**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**


(Mark
      One)


x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the fiscal year endedDecember
                  31, 2005ORo
              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 incorporation or organization)
            
            I.R.S.
                Employer 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 if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o   No
x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
o   No
x





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





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. Check One


Large
      accelerated filer o    Accelerated filer o    Non-accelerated filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





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





As
      of March
      29 ,
      2006,
      the Company had  9,505,846 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, 1999 and 2002, Part
      IV,
      Exhibits, incorporated in Part IV of this Annual Report.





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








i


DIALYSIS
      CORPORATION OF AMERICA





Index
      to
      Annual Report on Form 10-K


Year
      Ended December 31, 2005





Page**PART
                  I**Cautionary
                  Notice Regarding Forward-Looking Information
              1Item
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              21Item
                  1B.
              Unresolved
                  Staff Comments
              30Item
                  2.
              Properties
              30Item
                  3.
              Legal
                  Proceedings
              32Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              32**PART
                  II**Item
                  5.
              Market
                  for the Registrant's Common Equity, Related Stockholder Matters
                  and Issuer
                  Purchases of Equity Securities
              32Item
                  6.
              Selected
                  Financial Data
              35Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              36Item
                  7A.
              Quantitative
                  and Qualitative Disclosure About Market Risk
              49Item
                  8.
              Financial
                  Statements and Supplementary Data
              50Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              50Item
                  9A.
              Controls
                  and Procedures
              50Item
                  9B.
              Other
                  Information
              50


ii


Page**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the Registrant
              51Item
                  11.
              Executive
                  Compensation
              51Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              51Item
                  13.
              Certain
                  Relationships and Related Transactions
              51Item
                  14.
              Principal
                  Accountant Fees and Services
              52**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              53Signatures
              
              56


iii


**Part
      I**





**Cautionary
      Notice Regarding Forward-Looking Information**





The
      statements contained in this Annual Report on Form 10-K dated March 30, 2006
      and
      the documents incorporated by reference in this Annual Report that are not
      historical are forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933 as amended (the “Securities Act”), and Section 21E of
      the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, from time
      to time, we or our representatives have made or may make forward looking
      statements, orally or in writing, and in press releases. The Private Securities
      Litigation Reform Act of 1995 contains certain safe harbors for forward-looking
      statements. Certain of the forward-looking statements include management’s
      expectations, intentions, beliefs and strategies regarding the growth of our
      company and our future operations, the character and development of the dialysis
      industry, anticipated revenues, our need for and sources of funding for
      expansion opportunities and construction, expenditures, costs and income, our
      business strategies and plans for future operations, and similar expressions
      concerning matters that are not considered historical facts. Forward-looking
      statements also include our statements regarding liquidity, anticipated cash
      needs and availability, and anticipated expense levels in Item 7, “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations.” Words
      such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans”
and “believes,” and words and terms of similar substance used in connection with
      any discussions of future operating or financial performance identify
      forward-looking statements. Such forward-looking statements, like all statements
      about expected future events, are based on assumptions and are subject to
      substantial risks and uncertainties that could cause actual results to
      materially differ from those expressed in the statements, including general
      economic, market and business conditions, opportunities pursued or not pursued,
      competition, changes in federal and state laws or regulations affecting the
      company and our operations, and other factors discussed periodically in our
      filings. Many of the foregoing factors are beyond our control. Among the factors
      that could cause actual results to differ materially are the factors detailed
      in
      the risks discussed in Item 1A, “Risk Factors” section beginning on page 21 of
      this 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 this
      Annual Report. You should read this 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 this 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. Our primary business is the operation
      of
      kidney dialysis centers and other dialysis services. 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 29 outpatient dialysis facilities
      including three centers we acquired in the first quarter of 2006 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 2005, we opened three dialysis centers: one in each of Maryland, Ohio,
      and South Carolina. We are in the process of developing five new centers: two
      in
      South Carolina, one in Pennsylvania and two in Georgia. We acquired a Virginia
      center and two Maryland centers in February 2006. Subsequent to the completion
      of the company’s merger with Medicore, Inc., its former parent in September
      2005, the company also engages in medical product sales.








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





telephone:
      (410) 694-0500


fax:
      (410) 694-0596


email:
      info@dialysiscorporation.com





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





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





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





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





The
      merger enabled the control interest in our company to be in the hands of the
      public stockholders and provides us with additional capital resources to
      continue its growth. See Note 16 to “Notes to Consolidated Financial
      Statements,” and Item 3, “Legal Proceedings” under Part I of this annual
      report.








**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.





2


Our
      medical services revenue is derived primarily from four sources: (i) outpatient
      hemodialysis services (52%, 46% and 47% of medical services revenue for 2005,
      2004 and 2003, respectively); (ii) home peritoneal dialysis services (7%, 7%,
      and 4% of medical services revenue for 2005, 2004 and 2003, respectively);
      (iii)
      inpatient hemodialysis services for acute patient care provided through
      agreements with hospitals and medical centers (5%, 5% and 7% of medical services
      revenue for 2005, 2004 and 2003, respectively); and (iv) ancillary services
      associated with dialysis treatments, primarily the administration of
      erythropoietin (“EPO”), a bio-engineered protein that stimulates the production
      of red blood cells (a deteriorating kidney loses its ability to regulate red
      blood cell count, resulting in anemia), (36%, 42% and 42% of medical services
      revenue for 2005, 2004 and 2003, respectively with EPO representing 28% of
      medical services revenue in each of these years). 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 approved a 1.6%
      composite rate increase for each of 2005 and 2006. In 2005, Medicare implemented
      an additional change in the manner it reimburses dialysis treatments, which
      includes a pricing revision to the current average wholesale price for
      separately billable drugs and biologicals. Effective January 1, 2006, payments
      for pharmaceuticals (including EPO) are set at the pharmaceutical’s average
      sales price as determined by the Inspector General of HHS, plus 6%, which is
      less than the average acquisition price used in 2005. Effective April, 2006,
      CMS
      is implementing a policy for monitoring the dosage of EPO based upon the
      patient’s hematocrit level and for limiting the quantity of EPO that can be
      administered in any one month. Medicare has implemented a case mix payment
      system, adjusting the composite rate for a limited number of patient
      characteristics. The increase in the composite rate is intended to offset
      reductions in pharmaceutical reimbursements. See under this Item 1, “Operations
      - Medicare Reimbursement” and Item 1A, “Risk Factors.” Commercial third-party
      reimbursement rates, which have increased as a percentage of our revenues over
      the last two years, are also susceptible to reduction. See “Operations -
      Medicare Reimbursement.” The inpatient dialysis service agreements for treating
      acute kidney disease are not subject to government fixed rates, but rather
      are
      negotiated with hospitals. Typically these rates are at least equivalent to
      or
      higher than the government fixed rates on a per treatment basis.





**Stock
      Split**





On
      January 28, 2004, the company affected 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, 2005, has been adjusted to reflect the stock
      split.


3





**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, 2003 was approximately
      325,000, and continues to grow at a rate of approximately 3% to 4% a year.
      This
      is thought to be attributable primarily to the aging of the population, greater
      patient longevity as a result of improved dialysis technology, and better
      treatment and survival rates for illnesses that lead to chronic kidney disease.
      The statistics further reflect over 4,500 dialysis facilities, with a current
      annual cost for treating ESRD patients in the United States at approximately
      $27
      billion at December, 2003, of which Medicare accounted for approximately $18
      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; 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.





4




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 29 years’ experience in developing and operating
      dialysis treatment facilities. Our priority is to provide quality patient care.
      We intend to continue to establish 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 have acquired three centers in early 2006. We are in
      different phases of negotiations with physicians for potential new facilities
      in
      a variety of states.





*Same
      Center Growth*





We
      endeavor to increase same center growth by adding quality staff and management
      and attracting new patients to our existing facilities. We seek to accomplish
      this objective by rendering high caliber patient care in convenient, safe and
      pleasant conditions. We believe that we have adequate space and stations within
      our facilities to accommodate greater patient volume and maximize our treatment
      potential. Same center growth relates to those centers that have been operable
      for at least 12 months or have exhibited consistent profitability, whichever
      first occurs. During fiscal 2005, we experienced approximately 7.3% increase
      in
      dialysis treatments for our facilities that qualified to be included in same
      center growth.





*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.





5


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





To
      construct and develop a new facility ready for operation takes an average of
      six
      to eight months, and approximately 12 months or longer to generate income,
      all
      of which are subject to variables based on location, size and competitive
      elements. Some of our centers are in the developmental stage, since they have
      not reached the point where the patient base is sufficient to generate and
      sustain earnings. See Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.” Construction of a 15 station facility,
      typically the size of our dialysis facilities, costs in a range of $750,000
      to
      $1,000,000, including equipment and initial working capital requirements,
      depending on location, size and related services to be provided by the proposed
      facility. 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.





On
      October 24, 2005, we entered into a Credit Agreement with KeyBank National
      Association for a three year, $15,000,000 revolving credit facility intended
      to
      provide available funds for the development and acquisition of new dialysis
      facilities and for other general working capital and corporate purposes. This
      financing agreement is secured by our ownership interest in each of our
      subsidiaries. Additionally, each of our wholly-owned subsidiaries and any future
      wholly-owned subsidiary is and will be a guarantor of our obligation under
      the
      credit facility. Both base rate loans and LIBOR loans may be obtained with
      the
      interest rate to include the applicable margin based on the type of loan. We
      did
      not utilize this credit facility during 2005. We borrowed $1,500,000 under
      this
      financing agreement in January 2006. See Note 2 to “Notes to Consolidated
      Financial Statements.”





*Inpatient
      Services*





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





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




6


**Operations**





*Location,
      Capacity and Use of Facilities*





We
      operate 29 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 404 licensed stations.





Of
      our 29
      dialysis facilities, 27 are owned by us through subsidiaries as follows: 14
      wholly-owned subsidiaries, one of which owns two facilities, and 12
      majority-owned subsidiaries in conjunction with the medical directors of those
      centers who hold minority interests. In addition we hold a minority 40% interest
      in an Ohio facility through a subsidiary that 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
      had
      given the non-affiliated owner of the facility in Georgia that we manage a
      put
      option to sell to one of our subsidiaries all the assets of that Georgia
      dialysis facility. Our subsidiary held a call option to purchase the assets
      of
      the Georgia facility. Each of the put and call options were exercisable through
      September, 2005. In August, 2005, our subsidiary notified the owner of the
      Georgia facility of its intent to exercise the call option and negotiate the
      acquisition of the facility’s assets from the owner. Subsequently, the parties
      agreed to defer the asset acquisition and to extend the call option held by
      our
      subsidiary through December 31, 2006. The threshold for the exercise of the
      put
      option was never attained and the put option expired unexercised in September,
      2005 and has not been extended. 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 179,000 hemodialysis treatments in 2005,
      an
      increase of approximately 30,000 treatments compared to fiscal
      2004.





We
      estimate that on average our centers were operating at approximately 48% of
      capacity as of December 31, 2005, 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.





7


*Operations
      of Dialysis Facilities*





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





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





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





*Ancillary
      Services*





Our
      dialysis facilities provide certain ancillary services to ESRD patients
      including the administration of certain prescription drugs, such as EPO, upon
      a
      physician’s prescription. EPO is a bio-engineered protein which stimulates the
      production of red blood cells and is used in connection with dialysis to treat
      anemia, a medical complication frequently experienced by ESRD patients. EPO
      decreases the necessity for blood transfusions in ESRD patients. 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.





8


*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 eleven of our centers have 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. 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.





9


*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 91% of dialysis patients had a Kt/V level greater than
      1.2,
      while approximately 95% of our patients had a Kt/V level greater than 1.2,
      for
      2004 and 2005.





Anemia
      is
      a shortage of oxygen-carrying red blood cells. Because red blood cells bring
      oxygen to all the cells in the body, anemia causes severe fatigue, heart
      disorders, difficulty concentrating, reduced immune function, and other
      problems. Anemia is common among renal patients, caused by insufficient
      erythropoietin, iron deficiency, repeated blood losses, and other factors.
      Anemia can be detected with a blood test for hemoglobin or
      hematocrit. ** It
      is
      ideal to have as many patients as possible with hemoglobin levels above 11. ** The
      national average for 2004 indicated 80% of dialysis patients had a hemoglobin
      level greater than 11, while approximately 80% and 81% of our patients had
      a
      hemoglobin level greater than 11, for 2004 and 2005, respectively.





Vascular
      access is the “lifeline” for hemodialysis patients. CMS has indicated that
      fistulas are the “gold standard” for establishing access to a patient’s
      circulatory system. 43% of DCA patients were dialyzed with a fistula during
      the
      year ended December 31, 2005.





*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.





10





Under
      the
      ESRD Program, payments for dialysis services are determined pursuant to Part
      B
      of the Medicare Act which presently pays 80% of the allowable charges for each
      dialysis treatment furnished to patients. The maximum payments vary based on
      the
      geographic location of the center. The remaining 20% may be paid by Medicaid
      if
      the patient is eligible, from private insurance funds or the patient’s personal
      funds. If there is no secondary payor to cover the remaining 20%, Medicare
      may
      reimburse us for part of that balance as part of our annual cost report filings.
      Medicare and Medicaid programs are subject to regulatory changes, statutory
      limitations and government funding restrictions, which may adversely affect
      dialysis services payments and, consequently, our revenues. See “Medicare
      Reimbursement” below.





The
      inpatient dialysis services are paid for by each contracted hospital pursuant
      to
      contractual pre-determined fees for the different dialysis
      treatments.





*Medicare
      Reimbursement*





We
      are
      reimbursed primarily by Medicare under a prospective reimbursement system for
      chronic dialysis services, and by third party payors including Medicaid and
      commercial insurance companies. Our dialysis facilities are certified to
      participate in the Medicare program. Under the Medicare system, the
      reimbursement rates are fixed in advance and limit the allowable charge per
      treatment, but provide us with predictable and recurring per treatment revenues
      and allows us to retain any profit earned. An established composite rate set
      by
      CMS governs the Medicare reimbursement available for a designated group of
      dialysis services, including dialysis treatments, supplies used for such
      treatments, certain laboratory tests and medications.





Other
      ancillary services and items are eligible for separate reimbursement under
      Medicare and are not part of the composite rate, including certain drugs such
      as
      EPO, for which the allowable rate for 2005 was $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 2005 was derived from providing dialysis patients with EPO. CMS
      limits the EPO reimbursement based upon patients’ hematocrit levels. CMS has
      issued a new payment coverage policy for EPO, which will be effective April
      1,
      2006. This new policy restricts payments based on EPO doses for certain patients
      and may affect physician prescription patterns as they adopt the new policy.
      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 approved a 1.6% composite rate increase for each of 2005 and 2006.
      Medicare reimburses dialysis providers for the ten most utilized ESRD drugs
      at
      an amount equal to the cost of such drugs, and for other ESRD drugs Medicare
      reimburses at an amount equal to the average sale price of the drug as
      determined by the Inspector General of HHS, plus 6%; and the composite rate
      has
      been increased by an amount estimated by HHS to be the dialysis provider’s
      average profit for these drugs. To make this change budget-neutral, a drug
      add-on composite has been included. Accordingly, CMS determined that the
      Medicare ESRD composite rate would increase by approximately 8.7% or $11 per
      treatment, and that payments for separately billable drugs would be reduced
      as
      described above. As of April 1, 2005, CMS reimburses providers using a case
      mix
      formula. CMS adjusted reimbursements based on predefined patient


11


parameters
      such as patient height, weight and age. Congress has mandated a budget
      neutrality factor adjustment so that aggregate payments under the system equal
      payments that would have been made without the case mix adjustments and the
      add-on composite for reimbursement of the drugs. Management believes there
      is
      minimal impact on its average Medicare revenue per treatment as a result of
      these changes in Medicare reimbursement. Any reduction in the Medicare composite
      reimbursement rate could have a material adverse effect on our business,
      revenues and net earnings.





*Medicaid
      Reimbursement*





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





**Sources
      of Medical Services Revenue**








**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Medicare
            
            
            51
            %
            
            48
            %
            
            54
            %Medicaid
                and Comparable Programs
            
            
            8
            %
            
            8
            %
            
            8
            %Hospital
                inpatient dialysis services
            
            
            5
            %
            
            6
            %
            
            7
            %Commercial
                and private payors
            
            
            36
            %
            
            38
            %
            
            31
            %





*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 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.


12


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
      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.





*Certification
      and Reimbursement*





Our
      dialysis centers must meet certain requirements, including, among others, those
      relating to patient care, patient rights, medical records, the physical set-up
      of the center, and personnel, in order to be certified
      by CMS, to be covered under the Medicare program and to receive Medicare
      reimbursement. See above under “Operations - Medicare Reimbursement.” Our
      dialysis centers are certified under the Medicare program, and except for two
      new centers awaiting certification, our dialysis centers are certified under
      applicable state Medicaid programs.





14


*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 five years and does not take into
      account the volume or value of any referrals to the dialysis center. Eleven
      of
      our outpatient dialysis centers are owned jointly between us and physicians
      who,
      in most cases, hold a minority position through a professional association.
      One
      of our facilities in Ohio 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.





15


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





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





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





*Stark
      II*





The
      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 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.





16


HHS’
      regulations to Stark II became effective in January, 2002. CMS adopted Phase
      II
      of its regulations under Stark II in March, 2004. These regulations exclude
      from
      covered designated health services and referral prohibitions, services included
      in the ESRD composite rate and EPO and other drugs required as part of dialysis
      treatments under certain conditions. Also excluded from “inpatient hospital
      services” are dialysis services provided by a hospital not certified by CMS to
      provide outpatient dialysis services, which would exclude our inpatient hospital
      services agreements from Stark II. Equipment and supplies used in connection
      with home dialysis are excluded from the Stark II definition of “durable medical
      equipment.”





Stark
      II
      regulations and the legislative history of Stark II 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 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.





17


*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 had
      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 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.


18





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 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.





19


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





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





**Medical
      Products**





Subsequent
      to our merger with our former parent company, Medicore, Inc., we are engaged
      in
      the development and distribution of medical products, primarily disposables,
      both domestically and internationally, to hospitals, blood banks, laboratories
      and retail pharmacies. Products distributed include exam gloves, prepackaged
      swabs and bandages and glass tubing products for laboratories. We additionally
      distribute a line of blood lancets used to draw blood for testing. The lancets
      are distributed under the names Producers of Quality Medical DisposablesTM, Lady
      LiteTM, our brand name Lite Touch, or under a private label if requested by the
      customer. Medical devices are required by the FDA, as a condition of marketing,
      to secure a 510(k) premarket notification clearance or a Premarket Approval
      Application. A product will be cleared by the FDA under a 510(k) if it is found
      to be substantially equivalent in terms of safety, effectiveness and intended
      use to another legally marketed product. We received 510(k) clearance for our
      blood lancet line and insulin syringes, and for the sterile products. Our
      medical products are subject to continuing FDA oversight, including labeling,
      “good manufacturing practices,” as defined in FDA regulations, and adverse event
      reporting, none of which adverse events have occurred to date. Although we
      hold
      three patents related to our lances (see “Patents and Trade Names” below), and
      obtained required FDA approval relating to the production of lancets, we are
      no
      longer manufacturing these products. Marketing of medical products is conducted
      by independent manufacturer representatives and our employees.





**Competition**





The
      dialysis industry is highly competitive. There are numerous providers who have
      dialysis centers in the same areas as our centers. Many are owned by larger
      corporations, which operate dialysis centers regionally, nationally and
      internationally. Our operations are small in comparison with those corporations.
      Some of our major competitors are large public companies, including Fresenius
      Medical Care, Inc., and DaVita, Inc. These companies have substantially greater
      financial resources, significantly more centers, patients and services than
      we
      do, and by virtue of such may have an advantage over us in competing for
      nephrologists and acquisitions of dialysis facilities in areas and markets
      we
      target. Moreover, competition for acquisitions has increased the cost of
      acquiring existing dialysis centers. Fresenius also manufactures and sells
      dialysis equipment and supplies, which may provide it with a greater
      competitive edge. We also face competition from hospitals and physicians that
      operate their own dialysis facilities.





20


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





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





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





**Employees**





As
      of
      March 1, 2006, our company had 352 full time employees, including
      administrators, licensed practical nurses, registered nurses, technical
      specialists, patient care technicians, clerical employees, social workers,
      dietitians, corporate staff and 4 employees in the medical products operations.
      We retain 31 part-time employees consisting of registered nurses, patient care
      technicians and clerical employees. We also utilize 110 per diem personnel
      to
      supplement staffing.





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





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





**Item
      1A. Risk Factors**





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





21





**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 29 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.”








**Dialysis
      operations are subject to extensive government regulation**





Our
      dialysis operations are subject to extensive federal and state government
      regulations, which include:





·
            licensing
                requirements for each dialysis
                center


·
            government
                healthcare program participation
                requirements


·
            reimbursement
                for patient services


·
            patient
                referral prohibitions; broad federal and state anti-kickback
                regulations


·
            false
                claims prohibitions for health care reimbursement and other fraud
                and
                abuse regulations


·
            record
                keeping requirements


·
            health,
                safety and environmental compliance


·
            expanded
                protection of the privacy and security of personal medical
                data


·
            standards
                for the exchange of electronic health information; electronic transactions
                and code sets; unique identifiers for
                providers


·
            medical
                waste disposal regulations





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





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





22





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





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








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





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





In
      the
      ordinary course of our business, we receive notices of deficiencies for failure
      to comply with various regulatory requirements. We review such notices and
      take
      appropriate corrective action. In most cases, we and the reviewing agency will
      agree upon the measures that will bring the center or services into compliance.
      In some cases or upon repeat violations, none of which we have experienced,
      the
      reviewing agency may take various adverse actions against a provider, including
      but not limited to:





·
            the
                imposition of fines;


·
            suspension
                of payments for new admissions to the center;
                and


·
            in
                extreme circumstances, decertification from participation in the
                Medicare
                or Medicaid programs and revocation of a center’s
                license.





Any
      such
      regulatory actions could adversely affect a center’s ability to continue to
      operate, to provide certain services, and/or its eligibility to participate
      in
      Medicare or Medicaid programs or to receive payments from other payors.
      Moreover, regulatory actions against one center may subject our other centers,
      which may be deemed under our common control or ownership, to similar adverse
      remedies.








**There
      has been increased governmental focus and enforcement with respect to anti-fraud
      initiatives as they relate to healthcare providers**





State
      and
      federal governments are devoting increased attention and resources to anti-fraud
      initiatives against healthcare providers. Legislation has expanded the penalties
      for healthcare fraud, including broader powers to exclude providers from the
      Medicare and Medicaid programs. We have established
      policies and procedures that we believe are sufficient to ensure that our
      facilities will operate in substantial compliance with these anti-fraud
      requirements. While we believe that our business practices are consistent with
      Medicare and Medicaid criteria, those criteria are often vague and subject
      to
      change and interpretation. Anti-fraud actions could have an adverse effect
      on
      our financial position and results of operations.





23





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





During
      2003, 2004 and 2005, approximately 54% , 48% and 51%, respectively of our
      patient revenues was derived from Medicare reimbursement, and 8% of our patient
      revenues in each of these years was derived from Medicaid and equivalent
      programs. Decreases in Medicare and Medicaid and equivalent rates and programs
      for our dialysis treatments would adversely affect our revenues and
      profitability.





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





·
            reductions
                in payments to us or government programs in which we
                participate


·
            increases
                in labor and supply costs, which we do experience, without comparable
                governmental reimbursement rate
                increases


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





In
      November, 2005, CMS released the final physician fee schedule for 2006. A number
      of provisions contained in the fee schedule will affect dialysis facilities.
      First, CMS revised the geographic designations and wage index adjustment applied
      to the composite payment rate. CMS will eliminate the wage index cap, currently
      set at 1.3, and will reduce the wage index floor for 2006 to 0.85 from 0.98.
      Revisions to the geographic adjustments applicable to composite rate payments
      will be phased in over a four year period. For 2006, 75% of the wage adjusted
      composite rate will reflect the old geographic adjustments and 25% will reflect
      the revised adjustments.





CMS
      also
      revised its drug payment methodology, moving from average acquisition cost
      pricing to average sales price plus 6%. While these rates will result in lower
      payments for pharmaceuticals, the composite rate was concurrently increased
      with
      a revision to the drug add-on adjustment from 1.087 to 1.147. CMS is continuing
      the case mix adjustments finalized in 2005 whereby providers receive higher
      composite rate payments for certain patients based on age, body mass index
      and
      body surface area.





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








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





Any
      reduction in the rates paid by private insurers, hospitals and other
      non-governmental third-party organizations would adversely affect our business.
      Alternatively, any change in patient coverage, such as Medicare eligibility
      as
      opposed to higher private insurance coverage, would result in a reduction of
      revenue. We estimate approximately 38%, 44% and 41% of our patient revenues
      for
      2003, 2004 and 2005, respectively, was obtained from sources other than Medicare
      or Medicaid and equivalent programs. We generally charge non-governmental
      organizations for dialysis treatment rates which exceed the fixed Medicare
      and
      Medicaid and equivalent rates. If private payors reduce their payments or we
      experience a shift in revenue mix toward Medicare or Medicaid reimbursement,
      then our revenue, cash flow and earnings would decrease, and our cash flow
      and
      profits would be disproportionately affected.





24





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





EPO,
      a
      bio-engineered drug used for treating anemia in dialysis patients, is currently
      available from a single manufacturer, Amgen, Inc. There currently is no
      alternative drug available to us for the treatment of anemia of our dialysis
      patients. The available supply of EPO could be delayed or reduced, whether
      by
      Amgen itself, through unforeseen circumstances, or as a result of excessive
      demand. In addition, Amgen could increase the price of EPO. This would adversely
      impact our revenues and profitability, since approximately 28% of our medical
      revenues in each of 2003, 2004 and 2005 were based upon the administration
      of
      EPO to our dialysis patients.





If
      government or private payors reduce reimbursement for EPO, then our revenues
      and
      earnings will decline. Most of our EPO reimbursement is from government
      programs. For 2005, Medicare and Medicaid reimbursement represented 72% of
      the
      total revenue derived from EPO. In 2005, CMS revised its rules for reimbursement
      of pharmaceuticals, including EPO, which resulted in a net reduction of average
      Medicare payment rates. In 2006, reimbursement for EPO will be at the average
      sales price plus 6%, which will result in lower reimbursement for
      pharmaceuticals, but offset by the 1.6% composite rate increase.





Changes
      in Medicare reimbursement criteria may also impact EPO revenue. In 2005, CMS
      adopted a national monitoring policy for EPO claims. This policy, which will
      be
      effective April, 2006, may have an adverse impact on our net revenue and
      earnings. Under the new policy, CMS will initiate monitoring when patient
      hematocrit levels reach a threshold of 39.0. CMS expects a 25% reduction in
      the
      dosage of EPO for patients whose hemotocrit exceeds this threshold. If dosage
      is
      not reduced, payment will be made as if the reduction had occurred. The policy
      also limits the quantity of EPO that can be administered in a month, regardless
      of hematocrit levels. We have revised our protocols on anemia management to
      address this policy.








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





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








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





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








25


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





Other
      than four center acquisitions over the period 2002 through 2004 and three
      centers acquired in the first quarter of 2006, expansion of our operations
      has
      been through construction of dialysis centers. We developed two dialysis centers
      and acquired one facility in 2003, opened five new centers and acquired a
      company with two dialysis facilities in 2004, opened three new centers in 2005,
      have four centers under development, and have acquired three centers in early
      2006. 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 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.


26


**We
      depend on physician referrals, and the limitation or cessation of such referrals
      would adversely impact our revenues and earnings**





Most
      dialysis facilities, including ours, are dependent upon referrals of ESRD
      patients for treatment by physicians, primarily those physicians specializing
      in
      nephrology. We retain by written agreement qualified physicians or groups of
      qualified physicians to serve as medical directors for each of our facilities.
      The medical directors are typically a source of patients treated at the
      particular facility served. There is no requirement for these physicians to
      refer their patients to us, and they are free to refer patients to any other
      dialysis facility. The loss of the patient base of the medical director or
      other
      physicians in the area of our facilities could result in a decline in our
      operations, revenues and earnings. We may not be able to renew or otherwise
      negotiate compensation under the medical director agreements with our medical
      director physicians which could terminate the relationship, and without a
      suitable medical director replacement could result in closure of the facility.
      Accordingly, the loss of these key physicians at a particular facility could
      have a material adverse effect on the operations of the facility and could
      adversely affect our revenues and earnings. Most of our medical director
      agreements range in terms of from five to ten years with renewals. We have
      had
      no difficulty in renewing agreements as they have expired. All the medical
      director agreements provide for noncompetition restrictions. We have never
      had
      to attempt to enforce such restrictions, but there is no assurance that a
      particular jurisdiction in which the agreement is applicable would uphold such
      noncompetition agreement, which would increase the potential for competition
      with affiliated dialysis centers and could adversely impact our revenues and
      earnings.





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








**Industry
      changes could adversely affect our business**





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








**Our
      business is subject to substantial competition, and we must compete effectively,
      otherwise our growth could slow**





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





27


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 would adversely impact
      earnings. The liability exposure of operations in the healthcare services
      industry has increased, resulting not only in increased premiums, but in limited
      liability on behalf of the insurance carriers. Our ability to obtain the
      necessary and sufficient insurance coverage for our operations upon expiration
      of our insurance policies may be limited, and sufficient insurance may not
      be
      available on favorable terms, if at all. Such insurance may not be sufficient
      to
      cover any judgments, settlements or costs relating to potential future claims,
      complaints or law suits. Our inability to obtain sufficient insurance for our
      operations, or if we obtain insurance which is limited, any future significant
      judgments, settlements and costs relating to future potential actions, suits
      or
      claims, could have an adverse effect on our company.


28


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





We
      are
      dependent upon the services of Thomas K. Langbein, Chairman of the Board, and
      Stephen W. Everett, our President, Chief Executive Officer and a director.
      Mr.
      Langbein has been involved with us since we organized in 1976. Mr. Everett
      joined our company in November, 1998 as Vice President, became Executive Vice
      President in June, 1999, President on March 1, 2000, and Chief Executive Officer
      in May, 2003. Mr. Everett has been involved in the healthcare industry for
      26
      years. Mr. Everett had an employment agreement with us through December 31,
      2005. A new five-year employment agreement was entered into with Mr. Everett
      effective as of January 3, 2006. Among other things, the employment agreement
      contains a non-competition provision during the term of the agreement and for
      one year after termination. It would be very difficult to replace the services
      of these individuals, whose services, both individually and combined, if lost,
      would adversely affect our operations and earnings, and most likely as a result,
      the trading price of our common stock. There is no key-man life insurance
      covering any of our officers.








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





Our
      officers and directors own 2,340,675 shares of our common stock and vested
      options exercisable into an additional 36,250 shares of common stock, for an
      aggregate of 2,376,925 shares
      or approximately 25% of then 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 7,165,000
      shares. Common stock of the company owned by our officers and directors
      represent approximately 33% of the float. Accordingly, the sale by such officers
      and directors under Rule 144 may have an adverse affect on the market price
      of
      our common stock, and may inhibit our ability to manage subsequent equity or
      debt financing.








**Over
      the last year, our stock price has exhibited volatility, and any investment
      in
      our common stock may, therefore, decline for reasons unrelated to our
      performance**





Our
      common stock trades on the Nasdaq SmallCap Market under the symbol “DCAI.” The
      market price of our common stock has exhibited significant volatility. For
      fiscal 2005, our per share price range was $9.16 to $35.00.





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
      significant fluctuation in the price of our common stock, or in the trading
      volume. The renal care industry has experienced continued and
      rapid
      consolidation as evidenced by the acquisition by DaVita, Inc. of Gambro
      Healthcare, Inc. in October 2005 and the prospective acquisition of Renal Care
      Group, Inc. by Fresenius Medical Care, AG. This consolidation among the four
      larger dialysis service providers may have generated interest of the marketplace
      in our common stock.





29


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





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


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


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


·
            actions
                and announcements by our
                competitors


·
            the
                outlook for the healthcare industry
                generally





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





**Item
      1B. Unresolved Staff Comments**





None.








**Item
      2. Properties**





Dialysis
      Corporation of America owns a property in Easton, Maryland which consists of
      approximately 7,500 square feet, most of which is leased to a competitor under
      a
      10-year lease through June 30, 2009 with two renewals of five years each. The
      lease is guaranteed by the tenant’s parent company.





Our
      Easton, Maryland property has a mortgage to secure a $700,000 development loan
      at an annual interest rate of 1% over the prime rate, maturing in December
      2007.
      This loan had a remaining principal balance of approximately $583,000 at
      December 31, 2005. See Item 7, “Management’s Discussions and Analysis of
      Financial Condition and Results of Operations” and Note 2 to “Notes to
      Consolidated Financial Statements.”





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





We
      acquired property in Valdosta, Georgia in 2000, 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 $633,000
      at December 31, 2005. We are in the process of refinancing the mortgage for
      another five years, basically on the same terms, except for a reduced interest
      rate. 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.





30


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





In
      addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio
      facilities, we presently own or manage 26 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.





During
      2005 we acquired undeveloped properties in Georgia, Pennsylvania and South
      Carolina where we are constructing three of the five dialysis centers currently
      under development. The purchase prices ranged from $150,000 to $205,000 and
      were
      paid in cash. Upon completion of the Georgia center we contemplate a sale and
      leaseback transaction with a third party, similar to the arrangement at our
      Cincinnati, Ohio facility. We acquired three new centers, one in Virginia and
      two in Maryland in early 2006, that lease the facilities in which they operate.
      We continue to actively pursue the additional development and acquisition of
      dialysis facilities in other areas which would entail the acquisition or lease
      of additional property.





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, which were largely financed under a 1996 master
      lease/purchase agreement until 2003 since which we have not utilized this
      financing agreement for additional equipment acquisitions. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”





Most
      of
      our dialysis facilities do not operate at full capacity. See “Business -
      Operations - Location, Capacity and Use of Facilities” above. The existing
      dialysis facilities could accommodate greater patient volume, particularly
      if we
      increase hours and/or days of operation without adding additional dialysis
      stations or any additional capital expenditures. We also have the ability and
      space at most of our facilities to expand to increase patient volume subject
      to
      obtaining appropriate governmental approval.





31


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








**Item
      3. Legal Proceedings**





In
      April,
      2005, three lawsuits were filed, two in Florida and one in Maryland, as putative
      class and derivative actions, each by alleged holders of the company’s commons
      tock, against directors of the company and against Medicore, Inc., the company’s
      former parent which merged with the company on September 21, 2005, alleging
      breaches of fiduciary duty in connection with the merger. The litigation was
      previously reported in the company’s quarterly report on Form 10-Q for the first
      quarter ended March 31, 2005, and in the proxy statement/prospectus relating
      to
      the merger (part of registration statement no. 333-125515) dated August 12,
      2005
      under the caption “The Merger - Litigation.”





The
      merger was approved by the company’s and Medicore’s shareholders at each
      company’s annual meeting on September 21, 2005, the effective date of the
      merger. The board of directors, each of whom is a defendant, and the special
      committee and its special counsel which investigated the charges in the
      complaints, determined that maintenance of the derivative suits is not in the
      best interest of the company, and the actions are without merit, and defendants
      deny having committed any violation of law or breach of duty, or otherwise
      having acted in any improper manner. The parties are engaged in good faith
      discussions with respect to the possible settlement of all the actions. The
      proposed settlement, which would not have a significant impact on the company,
      may not be completed, in which case the company would continue its defense
      of
      the actions. The company believes the ultimate outcome of these actions would
      not have a material adverse effect on its results of operations, financial
      position or cash flows. However, there can be no assurance that an adverse
      determination would not have a material adverse effect on the
      company.








**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,
      2005 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, 2004 and 2005 as
      reported by Nasdaq.


32





**Bid
                Price****2004**
            
            **High**
            
            **Low**1stQuarter
            
            $
            12.00
            
            $
            4.052ndQuarter
            
            
            5.65
            
            
            3.753rdQuarter
            
            
            5.14
            
            
            3.814thQuarter
            
            
            30.42
            
            
            4.51





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





As
      of
      March 23, 2006, the high and low sales prices of our common stock were $13.60
      and $13.08, 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
      23, 2006, we had 1,053 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 5,052 beneficial owners
      of
      our common stock.








**Dividend
      Policy**





The
      company does not anticipate that it will pay dividends in the foreseeable
      future. The board of directors intends to retain earnings for use in the
      business. Future dividend policy will be at the discretion of the board of
      directors, and will depend on our earnings, capital requirements, financial
      condition and other similar relevant factors. Any determination to pay a
      dividend is also subject to 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, and is subject to restrictions
      (other than stock dividends) under our Credit Agreement with KeyBank National
      Association.








33


**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, 2005.
      There
      were no equity compensation plans outstanding at December 31, 2005 that were
      not
      approved by shareholders.





Plan
                Category
            Number
                of securities to be
              issued
                upon exercise of
              outstanding
                options, warrants
              and
                rights
            Weighted-average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            Number
                of securities
              remaining
                available for
              future
                issuance under equity
              compensation
                plans
              (excluding
                securities reflected
              in
                column (a))(a)
            (b)
            (c)Equity
                compensation plans
              approved
                by security holders: (1)
            322,500
            $2.513
            687,654


_______________


(1)
            The
                options are five years in duration (except for one three-year option
                for
                10,000 shares), expire at various dates between September 5, 2006
                and June
                6, 2009, and 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
      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.” Common stock obtained upon option exercises
      has been reported in our quarterly reports, Form 10-Q, for the periods ended
      March 31, 2005, June 30, 2005 and September 30, 2005. During the fourth quarter
      of fiscal 2005 there were option exercises by one officer and director for
      123,616 shares at $.625 per share and 12,500 shares at $4.02 per share, and
      by
      one former director for 1,250 shares and a former officer for 12,500 shares,
      each at $4.02 per share.








**Stock
      Repurchases**





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


34


**Item
      6. Selected Financial Data**





The
      following selected financial data for the five years ended December 31, 2005
      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, 2005, together with the related Reports
      of
      Independent Certified Public Accountants, are included elsewhere in this Annual
      Report on Form 10-K. The data should be read in conjunction with the
      consolidated financial statements, related notes and other financial information
      included herein, and Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations.”





**Consolidated
                Statements of Operations Data**
              (in
                thousands except per share amounts)
              Years
                Ended December 31,2005
            
            2004
            
            2003
            
            2002
            
            2001Revenues(1)
            
            $
            45,392
            
            $
            40,986
            
            $
            29,997
            
            $
            25,354
            
            $
            19,035Net
                income
            
            
            1,900
            
            
            2,214
            
            
            1,150
            
            
            1,242
            
            
            784Earnings
                per share(2)Basic
            
            
            .22
            
            
            .27
            
            
            .15
            
            
            .16
            
            
            .10Diluted
            
            
            .20
            
            
            .25
            
            
            .13
            
            
            .14
            
            
            .10





**Consolidated
                Balance Sheet Data**
              (in
                thousands)
              December
                31,2005
            
            2004
            
            2003
            
            2002
            
            2001Working
                capital
            
            $
            7,617
            
            $
            3,644
            
            $
            3,773
            
            $
            4,593
            
            $
            3,883Total
                assets
            
            
            38,803
            
            
            26,490
            
            
            19,604
            
            
            17,154
            
            
            15,683Intercompany
                advance payable(receivable)
                from Medicore(non-current
                portion)(3)
            
            
            —
            
            
            449
            
            
            234
            
            
            —
            
            
            (201
            )Intercompany
                note and accrued interestpayable
                to Medicore(3)
            
            
            —
            
            
            1,462
            
            
            —
            
            
            —
            
            
            —Long
                term debt, net of current portion
            
            
            635
            
            
            1,586
            
            
            2,097
            
            
            2,727
            
            
            2,935Stockholders’
                equity
            
            
            25,613
            
            
            13,330
            
            
            10,970
            
            
            9,727
            
            
            8,485


_______________


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





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





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


35


**Item
      7. Management'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 29 outpatient dialysis centers, including three centers
      acquired in the first quarter of 2006, 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.





***Quality
      Clinical Results***





Our
      goal
      is to provide consistent quality clinical care to our patients from caring
      and
      qualified doctors, nurses, patient care technicians, social workers and
      dieticians. We have demonstrated an unwavering commitment to quality renal
      care
      through our continuous quality improvement initiatives. We strive to maintain
      a
      leadership position as a quality provider in the dialysis industry and often
      set
      our goals to exceed the national average standards. See Item 1, “Business -
      Operations - Quality Clinical Results.”





***Patient
      Treatments***





The
      following table shows the number of in-center, home peritoneal and acute
      inpatient treatments performed by us through the dialysis centers we operate,
      including 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,****2005**
            
            **2004**
            
            **2003**In
                center
            
            
            155,130
            
            
            127,293
            
            
            103,025Home
                peritoneal
            
            
            16,942
            
            
            13,311
            
            
            7,193Acute
            
            
            7,100
            
            
            8,387
            
            
            8,010179,172(1
            )
            
            148,991(1
            )
            
            118,228(1
            )


_______________


(1)
            Treatments
                by the two managed centers included: in-center treatments of 15,244,
                13,196 and 11,081, respectively, for 2005, 2004 and 2003; no home
                peritoneal treatments; and acute treatments of 239, 128 and 156,
                respectively, for 2005, 2004 and
                2003.


36




***New
      Business Development***





Dialysis
      Corporation of America ’s
      future
      growth depends primarily on the availability of suitable dialysis centers for
      development or acquisition in appropriate and acceptable areas, and our ability
      to manage the development costs for these potential dialysis centers while
      competing with larger companies, some of which are public companies or divisions
      of public companies with greater numbers of personnel and financial resources
      available for acquiring and/or developing dialysis centers in areas targeted
      by
      us. Additionally, there is intense competition for qualified nephrologists
      who
      would serve as medical directors of dialysis facilities, and be responsible
      for
      the supervision of those dialysis centers. The company is currently constructing
      three dialysis centers and is in various stages of development with two others.
      There is no assurance as to when any new dialysis centers or inpatient service
      contracts with hospitals will be implemented, or the number of stations, or
      patient treatments such center or service contract may involve, or if such
      center or service contract will ultimately be profitable.





***Start-up
      Losses***





It
      has
      been our experience that newly established dialysis centers, although
      contributing to increased revenues, have adversely affected our results of
      operations in the short term due to start-up costs and expenses and a smaller
      patient base. These
      losses are typically a result of several months of pre-opening costs, and six
      to
      eighteen months of post opening costs, in excess of revenues. We consider new
      dialysis centers to be “start-up centers” through their initial twelve months of
      operations, or when they achieve consistent profitability, whichever is sooner.
      For the year ended December 31, 2005, we incurred an aggregate of approximately
      $744,000 in net losses for start-up centers.





***EPO
      Utilization***





We
      also
      provide ancillary services associated with dialysis treatments, including the
      administration of EPO for the treatment of anemia in our dialysis patients.
      EPO
      is currently available from only one manufacturer, and no alternative drug
      has
      been available to us for the treatment of anemia in our dialysis patients.
      If
      our available supply of EPO were reduced either by the manufacturer or due
      to
      excessive demand, our revenues and net income would be adversely affected.
      The
      manufacturer of EPO could implement price increases which would adversely affect
      our net income. This manufacturer developed another anemia drug that could
      possibly substantially reduce our revenues and profit from the treatment of
      anemia in our patients.





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





***Reimbursement***





Approximately
      59% of our medical services revenue is derived from Medicare and Medicaid
      reimbursement with rates established by CMS, and which rates are subject to
      legislative changes. Congress approved a 1.6% composite rate increase for each
      of 2005 and 2006. Medicare changed the way it reimburses
      dialysis providers, which includes revision of pricing for separately billable
      drugs and biologics, with an add-on component to make the change budget-neutral.
      Medicare also implemented a case mix payment system as an adjustment to the
      composite rate. See Item 1, “Business - Operations - Medicare Reimbursement.”
Dialysis is typically reimbursed at higher rates from private payors, such
      as a
      patient’s insurance carrier, as well as higher payments received under
      negotiated contracts with hospitals for acute inpatient dialysis
      services.





37


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





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Medicare
            
            
            51
            %
            
            48
            %
            
            54
            %Medicaid
                and comparable programs
            
            
            8
            %
            
            8
            %
            
            8
            %Hospital
                inpatient dialysis services
            
            
            5
            %
            
            6
            %
            
            7
            %Commercial
                insurers and other private payors
            
            
            36
            %
            
            38
            %
            
            31
            %100
            %
            
            100
            %
            
            100
            %





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





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Outpatient
                hemodialysis services
            
            $
            23,084
            
            
            52
            %
            $
            18,599
            
            
            46
            %
            $
            13,873
            
            
            47
            %Home
                peritoneal dialysis services
            
            
            3,198
            
            
            7
            %
            
            2,691
            
            
            7
            %
            
            1,294
            
            
            4
            %Inpatient
                hemodialysis services
            
            
            2,055
            
            
            5
            %
            
            2,261
            
            
            5
            %
            
            2,114
            
            
            7
            %Ancillary
                services
            
            
            16,350
            
            
            36
            %
            
            16,899
            
            
            42
            %
            
            12,395
            
            
            42
            %$
            44,687
            
            
            100
            %
            $
            40,450
            
            
            100
            %
            $
            29,676
            
            
            100
            %





***Compliance***





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





38


**Results
      of Operations**





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




**Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003******Medical
                    services revenue
                
                $
                44,687
                
                $
                40,450
                
                $
                29,676Product
                    sales
                
                
                207
                
                
                —
                
                
                —Total
                    sales revenues
                
                
                44,894
                
                
                40,450
                
                
                29,676Other
                    income
                
                
                498
                
                
                536
                
                
                321Total
                    operating revenues
                
                
                45,392
                
                
                40,986
                
                
                29,997Cost
                    of medical services
                
                
                27,860
                
                
                23,546
                
                
                18,221Cost
                    of product sales
                
                
                119
                
                
                —
                
                
                —Total
                    cost of sales revenues
                
                
                27,979
                
                
                23,546
                
                
                18,221Selling,
                    general and administrative expenses
                
                
                13,456
                
                
                12,089
                
                
                9,357Provision
                    for doubtful accounts
                
                
                571
                
                
                1,198
                
                
                290Total
                    operating costs and expenses
                
                
                42,006
                
                
                36,833
                
                
                27,868Operating
                    income
                
                
                3,386
                
                
                4,153
                
                
                2,129Other,
                    net
                
                
                66
                
                
                35
                
                
                78Income
                    before income taxes, minority interest and equity in affiliate
                    earnings
                
                
                3,452
                
                
                4,188
                
                
                2,207Income
                    tax provision
                
                
                1,427
                
                
                1,576
                
                
                878Income
                    before minority interest and equity in affiliate earnings
                
                
                2,025
                
                
                2,612
                
                
                1,329Minority
                    interest in income of consolidated subsidiaries
                
                
                (454
                )
                
                (681
                )
                
                (223
                )Equity
                    in affiliate earnings
                
                
                329
                
                
                283
                
                
                44Net
                    income
                
                $
                1,900
                
                $
                2,214
                
                $
                1,150





***2005
      Compared to 2004***





Medical
      services revenue increased approximately $4,237,000 (10%) for the year ended
      December 31, 2005, compared to the preceding year. Dialysis treatments performed
      increased from 135,667 in 2004 to 163,689 in 2005, a 21% increase. The increase
      in treatments includes treatments at the five new centers we opened during
      2004
      which were in operation throughout 2005, the two Pennsylvania centers acquired
      in late August, 2004 which were in operation throughout 2005 and three new
      centers we opened during 2005. Some of our patients carry commercial insurance
      which may require an out of pocket co-pay by the patient, which is often
      uncollectible by us. This co-pay is typically limited,
      and therefore may lead to our under-recognition of revenue at the time of
      service. We routinely recognize these revenues as we become aware that these
      limits have been met.





39


We
      record
      contractual adjustments based on fee schedules for a patient’s insurance plan
      except in circumstances where the schedules are not readily determinable, in
      which case rates are estimated based on similar insurance plans and subsequently
      adjusted when actual rates are determined. Out-of-network providers generally
      do
      not provide fee schedules and coinsurance information and, consequently,
      represent the largest portion of contractual adjustment changes. Estimated
      contractual adjustments for 2004 and prior years made during 2005 resulted
      in
      approximately a $74,000 reduction in revenues in 2005. Based on historical
      data
      we do not anticipate that a change in estimates would have a significant impact
      on our financial conditions or results of operations.





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





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





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





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





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





Approximately
      28% of our medical services revenue for the years ended December 31, 2005 and
      December 31, 2004 derived from the administration of EPO to our dialysis
      patients. Beginning this year, Medicare will reimburse dialysis providers for
      the top ten most utilized ESRD drugs at an amount equal to the cost of such
      drugs as determined by the Inspector General of HHS, with complimentary
      increases in the composite rate. Management believes these changes will have
      little impact on the company’s average Medicare revenue per treatment. See Item
      1, “Business - Operations - Medicare Reimbursement.”





Selling,
      general and administrative expenses, those corporate and facility costs not
      directly related to the care of patients, including, among others,
      administration, accounting and billing, increased by approximately $1,367,000
      (11%) for the year ended December 31, 2005, compared to the preceding year.
      This
      increase reflects operations of our new dialysis centers and increased support
      activities resulting from expanded operations. Included are expenses of new
      centers incurred prior to Medicare approval for which there were no
      corresponding medical services revenue. Selling, general and administrative
      expenses as a percentage of medical services revenue amounted to approximately
      30% for the ended year December 31, 2005, and for the preceding
      year.





40


Provision
      for doubtful accounts decreased approximately $627,000 for year ended December
      31, 2005, compared to the preceding year. The provision amounted to 1% of sales
      for the year ended December 31, 2005 compared to 3% for the preceding year.
      Medicare bad debt recoveries of $505,000 were recorded during the year ended
      December 31, 2005, compared to approximately $214,000 for the preceding year.
      Without the effect of the Medicare bad debt recoveries, the provision would
      have
      amounted to 2% of sales for the year ended December 31, 2005 compared to 3%
      for
      the preceding year. The provision for doubtful accounts reflects our collection
      experience with the impact of that experience included in accounts receivable
      presently reserved, plus recovery of accounts previously considered
      uncollectible from our Medicare cost report filings. The provision for doubtful
      accounts is determined under a variety of criteria, primarily aging of the
      receivables and payor mix. Accounts receivable are estimated to be uncollectible
      based upon various criteria including the age of the receivable, historical
      collection trends and our understanding of the nature and collectibility of
      the
      receivables, and are reserved for in the allowance for doubtful accounts until
      they are written off.





Days
      sales outstanding were 79 as of December 31, 2005 compared to 74 as of December
      31, 2004. The 2004 collection delays resulting in the company’s Georgia dialysis
      facilities experiencing a deterioration in their accounts receivable aging
      were
      largely due to the State of Georgia Medicaid program’s implementation of a new
      computer system in 2003. Days sales outstanding were also impacted by the
      expected and typical slower receivable turnover at our new centers opened during
      2005 and by payor mix. Based on our collection experience with the different
      payor groups comprising our accounts receivable, our analysis indicates that
      our
      allowance for doubtful accounts reasonably estimates the amount of accounts
      receivable that we will ultimately not collect.





After
      a
      patient’s insurer has paid the applicable coverage for the patient, the patient
      is billed for the applicable co-payment or balance due. If payment is not
      received from the patient for its applicable portion, collection letters and
      billings are sent to that patient until such time as the patient’s account is
      determined to be uncollectible, at which time the account will be charged
      against the allowance for doubtful accounts. Patient accounts that remain
      outstanding four months after initial collection efforts are generally
      considered uncollectible.





Other
      non-operating income (expense) increased approximately $131,000 for the year
      ended December 31, 2005, compared to the preceding year. This includes an
      increase in interest income of $64,000,
      an increase in rental income of $47,000, an increase in miscellaneous other
      income of $5,000 and a decrease in interest expense to unrelated parties of
      $15,000 with the effect of reduced average non-inter-company borrowings more
      than offsetting an increase in average interest rates. Interest expense to
      our
      former parent, Medicore, Inc., increased $102,000 for the year ended December
      31, 2005 compared to the preceding year as a result of an increase in the
      intercompany advance payable to our former parent and borrowings under a demand
      promissory note payable to our former parent and increases in the average
      interest rates on these borrowings. Both the intercompany advance payable and
      the demand promissory note payable, as well as accrued interest on the note,
      were forgiven in conjunction with our merger with our former parent. The prime
      rate was 7.25% at December 31, 2005, and 5.25% at December 31, 2004. See Notes
      1, 2, 3, 4, 13, and 16 of “Notes to the Consolidated Financial
      Statements.”





Although
      operations of additional centers have resulted in additional revenues, certain
      of these centers are still in the start-up stage and, accordingly, their
      operating results will adversely impact our overall results of operations until
      they achieve a patient count sufficient to sustain profitable
      operations.


41


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, 2005, compared to the preceding year. See Notes
      1
      and 15 to “Notes to Consolidated Financial Statements.”





***2004
      Compared to 2003***





Medical
      services revenue 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 revenue. 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 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 and prior years made during 2004 resulted
      in
      approximately a $508,000 increase in revenue and adjustments for 2002 and prior
      years made in 2003 resulted in approximately a $59,000 increase in revenue.
      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.





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%).





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.





42


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 revenue for the year ended December 31, 2004, and
      for the preceding year was derived from the administration of EPO to our
      dialysis patients.





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 revenue 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 services revenue. 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.”





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 54 as of December 31, 2003 to
      74
      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.


43





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 start-up stage and, accordingly, their
      operating results will adversely impact our overall results of operations until
      they achieve a patient count sufficient to sustain profitable
      operations.





Minority
      interest represents the proportionate equity interests of minority owners of
      our
      subsidiaries whose financial results are included in our consolidated results.
      Equity in affiliate earnings represents our proportionate interest in the
      earnings of our 40% owned Ohio affiliate 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.”





**Liquidity
      and Capital Resources**





Working
      capital totaled approximately $7,617,000 at December 31, 2005, which reflected
      an increase of $3,973,000 (109%) during the current year. Included in the
      changes in components of working capital was an increase in cash and cash
      equivalents of $2,336,000, which included net cash provided by operating
      activities of $1,923,000; net cash used in investing activities of $2,730,000
      (including additions to property and equipment of $5,482,000, net cash received
      upon our merger with our former parent of $2,737,000, a payment of $381,000
      toward the remaining balance due on our acquisition of Keystone Kidney Care,
      a
      $95,000 repayment of an officer loan, and distributions of $340,000 received
      from our 40% owned Ohio affiliate; and net cash provided by financing activities
      of $3,143,000 (including an increase in advances payable to our former parent
      of
      $162,000, an increase in the note payable to our former parent of $3,096,000,
      debt repayments of $512,000, distributions to subsidiary minority members of
      $370,000, receipts of $333,000 from the exercise of stock options and capital
      contributions of $434,000 by subsidiary minority members).





Net
      cash
      provided by operating activities consists of net income before non-cash items
      consisting of depreciation and amortization of $1,749,000, bad debt expense
      of
      $571,000, a deferred income tax benefit of $64,000, income applicable to
      minority interest of $454,000, and equity in affiliate earnings of $329,000,
      as
      adjusted for changes in components of working capital. Significant changes
      in
      components of working capital, in addition to the $2,336,000 increase in cash,
      included an increase in refundable income taxes of $1,227,000 resulting largely
      from our ability to utilize tax benefits from the net operating loss
      carryforwards of our former parent, an increase in accounts receivable of
      $1,946,000, an employment contract liability of $1,960,000 resulting from our
      merger with our former parent, an increase in accrued expenses of $817,000
      (including an increase of $269,000 in “due to insurance companies”) and a
      decrease of $1,462,000 in note and accrued interest payable to former parent
      as
      a result of amounts forgiven in conjunction with our merger with our former
      parent. 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.





44


Our
      Easton, Maryland building has a mortgage to secure a subsidiary development
      loan. This loan had a remaining principal balance of $583,000 at December 31,
      2005 and $610,000 at December 31, 2004. 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 $633,000 at December 31, 2005
      and
      $675,000 at December 31, 2004. See Note 2 to “Notes to Consolidated Financial
      Statements.”





We
      have
      an equipment financing agreement for kidney dialysis machines that had an
      outstanding balance of approximately $371,000 at December 31, 2005, and $814,000
      at December 31, 2004. There was no additional equipment financing under this
      agreement during 2005. See Note 2 to “Notes to Consolidated Financial
      Statements.”





During
      2005, we borrowed approximately $3,100,000 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. The balance under this note, as well as accrued interest on the note
      and
      intercompany advances were forgiven as part of our merger with our former
      parent. In September 2005, the company and its former parent, Medicore, Inc.
      finalized their merger. See Notes 1, 3, 4, 13, and 16 to “Notes to Consolidated
      Financial Statements.”





We
      opened
      centers in; Baltimore, Maryland; Edgefield, South Carolina; and Norwood, Ohio
      during 2005. We are in the process of developing a new dialysis center in each
      of Georgia and Pennsylvania and two new centers in South Carolina. Payment
      of
      approximately $381,000 was made during 2005 on our Keystone Kidney Care
      acquisition, leaving a remaining balance of approximately $381,000 which is
      due
      in August 2006. See Note 10 to “Notes to Consolidated Financial
      Statements.”





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





We
      are
      seeking to expand our outpatient dialysis treatment facilities and inpatient
      dialysis care and are presently in different phases of negotiations with
      physicians 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.” To assist with our future
      expansion we entered into a $15,000,000, 3 year credit agreement for a revolving
      line of credit with Key Bank National Association in October 2005. No amounts
      were financed under this new credit facility during 2005. We borrowed $1,500,000
      under this credit facility in January, 2006. No assurance can be given that
      we
      will be successful in implementing our growth strategy or that available
      financing will be adequate to support our expansion. See Item 1,
“Business-Business Strategy.”


45





**Aggregate
      Contractual Obligations**





As
      of
      December 31, 2005, 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
              
              $
              1,587
              
              $
              955
              
              $
              632
              
              $
              —
              
              $
              —Operating
                  leases
              
              
              8,067
              
              
              1,600
              
              
              2,994
              
              
              1,968
              
              
              1,505Acquisition
                  liability
              
              
              381
              
              
              381
              
              
              —
              
              
              —
              
              
              —Expected
                  interest payments:Long-term
                  debt
              
              
              113
              
              
              68
              
              
              45
              
              
              —
              
              
              —Purchase
                  obligations:Medical
                  services
              
              
              6,668
              
              
              1,163
              
              
              2,156
              
              
              1,711
              
              
              1,638Construction
                  contracts
              
              
              305
              
              
              305
              
              
              —
              
              
              —
              
              
              —Total
                  purchase obligations
              
              
              6,973
              
              
              1,468
              
              
              2,156
              
              
              1,711
              
              
              1,638Total
                  contractual obligations
              
              $
              17,121
              
              $
              4,472
              
              $
              5,827
              
              $
              3,679
              
              $
              3,143





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





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





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





The
      merger enabled the control interest in the company to be in the hands of the
      public stockholders and provides the company with additional capital resources
      to continue its growth. See Note 1, Note 3, Note 4, Note 13, and Note 16 to
      “Notes to Consolidated Financial Statements.”





**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.”


46





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. See Note 1 to “Notes to Consolidated Financial
      Statements.”





In
      December 16, 2004, the FASB issued Statement of Financial Accounting Standards
      No. 123 (revised), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) requires
      companies to recognize the fair value of stock option grants as a compensation
      costs in their financial statements. The company will be required to comply
      with
      the provisions of FAS 123(R) effective with its interim financial statements
      for
      the first quarter of 2006. The company will consider the effects of FAS 123(R)
      when formulating future compensation plans. See Note 1 to “Notes to Consolidated
      Financial Statements.”





In
      May,
      2005, the FASB issued FASB 154 (“FAS 154”), “Accounting Changes and Error
      Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.”
This Statement replaces APB Opinion No. 20, “Accounting Changes,” and FASB
      Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements,”
and changes the requirements for the accounting for and reporting of a change
      in
      accounting principle. This statement is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      The company does not expect FAS 154 to have a significant effect on its
      financial statements. See Note 1 to “Notes to Consolidated Financial
      Statements.”





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
      Period for Leasehold Improvements (“EITF 05-6”). EITF 05-6 provides guidance on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The guidance
      in
      EITF 05-6 will be applies prospectively and is effective for periods beginning
      after June 29, 2005. The company does not expect EITF 05-6 to have a significant
      effect on its financial statements. See Note 1 to “Notes to Consolidated
      Financial Statements.”





**Critical
      Accounting Policies and Estimates**





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





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





47


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





Revenue
      Recognition : Revenues
      are recognized net of contractual provisions at the expected collectable amount.
      We receive payments through reimbursement from Medicare and Medicaid for our
      outpatient dialysis treatments coupled with patients’ private payments,
      individually and through private third-party insurers. A substantial portion
      of
      our revenues are derived from the Medicare 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 $2,584,000 at December 31, 2005.





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 $1,216,000 at December 31, 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 $18,000 on our results of
      operations for the year ended December 31, 2005.





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, 2005, 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 our fourth quarter ended December 31, 2005 that have 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,
      2005.





50





**PART
      III**





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





Information
      concerning the company’s directors is incorporated herein by reference to the
      company’s 2006 proxy statement* under the caption “Election of
      Directors.”





Information
      concerning the company’s executive officers is incorporated herein by reference
      to the company’s 2006 proxy statement* under the caption “Executive Officers of
      the Company.”





Information
      concerning the audit committee and its financial report and our Code of Ethics
      is incorporated by reference to the company’s 2006 proxy statement* under the
      caption “Corporate Governance; Board Committees; Meetings During
      2005.”





Information
      relating to compliance with Section 16(a) of the Exchange Act is incorporated
      herein by reference to the company’s 2006 proxy statement* under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance.”





The
      company adopted a Code of Ethics that applies to our Chief Executive Officer,
      Chief Financial Officer, Principal Accounting Officer or Controller, and persons
      performing similar functions, as well as other employees. See Item 1, “Business
      - Corporate Integrity Program - Code of Ethics.”








**Item
      11. Executive Compensation**





Information
      concerning management and director compensation is incorporated herein by
      reference to the company’s 2006 proxy statement* under the caption “Executive
      Compensation.”








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





Information
      concerning security ownership of certain beneficial owners and management is
      incorporated herein by reference to the company’s 2006 proxy statement* under
      the caption “Security Ownership of Certain Beneficial Owners and
      Management.”





Information
      concerning related stockholder matters is incorporated herein by reference
      to
      the company’s 2006 proxy statement* under the caption “Equity Compensation Plan
      Information Table.”








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





Information
      concerning certain relationships and related transactions is incorporated herein
      by reference to the company’s 2006 proxy statement* under the caption “Certain
      Relationships and Related Transactions.”


51





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





Information
      concerning fees and services of the company’s independent auditors is
      incorporated herein by reference to the company’s 2006 proxy statement* under
      the caption “Appointment of Independent Auditors.”





*
            The
                company’s definitive proxy statement relating to the upcoming annual
                meeting of shareholders will be filed within 120 days of the end
                of the
                company’s fiscal year, which is no later than April 30,
                2006.





52





**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
                  Contracts10.1
              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)).10.2
              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)).10.3
              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)).10.4
              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)).10.5
              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)).10.6
              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)).
  53
 10.7
              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).10.8
              Promissory
                  Note Modification Agreement between DCA of Vineland, LLC*(1)*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).10.9
              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)).10.10
              Agreement
                  of Lease by and between Copt Concourse, LLC and the Company dated
                  March
                  31, 2004 (incorporated by reference to the Company’s Current Report on
                  Form
                  8-K
                    dated March 31, 2004, item 7(c)(10((i)).10.11
              Agreement
                  and Plan of Merger By and Among Medicore, Inc.*(2)*and the Company dated June 2, 2005 (incorporated by reference to
                  Annex A
                  to the proxy statement/prospectus included in and made a part of
                  the
                  Company’s registration statement on Form S-4/A1 dated June 3, 2005, as
                  amended on August 10, 2005, registration no.
                  333-125515).10.12
              Articles
                  and Plan of Merger filed by the Company and Medicore, Inc.*(2)*dated September 21, 2005 (incorporated herein by reference to the
                  Company’s Current Report on Form 8-K dated September 26, 2005, Item
                  9.01(c)3.1).10.13
              Credit
                  Agreement between the Company and KeyBank National Association
                  dated
                  October 24, 2005 (incorporated by reference to the Company’s Current
                  Report on Form 8-K dated October 27, 2005 (“October 2005 Form 8-K”), Item
                  9.01(d)(10)(i)).10.14
              Revolving
                  Credit Note dated October 24, 2005 (incorporated by reference to
                  the
                  Company’s October 2005 Form 8-K, Item 9.01(d)(10)(ii)).10.15
              Guaranty
                  of Payment by the Company’s Wholly-Owned Subsidiaries in favor of KeyBank
                  National Association dated October 24, 2005 (incorporated by reference
                  to
                  the Company’s October 2005 Form 8-K, Item
                  9.01(d)(10)(iii)).10.16
              Pledge
                  Agreement by the Company in favor of KeyBank National Association
                  dated
                  October 24, 2005 (incorporated by reference to the Company’s October 2005
                  Form 8-K, Item 9.01(d)(10)(iv).10.17
              Amendment
                  No. 1 to Credit Agreement between the Company and KeyBank National
                  Association dated December 15, 2005 (incorporated by reference
                  to the
                  Company’s Current Report on Form 8-K dated December 16, 2005, Item
                  9.01(d)(10)(i)).10.18
              Employment
                  Agreement between the Company and Stephen W. Everett dated February
                  22,
                  2006 (incorporated by reference to the Company’s Current Report on Form
                  8-K dated February 28, 2006, Item
                  9.01(d)(10)10.1).
  54
 10.19
              Amendment
                  No. 2 to Credit Agreement between the Company and KeyBank National
                  Association dated as of February 14, 2006.21
              Subsidiaries
                  of the Company23
              Consent
                  of experts and counsel23.1
              Consent
                  of Moore Stephens, P.C.31
              Rule
                  13a-14(a)/15d-14(a) Certifications.31.1
              Certification
                  of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
                  Securities Exchange Act of 1934.31.2
              Certification
                  of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
                  Securities Exchange Act of 1934.32
              Section
                  1350 Certifications32.1
              Certification
                  of the Chief Executive Officer and the Chief Financial Officer
                  pursuant to
                  Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
                  Section 1350(3).




_______________


*
              Management
                  contract or compensatory plan or
                  arrangement.
 
 +
              Documents
                  incorporated by reference not included in Exhibit
                  Volume.
 
 ‡
              Incorporated
                  by reference to the company’s registration statement on Form SB-2 dated
                  December 22, 1995 as amended February 9, 1996, April 2, 1996 and
                  April 15,
                  1996, registration no. 33-80877-A, Part II, Item
                  27.





*(1)*
            *51%*owned
                subsidiary.





*(2)*
            Former
                parent of the Company. Merged into the Company on September 21,
                2005.





*(3)*
            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.








55





**SIGNATURES**





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




DIALYSIS
              CORPORATION OF AMERICABy:
            /s/ STEPHEN
              W. EVERETTStephen
                W. Everett
              *President
                and Chief Executive Officer*March 30, 2006


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





Signature
              
              Title
              
              Date/s/
              THOMAS
                  K. LANGBEIN
              
              Chairman
                  of the Board of Directors
              
              March
                  29, 2006Thomas
                  K. Langbein/s/
              STEPHEN
                  W. EVERETT
              
              President,
                  Chief Executive Officer and Director
              
              March
                  30, 2006Stephen
                  W. Everett/s/
              DANIEL
                  R. OUZTS
              
              Vice
                  President of Finance, Chief Financial Officer, Chief Accounting
                  Officer
                  and Treasurer
              
              March
                  30, 2006Daniel
                  R. Ouzts/s/
              PETER
                  D. FISCHBEIN
              
              Director
              
              March
                  29, 2006Peter
                  D. Fischbein/s/
              ROBERT
                  W. TRAUSE
              
              Director
              
              March
                  29, 2006Robert
                  W. Trause/s/
              ALEXANDER
                  BIENENSTOCK
              
              Director
              
              March
                  29, 2006Alexander
                  Bienenstock





56





**ANNUAL
      REPORT ON FORM 10-K**


**ITEM
      8, ITEM 15(a) (1) and (2)**


**LIST
      OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES**


**FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA**


**FINANCIAL
      STATEMENT SCHEDULES**


**YEAR
      ENDED DECEMBER 31, 2005**


**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, 2005 and 2004
            F-3Consolidated
                Statements of Income - Years ended December 31, 2005, 2004, and
                2003
            F-4Consolidated
                Statements of Stockholders’ Equity - Years ended December 31, 2005, 2004
                and 2003
            F-5Consolidated
                Statements of Cash Flows - Years ended December 31, 2005, 2004 and
                2003
            F-6Notes
                to Consolidated Financial Statements - December 31, 2005
            F-7








The
      following financial statement schedule of Dialysis Corporation of America and
      subsidiaries is included in Item 15(a)(2):





Schedule
                II - Valuation and qualifying accounts
            F-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, 2005 and 2004, and the related
      consolidated statements of income, stockholders' equity, and cash flows for
      each
      of the three years in the period ended December 31, 2005. 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, 2005 and 2004,
      and the consolidated results of their operations and their cash flows for each
      of the three years in the period ended December 31, 2005, in conformity with
      accounting principles generally accepted in the United States of
      America.





MOORE
      STEPHENS, P.
      C.


Certified
      Public
      Accountants.





Cranford,
      New Jersey


February
      10, 2006 except


For
      Note
      18 for which the


Date
      is
      March 1, 2006





F-2





**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,**
            
            **December
                31,****2005**
            
            **2004****ASSETS**Current
                assets:Cash and cash equivalents
            
            $
            2,937,557
            
            $
            601,603Accounts receivable, less allowanceof $1,886,000 at December 31, 2005;$1,636,000 at December 31, 2004
            
            
            10,538,033
            
            
            8,592,476Inventories, less allowance for obsolescenceof $77,000 at December 31, 2005
            
            
            1,457,566
            
            
            1,297,782Deferred income tax asset
            
            
            838,000
            
            
            720,000Officer loan and interest receivable
            
            
            ---
            
            
            111,696Prepaid expenses and other current assets
            
            
            1,425,112
            
            
            1,223,023Refundable income taxes
            
            
            1,227,306
            
            
            ---Total
                current assets
            
            
            18,423,574
            
            
            12,546,580Property
                and equipment:Land
            
            
            1,571,975
            
            
            376,211Buildings and improvements
            
            
            4,411,670
            
            
            2,352,191Machinery and equipment
            
            
            9,686,962
            
            
            8,087,349Leasehold
                improvements
            
            
            6,735,727
            
            
            4,674,70422,406,334
            
            
            15,490,455Less accumulated depreciation and amortization
            
            
            8,622,822
            
            
            6,496,57113,783,512
            
            
            8,993,884Deferred
                income taxes
            
            
            1,680,234
            
            
            ---Goodwill
            
            
            3,649,014
            
            
            3,649,014Other
                assets
            
            
            1,266,789
            
            
            1,300,236Total
                other assets
            
            
            6,596,037
            
            
            4,949,250$
            38,803,123
            
            $
            26,489,714**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts payable
            
            $
            1,775,352
            
            $
            1,625,930Accrued expenses
            
            
            5,739,266
            
            
            4,921,769Employment contract liability
            
            
            1,960,000
            
            
            ---Note payable and accrued interest payable to parent
            
            
            ---
            
            
            1,461,647Current portion of long-term debt
            
            
            952,000
            
            
            513,000Acquisition liabilities - current portion
            
            
            380,298
            
            
            380,298Total
                current liabilities
            
            
            10,806,916
            
            
            8,902,644Advances
                from former parent
            
            
            ---
            
            
            449,117Long-term
                debt, less current portion
            
            
            635,003
            
            
            1,585,936Acquisition
                liabilities, net of current portion
            
            
            ---
            
            
            380,297Deferred
                income tax liability
            
            
            ---
            
            
            559,000Total
                liabilities
            
            
            11,441,919
            
            
            11,876,994Minority
                interest in subsidiaries
            
            
            1,748,130
            
            
            1,282,924Commitments
                and ContingenciesStockholders'
                equity:Common stock, $.01 par value, authorized 20,000,000 shares:
              9,265,534 shares issued and outstanding at December 31, 2005;
              8,485,815 shares issued and outstanding at December 31,
                2004
            
            
            92,655
            
            
            84,858Additional
                paid-in capital
            
            
            15,332,975
            
            
            4,957,146Retained
                earnings
            
            
            10,187,444
            
            
            8,287,792Total
                stockholders' equity
            
            
            25,613,074
            
            
            13,329,796$
            38,803,123
            
            $
            26,489,714


See
      notes
      to consolidated financial statements.





F-3





**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF INCOME**








**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Operating
                revenues:Sales:Medical
                services revenue
            
            $
            44,686,579
            
            $
            40,449,562
            
            $
            29,676,388Product
                sales
            
            
            206,941
            
            
            ---
            
            
            ---Total
                sales revenues
            
            
            44,893,520
            
            
            40,449,562
            
            
            29,676,388Other
                income
            
            
            498,257
            
            
            536,434
            
            
            320,58045,391,777
            
            
            40,985,996
            
            
            29,996,968Cost
                and expenses:Cost
                of sales revenues:Cost
                of medical services
            
            
            27,859,804
            
            
            23,545,586
            
            
            18,220,891Cost
                of product sales
            
            
            119,327
            
            
            ---
            
            
            ---Total
                cost of sales revenues
            
            
            27,979,131
            
            
            23,545,586
            
            
            18,220,891Selling,
                general and administrative expenses
            
            
            13,455,701
            
            
            12,088,521
            
            
            9,357,552Provision
                for doubtful accounts
            
            
            571,016
            
            
            1,197,905
            
            
            289,58242,005,848
            
            
            36,832,012
            
            
            27,868,025Operating
                income
            
            
            3,385,929
            
            
            4,153,984
            
            
            2,128,943Other
                income (expense):Interest
                income officer/director note
            
            
            5,527
            
            
            4,193
            
            
            3,972Interest
                expense to former parent company
            
            
            (157,591
            )
            
            (55,996
            )
            
            (1,633
            )Other
                income, net
            
            
            217,821
            
            
            86,753
            
            
            75,85065,757
            
            
            34,950
            
            
            78,189Income
                before income taxes, minority interestand equity in affiliate earnings
            
            
            3,451,686
            
            
            4,188,934
            
            
            2,207,132Income
                tax provision
            
            
            1,426,552
            
            
            1,576,292
            
            
            878,211Income
                before minority interest and equity inaffiliate earnings
            
            
            2,025,134
            
            
            2,612,642
            
            
            1,328,921Minority
                interest in incomeof consolidated subsidiaries
            
            
            (454,214
            )
            
            (681,385
            )
            
            (223,291
            )Equity
                in affiliate earnings
            
            
            328,732
            
            
            282,946
            
            
            44,354Net
                income
            
            $
            1,899,652
            
            $
            2,214,203
            
            $
            1,149,984Earning
                per share:Basic
            
            $
            .22
            
            $
            .27
            
            $
            .15Diluted
            
            $
            .20
            
            $
            .25
            
            $
            .13





See
      notes
      to consolidated financial statements.





F-4





**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 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
            
            
            ---
            
            
            13,329,796Net
                income
            
            
            ---
            
            
            ---
            
            
            1,899,652
            
            
            ---
            
            
            1,899,652Exercise
                of stock options for 330,616shares
                of common stock
            
            
            3,306
            
            
            329,329
            
            
            ---
            
            
            ---
            
            
            332,635Merger
                with former parent(449,103
                shares) (Note 16)
            
            
            4,491
            
            
            10,046,500
            
            
            ---
            
            
            ---
            
            
            10,050,991Balance
                December 31, 2005
            
            $
            92,655
            
            $
            15,322,975
            
            $
            10,187,444
            
            $
            ---
            
            $
            25,613,074





See
      notes
      to consolidated financial statements.





F-5





**DIALYSIS
      CORPORATION OF AMERICA AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended December
                31,****2005**
            
            **2004**
            
            **2003**Operating
                activities:Net income
            
            $
            1,899,652
            
            $
            2,214,203
            
            $
            1,149,984Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation
            
            
            1,735,559
            
            
            1,492,744
            
            
            1,183,920Amortization
            
            
            13,179
            
            
            6,243
            
            
            2,314Bad debt expense
            
            
            571,016
            
            
            1,197,905
            
            
            289,582Deferred income tax (benefit) provision
            
            
            (63,930
            )
            
            192,000
            
            
            11,000Minority interest
            
            
            454,214
            
            
            681,385
            
            
            223,291Equity in affiliate earnings
            
            
            (328,732
            )
            
            (282,946
            )
            
            (44,354
            )Increase (decrease) relating to operating activities from:Accounts receivable
            
            
            (2,462,593
            )
            
            (4,661,238
            )
            
            (1,686,942
            )Inventories
            
            
            4,383
            
            
            (193,486
            )
            
            (166,652
            )Interest receivable on officer loan
            
            
            16,696
            
            
            (4,193
            )
            
            (3,972
            )Prepaid expenses and other current assets
            
            
            (150,739
            )
            
            85,183
            
            
            238,749Refundable income taxes
            
            
            197,354
            
            
            ---
            
            
            ---Accounts payable
            
            
            95,809
            
            
            330,112
            
            
            (205,977
            )Accrued interest on note payable to former parent
            
            
            37,443
            
            
            26,639
            
            
            ---Accrued expenses
            
            
            (96,676
            )
            
            1,839,390
            
            
            676,203Income taxes payable
            
            
            ---
            
            
            90,662
            
            
            28,949Net
                cash provided by operating activities
            
            
            1,922,635
            
            
            3,014,603
            
            
            1,696,095Investing
                activities:Acquisition of former parent
            
            
            2,736,500
            
            
            ---
            
            
            ---Loans to physician affiliates
            
            
            ---
            
            
            (125,000
            )
            
            (150,000
            )Payments received on physician affiliate loans
            
            
            17,146
            
            
            5,987
            
            
            ---Repayment of officer loan
            
            
            95,000
            
            
            ---
            
            
            ---Additions to property and equipment, net of minor
                disposals
            
            
            (5,482,338
            )
            
            (3,131,701
            )
            
            (1,655,909
            )Acquisition of dialysis centers
            
            
            (380,297
            )
            
            (757,616
            )
            
            (75,000
            )Distributions from affiliate
            
            
            339,606
            
            
            96,633
            
            
            77,000Purchase of minority interests in subsidiaries
            
            
            ---
            
            
            (670,000
            )
            
            (670,000
            )Other assets
            
            
            (55,399
            )
            
            (23,389
            )
            
            (4,846
            )Net
                cash used in investing activities
            
            
            (2,729,782
            )
            
            (4,605,086
            )
            
            (2,478,755
            )Financing
                activities:Advances from former parent
            
            
            161,929
            
            
            215,023
            
            
            234,094Notes payable to former parent
            
            
            3,096,000
            
            
            1,435,008Repurchase of stock
            
            
            ---
            
            
            ---
            
            
            (42,000
            )Payments on long-term debt
            
            
            (511,933
            )
            
            (715,037
            )
            
            (586,750
            )Exercise of stock options
            
            
            332,635
            
            
            5,400
            
            
            34,875Capital contributions by subsidiaries’ minority members
            
            
            434,000
            
            
            172,000
            
            
            204,382Distribution to subsidiary minority members
            
            
            (369,530
            )
            
            (435,510
            )
            
            (118,655
            )Net
                cash provided by (used in) financing activities
            
            
            3,143,101
            
            
            676,884
            
            
            (274,054
            )Increase
                (decrease) in cash and cash equivalents
            
            
            2,335,954
            
            
            (913,599
            )
            
            (1,056,714
            )Cash
                and cash equivalents at beginning of year
            
            
            601,603
            
            
            1,515,202
            
            
            2,571,916Cash
                and cash equivalents at end of year
            
            $
            2,937,557
            
            $
            601,603
            
            $
            1,515,202




See
      notes
      to consolidated financial statements.





F-6




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





***Business***





The
      company is primarily engaged in kidney dialysis operations which include
      outpatient hemodialysis services, home dialysis services, inpatient dialysis
      services and ancillary services associated with dialysis treatments. The company
      owns 27 operating dialysis centers (including three centers acquired in the
      first quarter of 2006) 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 four dialysis facilities under development; has agreements
      to
      provide inpatient dialysis treatments to nine hospitals; and provides supplies
      and equipment for dialysis home patients. Subsequent to the completion of the
      company’s merger with Medicore, Inc., its former parent, the company also
      engages in medical product sales. The medical products operations are not a
      significant component of the company’s operations contributing sales revenues of
      $207,000 during 2005 (approximately .5% of 2005 sales revenues). See
“Consolidation” below in this Note 1, Note 3, Note 4, Note 13, and Note
      16.





***Medical
      Service Revenue***





Our
      revenues by payor are as follows:





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Medicare
            
            51%
            
            48%
            
            54%Medicaid
                and comparable programs
            
            8%
            
            8%
            
            8%Hospital
                inpatient dialysis services
            
            5%
            
            6%
            
            7%Commercial
                insurers and other private payors
            
            36%
            
            38%
            
            31%100%
            
            100%
            
            100%




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





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Outpatient
                hemodialysis services
            
            $
            23,084
            
            
            52%
            
            $
            18,599
            
            
            46%
            
            $
            13,873
            
            
            47%Home
                peritoneal dialysis services
            
            
            3,198
            
            
            7%
            
            
            2,691
            
            
            7%
            
            
            1,294
            
            
            4%Inpatient
                hemodialysis services
            
            
            2,055
            
            
            5%
            
            
            2,261
            
            
            5%
            
            
            2,114
            
            
            7%Ancillary
                services
            
            
            16,350
            
            
            36%
            
            
            16,899
            
            
            42%
            
            
            12,395
            
            
            42%$
            44,687
            
            
            100%
            
            $
            40,450
            
            
            100%
            
            $
            29,676
            
            
            100%





***Consolidation***





The
      consolidated financial statements include the accounts of Dialysis Corporation
      of America and its subsidiaries, collectively referred to as the “company.” All
      material intercompany accounts and transactions have been eliminated in
      consolidation. The company was formerly a majority owned subsidiary of Medicore,
      Inc., until the merger of Medicore into the company effected on September 21,
      2005. See “Business” above in this Note 1, Note 3, Note 4, Note 13, and Note 16.
      The company has a





F-7




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





40%
      interest in an Ohio dialysis center which it manages, which is accounted for
      on
      the equity method and not consolidated for financial reporting purposes. See
      Note 15.





***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, and estimates for patient revenues from
      non-contracted payors. Our estimates are based on historical experience and
      assumptions believed to be reasonable given the available evidence at the time
      of the estimates. Actual results could differ from those estimates.





***Vendor
      Volume Discounts***





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





***Government
      Regulation***





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





Reimbursement
      rates under these programs are subject to regulatory changes and governmental
      funding restrictions. Laws and regulations governing the Medicare and Medicaid
      programs are complex and subject to interpretation. The company believes that
      it
      is in compliance with all applicable laws and regulations and is not aware
      of
      any pending or threatened investigations involving allegations of potential
      wrongdoing. While no such regulatory inquiries have been made, compliance with
      such laws and regulations can be subject to future government review and
      interpretation as well as significant regulatory action including fines,
      penalties, and exclusions from the Medicare and Medicaid programs.





***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





F-8




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





equivalents
      approximate their fair values. Although cash and cash equivalents are largely
      not federally insured, the credit risk associated with these deposits that
      typically may be redeemed upon demand is considered low due to the high quality
      of the financial institutions in which they are invested.





***Credit
      Risk***





The
      company’s primary concentration of credit risk is with accounts receivable,
      which consist of amounts owed by governmental agencies, insurance companies
      and
      private patients. Receivables from Medicare and Medicaid comprised 45% of
      receivables at December 31, 2005 and 52% at December 31, 2004.





***Inventories***





Inventories,
      are valued at the lower of cost (first-in, first-out method) or market value
      and
      consist of supplies used in dialysis treatments and inventory of the company’s
      medical products division acquired pursuant to the company’s merger with its
      former parent. See “Consolidation” above in this Note 1, Note 3, Note 4, and
      Note 16.





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





Prepaid
      expenses and other current assets is comprised as follows:





**December
                31,********2005**
            
            **2004**Prepaid
                expenses
            
            $
            993,277
            
            $
            607,398Other
            
            
            431,835
            
            
            615,625$
            1,425,112
            
            $
            1,223,023





***Accrued
      Expenses***





Accrued
      expenses is comprised as follows:





**December
                31,****2005**
            
            **2004**Accrued
                compensation
            
            $
            1,059,791
            
            $
            1,306,892Excess
                insurance liability
            
            
            3,195,520
            
            
            2,926,711Other
            
            
            1,483,955
            
            
            688,166$
            5,739,266
            
            $
            4,921,769





Excess
      insurance liability represents amounts paid by insurance companies in excess
      of
      the amounts expected by the company from the insurers. The company communicates
      with the payors regarding these amounts, which can result from duplicate
      payments, payments in excess of contractual agreements, payments as primary
      when
      payor is secondary, and underbillings by the company based on estimated fee
      schedules. These amounts remain in excess insurance liability until
      resolution.




F-9




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





***Vendor
      Concentration***




The company purchases erythropoietin (EPO) from one supplier which comprised
      34%
      in 2005, 36% in 2004 and 37% in 2003 of the company’s cost of medical services.
      There is only one supplier of EPO in the United States. This supplier received
      FDA approval for an alternative product available for dialysis patients, which
      is indicated to be effective for a longer period than EPO. The alternative
      drug
      also could be administered by the patient’s physician. Accordingly, the use of
      this drug could reduce our revenues from our current treatment of anemia,
      thereby adversely impacting our revenues and profitability. There are no other
      suppliers of any similar drugs available to dialysis treatment providers.
      Revenues from the administration of EPO, which amounted to approximately
      $12,580,000 in 2005, $11,381,000 in 2004 and $8,308,000 in 2003, comprised
      28%
      of medical services revenues in each of these years.





***Property
      and Equipment***




Property and equipment is stated on the basis of cost. Depreciation is
      computed for book purposes by the straight-line method over the estimated useful
      lives of the assets, which range from 5 to 34 years for buildings and
      improvements; 3 to 10 years for machinery, computer and office equipment, and
      furniture; and 5 to 10 years for leasehold improvements based on the shorter
      of
      the lease term or estimated useful life of the property. Replacements and
      betterments that extend the lives of assets are capitalized. Maintenance and
      repairs are expensed as incurred. Upon the sale or retirement of assets, the
      related cost and accumulated depreciation are removed and any gain or loss
      is
      recognized. See Note 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
      consists of net income.





***Revenue
      Recognition***




Net
      revenue is recognized as services are rendered at the net realizable amount
      from
      Medicare, Medicaid, commercial insurers and other third party payors. As of
      December 31, 2005, one of the





F-10




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





company’s
      new centers is awaiting Medicare certification and two are awaiting Medicaid
      certification. 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 $67,000 at December 31, 2005 and $80,000 at December 31, 2004
      are
      included in other assets. Amortization expense was $13,179 for 2005, $6,243
      for
      2004 and $2,314 for 2003.





***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 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





F-11




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





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” below in this Note 1.





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 those Statements. The
      fair
      value for these options was estimated at the date of grant using a Black-Scholes
      option pricing model with the following weighted-average assumptions for options
      granted during 2004, 2003, 2002 and 2001, respectively: risk-free interest
      rate
      of 3.83%, 1.44%, 3.73%, and 5.40%; no dividend yield; volatility factor of
      the
      expected market price of the company’s common stock of 1.31, 1.07, 1.15 and
      1.14, and a weighted-average expected life of 5 years, 4.7 years, 5 years and
      4
      years.




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




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





**2005**
            
            **2004**
            
            **2003**Net
                income, as reported
            
            $
            1,900,000
            
            $
            2,214,000
            
            $
            1,150,000Stock-based
                employee compensation expense under
              fair
                value method, net of related tax effects
            
            
            (430,000
            )
            
            (170,000
            )
            
            (64,000
            )Pro
                forma net income
            
            $
            1,470,000
            
            $
            2,044,000
            
            $
            1,086,000Earnings
                per share:Basic,
                as reported
            
            $
            .22
            
            $
            .27
            
            $
            .15Basic,
                pro forma
            
            $
            .17
            
            $
            .25
            
            $
            .14Diluted,
                as reported
            
            $
            .20
            
            $
            .25
            
            $
            .13Diluted,
                pro forma
            
            $
            .16
            
            $
            .23
            
            $
            .12




F-12




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**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,****2005**
            
            **2004**
            
            **2003**Net
                income
            
            $
            1,899,652
            
            $
            2,214,203
            
            $
            1,149,984Weighted
                average shares-denominator basic computation
            
            
            8,769,399
            
            
            8,256,282
            
            
            7,904,874Effect
                of dilutive stock options
            
            
            497,506
            
            
            527,575
            
            
            830,612Weighted
                average shares, as adjusted-denominator diluted
              computation
            
            
            9,266,905
            
            
            8,783,857
            
            
            8,735,486Earnings
                per share:Basic
            
            $
            .22
            
            $
            .27
            
            $
            .15Diluted
            
            $
            .20
            
            $
            .25
            
            $
            .13





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








***Other
      Income***





Operating:




Other operating income is comprised as follows:





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Management
                fee income
            
            $
            498,257
            
            $
            402,251
            
            $
            320,580Litigation
                settlement
            
            
            ---
            
            
            134,183
            
            
            ---$
            498,257
            
            $
            536,434
            
            $
            320,580




F-13




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





Non-operating:





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





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Rental
                income
            
            $
            238,743
            
            $
            191,350
            
            $
            190,308Interest
                income
            
            
            99,300
            
            
            35,402
            
            
            49,914Interest
                expense
            
            
            (147,635
            )
            
            (162,791
            )
            
            (201,316
            )Other
            
            
            27,413
            
            
            22,792
            
            
            36,944Other
                income, net
            
            $
            217,821
            
            $
            86,753
            
            $
            75,850




***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 charges 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 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.




F-14




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





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, are 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 January 1, 2006. 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 board of directors approved accelerated vesting
      of
      all unvested options as of December 31, 2005, resulting in there being no
      unvested options as of December 31, 2005. FAS 123(R) will be a consideration
      in
      the formulation of future compensation plans and grants.





In
      May,
      2005, the FASB issued Statement of Financial Accounting Standards No. 154,
      “Accounting Changes and Error Corrections - a replacement of APB Opinion No.
      20
      and FASB Statement No. 3” (“FAS 154”). This Statement replaces APB Opinion No.
      20, “Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting
      Changes in Interim Financial Statements,” and changes the requirements for the
      accounting for and reporting of a change in accounting principle. FAS 154
      applies to all voluntary changes in accounting principle. It also applies to
      changes required by an accounting pronouncement in the unusual instance that
      the
      pronouncement does no include specific transition provisions. When a
      pronouncement includes specific transition provision, those provisions should
      be
      followed. This statement is effective for accounting changes and corrections
      of
      errors made in fiscal years beginning after December 15, 2005. The company
      does
      not expect FAS 154 to have a significant effect on its financial
      statements.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
      Period for Leasehold Improvements (“EITF 05-6”). EITF 05-6 provides guidance on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The EITF
      concluded that the amortization period used for leasehold improvements acquired
      in a business combination or purchased after the inception of a lease should
      be
      the lesser of (a) the subsequently acquired leasehold improvements’ useful life
      or (b) a period that reflects renewals that are reasonably assured upon the
      acquisition or purchase of the subsequently acquired leasehold improvements.
      The
      guidance in EITF 05-6 will be applied prospectively and is effective for periods
      beginning after June 29, 2005. The company does not expect EITF 05-6 to have
      a
      significant effect on its financial statements.




F-15




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      2--LONG-TERM DEBT**





Long-term debt is as follows:





******December 31,****2005**
            
            **2004**Development
                loan secured by land and buildingwith
                a net book value of $317,000 atDecember
                31, 2005. Monthly principalpayments
                of $2,217 plus interest at 1% overthe
                prime rate effective December 16, 2002with
                remaining balance due December 2, 2007.
            
            $
            582,979
            
            $
            609,580Mortgage
                note secured by land and buildingwith
                a net book value of $844,000 atDecember
                31, 2005. 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.
            
            
            632,591
            
            
            675,018Equipment
                financing agreement secured by equipmentwith
                a net book value of $557,000 at December 31,2005.
                Monthly payments totaling approximately $34,000 as ofDecember
                31, 2005, including principal and interest,as
                described below, pursuant to various schedulesextending
                through August, 2007 with interest at ratesranging
                from 5.40% to 10.47%.
            
            
            371,433
            
            
            814,3381,587,003
            
            
            2,098,936Less
                current portion
            
            
            952,000
            
            
            513,000$
            635,003
            
            $
            1,585,936




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. The bank subsequently released DCA of
      Vineland, LLC’s assets as security leaving the company as the remaining obligor
      on this loan agreement. Outstanding borrowings were subject to monthly payments
      of interest only through December 2, 2001, with monthly payments thereafter
      of
      $2,917 principal plus interest through December 2, 2002, 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 $583,000
      at December 31, 2005 and $610,000 December 31, 2004.





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





F-16




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





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 $633,000 at December 31, 2005
      and
      $675,000 at December 31, 2004.





The
      equipment financing agreement represents financing for kidney dialysis machines
      for the company’s dialysis facilities. There was no financing under this
      agreement in 2005, 2004 or 2003. 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 $371,000 at December 31, 2005 and
      $814,000 at December 31, 2004.





The
      prime
      rate was 7.25% as of December 31, 2005 and 5.25% as of December 31, 2004. For
      interest payments, see Note 13.




Scheduled maturities of long-term debt outstanding at December 31, 2005 are
      approximately:





2006
            
            $
            952,0002007
            
            
            635,0002008
            
            
            ---2009
            
            
            ---2010
            
            
            ---Thereafter
            
            
            ---$
            1,587,000




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, 2005 and December 31, 2004.




On October 24, 2005, the company entered into a three year, $15,000,000
      revolving line of credit with a maturity date of October 24, 2008. There was
      no
      financing under this agreement in 2005. Each of the company’s wholly-owned
      subsidiaries has guaranteed this credit facility, as will any future
      wholly-owned subsidiaries. Further, the obligation under the revolving line
      of
      credit is secured by the company’s pledge of its ownership in its subsidiaries.
      The credit facility, which has provisions for both base rate and LIBOR loans,
      is
      intended to provide funds for the development and acquisition of new dialysis
      facilities, to meet general working capital requirements, and for other general
      corporate purposes. Borrowings under the revolving line of credit accrue
      interest at a rate based upon the applicable margin for base rate and LIBOR
      loans plus the base rate for base rate loans and the LIBOR rate for LIBOR loans,
      as those terms are defined in the agreement. The LIBOR rate applicable to a
      LIBOR loan is determined by the interest period selected by the company for
      that
      particular loan, which represents the duration of the loan. The company has
      the
      right to convert the base rate loan to a LIBOR loan, and vice versa. The
      agreement contains customary reporting and financial covenant requirements
      for
      this type of credit facility. The company was in compliance with the
      requirements of this credit facility at December 31, 2005.





F-17




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      3--INCOME TAXES**





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





**2005**
            
            **2004**
            
            **2003**Current:Federal
            
            $
            1,241,000
            
            $
            1,052,000
            
            $
            603,000State
            
            
            240,000
            
            
            324,000
            
            
            264,000City
            
            
            10,000
            
            
            8,000
            
            
            ---1,491,000
            
            
            1,384,000
            
            
            867,000Deferred:Federal
            
            
            (156,000
            )
            
            227,000
            
            
            28,000State
            
            
            92,000
            
            
            (35,000
            )
            
            (17,000
            )(64,000
            )
            
            192,000
            
            
            11,000$
            1,427,000
            
            $
            1,576,000
            
            $
            878,000





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





**December
                31,****2005**
            
            **2004**Deferred
                tax liabilities:Depreciation
                and amortization
            
            $
            814,000
            
            $
            852,000Total
                deferred tax liabilities
            
            
            814,000
            
            
            852,000Deferred
                tax assets:Accrued
                expenses
            
            
            153,000
            
            
            118,000Bad
                debt allowance
            
            
            685,000
            
            
            602,000Startup
                costs
            
            
            141,000
            
            
            126,000Subtotal
            
            
            979,000
            
            
            846,000Net
                operating loss carryforwards
            
            
            2,353,000
            
            
            167,000Total
                deferred tax assets
            
            
            3,332,000
            
            
            1,013,000Valuation
                allowance for deferred tax assets
            
            
            ---
            
            
            ---Deferred
                tax asset, net of valuation allowance
            
            
            3,332,000
            
            
            1,013,000Net
                deferred tax asset
            
            $
            2,518,000
            
            $
            161,000




No valuation allowance was recorded for deferred tax assets at December 31,
      2005
      or December 31, 2004, due to the company’s anticipated prospects for future
      taxable income in an amount sufficient to realize the deferred tax
      assets.




As a result of the company’s merger with its former parent, the company acquired
      a deferred tax asset of approximately $3,600,000, representing tax benefits
      from
      the former parent’s net operating loss carryforwards that the company can
      utilize to satisfy future income tax liabilities. The company has applied
      approximately $617,000 of the acquired deferred tax asset to offset a deferred
      income tax liability of the same amount, which would otherwise represent a
      future tax liability of the company. The company





F-18




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      3--INCOME TAXES--Continued**





has
      also
      applied approximately $1,309,000 toward the current year tax liability resulting
      in refundable income taxes of approximately $1,227,000 which is reflected as
      a
      current asset. See Note 16.





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,****2005**
            
            **2004**
            
            **2003**Statutory
                tax rate (34%) applied to income (loss)before
                income taxes, minority interest and equity
              in
                affiliate earnings
            
            $
            1,174,000
            
            $
            1,424,000
            
            $
            750,000Adjustments
                due to:State
                and city taxes, net of federal benefit
            
            
            193,000
            
            
            218,000
            
            
            189,000Change
                in valuation allowance
            
            
            ---
            
            
            (18,000
            )
            
            ---Non-deductible
                items
            
            
            11,000
            
            
            18,000
            
            
            11,000Subsidiary
                minority ownership
            
            
            (131,000
            )
            
            (206,000
            )
            
            (26,000
            )Ownership
                in affiliate
            
            
            112,000
            
            
            96,000
            
            
            15,000Other
            
            
            68,000
            
            
            44,000
            
            
            (61,000
            )$
            1,427,000
            
            $
            1,576,000
            
            $
            878,000





The
      company has equity positions in 22 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
      subsidiary LLC’s are included in the company’s Consolidated Statements of Income
      with the minority interest in the results of operations of subsidiary LLC’s
      shown separately on the Consolidated Statements of Income. Income attributable
      to the company’s equity position in its 40% owned affiliate (see Note 1 and Note
      15) is shown separately on the company’s Consolidated Statements of
      Income.




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.








**NOTE
      4--TRANSACTIONS WITH FORMER PARENT**





Our
      former parent provided certain financial and administrative services for us.
      Central operating costs were charged on the basis of time spent. In the opinion
      of management, this method of allocation is reasonable. The amount of expenses
      allocated by the former parent totaled approximately $150,000 for





F-19




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




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





the
      year
      ended December 31, 2005 with this allocation ceasing when the company and its
      former parent merged (see Note 1, Note 3, and Note 16) and $200,000 for the
      years ended December 31, 2004 and 2003, which is included in selling, general
      and administrative expenses in the Consolidated Statements of
      Income.





We
      had an
      intercompany advance payable to our former parent of approximately $449,000
      as
      of December 31, 2004, which bore interest at the short-term Treasury Bill rate.
      Interest expense on intercompany advances payable was approximately $9,000,
      $5,000 and $2,000 for the years ended December 31, 2005, 2004 and 2003,
      respectively with the interest ceasing when the company and its former parent
      merged. Interest was included in the intercompany advance balance. The
      intercompany advance of approximately $611,000 was forgiven as a result of
      the
      company’s merger with its former parent. See Note 1, Note 3, and Note
      16.




On March 17, 2004, the company issued a demand promissory note to its former
      parent for up to $1,500,000 of financing for equipment purchases with annual
      interest of 1.25% over the prime rate. The note was subsequently modified by
      increasing the maximum amount of advances that can be made to $5,000,000, and
      by
      adding to the purposes of the financing, working capital and other corporate
      needs. The note had an outstanding principal balance of approximately $1,435,000
      as of December 31, 2004. The outstanding note balance of approximately
      $4,531,000 was forgiven as a result of the company’s merger with its former
      parent. The weighted average interest rate on the note during the period it
      was
      outstanding during 2005 and 2004 was 7.58% and 5.84%, respectively. Interest
      expense on the note amounted to approximately $149,000 and $51,000 for the
      years
      ended December 31, 2005 and 2004 with the interest ceasing when the company
      and
      its former parent merged. Accrued interest payable on the note amounted to
      approximately $27,000 as of December 31, 2004. Accrued interest on the note
      of
      approximately $64,000 was forgiven as a result of the company’s merger with its
      former parent. See Note 1, Note 3, and Note 16.








**NOTE
      5--OTHER RELATED PARTY TRANSACTIONS**





For
      the
      years ended December 31, 2005, 2004 and 2003, respectively, the company paid
      premiums of approximately $705,000, $537,000 and $425,000 for insurance obtained
      through a director of its former parent.





For
      the
      years ended December 31, 2005, 2004 and 2003, respectively, legal fees of
      $196,000, $236,000 and $156,000 were paid to an attorney who acts as general
      counsel and Secretary for the company and who acted in the same capacities
      for
      the company’s former parent and who was a director of the company’s former
      parent.




In
      May
      2001, the company loaned its president $95,000 to be repaid with accrued
      interest at prime minus 1% (floating prime) on or before maturity on May 11,
      2006. This demand loan was collateralized by all of the President’s stock
      options in the company, as well as common stock from exercise of the options
      and
      proceeds from sale of such stock. Interest income on the loan amounted to
      approximately $6,000,
      $4,000 and $4,000 for 2005, 2004 and 2003, respectively. The note and accrued
      interest of approximately $22,000 were repaid in December, 2005.





F-20




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      5--OTHER RELATED PARTY TRANSACTIONS--Continued**





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 $15,000 in capital contributions during 2005, and
      $324,000 during the preceding year, under notes accruing interest at prime
      plus
      2%, with an aggregate of approximately $68,000 of distributions applied against
      the notes and accrued interest during 2005, and $74,000 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 Note 11 and Note 13.








**NOTE
      6--STOCK OPTIONS**





In
      April,
      1999, the company 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
      its officers, directors, employees and consultants with 680,000 options
      exercisable through April 20, 2000 and 920,000 options exercisable through
      April
      20, 2004. 1,480,000 options have been exercised. 120,000 options have been
      cancelled. 680,000 options were exercised in part with promissory notes with
      the
      interest at 6.2% and repaid with 91,800 shares of common stock in February,
      2004. The balance of the 800,000 options were exercised in 2003 and 2004 with
      the exercise prices paid in part with director bonuses and in part by the
      payment with company stock. The exercises and share payments to the company
      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 13.





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





In
      September, 2001, the board of directors granted five-year options for an
      aggregate of 150,000 shares exercisable at $.75 per share through September
      5,
      2006, to certain officers, directors and key employees. In 2003 and 2004, 8,146
      of these options were exercised, with the exercise prices satisfied by director
      bonuses. These exercises represent non-cash investing activity, which is a
      supplemental disclosure required by Financial Accounting Standards Board
      Statement No. 95, “Statement of Cash Flows.” See Note 13. In January, 2004,
      7,200 options were exercised and in February, 2005, 15,000 options were
      exercised for cash. 14,654 options have been cancelled due to the resignation
      of
      a director in June, 2004, and 105,000 options remain outstanding.




F-21




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      6--STOCK OPTIONS--Continued**





In
      May,
      2002, the board of directors granted five-year options for an aggregate of
      21,000 shares to certain of the company’s employees. Options for 14,000 shares
      have been cancelled as a result of the termination of several employee option
      holders. During 2005, 7,000 of these options were exercised with the company
      receiving $14,350 cash payments for the exercise price.





The
      board
      of directors determined that all outstanding, unvested options would vest as
      of
      December 31, 2005. The following weighted average information pertains to these
      options: expected life 3.8 years, exercise price $3.55, fair value $2.32, risk
      free interest rate 3.69%, and volatility factor .95.





In
      June,
      2003, the board of directors granted to an officer a five-year option for 50,000
      shares exercisable at $1.80 per share through June 3, 2008. These options remain
      outstanding.





In
      August, 2003, the board of directors granted a three-year option to a director
      for 10,000 shares exercisable at $2.25 per share through August 18, 2006. These
      options remain outstanding.





In
      January, 2004, the board of directors granted a five year option to an employee
      for 20,000 shares exercisable at $3.09 per share through January 12, 2009.
      In
      February, 2005, a portion of this option was exercised for 5,000 shares with
      the
      company receiving a cash payment of $15,425, leaving 15,000 of these options
      outstanding.





In
      June,
      2004, the board of directors granted 160,000 stock options to officers,
      directors and a key employee exercisable at $4.02 per share through June 6,
      2009. 3,750 options were exercised in July, 2005 with the company receiving
      a
      cash payment of $15,075 and an additional 13,750 options were exercised in
      December 2005 with the company receiving $55,275 cash payments. 142,500 options
      remain outstanding.





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





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





F-22




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      6--STOCK OPTIONS--Continued**





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




**2005**
            
            **2004**
            
            **2003****Weighted-Average**
            
            
            
            **Weighted-Average**
            
            
            
            **Weighted-Average****Options**
            
            **Exercise
                Price**
            
            **Options**
            
            **Exercise
                Price**
            
            **Options**
            
            **Exercise
                Price**Outstanding-beginning
                of year
            
            
            694,616
            
            
            
            
            
            1,191,716
            
            
            
            
            
            1,367,000Granted
            
            
            ---
            
            
            
            
            
            230,000
            
            
            $3.94
            
            
            60,000
            
            
            $1.88Cancellations
            
            
            (41,500
            )
            
            $3.83
            
            
            (14,654
            )
            
            $.75
            
            
            (51,000
            )
            
            $1.63Exercised
            
            
            (330,616
            )
            
            $1.01
            
            
            (712,446
            )
            
            $.63
            
            
            (184,284
            )
            
            $.73Expired
            
            
            ---
            
            
            
            
            
            ---
            
            
            
            
            
            ---Outstanding-end
                of year
            
            
            322,500
            
            
            
            
            
            694,616
            
            
            
            
            
            1,191,716Outstanding:August 2004 options
            
            
            ---
            
            
            
            
            
            50,000
            
            
            $4.02
            
            
            ---June 2004 options
            
            
            142,500
            
            
            $4.02
            
            
            160,000
            
            
            $4.02
            
            
            ---January 2004 options
            
            
            15,000
            
            
            $3.09
            
            
            20,000
            
            
            $3.09
            
            
            ---August 2003 options
            
            
            10,000
            
            
            $2.25
            
            
            10,000
            
            
            $2.25
            
            
            10,000
            
            
            $2.25June 2003 options
            
            
            50,000
            
            
            $1.80
            
            
            50,000
            
            
            $1.80
            
            
            50,000
            
            
            $1.80May 2002 options
            
            
            ---
            
            
            
            
            
            11,000
            
            
            $2.05
            
            
            11,000
            
            
            $2.05September 2001 options
            
            
            105,000
            
            
            $.75
            
            
            120,000
            
            
            $.75
            
            
            146,430
            
            
            $.75January 2001 options
            
            
            ---
            
            
            
            
            
            273,616
            
            
            $.63
            
            
            330,000
            
            
            $.63April 1999 options
            
            
            ---
            
            
            
            
            
            ---
            
            
            
            
            
            644,286
            
            
            $.63322,500
            
            
            
            
            
            694,616
            
            
            
            
            
            1,191,716Outstanding
                and exercisableend
                of year:June 2004 options
            
            
            142,500
            
            
            $4.02
            
            
            15,000
            
            
            $4.02
            
            
            ---January 2004 options
            
            
            15,000
            
            
            $3.09
            
            
            ---
            
            
            
            
            
            ---August 2003
            
            
            10,000
            
            
            $2.25
            
            
            5,000
            
            
            $2.25
            
            
            ---June 2003
            
            
            50,000
            
            
            $1.80
            
            
            12,500
            
            
            $1.80
            
            
            ---May 2002
            
            
            ---
            
            
            
            
            
            11,000
            
            
            $2.05
            
            
            ---September 2001 options
            
            
            105,000
            
            
            $.75
            
            
            90,000
            
            
            $.75
            
            
            90,000
            
            
            $.75January 2001 options
            
            
            ---
            
            
            
            
            
            207,616
            
            
            $.63
            
            
            198,000
            
            
            $
                  .63April 1999 options
            
            
            ---
            
            
            
            
            
            ---
            
            
            
            
            
            644,286
            
            
            $.63322,500
            
            
            
            
            
            341,116
            
            
            
            
            
            932,286Weighted-average
                fair value of
              options granted during the year
            
            
            
            
            
            
            
            $
            3.88
            
            
            
            
            $
            1.41





The
      remaining contractual life at December 31, 2005 is 3.6 years for the August
      2004
      options, 3.4 years for the June 2004 options, 3 years for the January 2004
      options, .6 years for the August 2003 options, 2.4 years for the June 2003
      options and .7 years for the September 2001 options.




F-23




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      6--STOCK OPTIONS--Continued**





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





As
      of
      December 31, 2005, the company has 323,000 shares reserved for issuance,
      including: 105,000 shares for the September, 2001 options, 50,000 shares for
      the
      June, 2003 options, 10,000 shares for the August, 2003 options, 15,000 shares
      for the January, 2004 options and, 142,500 shares for the June, 2004 options.
      All options were issued at fair market value on date of grant.





The
      number and exercise price of outstanding options was adjusted based upon a
      two-for-one stock split affected by the company in February, 2004. See Note
      1
      and Note 14.





**NOTE
      7--COMMITMENTS**





The
      company has leases on facilities housing its dialysis, administrative and
      medical operations and equipment leases. Total rent expense was approximately
      $1,466,000, $1,194,000 and $778,000 for the years ended December 31, 2005,
      2004,
      and 2003, respectively. The aggregate lease commitments at December 31, 2005
      for
      the company’s non-cancelable operating leases with a term of one year or more
      are approximately:





2006
            
            $
            1,605,0002007
            
            
            1,536,0002008
            
            
            1,464,0002009
            
            
            1,100,0002010
            
            
            869,000Thereafter
            
            
            1,505,000$
            8,079,000




Effective January 1, 1997, the company established a 401(k) savings plan (salary
      deferral plan) with an eligibility requirement of one year of service and 21
      year old age requirement. The company and its former parent established a new
      401(k) plan effective January, 2003, which allows employees, in addition to
      regular employee contributions, to elect to have a portion of bonus payments
      contributed. As an incentive to save for retirement, the company will match
      10%
      of an employee’s contribution resulting from any bonus paid during the year and
      may make a discretionary contribution with the percentage of any discretionary
      contribution to be determined each year with only employee contributions up
      to
      6% of annual compensation considered when determining employer matching. To
      date, employer matching expense has been minimal.




Stephen W. Everett, CEO, President and director of the company, had a five-year
      employment contract through December 31, 2005. The company and Mr. Everett
      finalized a new five-year employment agreement, agreed to in principle and
      effective January 3, 2006 with an initial annual salary of $275,000 and minimum
      increases of $10,000 per year thereafter. The agreement contains provisions
      for
      receipt of 40,000 shares of the company’s common stock of which 10,000 shares
      will be granted immediately subject to shareholder approval. Issuance of the
      remaining 30,000 shares will be based upon agreed upon performance criteria
      with
      the potential for 10,000 shares to be issued annually over the next three years.
      The agreement provides for certain fringe benefits, reimbursement of reasonable
      out-of-





F-24




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      7--COMMITMENTS--Continued**





pocket
      expenses, and a non-competition agreement with the company during the term
      of
      the agreement and for one year after termination. See Note 18.





A
      non-affiliated owner of a Georgia facility that is managed by the company held
      a
      put option to sell to a subsidiary of the company all the assets of that
      dialysis facility. The company’s subsidiary held a call option to purchase the
      assets of the Georgia facility. Each of the put and call options were
      exercisable through September, 2005. In August, 2005, our subsidiary notified
      the owner of the Georgia facility of its intent to exercise the call option
      and
      negotiate the acquisition of that facility’s assets. The parties agreed to
      extend the call option through December 31, 2006. The put option expired
      unexercised and has not been extended.





**NOTE
      8--REPURCHASE OF COMMON STOCK**





In
      September, 2000, the company announced a common stock repurchase plan for up
      to
      600,000 shares at current market prices. The repurchase plan terminated in
      the
      second quarter of 2005. The company repurchased and cancelled approximately
      360,000 shares under the plan at an aggregate cost of approximately $205,000.
      No
      shares were acquired by the company during 2004 or 2005 with the exception
      of
      shares paid to the company for exercise of stock options during 2004. See Notes
      6 and 13.





**NOTE
      9--CAPITAL EXPENDITURES AND DEPRECIATION**





Capital
                expenditures and depreciation
              expense were as follows:**2005**
            
            **2004**
            
            **2003**Capital
                expenditures
            
            $
            5,482,000
            
            $
            3,132,000
            
            $
            1,656,000Depreciation
                expense
            
            $
            1,736,000
            
            $
            1,493,000
            
            $
            1,184,000





**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.





These transactions resulted in an aggregate of approximately $2,441,000 of
      goodwill, representing the excess of the purchase price over the fair value
      of
      the net assets acquired. The goodwill is being





F-25





**NOTE
      10--ACQUISITIONS--Continued**





amortized
      for tax purposes over a 15-year period. Certain of the acquisition transactions
      were of minority interests held by medical directors of certain of our dialysis
      facilities.





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








**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 Note 5 and Note
      13.








**NOTE
      12--QUARTERLY FINANCIAL INFORMATION (Unaudited)**





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





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





F-26




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      12--QUARTERLY FINANCIAL INFORMATION (Unaudited)--Continued**





**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





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.








**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 Note 1, Note 2, Note 3, Note 4, Note 5, Note 6, Note
      11, and Note 16:





**2005**
            
            **2004**
            
            **2003**Interest
                paid (see Note 2)
            
            $
            273,000
            
            $
            204,000
            
            $
            189,000Income
                taxes paid (see Note 3)
            
            
            1,301,000
            
            
            1,350,000
            
            
            777,000Options
                exercise bonus (191,238 shares 2004;
              159,284
                shares 2003) (see Note 6)
            
            
            ---
            
            
            120,000
            
            
            100,000Subsidiary
                minority member capital contributions
              financing
                (see Note 5 and Note 11)
            
            
            15,000
            
            
            324,000
            
            
            223,000Subsidiary
                minority member distributions applied
              against
                financing (see Note 5 and Note 11)
            
            
            68,000
            
            
            74,000
            
            
            54,000Share
                payment (514,008 options exercised; 72,375
              shares
                paid) for stock option exercises (see Note 6)
            
            
            ---
            
            
            321,000
            
            
            ---Payment
                on note receivable with 91,800 shares of commonstock
                (see Note 6)
            
            
            ---
            
            
            521,000
            
            
            ---Increase
                in additional paid-in capital from exercise of non-qualified
                stock options (see Note 3 and Note 6)
            
            
            ---
            
            
            120,000
            
            
            ---Net
                share issuance in merger with former parent (Note 1, Note 3, Note
                4 and
                Note 16)
            
            
            10,051,000
            
            
            ---
            
            
            ---








**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





F-27




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      14--STOCK SPLIT--Continued**





February
      10, 2004. The two-for-one stock split increased the outstanding shares of common
      stock at that time to 7,937,544 shares. The split also required adjustment
      in
      the outstanding stock options by doubling the number of shares obtainable upon
      exercise, and halving the exercise price of the options. See Note 1 and Note
      6.








**NOTE
      15--AFFILIATE FINANCIAL INFORMATION**





The
      following amounts represent certain operating data (in thousands) 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):





**2005**
            
            **2004**
            
            **2003**Revenues
            
            $
            2,667
            
            $
            2,275
            
            $
            1,547Gross
                profit
            
            $
            1,485
            
            $
            1,244
            
            $
            600Net
                income
            
            $
            822
            
            $
            707
            
            $
            111





The
      following amounts (in thousands) are from the balance sheet of the company’s 40%
      owned Ohio affiliate:





******December 31,****2005**
            
            **2004**Current
                assets
            
            $
            926
            
            $
            945Non-current
                assets
            
            
            124
            
            
            161Total
                assets
            
            $
            1,050
            
            $
            1,106Current
                liabilities
            
            $
            216
            
            $
            245Non-current
                liabilities
            
            
            ---
            
            
            ---Capital
            
            
            834
            
            
            861Total
                liabilities and capital
            
            $
            1,050
            
            $
            1,106


The
      company’s equity in the net assets of this affiliate of $334,000 at December 31,
      2005, and $345,000 at December 31, 2004, is included in other assets on its
      consolidated balance sheet.








**NOTE
      16--ACQUISITION OF FORMER PARENT COMPANY**





On
      June
      2, 2005, the company and its former parent, Medicore, Inc., which owned
      approximately 56% of the company, entered into an Agreement and Plan of Merger
      for Medicore to merge into the company for consideration consisting of
      approximately 5,271,000 shares of the company’s common stock. On September 21,
      2005, the shareholders of Medicore and the company approved the merger, the
      articles of merger were filed, and the merger was completed. Each Medicore
      shareholder received .68





F-28




**DIALYSIS
        CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005**




**NOTE
      16--ACQUISITION OF FORMER PARENT COMPANY--Continued**





shares
      of
      the company’s common stock for each share of Medicore common stock, and
      Medicore’s ownership in the company of approximately 4,821,000 of the company’s
      common stock was retired resulting in approximately 9,116,000 shares of the
      company outstanding after the merger. See Note 4.





The
      following table summarizes the merger transaction:





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




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





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





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





F-29




**DIALYSIS
          CORPORATION OF AMERICA AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December
          31, 2005**




**NOTE
      16--ACQUISITION OF PARENT COMPANY--Continued**





The
      results of operations of the company’s former parent are included in the
      company’s consolidated operating results effective with the merger, September
      21, 2005. Pro forma results of operations if the merger had completed as of
      January 1, 2003 are as follows (in thousands except per share
      data):





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Operating
                revenues
            
            $
            46,008
            
            $
            41,768
            
            $
            30,807Net
                income
            
            $
            2,093
            
            $
            2,572
            
            $
            1,573Earnings
                per share:Basic
            
            $
            .23
            
            $
            .29
            
            $
            .19Diluted
            
            $
            .22
            
            $
            .28
            
            $
            .17




**NOTE
      17--TRANSACTIONS WITH VIRAGEN, INC.**





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





In
      August, 2002, Medicore initiated a legal action against Viragen for breach
      of
      the royalty agreement and for an accounting of sales pursuant to the royalty
      agreement. In July, 2003, Medicore reached an agreement with Viragen pursuant
      to
      mediation proceedings following its obtaining a partial summary judgment against
      Viragen in March, 2003, for amounts owed to it under the royalty agreement.
      Viragen remitted $30,000 on August 1, 2003, August 1, 2004 and August 1, 2005,
      with annual interest at 5% on the August, 2004 and 2005 payments. Viragen also
      agreed to commence remitting the quarterly royalty payments due under the
      royalty agreement. Pursuant to the company’s merger with its former parent,
      royalties are now payable to the company. See Note 1, Note 3, Note 4, and Note
      16.





**NOTE
      18--SUBSEQUENT EVENTS**





In
      February, 2006, the company acquired the assets of a Virginia dialysis center
      and in March, 2006 acquired the assets of two Maryland dialysis centers. Each
      of
      these centers is 80% owned by the company with a 20% minority
      interest.





The
      company finalized a new five-year employment agreement with Stephen W. Everett,
      CEO, President and a director, effective January 3, 2006. See Note
      7.




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
              AccountantsCranford,
              New JerseyFebruary
              10,
              2006






F-31




**Schedule
      II - Valuation and Qualifying Accounts**


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


**December
      31, 2005**





COL.
                  A
              
              COL.
                  B
              
              COL.
                  C
              
              COL.
                  D
              
              COL.
                  EClassification
              
              Balance
                  at
                Beginning
                Of
                  Period
              
              Additions
                  (Deductions)
                Charged
                  (Credited) to
                Cost
                  and Expenses
              
              Additions
                Charged
                  to
                Other
                  Accounts
                Describe
              
              Other
                  Changes
                Add
                  (Deduct)
                Describe
              
              Balance
                at
                  End of
                PeriodYEAR
                  ENDED DECEMBER 31, 2005:Reserves
                  and allowances deductedfrom
                  asset accounts:Allowance
                  for uncollectible accounts
              
              $
              1,636,000
              
              $
              571,000
              
              
              
              
              $
              (321,000)(1
              )
              $
              1,886,000Reserve
                  for inventory obsolescence
              
              
              ---
              
              
              ---
              
              
              
              
              
              91,000
                  (2
              )
              
              77,000(14,000)(3
              )$
              1,636,000
              
              $
              571,000
              
              
              
              
              $
              (244,000
              )
              $
              1,963,000YEAR
                  ENDED DECEMBER 31, 2004:Reserves
                  and allowances deductedfrom
                  asset accounts:Allowance
                  for uncollectible accounts
              
              $
              785,000
              
              $
              1,198,000
              
              
              
              
              $
              (347,000)(1
              )
              $
              1,636,000Valuation
                  allowance for deferred tax asset
              
              
              52,000
              
              
              (52,000
              )
              
              
              
              
              ---
              
              
              ---$
              837,000
              
              $
              1,146,000
              
              
              
              
              $
              (347,000
              )
              $
              1,636,000YEAR
                  ENDED DECEMBER 31, 2003:Reserves
                  and allowances deductedfrom
                  asset accounts:Allowance
                  for uncollectible 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
              )
              $
              837,000
  (1)  Uncollectible
        accounts written off, net of recoveries.
 (2)  Acquisition
        of former parent company.
 (3)  Net
        write-offs against inventory reserves.


F-32


**Exhibits**





**to**





**DIALYSIS
      CORPORATION OF AMERICA**


**Annual
      Report on Form 10-K for the Fiscal Year Ended December 31,
      2005**




10.19
              Amendment
                  No. 2 to Credit Agreement between the Company and KeyBank National
                  Association dated as of February 14, 2006.21
              Subsidiaries
                  of the Company23.1
              Consent
                  of Moore Stephens, P.C.31.1
              Certification
                  of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities
                  Exchange Act of 193431.2
              Certification
                  of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities
                  Exchange Act of 193432.1
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Rule
                  13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
                  Section
                  1350