UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10--Q


(Mark One)

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

For the quarterly period ended March 31, 2010


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

For the transition period from _______________________ to __________________

Commission file number 0-8527


	DIALYSIS CORPORATION OF AMERICA
	(Exact name of registrant as specified in its charter)

Florida		59-1757642
(State or other jurisdiction of incorporation		(I.R.S. Employer
or organization)		Identification No.)

1302 Concourse Drive, Suite 204, Linthicum, Maryland		21090
(Address of principal executive offices)		(Zip Code)

	(410) 694-0500
	(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically any posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Common Stock Outstanding

Common Stock, $.01 par value: 9,610,373 shares as of May 10, 2010.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

INDEX

PART I -- FINANCIAL INFORMATION

The Consolidated Financial Statements (Unaudited) for the three months ended March 31, 2010 and March 31, 2009, include the accounts of the Registrant and its subsidiaries.

Item 1.	Financial Statements		1

	1)	Consolidated Statements of Income for the three months ended March 31, 2010 and March 31, 2009 (Unaudited).	1

	2)	Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009.	2

	3)	Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and March 31, 2009 (Unaudited).	3

	4)	Notes to Consolidated Financial Statements as of March 31, 2010 (Unaudited).	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		24

PART II -- OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		26

Item 6.	Exhibits		26

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except share and per share amounts)

	Three Months Ended
	March 31,
	2010			2009
Operating revenues:
Sales:
Medical services revenue	$	23,640		$	23,168
Product sales		298			289
Total sales revenues		23,938			23,457

Operating costs and expenses:
Cost of sales revenues:
Cost of medical services		14,987			14,431
Cost of product sales		149			160
Total cost of sales revenues		15,136			14,591
Selling, general and administrative expenses:
Corporate		3,119			2,862
Facility		3,905			3,729
Total		7,024			6,591
Stock compensation expense		43			85
Depreciation and amortization		852			726
Provision for doubtful accounts		628			671
		23,683			22,664

Operating income		255			793

Other income (expense), net		26			(14	)

Income before income taxes		281			779

Income tax provision		52			242

Net income		229			537


Less: net income attributable to noncontrolling interests		346			357

Net (loss) income attributable to the company	$	(117	)	$	180

(Loss) earnings per share:
Basic	$	(.01	)	$	.02
Diluted	$	(.01	)	$	.02

Weighted average shares outstanding:
Basic		9,609,698			9,590,778
Diluted		9,609,698			9,612,637

See notes to consolidated financial statements.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share amounts)

	March 31,		December 31,
	2010		2009(A)
ASSETS
Current assets:
Cash and cash equivalents	$	2,962	$	3,236
Accounts receivable, less allowance of $2,378 at March 31, 2010; $3,046 at December 31, 2009		21,310		21,297
Inventories, less allowance for obsolescence of $15 at March 31, 2010 and December 31, 2009		2,967		2,985
Deferred income tax asset		1,428		1,428
Prepaid expenses and other current assets		3,112		2,292
Total current assets		31,779		31,238

Property and equipment:
Land		1,333		1,333
Buildings and improvements		5,898		5,899
Machinery and equipment		17,348		16,732
Leasehold improvements		11,982		11,403
		36,561		35,367
Less accumulated depreciation and amortization		16,831		16,284
		19,730		19,083

Goodwill		16,492		16,492
Other assets		796		824
Total other assets		17,288		17,316
	$	68,797	$	67,637

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	8,572	$	6,854
Accrued expenses		6,235		6,403
Income taxes payable		43		25
Current portion of long-term debt		73		76
Total current liabilities		14,923		13,358

Long-term debt, less current portion		8,183		8,199
Deferred income tax liability		1,812		1,824
Total liabilities		24,918		23,381

Commitments and Contingencies

Equity:
Common stock, $.01 par value, authorized 20,000,000 shares: 9,610,373 shares issued, and outstanding at March 31, 2010 9,600,385 shares issued and outstanding at December 31, 2009		96		96
Additional paid-in capital		16,341		16,298
Retained earnings		21,917		22,034
Total company stockholders’ equity		38,354		38,428
Noncontrolling interests		5,525		5,828
Total equity		43,879		44,256
	$	68,797	$	67,637

(A) Reference is made to the company’s Annual Report on Form 10-K and amended Annual Report on Form 10-K/A for the year ended December 31, 2009 filed with the Securities and Exchange Commission in March, 2010 and April, 2010, respectively.

See notes to consolidated financial statements.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Three Months Ended March 31,
	2010			2009
Operating activities:
Net income	$	229		$	537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		852			727
Bad debt expense		628			671
Deferred income tax provision		(12	)		---
Stock related compensation expense		43			85
Increase (decrease) relating to operating activities from:
Accounts receivable		(641	)		(26	)
Inventories		18			219
Prepaid expenses and other current assets		(820	)		221
Accounts payable		1,718			(1,096	)
Accrued expenses		(168	)		(237	)
Income taxes payable		18			(25	)
Net cash provided by operating activities		1,865			1,076

Investing activities:
Additions to property and equipment, net of minor disposals		(1,471	)		(622	)
Net cash used in investing activities		(1,471	)		(622	)

Financing activities:
Line of credit repayments		---			(3,000	)
Payments on other long-term debt		(19	)		(19	)
Capital contributions by noncontrolling interests		100			---
Distributions to noncontrolling interests		(749	)		(598	)
Net cash used in financing activities		(668	)		(3,617	)

Decrease in cash and cash equivalents		(274	)		(3,163	)

Cash and cash equivalents at beginning of period		3,236			6,543

Cash and cash equivalents at end of period	$	2,962		$	3,380

Supplemental disclosure of cash flow information:

Interest paid	$	85		$	130
Income taxes paid		325			112

See notes to consolidated financial statements.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

We are primarily engaged in kidney dialysis operations which include outpatient hemodialysis services, home dialysis services, inpatient dialysis services and ancillary services associated with dialysis treatments. We own 36 operating dialysis centers located in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia. We have one Ohio dialysis facility under development and have agreements to provide inpatient dialysis treatments to 11 hospitals. Our medical products operation is not a significant component of our operations. Medical products operating revenues were $298 during the first quarter of 2010 and $289 for the same period of the preceding year (1.2%, of operating revenues for each period) and operating income of $62 during the first quarter of 2010 and $53 for the same period of the preceding year (24.3% and 6.7%, respectively of operating income).

Medical Services Revenue

Our medical services revenues by payor are as follows:

	Three Months Ended March 31,
	2010			2009
Medicare		47	%		47	%
Medicaid and comparable programs		8			8
Hospital inpatient dialysis services		3			3
Commercial insurers and other private payors(1)		42			42
		100	%		100	%

(1)

Private payors represent an insubstantial amount (less than 1%) of revenues.

Our sources of medical services revenue are as follows:

	Three Months Ended March 31,
	2010				2009
Outpatient hemodialysis services	$	11,975	51	%	$	12,123	52	%
Home and peritoneal dialysis services		1,007	4			959	4
Inpatient hemodialysis services		570	2			614	3
Ancillary services		10,088	43			9,472	41
	$	23,640	100	%	$	23,168	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.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Our principal estimates are for estimated uncollectible accounts receivable as provided for in allowance for doubtful accounts, estimated useful lives of depreciable assets, and estimates for patient revenues from non-contracted payors. Estimates are based on historical experience and assumptions believed to be reasonable given the available evidence at the time of the estimates. Actual results could differ from those estimates.

Vendor Volume Discounts

We have contractual arrangements with certain vendors pursuant to which we receive discounts based on volume of purchases. These discounts are recorded as a reduction in inventory costs resulting in reduced costs of sales as the related inventory is utilized as required by the Revenue Recognition Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification.

Government Regulation

A substantial portion of our revenues are attributable to payments received under Medicare, which is supplemented by Medicaid or comparable benefits in the states in which we operate.

Reimbursement rates under these programs are subject to regulatory changes and governmental funding restrictions. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The company believes that it is in compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to government review and interpretation as well as regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

In February, 2010, we received a subpoena from the U.S. Department of Health and Human Services, Office of Inspector General (“OIG”), requesting documents relating to our utilization of EPO for the period from January 1, 2002 to the present. We are cooperating with the government, have provided the requested documents, and have made a presentation and explanation of the issues. We have been advised this is a civil inquiry. We are unable at this time to determine when and to what extent this investigation may be resolved. See Item 1A, “Risk Factors,” to our Annual Report on Form 10-K for the year ended December 31, 2009 (“2009 Annual Report”).

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Although cash and cash equivalents are largely not federally insured, the credit risk associated with these deposits that typically may be redeemed upon demand is considered low due to the high quality of the financial institutions in which they are deposited.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

Credit Risk

Our primary concentration of credit risk is with accounts receivable, which consist of amounts owed by governmental agencies, insurance companies and private patients. Receivables from Medicare and Medicaid comprised 46% of receivables at March 31, 2010 and 52% at December 31, 2009.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market value and consist of supplies used in dialysis treatments and the finished goods inventory of our medical products division.

Accrued Expenses

Accrued expenses are comprised as follows:

	March 31,		December 31,
	2010		2009
Accrued compensation	$	1,849	$	1,648
Duplicate insurance payments		590		758
Excess insurance payments		2,812		2,972
Other		984		1,025
	$	6,235	$	6,403

Duplicate insurance payments occur when we are paid more than once for the same service. Excess insurance payments represent amounts paid by insurance companies in excess of the amounts recorded as earned from associated treatments that are not duplicate insurance payments. On a quarterly basis, we perform an analysis to determine whether these excess insurance payments result from payments in excess of contractual agreements, payments made as primary payor when the party is a secondary payor, or variances to estimated fee schedules used for payors to whom we are not contracted. Our analysis includes communicating with payors to determine the reason for the excess payment. These amounts remain in excess insurance payments or duplicate payments until resolution, which can vary from several months to several years.

Approximately $3 for the three months ended March 31, 2009 of medical services revenue was recorded in medical services revenue representing amounts included in excess insurance payments that we determined were nonrefundable based upon our quarterly analysis with no such amount recorded during the three months ended March 31, 2010. These amounts were primarily related to earned revenues greater than the estimated fees recognized as medical services revenue from payors to whom we were not contracted.

We have a self-insured medical and dental insurance plan administered by a third party administrator pursuant to which we are responsible for claims and administrative fees for which the obligation payable was approximately $348 at March 31, 2010 and $365 at December 31, 2009, included in other accrued expenses above.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

Vendor Concentration

There is only one supplier of erythropoietin (“EPO”) in the United States. This supplier and another manufacturer received U.S. Food and Drug Administration approval for alternative products available for dialysis patients, which are indicated to be effective for a longer period than EPO. The alternative drugs also could be administered by the patient’s physician. Accordingly, the use of these drugs could reduce our revenues from our current treatment of anemia, thereby adversely impacting our revenues and profitability. There are no other suppliers of any similar drugs available to dialysis treatment providers. Revenues from the administration of EPO, which amounted to approximately $7,207 for the first quarter of 2010 and $6,872 for the same period of the preceding year, comprised 30% and 29%, respectively of medical services revenues for these periods.

Property and Equipment

Property and equipment is stated at 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 39 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 minimum 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.

We review long-lived assets for impairment whenever events or circumstances indicate their carrying amount may not be recoverable. If any assets are considered impaired, we measure impairment as the amount the carrying amount exceeds the fair value of the assets.

Revenue Recognition

Net revenue is recognized as services are rendered at the net realizable amount from Medicare, Medicaid, commercial insurers and other third party payors. We occasionally provide dialysis treatments on a charitable basis to patients who cannot afford to pay. The amount is not significant, and we do not record revenues related to these charitable treatments. Product sales are recorded pursuant to stated shipping terms.

Goodwill

Goodwill represents cost in excess of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually (or more frequently if impairment indicators are present) as required by the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification for impairment, which testing has indicated no impairment for goodwill.

Deferred Expenses

Deferred expenses, except for deferred loan costs, are amortized on the straight-line method over their estimated benefit period with deferred loan costs amortized over the lives of the respective loans. Deferred expenses of approximately $540 at March 31, 2010 and $564 at December 31, 2009, consist primarily of non-competition agreements on acquisitions, and are included in other assets. Amortization expense was approximately $25 for the three months ended March 31, 2010 and for the same period of the preceding year.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

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.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although such assessments historically have been minimal and immaterial to our financial results. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

Stock-Based Compensation

We measure compensation cost for stock award compensation arrangements based on grant date fair value to be expensed ratably over the requisite vesting period as required by the Stock Compensation Topic of the FASB Accounting Standards Codification. Stock compensation expense was approximately $19 for the three months ended March 31, 2010, and $52 for the same period of the preceding year, respectively, with related income tax benefits of $8 for shares vesting during the three months ended March 31, 2010, and $19 for the same period of the preceding year.

During April, 2007, the company issued a 50,000 share incentive stock option with a total grant date fair value of $329. This option is being expensed over the four-year vesting period for which the expense amounted to approximately $21 for three months ended March 31, 2010, and for the same period of the preceding year. The fair value of this option was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4.61%; no dividend yield; volatility factor of the expected market price of our common stock of 0.666 based on historical volatility for a period coinciding with the expected option life; and an expected life of four years.

During February, 2008, the company issued two incentive stock options for a total of 60,000 shares, with the 7,500 share unvested portion of the 10,000 share option cancelled upon resignation of the employee and the 2,500 share vested portion of the option having expired in April, 2010, leaving the remaining 50,000 share option with a grant date fair value of $166. This option is being expensed over the four-year vesting period for which the expense amounted to approximately $10 for the three months ended March 31, 2010, and for the same period of the preceding year. Expense of approximately $7 was reversed during the three months ended March 31, 2010 for unvested options of the employee who resigned. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk free interest rate of 2.73%; no dividend yield; volatility factor of the expected market price of our common stock of 0.626 based on historical volatility for a period coinciding with the expected option life; and an expected life of four years. As these are incentive stock options, the related expense is not deductible for tax purposes.

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

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

(Loss) 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.

	Three Months Ended
	March 31,
	2010			2009
	(shares in thousands)

Net (loss) income attributable to the company	$	(117	)	$	180

Weighted average shares outstanding		9,610			9,591

Weighted average shares outstanding		9,610			9,591
Shares issuable for employee stock awards		---			16
Weighted average shares diluted computation		9610			9,607
Effect of dilutive stock options		---			6
Weighted average shares, as adjusted diluted computation		9,610			9,613

(Loss) earnings per share:
Basic	$	(.01	)	$	.02
Diluted	$	(.01	)	$	.02

Other Income (Expense)

Non-operating:

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

	Three Months Ended
	March 31,
	2010			2009
Rental income	$	110		$	103
Interest income		2			17
Interest expense		(88	)		(134	)
Other		2			---
Other income (expense), net	$	26		$	(14	)

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

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

Estimated Fair Value of Financial Instruments

The carrying value of cash, accounts receivable and debt in the accompanying financial statements approximate their fair value because of the short-term maturity of these instruments, and in the case of debt because such instruments either bear variable interest rates which approximate market or have interest rates approximating those currently available to the company for loans with similar terms and maturities.

Reclassification

Certain prior year amounts have been reclassified to conform with the current year’s presentation.

New Pronouncements

In January, 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and timing of the transfers. Additionally, the guidance requires a roll forward of purchase, sale, issuance and settlement activities for the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this new guidance is not expected to have a material impact on our financial statements.

In February, 2010, the FASB issued guidance to amend the disclosure requirements regarding subsequent events which removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. Adoption of this new guidance, which became effective immediately upon issuance, results in presentation differences but will not otherwise affect our financial statements.

NOTE 2--INTERIM ADJUSTMENTS

The financial statements for the three months ended March 31, 2010 and March 31, 2009 are unaudited and include, in the opinion of management of the company, all adjustments (consisting of normal recurring activity) necessary to present fairly the earnings for such periods. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2010.

While the company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in the company’s audited financial statements for the year ended December 31, 2009.

NOTE 3--LONG-TERM DEBT

Pursuant to a December 3, 1999 loan agreement through our subsidiary, DCA of Vineland, LLC, we obtained a $700 development loan currently secured by a mortgage on our real property in Easton, Maryland. In May, 2006, the loan was modified to extend the maturity date to May 2, 2026. Monthly payments are approximately $2 plus interest at prime. This loan had an outstanding principal balance of approximately $458 at March 31, 2010 and $465 at December 31, 2009.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 3--LONG-TERM DEBT--Continued

In April, 2001, we obtained a $788 five-year mortgage through April, 2006, on our building in Valdosta, Georgia. We refinanced this mortgage in April, 2006 with the new mortgage having an April, 2011, maturity. Interest was at prime with a rate floor of 5.75% and a rate ceiling of 8.00% until September 15, 2008 when the rate floor was revised to 5.00% and the rate ceiling was revised to 7.50%. As of May, 2006, payments are $6 including principal and interest, with a final payment consisting of a balloon payment and any unpaid interest due April, 2011. The remaining principal balance under this mortgage amounted to approximately $498 at March 31, 2010 and $510 at December 31, 2009.

The prime rate was 3.25% at March 31, 2010 and December 31, 2009.

On October 24, 2005, we entered into a revolving line of credit with a maturity date, as amended, of November 4, 2011 and total availability of $25,000. Each of our wholly-owned subsidiaries has guaranteed this credit facility, as will future wholly-owned subsidiaries. Further, the obligation under the revolving line of credit is secured by our pledge of our ownership in our subsidiaries. The credit facility, which has provisions for both base rate and LIBOR loans, is intended to provide funds for the development and acquisition of new dialysis facilities, to meet general working capital requirements, and for other general corporate purposes. Up to $3,000 has been allocated for the repurchase of company stock under the stock repurchase program management established in April, 2009, provided the company continues to be in compliance with the financial covenants of the credit facility after giving effect to such stock repurchases. Borrowings under the revolving line of credit accrue interest at the base rate for base rate loans and at LIBOR for LIBOR loans, plus the applicable margin, as those terms are defined in the agreement. The LIBOR applicable to a LIBOR loan is determined by the interest period selected by the company for that particular loan, which represents the duration of the loan. We have the right to convert a base rate loan to a LIBOR loan, and vice versa. The agreement contains customary reporting and financial covenant requirements for this type of credit facility. We were in compliance with the requirements of this credit facility at March 31, 2010 and December 31, 2009. Outstanding borrowings under our line of credit were $7,300 at March 31, 2010 and at December 31, 2009, consisting of two LIBOR loans with one month terms. The interest rate on the LIBOR loans was 3.25%, which includes LIBOR at issuance plus an applicable margin of 3.00%. The individual LIBOR loans outstanding at March 31, 2010 are renewable at the end of their respective one month terms.

Our two mortgage agreements contain certain restrictive covenants that, among other things, limit the payment of dividends, require lenders’ approval for a merger, sale of substantially all of our assets, or other business combination to which we are a party, and require maintenance of certain financial ratios. The company was in compliance with the debt covenants at March 31, 2010 and December 31, 2009.

NOTE 4--INCOME TAXES

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.

No valuation allowance was recorded for deferred tax assets at March 31, 2010 or December 31, 2009, due to the company’s anticipated prospects for future taxable income in an amount sufficient to realize the deferred tax assets.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 5--STOCK OPTIONS AND STOCK AWARDS

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. The four remaining grants for 18,750 shares were exercised during June, 2009, with one 5,000 share grant exercised for approximately $20 cash proceeds and three grants for a total of 13,750 shares exercised through a cashless exercise with approximately $55 exercise price satisfied through payment of 9,854 shares resulting in an additional 3,896 shares outstanding after the exercise.

On June 27, 2006, we granted stock awards of 64,000 shares to officers and key employees with the awards vesting in equal yearly increments over four years commencing December 31, 2006. Of these stock awards, 36,000 shares were cancelled, 8,500 shares vested at the end of 2006, 6,500 shares vested at the end of each of 2007, 2008 and 2009. Expense related to these stock awards was approximately $18 for the three months ended March 31, 2009 with no such expense during the same period of the current year since the shares are fully vested.

In April, 2007, the board of directors granted a five-year option to our Vice President of Operations for 50,000 shares exercisable at $12.18 through April 15, 2012. The option vests in equal increments of 12,500 shares every 12 months commencing April 15, 2008. The grant date fair value of $329 is being expensed over the four-year vesting period with approximately $21 expense recorded during the three months ended March 31, 2010 and for the same period of the preceding year.

On January 10, 2008, the board of directors granted stock awards for 13,500 shares to non-executive management personnel with the awards to vest over four years in 25% equal increments commencing on January 9, 2009. One award for 1,000 shares was cancelled due to termination of an employee leaving awards for 12,500 shares outstanding for which approximately $6 stock compensation expense was recorded during the three months ended March 31, 2010 and for the same period of the preceding year.

On February 29, 2008, the board of directors granted a five year option to our Chief Financial Officer for 50,000 shares exercisable at $12.18 through February 28, 2013, and a five year option to a key employee for 10,000 shares, each of the options vesting in equal increments every 12 months commencing February 28, 2009 with the 7,500 share unvested portion of the 10,000 share option cancelled due to resignation of the employee resulting in an expense reversal of approximately $7 during the three months ended March 31, 2010. The 2,500 vested option shares expired in April, 2010. The grant date fair value of approximately $166 for the remaining 50,000 share option is being expensed over the four-year vesting period with approximately $12 expense recorded during the three months ended March 31, 2010 and for the same period of the preceding year.

On February 27, 2009 we granted stock awards for 5,000 shares to our four non-employee directors, one of whom became an employee director in September, 2009. These awards vested immediately with an expense of $28 recorded during the three months ended March 31, 2009.

On June 11, 2009 we granted stock awards for 10,000 shares to our four non-employee directors, one of whom became an employee director in September, 2009. The awards vest one year from the date of issuance. The expense of $51 is being recorded over the one year period until the awards vest with approximately $13 expense recorded during the three months ended March 31, 2010.

NOTE 6--COMMITMENTS

We have entered into a three-year grant agreement with the University of Cincinnati, College of Medicine, under which we will provide $265 per year for three years to support basic and clinical research and education relating to kidney disease. We are providing the University with the amounts due under the grant at the end of the first quarter of each of the three years of the agreement. As of March 31, 2010 one year remained unpaid under the grant.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 7--ACQUISITIONS

Our various acquisitions were made either on the basis of existing profitability or expectation of future profitability for the interest acquired based on our analysis of the potential for each acquisition, and the value of the relationship with the physician affiliated with the selling entity. Each acquisition was intended to either strengthen our market share within a geographic area or provide us with the opportunity to enter a new geographic area and market. Management also reviews the purchase price and any resulting goodwill based on established current valuations for dialysis centers. Also considered are the anticipated synergistic effects of a potential acquisition, including potential costs integration and the effect of the acquisition on our overall valuation. Certain of the acquisition transactions were of minority interests held by medical directors of certain of our dialysis facilities.

These transactions resulted in an aggregate of approximately $16,492 of goodwill, representing the excess of the purchase price over the fair value of the net assets acquired, including net goodwill of $7,916 from 2008 acquisitions as further described below. The goodwill is being amortized for tax purposes over a 15-year period with the exception of $1,358 goodwill from a stock acquisition which is not amortizable for tax purposes.

Pursuant to a call option which was exercised on January 11, 2007, one of our subsidiaries acquired, effective January 1, 2008, the assets of a Georgia dialysis facility that we had been managing pursuant to a management services agreement. Effective January 1, 2008, we have an 80% interest in the facility, which is operated through our subsidiary with the former owner having a 20% interest. The purchase price included the 20% noncontrolling interest and approximately $2,541, one half of which was paid at closing with the remaining portion subject to a one year promissory note payable to the seller with interest at prime plus 1% which was paid in December, 2008. This transaction resulted in approximately $2,311 of goodwill amortizable over 15 years for tax purposes.

Effective March 1, 2008, we acquired the 20% noncontrolling interest in DCA of Chesapeake, LLC and DCA of North Baltimore, LLC for $25. This transaction resulted in a reduction of the existing goodwill on these subsidiaries by $159.

On December 31, 2008, we acquired a Maryland dialysis center for approximately $6,627, including acquisition costs, resulting in approximately $5,715 of goodwill, the excess of the net purchase price over the estimated fair value of net assets acquired, including the valuation of a ten year non-competition agreement that is being amortized over the life of the agreement. The goodwill is amortizable for tax purposes over 15 years. We began recording the results of operations for the acquired company in our consolidated results of operations as of January 1, 2009.

We have determined there is no impairment of goodwill related to any of our acquisitions.

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(unaudited)

(dollars in thousands, except per share amounts)

NOTE 8--EQUITY

The changes in equity for the three months ended March 31, 2010 are summarized as follows:

	Stockholders
	Common Stock		Additional Paid-in Capital		Retained Earnings			Total			Noncontrolling Interests			Total
Balance December 31, 2009	$	96	$	16,298	$	22,034		$	38,428		$	5,828		$	44,256
Stock related compensation expense		---		43		---			43			---			43
Capital contributions by noncontrolling interest		---		---		---			---			100			100
Distributions to noncontrolling interests		---		---		---			---			(749	)		(749	)
Net (loss) income		---		---		(117	)		(117	)		346			229
Balance March 31, 2010	$	96	$	16,341	$	21,917		$	38,354		$	5,525		$	43,879

NOTE 9--SUBSEQUENT EVENTS

On April 13, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), between and among U.S. Renal Care, Inc., a Delaware corporation (“USRC”), and Urchin Merger Sub, Inc., a Florida corporation and a wholly owned subsidiary of USRC (“Merger Sub”), pursuant to which, and subject to the terms and conditions set forth therein, on April 22, 2010, Merger Sub commenced a cash tender offer (the “Tender Offer”) to acquire all of our issued and outstanding shares of common stock, par value $0.01 per share, at a price per share equal to $11.25, net to the seller in cash, without interest and subject to any required withholding of taxes (the “Per Share Consideration”). The Merger Agreement provides that the Tender Offer will expire 20 business days following the commencement of the Tender Offer, subject to certain extension rights and obligations set forth in the Merger Agreement, provided that Merger Sub shall not be required to extend the expiration date of the Tender Offer beyond January 31, 2011.

To the extent our common stock is not fully acquired in the Tender Offer, Merger Sub, subject to shareholder approval, if necessary, and at that time it is anticipated USRC will control the company and its equity interests, will merge with our company (the “Merger”) with the common stock then remaining to receive the Per Share Consideration. As a result of the Merger, our company will be a wholly-owned subsidiary of USRC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Notice Regarding Forward-Looking Information

The statements contained in this quarterly report on Form 10-Q for the quarter ended March 31, 2010, that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, from time to time, we or our representatives have made or may make forward looking statements, orally or in writing, and in press releases. The Private Securities Litigation Reform Act of 1995 contains certain safe harbors for forward-looking statements. Certain of the forward-looking statements include management’s expectations, intentions, beliefs and strategies regarding the growth of our company and our future operations, the character and development of the dialysis industry, anticipated revenues, our need for and sources of funding for expansion opportunities and construction, expenditures, costs and income, our business strategies and plans for future operations, potential business combinations, the completion of Tender Offer and Merger with Merger Sub and USRC (see Note 9 to “Notes to Consolidated Financial Statements” and “Merger Agreement” below), 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 this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” commonly known as MD&A. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan” and “belief,” and words and terms of similar substance used in connection with any discussions of future operating or financial performance identify forward-looking statements. Such forward-looking statements, like all statements about expected future events, are based on assumptions and are subject to substantial risks and uncertainties that could cause actual results to materially differ from those expressed in the statements, including the general economic and market conditions which substantially deteriorated over the last two years, and continue in a global economic decline to date, business opportunities pursued or not pursued, competition, changes in federal and state laws or regulations affecting the company and our operations, and other factors discussed periodically in our filings. Many of the foregoing factors are beyond our control. Among the factors that could cause actual results to differ materially are the factors detailed in the risks discussed in Item 1A, “Risk Factors,” beginning on page 21 of our 2009 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. The trading price of our common stock has recently significantly increased based upon the Tender Offer and Merger regarding the common stock of the company, which has a Per Share Consideration of $11.25. Accordingly, readers are cautioned not to place too much reliance on such forward-looking statements. We filed an amendment to our 2009 Annual Report on Form 10-K/A on April 30, 2010 to provide Part III information, which information had been incorporated by reference by our 2009 Annual Report, to wit, Item 9, “Directors, Executive Officers and Corporate Governance,” Item 10, “Executive Compensation,” Item 11, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” Item 12, “Certain Relationships and Related Transactions, and Director Independence,” and Item 13, “Principal Accountant Fees and Services,” from a proxy statement we had anticipated to file within 120 days of December 31, 2009, our year end, which proxy statement was not filed due to our entering into the Merger Agreement on April 13, 2010 with USRC and its wholly-owned subsidiary, Merger Sub. On April 22, 2010, Merger Sub proceeded with a Tender Offer for all the common stock of the company to be followed by a merger of Merger Sub with the company. In the event the Tender Offer and Merger are consummated, we will not be holding an annual meeting of shareholders for the election of directors, and, accordingly, will not be filing a definitive proxy statement regarding such meeting.

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 quarterly report. You should read this quarterly report on Form 10-Q, with any of 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 quarterly report, except for the current Tender Offer and Merger, and except as required by law, we undertake no obligation to rewrite or update such statements to reflect subsequent events.

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 (unaudited), including the notes, included elsewhere in this report on Form 10-Q.

Overview

We provide dialysis services, primarily kidney dialysis treatments through 36 outpatient dialysis centers, to patients with chronic kidney failure, also known as end-stage renal disease or ESRD. We provide dialysis treatments to dialysis patients of 11 hospitals and medical centers through acute inpatient dialysis services agreements with those entities. We also provide homecare services, including home peritoneal dialysis. We engage in medical product sales, which is not a significant part of our business.

Quality Clinical Results

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

Kt/V is a formula that measures the amount of dialysis delivered to the patient, based on the removal of urea, an end product of protein metabolism. Kt/V provides a means to determine an individual dialysis prescription and to monitor the effectiveness or adequacy of the dialysis treatment as delivered to the patient. We believe it is critical to achieve a Kt/V level of greater than 1.2 for as many patients as possible. Approximately 98% of our patients had a Kt/V level greater than 1.2 for the first quarter ended March 31, 2010, compared to approximately 97% for the fourth quarter ended December 31, 2009.

Anemia is a shortage of oxygen-carrying red blood cells. Because red blood cells bring oxygen to all the cells in the body, untreated anemia can cause severe fatigue, heart disorders, difficulty concentrating, reduced immune function, and other problems. Anemia is common among renal patients, caused by insufficient erythropoietin, iron deficiency, repeated blood losses, and other factors. Anemia can be detected with a blood test for hemoglobin or hematocrit. It is ideal to have as many patients as possible with hemoglobin levels above 11. Approximately 78% of our patients had a hemoglobin level greater than 11 for the first quarter ended March 31, 2010, compared to approximately 80% for the fourth quarter ended December 31, 2009.

Vascular access is the site on a patient’s body where blood is removed and returned during dialysis. The Center for Medicare and Medicaid Services, CMS has indicated that fistulas are the “gold standard” for establishing access to a patient’s circulatory system in order to provide life sustaining dialysis. Approximately 63% of our patients were dialyzed with a fistula during the first quarter ended March 31, 2010, compared to approximately 60% for the fourth quarter ended December 31, 2009.

Patient Treatments

The following table shows the number of in-center, home and peritoneal and acute inpatient treatments performed by us through the dialysis centers we operate, and in those hospitals and medical centers with which we have inpatient acute service agreements for the periods presented:

	Three Months Ended March 31,
	2010		2009
In center		65,119		66,137
Home and peritoneal		3,993		3,858
Acute		1,414		1,495
		70,526		71,490

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. We experienced approximately a 1% decrease in dialysis treatments for the first quarter of 2010 at centers that were operable during the entire first quarter of the preceding year compared to a 3% increase for the first quarter of 2009.

New Business Development

Our future growth depends primarily on the availability of suitable dialysis centers for development or acquisition in appropriate and acceptable areas, and our ability to manage the development costs for these potential dialysis centers while competing with larger companies, some of which are public companies or divisions of public companies with greater numbers of personnel and financial resources available for acquiring and/or developing dialysis centers in areas targeted by us. Additionally, there is intense competition for qualified nephrologists who would serve as medical directors of dialysis facilities. We opened one new Ohio dialysis center during the first quarter of 2010 and have one Ohio dialysis center under development. There is no assurance as to when any new dialysis centers or inpatient service contracts with hospitals will be implemented, or the number of stations, or patient treatments such center or service contract may involve, or if such center or service contract will ultimately be profitable.

Start-up Losses

It has been our experience that newly established dialysis centers, although contributing to increased revenues, have adversely affected our results of operations in the short term due to start-up costs and expenses and a smaller patient base. These losses are typically a result of several months of pre-opening costs, and six to eighteen months of post opening costs, in excess of revenues. We consider new dialysis centers to be “start-up centers” through their initial 12 months of operations, or when they achieve consistent profitability, whichever is sooner. For the quarter ended March 31, 2010, we incurred an aggregate of approximately $192 thousand in pre-tax losses for start-up centers compared to $61 thousand for the same period of the preceding year.

EPO Utilization

We also provide ancillary services associated with dialysis treatments, including the administration of EPO for the treatment of anemia in our dialysis patients. EPO is a bio-engineered protein that stimulates the production of red blood cells. A deteriorating kidney loses its ability to regulate the red blood cell counts, which typically results in anemia. EPO is currently available from only one manufacturer. 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. In February, 2010, OIG issued a subpoena for certain of our documents relating to our utilization of EPO. We are cooperating with the government and have provided the requested documents. See Note 1 to “Notes to Consolidated Financial Statements.”

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 55% of our medical services revenues for the first quarter of 2010 were derived from Medicare and Medicaid reimbursement with rates established by CMS, and which rates are subject to legislative changes. Dialysis is typically reimbursed at higher rates from private payors, such as a patient’s insurance carrier, as well as higher payments received under negotiated contracts with hospitals for acute inpatient dialysis services. The breakdown of our revenues by type of payor and the breakdown of our medical services revenues (in thousands) derived from our primary revenue sources and the percentage of total medical services revenue represented by each source for the periods presented are provided in Note 1 to “Notes to Consolidated Financial Statements.”

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. We have a Compliance Program to assure that we provide the highest level of patient care and services in a professional and ethical manner consistent with applicable federal and state laws and regulations. Our Compliance Program also relates to claims submission, cost report preparation, initial audit and human resources.

Results of Operations

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

	Three Months Ended
	March 31,
	2010			2009
Medical services revenue	$	23,640		$	23,168
Product sales		298			289
Total sales		23,938			23,457

Cost of medical services		14,987			14,431
Cost of product sales		149			160
Total cost of sales		15,136			14,591
Corporate selling, general and administrative expenses		3,119			2,862
Facility selling, general and administrative expenses		3,905			3,729
Total selling, general and administrative expense		7,024			6,591
Stock compensation expense		43			85
Depreciation and amortization		852			726
Provision for doubtful accounts		628			671
Total operating costs and expenses		23,683			22,664

Operating income		255			793

Other income (expense), net		26			(14	)

Income before income taxes		281			779

Income tax provision		52			242

Net income		229			537

Less: net income attributable to noncontrolling interests		346			357

Net (loss) income attributable to the company	$	(117	)	$	180

Medical services revenue increased approximately $472 thousand (2%) for the three months ended March 31, 2010, compared to the same period of the preceding year. Medical services revenue for the three months ended March 31, 2009 includes approximately $3 thousand of amounts previously included in excess insurance liability that was determined to be non-refundable with no such amounts recorded during the three months ended March 31, 2010. Dialysis treatments performed decreased from 71,490 during the first quarter of 2009 to 70,526 during the first quarter of 2010, a 1% decrease.

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. Based on historical data we do not anticipate that a change in estimates would have a significant impact on our financial condition, results of operations or cash flows.

Operating income decreased approximately $537 thousand (68%) for the three months ended March 31, 2010, compared to the preceding year. This reduction includes the effect of approximately $300 thousand in legal and other costs associated with our pending acquisition by USRC (see “Cautionary Notice Requiring Forward-Looking Information” above and “Merger Agreement” below) and the OIG investigation regarding our utilization of EPO (see Note 1 to “Notes to Consolidated Financial Statements”). These costs are included as a component of corporate selling, general and administrative expense. Start-up costs associated with our new centers was approximately $192 thousand for the three months ended March 31, 2010 compared to $61 thousand for the same period of the preceding year.

Cost of medical services sales as a percentage of sales increased to 63% for the three months ended March 31, 2010, compared to 62% for the same period of the preceding year, which includes increases in supply costs and payroll costs as a percentage of sales revenues.

Approximately 30% of our medical services revenue for the three months ended March 31, 2010 and 29% for the same period of the preceding year derived from the administration of EPO to our dialysis patients.

Our medical products operation represents a minor portion of our operations. Medical products operating revenues of $298 thousand for the first quarter of 2010 and $289 thousand for the same period of the preceding year (1.2% of operating revenues for each period). Operating income for the medical products operation was $62 thousand for the first quarter of 2010 and $53 thousand for the same period of the preceding year (24.3% of first quarter 2010 and 6.7% of first quarter 2009 operating income).

Cost of sales for our medical products operation amounted to 50% of sales of that division for the three months ended March 31, 2010 and 55% for the same period of the preceding year. Cost of sales for this operation is largely related to product mix.

Selling, general and administrative expenses represent those corporate and facility costs not directly related to the care of patients, including, among others, administration, accounting and billing. Corporate selling, general and administrative expenses increased approximately $257 thousand (9%) from $2.9 million to $3.1 million for the three months ended March 31, 2010 compared to the same period of the preceding year which reflects approximately $300 thousand costs associated with our pending acquisition by USRC (see “Cautionary Notice Regarding Forward-Looking Information” above and “Merger Agreement” below) and the OIG investigation (see Note 1 to “Notes to Consolidated Financial Statements”), as well as increase support activities resulting from expanded operations, ongoing investments in our infrastructure and the cost of development activities. Facility selling, general and administrative expenses increased approximately $176 thousand (5%) from $3.7 million to $3.9 million for the three months ended March 31, 2010 compared to the same period of the preceding year. The increase includes the centers that commenced operations during first quarter of 2010 or were still in their startup phase. Total selling, general and administrative expenses as a percentage of medical services revenue amounted to approximately 30% for the three months ended March 31, 2010 compared to 28% for the same period of the preceding year.

Provision for doubtful accounts decreased approximately $43 thousand for the three months ended March 31, 2010, compared to the same period of the preceding year, which reflects changes in the commercial patient portion of our payor mix. The provision amounted to 2.7% of medical services revenue for the three months ended March 31, 2010 and 2.9% for the same period of the preceding year. Medicare bad debt recoveries of $515 thousand were recorded during the three months ended March 31, 2010, compared to approximately $55 thousand for the same period of the preceding year. Without the effect of the Medicare bad debt recoveries, the provision for doubtful accounts would have amounted to 4.8% of medical services revenue for the three months ended March 31, 2010, and 3.1% for the same period of 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.

As of March 31, 2010, approximately $4.5 million in unreserved accounts receivable, representing approximately 21% of our total accounts receivable balance, were more than six months old. Approximately 0.4% of our treatments are classified as “patient pay”. Virtually all revenue is realized from government and commercial payors.

Days’ sales outstanding were 83 as of March 31, 2010, compared to 78 as of December 31, 2009. Days’ sales outstanding are impacted by the expected and typical slower receivable turnover at our new centers opened and by payor mix. Based on our collection experience with the different payor groups comprising our accounts receivable, our analysis indicates that our allowance for doubtful accounts reasonably estimates the amount of accounts receivable that we will ultimately not collect.

After a patient’s insurer has paid the applicable coverage for the patient, the patient is billed for the applicable co-payment or balance due. If payment is not received from the patient for his 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.

Non-operating income amounted to approximately $26 thousand for the three months ended March 31, 2010, compared to non-operating expense of approximately $14 thousand for the same period of the preceding year which included an increase in rental income of $7 thousand, a decrease in interest income of $15 thousand from lower interest rates on invested funds and lower average invested funds, a decrease in interest expense of $46 thousand resulting from lower interest rates and an increase in miscellaneous other income of $2 thousand.

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.

Noncontrolling interests represents the proportionate equity interests of noncontrolling owners in our subsidiaries whose financial results are included in our consolidated results.

Liquidity and Capital Resources

Working capital totaled approximately $16.9 million at March 31, 2010, which reflected a decrease of $1.0 million (6%) during the three months ended March 31, 2010. Included in the changes in components of working capital was a decrease in cash and cash equivalents of $274 thousand, which included net cash provided by operating activities of $1.9 million; net cash used in investing activities of $1.5 million (consisting primarily additions to property and equipment); and net cash used in financing activities of $668 thousand (including debt payments of $19 thousand capital contributions by non-controlling interest of $100 thousand and distributions to noncontrolling interests of $749 thousand).

Net cash provided by operating activities consists of net income attributable to the company before non-cash items which for the first quarter of 2010 consisted of depreciation and amortization of $852 thousand, provision for doubtful accounts of $628 thousand, and non-cash stock and stock option compensation expense of $43 thousand, as adjusted for changes in components of working capital. Significant changes in components of working capital, in addition to the $274 thousand decrease in cash, included an increase in prepaid expenses and other current assets of $821 thousand, including a $515 thousand increase related to estimated Medicare bad debt recoveries, an increase in accounts payable of $1.7 million, and a decrease in accrued expenses of $168 thousand. The major uses of cash in operating activities are supply costs, payroll, independent contractor costs, and costs for our leased facilities.

Our Easton, Maryland building has a mortgage to secure a subsidiary development loan. This loan had a remaining principal balance of $458 thousand at March 31, 2010 and $465 thousand at December 31, 2009. In April, 2001, we obtained a five-year mortgage on our building in Valdosta, Georgia which we refinanced upon maturity in April, 2006 for an additional five years with a new maturity of April, 2011. This loan had an outstanding principal balance of approximately $498 thousand at March 31, 2010 and $510 thousand at December 31, 2009.

We opened one new Ohio dialysis center during the first quarter of 2010 and have one Ohio dialysis center under development.

Capital is needed primarily for the development of outpatient dialysis centers. The construction of a 15 station facility, typically the size of our dialysis facilities, costs in the range of $1.0 to $1.5 million, depending on location, size and related services to be provided, which includes equipment and initial working capital requirements. Acquisition of an existing dialysis facility is more expensive than construction, although acquisition would provide us with an immediate ongoing operation, which most likely would be generating income. Although our expansion strategy focuses primarily on construction of new centers, we have expanded through acquisition of dialysis facilities and continue to review potential acquisitions. Development of a dialysis facility to initiate operations takes four to six months and usually up to 12 months or longer to generate earnings. We consider some of our centers to be in the developmental stage since they have not developed a patient base sufficient to generate and sustain earnings.

We are seeking to expand our outpatient dialysis treatment facilities and inpatient dialysis care and are presently in different phases of negotiations with physicians and others for the development or acquisition of additional outpatient centers. Such expansion requires capital. We have been funding our expansion through internally generated cash flow and a revolving line of credit with KeyBank National Association. To assist with our expansion we have a $25.0 million revolving line of credit with KeyBank National Association maturing November 4, 2011. We had outstanding borrowings of $7.3 million under this credit facility as of March 31, 2010 and December 31, 2009. No assurance can be given that we will be successful in our growth strategy or that available financing will be adequate to support such expansion.

Merger Agreement

On April 13, 2010, we entered into the Merger Agreement between and among USRC and its wholly owned subsidiary, Merger Sub, pursuant to which, and subject to the terms and conditions set forth therein, on April 22, 2010, Merger Sub commenced a cash Tender Offer to acquire all of our issued and outstanding shares of common stock, par value $0.01 per share, at the Per Share Consideration equal to $11.25, net to the seller in cash. The Merger Agreement provides that the Tender Offer will expire 20 business days following the commencement of the Tender Offer, subject to certain extension rights and obligations set forth in the Merger Agreement, provided that Merger Sub shall not be required to extend the expiration date of the Tender Offer beyond January 31, 2011. In order to acquire any remaining shares of our common stock outstanding subsequent to the Tender Offer, Merger Sub will be merged into our company, the remaining common stock will be acquired at the Per Share Consideration, and our company will become a wholly-owned subsidiary of USRC.

New Accounting Pronouncements

In January, 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and timing of the transfers. Additionally, the guidance requires a roll forward of purchase, sale, issuance and settlement activities for the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this new guidance is not expected to have a material impact on our financial statements.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition: Revenues are recognized net of contractual provisions at the expected collectable amount. We receive payments through reimbursement from Medicare and Medicaid for our outpatient dialysis treatments coupled with patients’ private payments, individually and through private third-party insurers. A substantial portion of our revenues are derived from the Medicare ESRD program, which outpatient reimbursement rates are fixed under a composite rate structure, which includes the dialysis services and certain supplies, drugs and laboratory tests. Certain of these ancillary services are reimbursable outside of the composite rate. Medicaid reimbursement is similar and supplemental to the Medicare program. Our acute inpatient dialysis operations are paid under contractual arrangements, usually at higher contractually established rates, as are certain of the private pay insurers for outpatient dialysis. We have developed a sophisticated information and computerized coding system, but due to the complexity of the payor mix and regulations, we sometimes receive more or less than the amount expected when the services are provided. We reconcile any differences at least quarterly.

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 record reasonable estimates of revenue based on our historical experience and identifying on a timely basis necessary changes to estimates as required by the Revenue Recognition Topic of the FASB Accounting Standards Codification.

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 the Contingencies Topic of the FASB Codification.

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

Goodwill and Intangible Asset Impairment: In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We analyze goodwill and indefinite lived intangible assets for impairment on at least an annual basis or when conditions warrant as required by the Intangible-Goodwill and Other Topic of the FASB Codification.

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. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable as required by the Property, Plant and Equipment Topic of the FASB Codification. 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.

Item 3. Quantitative and Qualitative Disclosures 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 $2.4 million at March 31, 2010.

Interest rate risk on debt is managed by negotiation of appropriate rates for equipment financing and other fixed rate obligations based on current market rates. There is an interest rate risk associated with our variable rate debt obligations, which totaled approximately $8.3 million at March 31, 2010.

We have exposure to both rising and falling interest rates. Due to the global financial crisis and the correspondingly exceedingly low interest rates on invested funds, there was no substantial risk of a decrease in interest income as a result of decreased yields at March 31, 2010. Assuming a relative 15% increase in rates on our period-end variable rate debt would have resulted in a negative impact of approximately $7 thousand on our results of operations for the quarter ended March 31, 2010.

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

Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures.

As of the end of the period of this quarterly report on Form 10-Q for the first quarter ended March 31, 2010, management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer, and our Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. These disclosure controls and procedures are designed to provide reasonable assurance that, among other things, information is accumulated and communicated to our management, including our President and 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.

Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On April 13, 2010, subsequent to the end of the first quarter to which this quarterly report relates and the date the company entered into the Merger Agreement with USRC and Merger Sub, the company issued stock awards for 173,700 shares of its common stock to 19 individuals, including nine of its officers and directors, two of its counsel, and key employees and several others who have been affiliated with the company for many years. The awards were granted as compensation for services rendered and to be rendered, and provide for the issuance of restricted common stock vesting in equal quarterly amounts on each April 12th from 2011 to 2014, with vesting accelerating upon a change in control of the company, including the Tender Offer and Merger as described above in Note 9, “Subsequent Events” to “Notes to Consolidated Financial Statements,” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I of this Quarterly Report. The awardees must be affiliated with the company at the time of vesting. All of the officers’ and directors’ restricted stock is subject to a Tender and Voting Agreement under which each has agreed to tender his/her shares (including the restricted stock awards) in accordance with the terms of the Tender Offer, and provides USRC and Merger Sub with a proxy to vote his/her shares, primarily for the transactions contemplated in the Merger Agreement and against the approval or adoption of any Alternative Transaction as defined in the Merger Agreement.

Although the restricted common stock has been issued pursuant to the stock awards, they are being held by the Secretary of the company and are not to be released to the awardees until vesting through April 12, 2014 or vesting otherwise accelerates, and are accordingly not deemed or included in the company’s outstanding shares.

The only other unregistered issuance of our equity securities that may be deemed a sale during the first quarter ended March 31, 2010 was the vesting on January 9, 2010 of 3,125 shares of common stock pursuant to a grant of 13,500 shares of restricted stock awards to key employees on January 10, 2008 (a 1,000 share award was cancelled due to a termination of one key employee), which awards vest in equal quarterly amounts on each January 9 through 2012. The above transaction has been previously reported on a current report on Form 8-K dated June 29, 2006, and in our quarterly reports for 2009 and our 2009 Annual Report.

The sales of our equity securities as described above were exempt from the registration requirements of Section 5 of the Securities Act under the private placement exemptions of Section 4(2) and/or Regulation D of the Securities Act, based on the limited number of awardees, each of whom are officers, directors, key employees and several affiliated with the company for many years, knowledgeable concerning the affairs of the company. In addition, all the stock awards upon vesting will be restricted from further distribution. There are restrictive legends on the certificates and stop order instructions from further transfer on the records of the transfer agent.

The declaration and issuance of cash dividends are subject to the covenants in the KeyBank National Association credit facility, which precludes the payment of dividends (other than stock dividends). We also have a mortgage with Ameris Bank on our property in Valdosta, Georgia which restricts the payment of dividends above 25% of our net worth. See Note 3, “Long Term Debt,” to “Notes to Consolidated Financial Statements” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Liquidity and Capital Resources” of Part I of this Quarterly Report.

Item 6. Exhibits

31	Rule 13a-14(a)/15d-14(a) Certifications

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

32	Section 1350 Certifications

	32.1*	Certifications 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.

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 the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.

SIGNATURES

Pursuant to the requirements 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 AMERICA

	By:	/s/ ANDREW JEANNERET
		ANDREW JEANNERET, Vice President, Finance and
		Chief Financial Officer

	By:	/s/ Daniel R. Ouzts
		Daniel R. Ouzts, Vice President,
		Finance and Principle Accounting
		Officer

Dated: May 10, 2010

EXHIBIT INDEX

Exhibit No.

31	Rule 13a-14(a)/15d-14(a) Certifications

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

32	Section 1350 Certifications

		32.1*	Certifications 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.

DIALYSIS CORP OF AMERICA 10-Q