I'd have to agree with everyone excepting the Velvet comment. I've seen Velvet on dead fish, and begining stages and this is in no way resembling it IMHO. (Google "Fish Velvet" for an idea). An injury, maybe, Begining stages HITH more then likely.
Dump the carbon, Increase the Bio-Media (I like Seachem Matrix, but any Ceramic based media will suffice). Increase the Water changes. Add Salt. Up the temp. You'll be fine.
As for Live fish. My Os munch on home raised Convicts. And the occasional store bought Giant Danios. I keep roughly 20 Giant Danios in the O tank at any given time. Chasing them seems to keep the aggression down between my 2 Os. As for the Convicts I have a single breeding pair. I raise the fry to about 3/4" and I take all my pink ones and dump them into the O tank. The Stripes go to the Fish store for Credit at $1.00 a piece. ATM, I have one crafty Con in the O tank that's just over 2 1/4" long and 7 little guys around 1". I figure over time they'll get weeded out as I've probably dumped more then 75 Cons and 100 Giant Danios into the tank all in all. and am down to 3 Danios, and the 8 Cons..
On a side note, I personally wouldn't take the time to do 4 35% water changes a week. I'd do 2 50% water changes. If not for any other reason then I'm lazy. And the fact that your Tap is 5ppm. If you get your Nitrates down to 5-10ppm after a water change, wait 3 days and do a 50% and it's back down to 10ppm. I'd call that a good level. I also don't have any experience with the Aqueon products your using. I tend to stick with Prime and Stress Coat. I avoid Medications like the plague if I can get away with it. But if I do need a Medication I look at the API stuff, Furan 2, Tetracycline Powder, Erythromycin Powder, Melafix, and Pimafix.. I'm not suggesting you need any of this at this time. But if your ever looking.
