 **Year
                    Ended December 31,****2004**
                
                **2003**
                
                **2002**Statutory
                    tax rate (34%) applied to income (loss)before
                    income taxes, minority interest and equity
                  in
                    affiliate earnings
                
                $
                1,424,238
                
                $
                750,425
                
                $
                702,874Adjustments
                    due to:State
                    taxes, net of federal benefit
                
                
                212,515
                
                
                189,116
                
                
                103,101Change
                    in valuation allowance
                
                
                (17,680
                )
                
                ---
                
                
                (145,000
                )Non-deductible
                    items
                
                
                34,160
                
                
                11,197
                
                
                11,982Prior
                    year tax return accrual adjustment
                
                
                (33,504
                )
                
                ---
                
                
                (14,456
                )Other
                
                
                (43,437
                )
                
                (72,527
                )
                
                112,679$
                1,576,292
                
                $
                878,211
                
                $
                771,180
 
 The
          company has equity positions in 20 limited liability companies (“LLC’s”), each
          possessing a finite life. Based on their limited liability status, its
          members
          are not liable for the LLC’s debts, liabilities, or obligations. Each LLC has
          complied with the criteria for tax treatment as a partnership. As a result,
          taxable income or loss is to be reported on each member’s respective tax
          returns. Income and losses attributable to the company’s equity position in
          these LLC’s has been included as a component of retained earnings as of December
          31, 2004.
 
 The
          exercise of 70,348 non-qualified stock options during 2004 resulted in
          a tax
          deduction of approximately $304,000 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 $120,000
          resulted in a corresponding increase in additional paid-in capital of
          approximately $120,000. This represents, a non cash financing activity,
          which is
          a supplemental disclosure required by Accounting Standards Board Statement
          No.
          95 “Statement of Cash Flows”. See Note 13.
 
 For
          income tax payments, see Note 13.
 
 F-19
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          4--TRANSACTIONS WITH PARENT**
 
 Our
          parent provides certain financial and administrative services for us. Central
          operating costs are charged on the basis of time spent. In the opinion
          of
          management, this method of allocation is reasonable. The amount of expenses
          allocated by the parent totaled approximately $200,000 for the years ended
          December 31, 2004, 2003 and 2002, which is included in selling, general
          and
          administrative expenses in the Consolidated Statements of
          Operations.
  We
          had an
          intercompany advance payable to our parent of approximately $449,000 as
          of
          December 31, 2004 and $234,000 as of December 31, 2003, which bears interest
          at
          the short-term Treasury Bill rate. Interest expense on intercompany advances
          payable was approximately $5,000 and $2,000 for the years ended December
          31,
          2004 and 2003, respectively. Interest is included in the intercompany advance
          balance. Our parent has agreed not to require repayment of the intercompany
          advance balance prior to January 1, 2007; therefore, the advance has been
          classified as long-term at December 31, 2004.
  We
          had an
          intercompany advance receivable from our parent, which bore interest at
          the
          short-term Treasury Bill rate that was paid during 2002. Interest income
          on
          intercompany advances receivable was approximately $3,000 for the year
          ended
          December 31, 2002.
 
 On
          March
          17, 2004, the company issued a demand promissory note to its parent for
          up to
          $1,500,000 of financing for equipment purchases with annual interest of
          1.25%
          over the prime rate. The note was subsequently modified by increasing the
          maximum amount of advances that can be made to $5,000,000, and by adding
          to the
          purposes of the financing, working capital and other corporate needs. This
          note
          had an outstanding balance of approximately $1,435,000 and an interest
          rate of
          6.50% at December 31, 2004. The weighted average interest rate on the note
          during the period it was outstanding during 2004 was 5.84%. Interest expense
          on
          the note amounted to approximately $51,000 for the year ended December
          31, 2004.
          Accrued interest payable on the note amounted to approximately $27,000
          as of
          December 31, 2004.
 
 **NOTE
          5--OTHER RELATED PARTY TRANSACTIONS**
 
 For
          the
          years ended December 31, 2004, 2003 and 2002, respectively, the company
          paid
          premiums of approximately $537,000, $425,000 and $275,000 for insurance
          obtained
          through a director of the parent.
  For
          the
          years ended December 31, 2004, 2003 and 2002, respectively, legal fees
          of
          $236,000, $156,000 and $156,000 were paid to an attorney who acts as general
          counsel and Secretary for the company and the parent and who is a director
          of
          the parent.
  The
          20%
          minority interest in DCA of Vineland, LLC was held by a company owned by
          the
          medical director of that facility, who became a director of Dialysis Corporation
          of America in 2001. This physician was provided with the right to acquire
          up to
          49% of DCA of Vineland. In April, 2000, another company owned by this physician
          acquired an interest in DCA of Vineland, resulting in Dialysis Corporation
          of
          America holding a 51.3% ownership interest in DCA of Vineland and this
          physician’s companies holding a combined 48.7% ownership interest of DCA of
          Vineland. See Note 12.
 F-20
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
 
 **NOTE
          5--OTHER RELATED PARTY TRANSACTIONS--Continued**
 
 In
          July,
          2000, one of the companies owned by this physician acquired a 20% interest
          in
          DCA of Manahawkin, Inc. Under agreements with DCA of Vineland and DCA of
          Manahawkin, this physician serves as medical director for each of those
          dialysis
          facilities.
 
 In
          May
          2001, the company loaned its president $95,000 to be repaid with accrued
          interest at prime minus 1% (floating prime) on or before maturity on May
          11,
          2006. This demand loan is 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
 $4,000,
          $4,000 and $5,000 for 2004, 2003 and 2002, respectively.
 
 Minority
          members in subsidiaries in certain situations may fund a portion of required
          capital contributions by issuance of an interest bearing note payable to
          the
          company which minority members may repay directly or through their portion
          of
          capital distributions of the subsidiary. The minority members funded in
          the
          aggregate approximately $324,000 in capital contributions during 2004,
          and
          $223,000 during the preceding year, under notes accruing interest at prime
          plus
          2%, with an aggregate of approximately $74,000 of distributions applied
          against
          the notes and accrued interest during 2004, and $54,000 during the preceding
          year. These represent non-cash investing activities, which is a supplemental
          disclosure required by Financial Accounts Standards Board Statement No.
          95,
“Statement of Cash Flows.” See Notes 11 and 13.
 
 **NOTE
          6--STOCK OPTIONS**
 
 In
          June,
          1998, the board of directors granted an option under the now expired 1995
          Stock
          Option Plan to a board member for 10,000 shares exercisable at $1.13 per
          share
          through June 9, 2003. This option was exercised in June, 2003 with the
          company
          receiving an $11,250 cash payment for the exercise price.
 
 In
          April,
          1999, we adopted a stock option plan pursuant to which the board of directors
          granted 1,600,000 options exercisable at $.63 per share to certain of our
          officers, directors, employees and consultants with 680,000 options exercisable
          through April 20, 2000 and 920,000 options exercisable through April 20,
          2004,
          of which 120,000 options to date have been cancelled. In April, 2000, the
          680,000 one-year options were exercised for which we received cash payment
          of
          $3,400 and the balance in three-year promissory notes with the interest
          at 6.2%
          and which maturity was extended to April 20, 2004. The notes were repaid
          with
          91,800 shares of common stock with a fair market value of approximately
          $521,000
          on February 9, 2004. Interest income on the notes amounted to approximately
          $3,000 for the year ended December 31, 2004, all of which was earned during
          the
          first quarter. In March, 2003, 155,714 of the remaining 800,000 options
          outstanding were exercised for $97,322 with the exercise price satisfied
          by
          director bonuses accrued in 2002. In January, 2004, 130,278 of these options
          were exercised for $81,424 with the exercise price satisfied by director
          bonuses
          accrued in 2003. In February, 2004, 158,306 of these options were exercised
          for
          $98,941 with the exercise price satisfied by payment of 18,152 shares to
          the
          company for cancellation. In March, 2004, 355,702 of these
 F-21
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
 **NOTE
          6--STOCK OPTIONS--Continued**
 
 options
          were exercised for $222,314 with the exercise price satisfied by the payment
          of
          54,223 shares to the company. The exercises and share payments to the company
          represent noncash investing activity, which is a supplemental disclosure
          required by Financial Accounting Standards Board Statement No. 95, “Statement of
          Cash Flows.” See Note 14.
 
 In
          January, 2001, the board of directors granted to our Chief Executive Officer
          and
          President a five-year option for 330,000 shares exercisable at $.63 per
          share
          with 66,000 options vesting at January, 2001, and 66,000 options vesting
          annually on January 1, 2002 to 2005. In January, 2004, 56,384 of these
          options
          were exercised for $35,240 with the exercise price satisfied by a director
          bonus
          accrued in 2003.
  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. 30,000 of the options
          vested immediately with the remaining 120,000 options to vest in equal
          increments of 30,000 options each September 5, commencing September 5,
          2002. In
          March, 2003, 3,570 of these options were exercised for $2,678 with the
          exercise
          price satisfied by director bonuses accrued in 2002. In January, 2004,
          4,576 of
          these options were exercised for $3,432 with the exercise price satisfied
          by
          director bonuses accrued in 2003. These exercises represent non-cash investing
          activity, which is a supplemental disclosure required by Financial Accounting
          Standards Board Statement No. 95, “Statement of Cash Flows.” See Note 14. In
          January, 2004, 7,200 of these options were exercised with the company receiving
          a $5,400 cash payment for the exercise price. Of the 30,000 immediately
          exercisable options, 15,346 have been exercised and 14,654 cancelled due
          to the
          resignation of a director in June, 2004. Of the remaining 120,000 options,
          90,000 had vested as of December 31, 2004.
  In
          March,
          2002, the board of directors granted a five-year option to an officer for
          60,000
          shares exercisable at $1.58 per share through February 28, 2007. The option
          was
          to vest in equal annual increments of 15,000 shares on each February 28
          from
          2003 through 2006. The 15,000 options that had vested in February, 2003,
          were
          exercised by the officer in October, 2003, and the remaining 45,000 options
          expired unvested due to the July 31, 2003 resignation of the
          officer.
  In
          May,
          2002, the board of directors granted five-year options for an aggregate
          of
          21,000 shares to certain of the company’s employees of which 11,000 were
          outstanding and vested at December 31, 2004. These options are exercisable
          at
          $2.05 per share through May 28, 2007. Options for 10,000 shares have been
          cancelled as a result of the termination of several employee option
          holders.
 
 F-22
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          6--STOCK OPTIONS--Continued**
 
 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. The option
          vests
          annually in increments of 12,500 shares on each June 4 from 2004 to
          2007.
 
 In
          August, 2003, the board of directors granted a three-year option to a director
          who serves on several of the company’s committees including the audit committee,
          for 10,000 shares exercisable at $2.25 per share through August 18, 2006.
          The
          option vests in two annual increments of 5,000 shares commencing on August
          19,
          2004.
 
 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.
          The
          option vests in annual increments of 5,000 shares on each January 13 from
          2005
          through 2008.
 
 On
          January 28, 2004, the company affected a two-for-one stock split of its
          outstanding common stock. All option amounts and exercise prices have been
          adjusted to reflect the stock split. Split-adjusted option exercise prices
          resulting in a fraction of a cent have been rounded up to the nearest cent
          for
          purposes of these notes to the financial statements of the company.
 
 In
          June,
          2004, the board of directors granted 160,000 stock options to officers
          and
          directors exercisable at $4.02 per share through June 6, 2009. 15,000 options
          vested immediately and 145,000 options vest 25% annually commencing June
          7,
          2005.
 
 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
          vest 25% annually commencing August 16, 2005.
 
 F-23
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          6--STOCK OPTIONS--Continued**
 
 A
          summary
          of the company’s stock option activity and related information for the years
          ended December 31 follows:
 
 ****
 **2004**
                
                **2003**
                
                **2002****Options**
                
                **Weighted-Average**Exercise
                      Price
                
                **Options**
                
                **Weighted-Average**Exercise
                    Price
                
                **Options**
                
                **Weighted-Average**Exercise
                    PriceOutstanding-beginning
                    of year
                
                
                1,191,716
                
                
                
                
                
                1,367,000
                
                
                
                
                
                1,410,000Granted
                
                
                230,000
                
                $
                3.94
                
                
                60,000
                
                $
                1.88
                
                
                81,000
                
                $
                2.05Cancellations
                
                
                (14,654
                )
                $
                .75
                
                
                (51,000
                )
                $
                1.63
                
                
                (124,000
                )
                $
                .67Exercised
                
                
                (712,446
                )
                $
                .63
                
                
                (184,284
                )
                $
                .73
                
                
                ---
                
                
                ---Expired
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---Outstanding-end
                    of year
                
                
                694,616
                
                
                
                
                
                1,191,716
                
                
                
                
                
                1,367,000Outstanding-end
                    of year:August
                    2004 options
                
                
                50,000
                
                $
                4.02June
                    2004 options
                
                
                160,000
                
                $
                4.02January
                    2004 options
                
                
                20,000
                
                $
                3.09August
                    2003 options
                
                
                10,000
                
                $
                2.25
                
                
                10,000
                
                $
                2.25
                
                
                ---
                
                
                ---June
                    2003 options
                
                
                50,000
                
                $
                1.80
                
                
                50,000
                
                $
                1.80
                
                
                ---
                
                
                ---May
                    2002 options
                
                
                11,000
                
                $
                2.05
                
                
                11,000
                
                $
                2.05
                
                
                17,000
                
                $
                2.05March
                    2002 options
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                60,000
                
                $
                1.58September
                    2001 options
                
                
                120,000
                
                $
                .75
                
                
                146,430
                
                $
                .75
                
                
                150,000
                
                $
                .75January
                    2001 options
                
                
                273,616
                
                $
                .63
                
                
                330,000
                
                $
                .63
                
                
                330,000
                
                $
                .63April
                    1999 options
                
                
                ---
                
                
                
                
                
                644,286
                
                $
                .63
                
                
                800,000
                
                $
                .63June
                    1998 options
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                10,000
                
                $
                1.13694,616
                
                
                ---
                
                
                1,191,716
                
                
                
                
                
                1,367,000Outstanding
                    and exercisableend
                    of year:June
                    2004 options
                
                
                15,000
                
                $
                4.02August
                    2003
                
                
                5,000
                
                $
                2.25June
                    2003
                
                
                12,500
                
                $
                1.80May
                    2002
                
                
                11,000
                
                $
                2.05September
                    2001 options
                
                
                90,000
                
                $
                .75
                
                
                90,000
                
                $
                .75
                
                
                60,000
                
                $
                .75January
                    2001 options
                
                
                207,616
                
                $
                .63
                
                
                198,000
                
                $
                .63
                
                
                132,000
                
                $
                .63April
                    1999 options
                
                
                ---
                
                
                ---
                
                
                644,286
                
                $
                .63
                
                
                800,000
                
                $
                .63June
                    1998 options
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                10,000
                
                $
                1.13341,116
                
                
                
                
                
                932,286
                
                
                
                
                
                1,002,000Weighted-average
                    fair value ofoptions
                    granted during the year
                
                $
                3.88
                
                
                
                
                $
                1.41
                
                
                
                
                $
                1.28
 
 The
          remaining contractual life at December 31, 2003 is 3.4 years for the June,
          2003
          options, 1.7 years for the August, 2003 options, 2.4 years for the May,
          2002
          options, 1.7 years for the September, 2001 options, and 1 year for the
          January,
          2001 options.
  The
          company has 694,616 shares reserved for issuance, including: 273,616 shares
          for
          the January, 2001 options, 120,000 shares for the September, 2001 options,
          11,000 shares for the May, 2002 options, 50,000 shares for the June, 2003
          options, 10,000 shares for the August, 2003 options, 20,000 shares for
          the
          January 2004 options, 160,000 shares for the June 2004 options and 50,000
          shares
          for the August 2004 options. All options were issued at fair market value
          on
          date of grant.
 F-24
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          6--STOCK OPTIONS--Continued**
 
 The
          number and exercise price of outstanding options was adjusted based upon
          a
          two-for-one stock split affected by the company in February, 2004. See
          Note 1
          and 14.
 
 **NOTE
          7--COMMITMENTS**
 
 The
          company has leases on facilities housing its dialysis operations and equipment
          leases. Total rent expense was approximately $1,194,000, $778,000 and $521,000
          for the years ended December 31, 2004, 2003 and 2002, respectively. The
          aggregate lease commitments at December 31, 2004 for the company’s
          non-cancelable operating leases with a term of one year or more are
          approximately:
  2005
                  
                  $
                  1,426,0002006
                  
                  
                  1,464,0002007
                  
                  
                  1,393,0002008
                  
                  
                  1,379,0002009
                  
                  
                  1,029,000Thereafter
                  
                  
                  2,150,000$
                  8,841,000
 Effective
          January 1, 1997, the company established a 401(k) savings plan (salary
          deferral
          plan) with an eligibility requirement of one year of service and 21 year
          old age
          requirement. The company and its parent established a new 401(k) plan effective
          January, 2003, which allows employees, in addition to regular employee
          contributions, to elect to have a portion of bonus payments contributed.
          As an
          incentive to save for retirement, the company will match 10% of an employee’s
          contribution resulting from any bonus paid during the year and may make
          a
          discretionary contribution with the percentage of any discretionary contribution
          to be determined each year with only employee contributions up to 6% of
          annual
          compensation considered when determining employer matching.
 
 Stephen
          W. Everett, CEO, President and director of the company, has a five-year
          employment contract through December 31, 2005, currently at an annual salary
          of
          $250,000. The employment agreement also provides for certain fringe benefits,
          reimbursement of reasonable out-of-pocket expenses, and a one-year non-compete
          within the United States.
 
  The
          company has given the non-affiliated owner of the facility in Georgia that
          is
          managed by the company a put option to sell to a subsidiary of the company
          all
          the assets of that Georgia dialysis facility. The company’s subsidiary holds a
          call option to purchase the assets of the Georgia facility. Each of the
          put and
          call options are exercisable through September, 2005. The put option is
          not
          exercisable unless that Georgia dialysis facility has recorded $100,000
          in
          pre-tax profits. Upon exercise of either the put or call option the owner
          would
          receive a 20% interest in the company’s subsidiary which would own and operate
          the Georgia facility, and the remainder of the purchase price would be
          paid in
          cash, determined on a formula based upon a multiple of EBITDA.
  F-25
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          8--REPURCHASE OF COMMON STOCK**
 
 In
          September, 2000, the company announced its intent to repurchase up to 600,000
          shares of its common stock at current market prices. The company repurchased
          and
          cancelled approximately 154,000 shares in the fourth quarter of 2000 with
          a
          repurchase cost of approximately $65,000, and a total of approximately
          185,000
          shares at a cost of approximately $98,000 during 2001 and a total of
          approximately 21,000 shares at a cost of approximately $42,000 during
          2003.
 
 **NOTE
          9--CAPITAL EXPENDITURES AND DEPRECIATION**
  Capital
            expenditures and depreciation expense
            were as follows:
 **2004**
                
                **2003**
                
                **2002**Capital
                    expenditures
                
                $
                3,132,000
                
                $
                1,656,000
                
                $
                1,326,000Depreciation
                    expense
                
                $
                1,493,000
                
                $
                1,184,000
                
                $
                1,060,000
 
 **NOTE
          10--ACQUISITIONS**
 
  The
          company has made various acquisitions commencing in 2001, as further described
          below. These acquisitions were made either on the basis of existing
          profitability or expectation of future profitability for the interest acquired
          based on the company’s analysis of the potential for each acquisition, and the
          value of the relationship with the physician affiliated with the selling
          entity.
          Each acquisition was intended to either strengthen our market share within
          a
          geographic area or provide us with the opportunity to enter a new geographic
          area and market.
 
 In
          addition to potential future profitability, market share, physician
          relationships and geographic considerations, the company reviews the purchase
          price and any resulting goodwill based on established current per patient
          valuations for dialysis centers. The company also considers the synergistic
          effects of a potential acquisition, including potential costs integration
          and
          the effect of the acquisition on the overall valuation of the
          company.
   In
          August, 2001, the company acquired the remaining 30% minority interest
          in DCA of
          So. Ga., LLC, giving the company a 100% ownership interest, for $600,000.
          This
          transaction resulted in $523,000 goodwill representing the excess of the
          $600,000 purchase price over the $77,000 fair value of the assets acquired.
          The
          goodwill is being amortized for tax purposes over a 15-year period. The
          company’s decision to make this investment was based largely on the
          profitability of DCA of So. Ga. The party from whom the company acquired
          the
          minority interest is the medical director of another dialysis subsidiary
          of the
          company. See Note 1.
  In
          April,
          2002, the company acquired a dialysis center in Royston, Georgia for $550,000.
          This transaction resulted in $400,000 of goodwill representing the excess
          of the
          $550,000 purchase price over the $150,000 fair value of the assets acquired.
          The
          goodwill is being amortized for tax purposes over a 15-year period. The
          company’s decision to make this investment was based on its expectation of
          future profitability resulting from its review of this dialysis center’s
          operations prior to making the acquisition. See Note 1.
 
 F-26
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          10--ACQUISITIONS--Continued**
 
 During
          the second quarter of 2003, the company acquired the assets of a Georgia
          dialysis center and the 30% minority interests in each of two of its existing
          Georgia dialysis centers for a total consideration of $1,415,000, of which
          $745,000 was paid initially and the remaining balance of $670,000 was paid
          during the second quarter of 2004. These acquisitions resulted in $1,368,000
          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. The company’s decision to make these acquisitions was based on
          its expectation of profitability resulting from management’s evaluation of the
          operations of these dialysis centers. The party from whom the 30% minority
          interests were purchased was the medical director of one of the facilities
          at
          which the 30% interest was acquired and is the medical director of two
          other of
          the company’s Georgia dialysis facilities. See Note 1.
  Effective
          as of the close of business on August 31, 2004, the company acquired a
          Pennsylvania dialysis company for an estimated net purchase price of $1,521,000.
          Of that amount, $761,000 is currently in escrow, with the balance of
          approximately $760,000 to be paid in equal installments, each on the first
          and
          second anniversary of the effective date of the purchase agreement. This
          transaction resulted in $1,358,000 of goodwill representing the excess
          of the
          net purchase price over the estimated $164,000 fair value of net assets
          acquired, including an $83,000 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.
          The initial allocation of purchase cost at fair value was based upon available
          information and will be finalized as any contingent purchase amounts are
          resolved and estimated fair values of assets are finalized. The company
          began
          recording the results of operations for the acquired company as of the
          effective
          date of the acquisition. The company’s decision to make this investment was
          based on its expectation of future profitability resulting from its review
          of
          the acquired company’s operations prior to making the acquisition. See
 Note
          1.
 
 The
          following table summarizes the estimated fair values of the assets acquired
          and
          liabilities assumed at the date of acquisition for the August 2004 Pennsylvania
          acquisition:
 
 Accounts
                    receivable, net
                
                $
                215,825Inventory
                    and other current assets
                
                
                79,383Property,
                    plant and equipment, net
                
                
                88,231Intangible
                    assets
                
                
                82,500Goodwill
                
                
                1,357,681Total
                    assets acquired
                
                
                1,823,620Total
                    liabilities assumed
                
                
                302,429Net
                    assets acquired
                
                $
                1,521,191
  F-27
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          11--LOAN TRANSACTIONS**
 
 The
          company has and may continue to provide funds in excess of capital contributions
          to meet working capital requirements of its dialysis facility subsidiaries,
          usually until they become self-sufficient. The operating agreements for
          the
          subsidiaries provide for cash flow and other proceeds to first pay any
          such
          financing, exclusive of any tax payment distributions. See Notes 5 and
          13.
 
 **NOTE
          12--QUARTERLY FINANCIAL INFORMATION (Unaudited)**
 
 The
          following summarizes certain quarterly operating data (in thousands except
          per
          share data):
 
 
 **Year
                    Ended December 31, 2004****March
                    31**
                
                **June
                    30**
                
                **Sept.
                    30**
                
                **Dec.31**
                
                **Total**Net
                    Sales
                
                $
                8,410
                
                $
                9,497
                
                $
                10,857
                
                $
                11,686
                
                $
                40,450Gross
                    profit
                
                
                3,248
                
                
                3,759
                
                
                4,806
                
                
                5,092
                
                
                16,905Net
                    income
                
                
                288
                
                
                388
                
                
                776
                
                
                762
                
                
                2,214Earnings
                    per shares:Basic
                
                $
                .04
                
                $
                .05
                
                $
                .09
                
                $
                .09
                
                $
                .27Diluted
                
                $
                .03
                
                $
                .04
                
                $
                .09
                
                $
                .09
                
                $
                .25
  **Year
                    Ended December 31, 2003****March
                    31**
                
                **June
                    30**
                
                **Sept.
                    30**
                
                **Dec.31**
                
                **Total**Net
                    Sales
                
                $
                6,738
                
                $
                7,424
                
                $
                7,535
                
                $
                7,979
                
                $
                29,676Gross
                    profit
                
                
                2,535
                
                
                2,907
                
                
                2,829
                
                
                3,184
                
                
                11,455Net
                    income
                
                
                156
                
                
                220
                
                
                308
                
                
                466
                
                
                1,150Earnings
                    per shares:Basic
                
                $
                .02
                
                $
                .03
                
                $
                .04
                
                $
                .06
                
                $
                .15Diluted
                
                $
                .02
                
                $
                .03
                
                $
                .04
                
                $
                .05
                
                $
                .13
  **Year
                    Ended December 31, 2002****March
                    31**
                
                **June
                    30**
                
                **Sept.
                    30**
                
                **Dec.31**
                
                **Total**Net
                    Sales
                
                $
                5,488
                
                $
                6,315
                
                $
                6,698
                
                $
                6,661
                
                $
                25,162Gross
                    profit
                
                
                2,093
                
                
                2,598
                
                
                2,718
                
                
                2,686
                
                
                10,095Net
                    income
                
                
                162
                
                
                339
                
                
                393
                
                
                348
                
                
                1,242Earnings
                    per shares:Basic
                
                $
                .02
                
                $
                .04
                
                $
                .05
                
                $
                .04
                
                $
                .16Diluted
                
                $
                .02
                
                $
                .04
                
                $
                .05
                
                $
                .04
                
                $
                .14
 
 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-28
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          13--SUPPLEMENTAL CASH FLOW INFORMATION**
 
 The
          following amounts represent (rounded to the nearest thousand) non-cash
          financing
          and investing activities and other cash flow information in addition to
          information disclosed in Notes 3 and 6:
 
 2004
                
                2003
                
                2002Interest
                    paid (see Note 2)
                
                $
                204,000
                
                $
                189,000
                
                $
                234,000Income
                    taxes paid (see Note 3)
                
                
                1,350,000
                
                
                777,000
                
                
                1,234,000Equipment
                    financing (see Note 2)
                
                
                ---
                
                
                ---
                
                
                399,000Options
                    exercise bonus (191,238 shares 2004;159,284
                    shares 2003) (see Note 6)
                
                
                120,000
                
                
                100,000
                
                
                ---Subsidiary
                    minority member capital contributionsfinancing
                    (see Notes 5 and 13)
                
                
                324,000
                
                
                223,000
                
                
                ---Subsidiary
                    minority member distributions appliedagainst
                    financing (see Notes 5 and 13)
                
                
                74,000
                
                
                54,000
                
                
                ---Share
                    payment (514,008 options exercised; 72,375shares
                    paid) for stock option exercises (see Note 6)
                
                
                321,000
                
                
                ---
                
                
                ---Payment
                    on note receivable with 91,800 shares of common stock (see Note
                    6)
                
                
                521,000
                
                
                ---
                
                
                ---Increase
                    in additional paid-in capital from exercise of non-qualified
                    stock options
                    (see Notes 3 and 6)
                
                
                120,000
                
                
                ---
                
                
                ---
 
 **NOTE
          14--STOCK SPLIT**
 
 The
          board
          of directors declared a two-for-one stock split with respect to the company’s
          3,968,772 shares of outstanding common stock. The record date of the split
          was
          January 28, 2004; the distribution date was February 9, 2004; and the date
          Nasdaq reported the adjusted price of the common stock was February 10,
          2004.
          The two-for-one stock split increased the outstanding shares of common
          stock at
          that time to 7,937,544 shares. The split also required adjustment in the
          outstanding stock options by doubling the number of shares obtainable upon
          exercise, and halving the exercise price of the options. See Note 1 and
          6.
 
 **NOTE
          15--AFFILIATE FINANCIAL INFORMATION**
 
 The
          following amounts represent certain operating data of the company’s 40% owned
          Ohio affiliate that is accounted for in the equity method and not consolidated
          for financial reporting purposes (see Note 1):
 
 **2004**
                
                **2003**
                
                **2002**Revenues
                
                $
                2,275,000
                
                $
                1,547,000
                
                $
                1,600,000Gross
                    profit
                
                $
                1,244,000
                
                $
                600,000
                
                $
                665,000Net
                    income
                
                $
                707,000
                
                $
                111,000
                
                $
                174,000
 
 F-29
 **DIALYSIS
                CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
                31, 2004**
  **NOTE
          15--AFFILIATE FINANCIAL INFORMATION--Continued**
 
 The
          following amounts are from the balance sheet of the company’s 40% owned Ohio
          affiliate:
 
 **December
                    31,****2004**
                
                **2003**Current
                    assets
                
                $
                945,321
                
                $
                451,104Non-current
                    assets
                
                
                160,504
                
                
                206,540Total
                    assets
                
                $
                1,105,825
                
                $
                657,644Current
                    liabilities
                
                $
                244,570
                
                $
                211,221Non-current
                    liabilities
                
                
                ---
                
                
                50,953Capital
                
                
                861,255
                
                
                395,470Total
                    liabilities and capital
                
                $
                1,105,825
                
                $
                657,644
 
 **NOTE
          16--SUBSEQUENT EVENTS**
 
 On
          March
          15, 2005 the company and its parent, Medicore, Inc., jointly announced
          they have
          agreed to terms whereby Medicore, which owns approximately 56% of the company
          (57% at December 31, 2004), will merge into the company for a total
          consideration of approximately 5,289,000 shares of the company’s common stock.
          Upon completion of the merger, it is anticipated that each Medicore shareholder
          will receive .68 shares of the company’s common stock for each share of Medicore
          common stock, and Medicore’s ownership in the company will be retired resulting
          in approximately 9,000,000 shares of the company to remain outstanding.
          Completion of the transaction is subject to shareholder approval of each
          company.
 
 The
          merger is intended to simplify the corporate structure and enable the ownership
          of the control interest in the company to be in the hands of the public
          shareholders. The merger will provide the company with additional capital
          resources to continue to build its dialysis business.
  F-30
 
 **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
 February
          18, 2005
  F-31
 **Schedule
          II - Valuation and Qualifying Accounts**
 **Dialysis
          Corporation of America, Inc. and Subsidiaries**
 **December
          31, 2004**
  COL.
                            A
                        COL.
                            B
                        COL.
                            C
                        COL.
                            D
                        COL.
                            EClassification
                        Balance
                            atBeginningOf
                            Period
                        Additions
                            (Deductions)Charged
                            (Credited) toCost
                            and Expenses
                        Additions
                          Charged
                            to
                          Other
                            Accounts
                          Describe
                        Other
                            Changes
                          Add
                            (Deduct)
                          Describe
                        Balanceat
                            End ofPeriod
  YEAR
                            ENDED DECEMBER 31, 2004:Reserves
                            and allowances deductedfrom
                            asset accounts:Allowance
                            for uncollectible accounts
                        
                        $
                        785,000
                        
                        $
                        1,198,000
                        
                        
                        $
                        (347,000)
                        (1)
                        $
                        1,636,000Valuation
                            allowance for deferred tax asset
                        
                        
                        52,000
                        
                        
                        (52,000
                        )
                        
                        
                        ---
                        
                        
                        ---$
                        837,000
                        
                        $
                        1,146,000
                        
                        
                        $
                        (347,000
                        )
                        $
                        1,636,000YEAR
                            ENDED DECEMBER 31, 2003:Reserves
                            and allowances deductedfrom
                            asset accounts:Allowance
                            for uncollectable accounts
                        
                        $
                        831,000
                        
                        $
                        290,000
                        
                        
                        $
                        (336,000)
                        (1)
                        $
                        785,000Valuation
                            allowance for deferred tax asset
                        
                        
                        72,000
                        
                        
                        (20,000
                        )
                        
                        
                        ---
                        
                        
                        52,000$
                        903,000
                        
                        $
                        270,000
                        
                        
                        $
                        (336,000
                        )
                        $
                        837,000YEAR
                            ENDED DECEMBER 31, 2002:Reserves
                            and allowances deductedfrom
                            asset accounts:Allowance
                            for uncollectable accounts
                        
                        $
                        727,000
                        
                        $
                        721,000
                        
                        
                        $
                        (617,000)
                        (1)
                        $
                        831,000Valuation
                            allowance for deferred tax asset
                        
                        
                        217,000
                        
                        
                        (145,000
                        )
                        
                        
                        ---
                        
                        
                        72,000$
                        944,000
                        
                        $
                        576,000
                        
                        
                        $
                        (617,000
                        )
                        $
                        903,000
 (1)
                Uncollectible
                    accounts written off, net of
                    recoveries.
  F-32
   
 **Exhibits**
 
 **to**
 
 **DIALYSIS
        CORPORATION OF AMERICA**
  **Annual
        Report on Form 10-K/A, Amendment No. 1 For the Fiscal Year Ended December
        31,
        2004**
  23.1
                Consent
                    of Wiss & Company, LLP23.2
                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