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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-KSB
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 Commission file number 001-31608
 XCORPOREAL, INC.
  Delaware
    
    98-0349685(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)11150 Santa Monica Blvd., Suite 340
    
    Los Angeles, California 90025(Address of principal executive offices)
    
    (City, State and Zip Code)
 (310) 484-5668
 Securities registered under Section 12(b) of the Exchange Act: None
 Common stock, $0.0001 par value per share
 þ o
 o
 o þ
 $0
 $26,450,347 as of April 9, 200
 14,200,050 shares of common stock as of April 9, 2007
 o þ
   1




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##### 



TABLE OF CONTENTS
 PageForward Looking Statements
    
    3PART I.Item 1.
    
    Description of Business
    
    4Item 2.
    
    Description of Property
    
    14Item 3.
    
    Legal Proceedings
    
    14Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    14PART II.Item 5.
    
    Market for Common Equity, Related Stockholder Matters
    
    15Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    15Item 7.
    
    Financial Statements
    
    20Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    38Item 8A.
    
    Controls and Procedures
    
    38Item 8B.
    
    Other Information
    
    39PART III.Item 9.
    
    Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act
    
    40Item 10.
    
    Executive Compensation
    
    43Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    46Item 12.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    47Item 13.
    
    Exhibits
    
    47Item 14.
    
    Principal Accountant Fees and Services
    
    48EXHIBIT 14.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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Forward Looking Statements
   
    
    our capital needs and ability to obtain financing
    
    our ability to successfully research and develop marketable products
    
    our ability to obtain regulatory approval to market and distribute our products
    
    anticipated trends and conditions in the industry in which we operate, including regulatory changes
    
    general economic conditions
    
    other risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the SEC.
   3




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PART I
 
 Item 1. Description of Business
 Business
 Overview
 extra-corporeal
 
    
    Portable kidney dialysis for use in the clinic, hospital, or at home
    
    Wearable Arifical Kidney (WAK) for chronic treatment of End Stage Renal Disease (ESRD)
    
    Portable ultrafiltration for management of fluid overload in hospital or clinic settings
    
    Wearable Ultrafiltration Device (WUD) for chronic treatment of fluid overload.
   
    
    Raised over $29 million in equity financing
    
    Recruited experienced independent board members
    
    Recruited top industry management team and scientific staff
    
    Advanced the clinical studies for our technology
    
    Paid in excess of $1 million in licensed product development expenses.
   Product Applications
  4




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
    
    Reduced size, weight, and power consumption allows us to deploy a wearable package so
that the treatment does not interfere with normal activities of daily life.
    
    Reduced fluid requirements make the WAK easy to use for consumers and reduce utility
requirements (water, electricity) at home.
    
    Novel vascular access makes the WAK safe and effective for home use.
  Research and Development
 R&D Team
  
    
    Improving the chemicals used in the dialysis process. The current chemicals have been
used for decades. We believe new chemicals that last longer and can be used in smaller
quantities would further reduce the cost and weight of our product.
    
    Developing software to allow physicians to customize the function of the device to meet
the specific dialysis needs of each patient.
    
    Adapting the extra-corporealplatform technology underlying our Wearable Artificial
Kidney to other medical uses. We believe our technology is a platform for a number of
other devices that can be used to treat other diseases and will offer substantive value
propositions for patients and healthcare providers.
    
    Expanding our recruiting and retaining an experienced team of scientists and engineers.
 Clinical Studies
 T
  Government Regulation
 US Regulation
  5




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European Community
   6




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Competition
  License Agreement
  Patents and Trademarks
   Employees
  Business Development
 Formation
  Contribution and License Agreement
  7




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Delaware Reincorporation
    Terminated Merger Agreement
   8




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Reports to Security Holders
   http://www.sec.gov.
 Risk Factors
 You should carefully consider and evaluate all of the information in this report, including
the risk factors listed below. If any of these risks occur, our business, results of operations and
financial condition could be harmed, the price of our common stock could decline, and future events
and circumstances could differ significantly from those anticipated in the forward-looking
statements contained in this report.
 Risks Related to Our Business
 Our limited operating history may make it difficult to evaluate our business to date and our future
viability.
  We expect to continue to incur operating losses, and if we are not able to raise necessary
additional funds we may have to reduce or stop operations.
  Our success will depend on our ability to retain our managerial personnel and to attract additional
personnel.
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We need to develop our financial and reporting processes, procedures and controls to support our
anticipated growth.
   We cannot assure you that we will be able to complete development and obtain necessary approvals
for our proposed products even if we obtain sufficient funding.
  The success of our business will depend on our ability to develop and protect our intellectual
property rights, which could be expensive.
   10




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We may be subject to claims that we infringe the intellectual property rights of others, and
unfavorable outcomes could harm our business.
  We compete against other dialysis equipment manufacturers with much greater financial resources and
better established products and customer relationships, which may make it difficult for us to
penetrate the market and achieve significant sales of our products.
    We have not commissioned or obtained marketing studies which support the likelihood of success of
our business plan.
  Material weaknesses in our internal control over financial reporting may make it difficult to
accurately evaluate our results of operations and financial condition
  11




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An unfavorable result in the pending arbitration could have a material adverse effect on our
business.
  Risks Related to Our Industry
 Our business will always be strictly regulated by the federal and other governments, and we cannot
assure you that we will remain in compliance with all applicable regulation.
     12




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Our failure to respond to rapid changes in technology and its applications and intense competition
in the medical devices industry could make our treatment system obsolete.
  Product liability claims could adversely affect our results of operations
  Risks Related to Our Common Stock
 If a market for our common stock does not develop, our stockholders may be unable to sell their
shares.
  If a market for our common stock develops, our stock price may be volatile.
  Over 68% of our stock is controlled by a single stockholder who has the ability to substantially
influence the election of directors and the outcome of matters submitted to stockholders.
  13




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Investors interests in our company will be diluted and investors may suffer dilution in their net
book value per share if we issue additional shares or raise funds through the sale of equity
securities.
  We have never paid cash dividends and do not intend to do so.
  
 Item 2: Description of Property
 Description of Real Estate
  Investment Policies
  
 Item 3: Legal Proceedings
 National Quality Care,
Inc. v. Victor Gura, M.D., et al.
 
 Item 4: Submission of Matters to a Vote of Security Holders
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PART II
 
 Item 5: Market for Common Equity and Related Stockholder Maters
 Market Information
  Dividends
  Securities Authorized For Issuance Under Equity Compensation Plans
  Number of securitiesremaining availableNumber of securities
    
    
    
    
    
    for future issuanceto be issued upon
    
    Weighted-average
    
    under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,600,000
    
    
    $
    5.00
    
    
    
    400,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Totals
    
    
    1,600,000
    
    
    
    5.00
    
    
    
    400,000
 
  Item 6: Managements Discussion and Analysis or Plan of Operation
 Plan of Operation
 Liquidity and Capital Resources
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Research and Development
   1.
    
    The disposable blood circuit which will be replaced once or twice per week at
the hospital by personnel trained in sterile technique.2.
    
    The disposable ultrafiltration circuit and collection bag which will be emptied
by the patient periodically.3.
    
    The durable pumps, sensors, and electronic systems which will be packaged in a
wearable harness.
  1.
    
    The disposable blood circuit which will be replaced once or twice per week at
the dialysis clinic by personnel trained in sterile technique.2.
    
    The disposable dialysate circuit and regeneration system which will be replaced
once or twice per day by the dialysis patient at home.3.
    
    The durable pumps and electronic systems which will be packaged in a wearable
harness.
  
    
    Integrating the pumps, electronics, sensor systems, and power supply into a smaller,
lighter, more reliable package suitable for manufacturing.
    
    Packaging the durable and disposable components ergonomically and protecting the device
from environmental interferences (temperature, moisture).
    
    Refining the vascular access of the disposable blood circuit.
    
    Refining the anticoagulation strategy of the disposable blood circuit.
    
    Evaluation and selection of a dialyzer consistent with our ergonomic package and
suitable for manufacturing.
    
    Optimization and refinement of the dialysate regenerating system. Investigation of new
chemistries that could reduce the size, weight and/or cost of the regenerating system.
    
    Development of sensor systems and software to identify and manage fault conditions.
    
    Optimization and refinement of the battery power system and overall operating characteristics.
    
    Refinement of the sterilization process and validation for the disposable subsystems.
    
    System integration of all of the above elements.
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
    
    Verification and Validation of the safety and functionality of the resulting devices.
 Clinical Studies
 T
 Employees
  Managements Discussion and Analysis
 Results of Operations for the years ended December 31, 2006 and 2005
  Off-Balance Sheet Arrangements
  Legal Proceedings
  Critical Accounting Policies and Estimates
   17




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Identifiable Intangibles
  Stock-Based Compensation
 Share-Based Payment
   Recent Accounting Pronouncements
 Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities
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Fair Value
Measurements.
 Accounting for Registration Payment
Arrangements Accounting for Contingencies.
 Considering the Effects of Prior Year Misstatement when
Quantifying Misstatements in Current Year Financial Statements.
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Item 7: Financial Statements
 CONTENTS
 PAGEREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    21REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    22FINANCIAL STATEMENTS
    
    


BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005
    
    23STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2006 AND 2005, AND THE PERIOD FROM INCEPTION (MAY 4, 2001) TO
DECEMBER 31, 2006
    
    24STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY) FOR THE
YEARS ENDED DECEMBER 31, 2006 AND 2005, AND THE PERIOD FROM
INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
    
    25STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006
AND 2005, AND THE PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
    
    26NOTES TO FINANCIAL STATEMENTS
    
    27
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
   ,
    21




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Vancouver, CanadaFebruary 2, 2006, except as to Note 4
    
    AMISANO HANSONwhich is as of March 10, 2006
    
    Chartered Accountants
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XCORPOREAL,
INC. 
(formerly Pacific Spirit Inc.)
(a Development Stage Company)
 
 BALANCE SHEETS
 Years endedDecember 31,2006
    
    
    2005ASSETSCurrentCash
    
    $
    27,440,987
    
    
    $
    Prepaids
    
    
    70,850
    
    
    
    Other current assets
    
    
    19,378
    
    
    
    Total current assets
    
    
    27,531,215
    
    
    
    Property and equipment, net
    
    
    3,328
    
    
    
    Other assets
    
    
    1,000
    
    
    
    Total Assets
    
    
    27,535,543
    
    
    
    LIABILITIESCurrentAccounts payable
    
    
    143,606
    
    
    
    Accrued placement agent fees
    
    
    1,348,470
    
    
    
    Accrued professional fees
    
    
    312,208
    
    
    
    Accrued other liabilities
    
    
    204,522
    
    
    
    18,330Due to related party
    
    
    
    
    
    
    34,227Other current liabilities
    
    
    124,676
    
    
    
    Total Current Liabilities
    
    
    2,133,482
    
    
    
    52,557Commitments and contingenciesSTOCKHOLDERS EQUITY (DEFICIENCY)Preferred Stock, $0.001 par value, 10,000,000
shares authorized, none outstanding
    
    
    
    
    
    
    Common Stock, $0.0001 par value, 40,000,000
shares authorized, 14,200,050 and 3,820,000
outstanding on December 31, 2006 and 2005,
respectively
    
    
    1,420
    
    
    
    382Additional
paid-in capital
    
    
    29,924,410
    
    
    
    90,618Deficit accumulated during the development stage
    
    
    (4,523,769
    )
    
    
    (143,557
    )Total Stockholders Equity/(Deficiency)
    
    
    25,402,061
    
    
    
    (52,557
    )Total Liabilities & Stockholders Equity
    
    $
    27,535,543
    
    
    $
    
 23




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XCORPOREAL, INC.
(formerly Pacific Spirit Inc.)
(a Development Stage Company)
 
 STATEMENTS OF OPERATIONS
 May 4, 2001 (DateYears ended
    
    
    of Inception) toDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006Operating Expenses:Selling, general and
administrative
    
    $
    3,174,995
    
    
    $
    35,753
    
    
    $
    3,318,652Research and development
    
    
    1,287,322
    
    
    
    
    
    
    
    1,287,322Depreciation
    
    
    95
    
    
    
    
    
    
    
    95Loss before Other Income and Income
Tax
    
    
    (4,462,412
    )
    
    
    (35,753
    )
    
    
    (4,606,069
    )Interest Income
    
    
    82,200
    
    
    
    
    
    
    
    82,300Loss before income taxes
    
    
    (4,380,212
    )
    
    
    (35,753
    )
    
    
    (4,523,769
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net Loss
    
    $
    (4,380,212
    )
    
    $
    (35,753
    )
    
    $
    (4,523,769
    )Basic and diluted loss per share
    
    $
    (0.67
    )
    
    $
    (0.01
    )Weighted average number of shares
outstanding
    
    
    6,542,312
    
    
    
    3,820,000
  24




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XCORPOREAL, INC.
(formerly Pacific Spirit Inc.)
(a Development Stage Company)
 
 STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
 For the Period May 4, 2001 (Inception) to December 31, 2006
 DeficitAccumulatedAdditional
    
    
    DuringCommon Stock
    
    
    Paid-in
    
    
    DevelopmentShares
    
    
    Amount
    
    
    Capital
    
    
    Stage
    
    
    TotalCommon stock issued for cash at $0.01 per
share
    
    
    2,500,000
    
    
    $
    250
    
    
    $
    24,750
    
    
    
    
    
    
    $
    25,000Net Loss for the year ended December 31,
2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (40,255
    )
    
    
    (40,255
    )Balance as of December 31, 2001
    
    
    2,500,000
    
    
    
    250
    
    
    
    24,750
    
    
    
    (40,255
    )
    
    
    (15,255
    )Common stock issued for cash at $0.05 per
share
    
    
    1,320,000
    
    
    
    132
    
    
    
    65,868
    
    
    
    
    
    
    
    66,000Net Loss for the year ended December 31,
2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,249
    )
    
    
    (31,249
    )Balance as of December 31, 2002
    
    
    3,820,000
    
    
    
    382
    
    
    
    90,618
    
    
    
    (71,504
    )
    
    
    19,496Net Loss for the year ended December 31,
2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,962
    )
    
    
    (12,962
    )Balance as of December 31, 2003
    
    
    3,820,000
    
    
    
    382
    
    
    
    90,618
    
    
    
    (84,466
    )
    
    
    6,534Net Loss for the year ended December 31,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,338
    )
    
    
    (23,338
    )Balance as of December 31, 2004
    
    
    3,820,000
    
    
    
    382
    
    
    
    90,618
    
    
    
    (107,804
    )
    
    
    (16,804
    )Net Loss for the year ended December 31,
2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,753
    )
    
    
    (35,753
    )Balance as of December 31, 2005
    
    
    3,820,000
    
    
    
    382
    
    
    
    90,618
    
    
    
    (143,557
    )
    
    
    (52,557
    )Common stock issued for licence rights
    
    
    9,600,000
    
    
    
    960
    
    
    
    40
    
    
    
    
    
    
    
    1,000Capital stock cancelled
    
    
    (3,420,000
    )
    
    
    (342
    )
    
    
    342
    
    
    
    
    
    
    
    Warrants granted for consulting fees
    
    
    
    
    
    
    
    
    
    
    2,162,611
    
    
    
    
    
    
    
    2,162,611Forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    64,620
    
    
    
    
    
    
    
    64,620Common stock issued for cash at $7.00, net
of placement fees of $2,058,024
    
    
    4,200,050
    
    
    
    420
    
    
    
    27,341,928
    
    
    
    
    
    
    
    27,342,348Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    264,251
    
    
    
    
    
    
    
    264,251Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,380,212
    )
    
    
    (4,380,212
    )Balance as of December 31, 2006
    
    
    14,200,050
    
    
    $
    1,420
    
    
    $
    29,924,410
    
    
    $
    (4,523,769
    )
    
    $
    25,402,061
  25




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XCORPOREAL, INC.
(formerly Pacific Spirit Inc.)
(a Development Stage Company)
 
 STATEMENTS OF CASH FLOWS
 May 4, 2001 (DateYears ended
    
    
    of Inception) toDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006Cash flows used in operating activitiesNet Loss for the Period
    
    $
    (4,380,212
    )
    
    $
    (35,753
    )
    
    $
    (4,523,769
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Non-employee Stock Based Compensation
    
    
    2,162,611
    
    
    
    
    
    
    
    2,162,611Stock Based Compensation
    
    
    264,251
    
    
    
    
    
    
    
    264,251Depreciation
    
    
    95
    
    
    
    
    
    
    
    95Net Change in assets and liabilities:Prepaid Expenses
    
    
    (70,850
    )
    
    
    800
    
    
    
    (70,850
    )Other Current Assets
    
    
    (19,378
    )
    
    
    
    
    
    
    (19,378
    )Other Assets
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Accounts Payable and Accrued Liabilities
    
    
    1,990,475
    
    
    
    5,826
    
    
    
    2,008,805Other Current Liabilities
    
    
    124,676
    
    
    
    
    
    
    
    124,676Net Cash Provided by (Used in) Operating Activities
    
    
    70,668
    
    
    
    (29,127
    )
    
    
    (54,559
    )Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (3,423
    )
    
    
    
    
    
    
    (3,423
    )Net Cash Used in Investing Activities
    
    
    (3,423
    )
    
    
    
    
    
    
    (3,423
    )Cash Flows from Financing ActivitiesCapital Stock issued in Private Placement for $29,400,351 in
cash; fees of $2,057,002
    
    
    27,343,349
    
    
    
    
    
    
    
    27,434,349Advances from related party
    
    
    30,393
    
    
    
    28,551
    
    
    
    64,620Net Cash Provided by Financing Activities
    
    
    27,373,742
    
    
    
    28,551
    
    
    
    27,498,969Increase/(decrease) in cash during the period
    
    
    27,440,987
    
    
    
    (576
    )
    
    
    27,440,987Cash, beginning of the period
    
    
    
    
    
    
    576Cash, end of the period
    
    $
    27,440,987
    
    
    $
    
    
    
    $
    27,440,987Supplemental disclosure of cash flow information; cash paid for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
  26




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XCORPOREAL, INC.
(A DEVELOPMENT STAGE COMPANY)
 
 NOTES TO FINANCIAL STATEMENTS
 DECEMBER 31, 2006
 1. NATURE OF OPERATIONS
    2. DEVELOPMENT STAGE COMPANY
  Risks and Uncertainties
 3. SUMMARY OF ACCOUNTING POLICIES
 Cash and Cash Equivalents 
 Property and Equipment 
 Identifiable Intangibles and Amortization 
 27




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Research and Development 
 Income Taxes 
 Earnings per Share 
 Share-Based Compensation  Share-Based Payment Accounting for Stock-Based Compensation
 Use of Estimates 
 Reclassifications 
 Recently Issued Accounting Standards
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Fair Value Measurements.
 28




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Accounting for Registration Payment
Arrangements FSP 00-19-2 Accounting for Contingencies
 Fair Value Measurements SFAS
No. 157
 Considering the Effects of Prior Year Misstatement when
Quantifying Misstatements in Current Year Financial Statements
 Accounting for Uncertainty in
Income Taxes  An Interpretation of FASB Statement No. 109 FIN 48 Accounting for Income Taxes
 29




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4.
MINERAL PROPERTY
  5. PROPERTY AND EQUIPMENT
  Furniture and office equipment
    
    $
    3,423Accumulated depreciation
    
    
    (95
    )Property and equipment, net
    
    $
    3,328
  6. INTEREST INCOME
  7. LEASES
  8. LICENSE EXPENSES
  Other current liabilities
 9. NON-CASH TRANSACTIONS
      30




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10. LOSS PER COMMON SHARE
  Years endedDecember 31,2006
    
    
    2005Numerator:Net Loss
    
    $
    (4,380,212
    )
    
    $
    (35,753
    )Denominator:Weighted average outsanting
shares of common stock
    
    
    6,542,312
    
    
    
    3,820,000Loss per common share:Basic
    
    $
    (0.67
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.67
    )
    
    $
    (0.01
    )
  11. INCOME TAXES
 The (benefit) provision for taxes on income from continuing operations is comprised of
the following for the years ended December 31:
 2006
    
    
    2005Current:Federal
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
 The reported (benefit) provision for taxes on income from continuing operations differs from
the amount computed by applying the statutory federal income tax rate of 34% to loss before
income taxes as follows for the years ended December 31:
 2006 (%)
    
    
    2005 (%)Income tax benefit at statutory rate
    
    
    (34.00
    )
    
    
    (34.00
    )State taxes, net of federal benefits
    
    
    (5.83
    )
    
    
    (5.83
    )Research and development credits
    
    
    (3.92
    )
    
    
    Change in valuation allowance
    
    
    43.75
    
    
    
    39.83Total
    
    
    
    
    
    
    
 31




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##### Table of Contents



2006
    
    
    2005Net operating loss carryforwards
    
    $
    778,063
    
    
    $
    39,238Tax credits
    
    
    171,690
    
    
    
    Deferred Stock Based compensation
    
    
    966,726
    
    
    
    Deferred tax assets
    
    
    1,916,479
    
    
    
    39,238Valuation allowance
    
    
    (1,916,479
    )
    
    
    (39,238
    )Net deferred tax liability
    
    $
    (0
    )
    
    $
    (0
    )
 Based upon the Companys development stage status and history of operating losses, realization
of its deferred tax assets does not meet the more likely than not criteria under SFAS No. 109
and, accordingly, a valuation allowance for the entire deferred tax asset amount has been
recorded.The valuation allowance had an increase of $1.8 million and
$0.04 million in 2006 and 2005,
respectively.At December 31, 2006, the Company has net operating loss carry forwards for federal and state
income tax purposes of approximately $1.9 million which begin to expire in 2026 and 2021,
respectively. In addition, the Company has research and development and other tax credits for
federal and state income tax purposes of approximately $83,676 and $88,014, respectively. The
federal credits begin to expire in 2026 and state credits do not expire for California purposes.Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of net operating
losses (NOL) and other tax attributes may be subject to substantial limitations if certain
ownership changes occur during a three-year testing period (as defined). The Company is
currently evaluating the effect of the recent stock issuances on its ability to utilize its NOL
or credit carryovers.
 12. LICENSE AGREEMENT
  13. TERMINATED MERGER AGREEMENT
  14. STOCKHOLDERS EQUITY
 32




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##### Table of Contents



15. STOCK OPTIONS AND WARRANTS
 Incentive Compensation Plan
  Stock Options
   33




---



##### Table of Contents



For the years ended December 31,2006
    
    2005Annual dividends
    
    zero
    

    
    
    Expected volatility
    
    
    110135
    %
    
    
    Risk free interest rate
    
    
    4.574.60
    %
    
    
    Expected life
    
    510 years
    
    
    
  Warrants
     For the years ended December 31,2006
    
    2005Annual dividends
    
    zero
    

    
    
    Expected volatility
    
    
    110120
    %
    
    
    Risk free interest rate
    
    
    4.604.70
    %
    
    
    Expected life
    
    35 years
    

    
    
    
  34




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##### Table of Contents



WeightedAverageExerciseStock Options
    
    
    PriceOutstanding at
December 31, 2004
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled or forfeited
    
    
    
    
    
    
    Outstanding at
December 31, 2005
    
    
    
    
    
    
    Granted
    
    
    1,600,000
    
    
    $
    5.00Exercised
    
    
    
    
    
    
    Cancelled or forfeited
    
    
    
    
    
    
    Outstanding at
December 31, 2006
    
    
    1,600,000
    
    
    $
    5.00Exercisable at December
31, 2005
    
    
    
    
    
    
    Exercisable at December
31, 2006
    
    
    
    
    
    
    
  WeightedAverageExerciseWarrants
    
    
    PriceOutstanding at
December 31, 2004
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled or forfeited
    
    
    
    
    
    
    Outstanding at
December 31, 2005
    
    
    
    
    
    
    Granted
    
    
    454,221
    
    
    $
    2.72Exercised
    
    
    
    
    
    
    Cancelled or forfeited
    
    
    
    
    
    
    Outstanding at
December 31, 2006
    
    
    454,221
    
    
    $
    2.72Exercisable at December
31, 2005
    
    
    
    
    
    
    Exercisable at December
31, 2006
    
    
    454,221
    
    
    $
    2.72
  35




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##### Table of Contents



StockOptionsOutstanding at
December 31, 2005
    
    
    Granted
    
    
    1,600,000Exercised
    
    
    Cancelled or forfeited
    
    
    Outstanding at
December 31, 2006
    
    
    1,600,000
  16. RELATED PARTY TRANSACTIONS
  May 2, 2001(Date ofYear ended
    
    
    
    
    
    Inception) toDecember 31,
    
    
    
    
    
    December 31,2006
    
    2005
    
    2006Administrative services
    
    $
    3,000
    
    
    $
    9,000
    
    
    $
    12,000
  17. SUBSEQUENT EVENTS (unaudited)
 Amendment of the 2006 Incentive Compensation Plan
  Issuance of Stock Options and Warrants
  36




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##### Table of Contents



Lease for Corporate Headquarters
  37




---



##### Table of Contents



Item 8. Changes In and Disagreements With Accountant on Accounting and Financial Disclosure
 Change in the Companys Certifying Accountant
  
 Item 8A. Controls and Procedures
 Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
    
    
    Effective January 2, 2007, we appointed an interim Chief Financial Officer with
education and background in accounting and finance, substantial experience as CFO of
publicly traded companies, and adequate knowledge of financial accounting, internal
control, and generally accepted accounting principles.
    
    Effective February 27, 2007, our board of directors formed an Audit Committee composed
of three independent directors, including a chairman who meets the requirements as an audit
committee financial expert based on his experience and abilities.
    
    A thorough review of our financial reporting structures, internal control structures,
and regulatory filings was conducted by our CFO to ensure our controls and procedures are
adequate and effective.
   38




---



##### Table of Contents



Item 8B. Other Information
  39




---



##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
 Directors and Executive Officers
  DirectorName
    
    Age
    
    Position
    
    SinceTerren S. Peizer
    
    47
    
    Chairman of the Board
    
    2006Daniel S. Goldberger
    
    48
    
    President, Chief Operating Officer and Director
    
    2006Victor Gura, M.D.
    
    65
    
    Chief Medical and  Scientific Officer, and Director
    
    2006Robert S. Stefanovich
    
    42
    
    Chief Financial OfficerMarc G. Cummins
    
    46
    
    Director
    
    2006Hervé de Kergrohen, M.D.
    
    48
    
    Director
    
    2006Nicholas S. Lewin
    
    29
    
    Director
    
    2007Jay A. Wolf
    
    33
    
    Director
    
    2006
 Terren S. Peizer
 Daniel S. Goldberger
 Victor Gura, M.D.
 40




---



##### Table of Contents



Robert S. Stefanovich
 Marc G. Cummins
 Hervé de Kergrohen, M.D.
 Nicholas S. Lewin
 Jay A. Wolf
 41




---



##### Table of Contents



Family Relationships
  Legal Proceedings
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
  Corporate Governance
 Nominating Committee
 ,
  Audit Committee
 ,
 Audit Committee Financial Expert
  42




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##### Table of Contents



Item 10. Executive Compensation
  SUMMARY COMPENSATION TABLE
 Non-Equity
    
    NonqualifiedName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All Otherprincipal
    
    
    
    
    
    Salary
    
    
    
    
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensationposition
    
    Year
    
    ($)
    
    Bonus ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings ($)
    
    ($)
    
    Total ($)Daniel S. Goldberger
    
    
    2006
    
    
    $
    35,170
    
    
    
    
    
    
    
    
    
    
    $
    70,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    105,667President & COOVictor Gura

Chief Scientific
    
    
    2006
    
    
    $
    35,000
    
    
    
    
    
    
    
    
    
    
    $
    88,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    123,121OfficerPeter Sotola
    
    
    2006
    
    
    $
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000Former President*
 
 *
    
    Mr. Sotola resigned as president on October 13, 2006 Compensation Agreements
 President
  Chief Medical and Scientific Officer
  43




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##### Table of Contents



Incentive Compensation Plan
  Outstanding Equity Awards At Fiscal Year-End
  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 OPTION AWARDS
    
    STOCK AWARDSEquityIncentiveEquity
    
    PlanIncentive
    
    Awards:Plan
    
    Market orEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Awards:
    
    PayoutIncentive Plan
    
    
    
    
    
    
    
    
    
    Number
    
    Value of
    
    Number of
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    of Shares
    
    Shares
    
    Unearned
    
    UnearnedNumber of
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    or Units
    
    or Units
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    of Stock
    
    of Stock
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    That
    
    That
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    Have
    
    Have
    
    Rights Thats
    
    Rights ThatOptions
    
    Options
    
    Unearned
    
    Exercise
    
    Option
    
    Not
    
    Not
    
    Have Not
    
    Have Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    (#)Daniel S.
Goldberger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 14,President
& COO
    
    
    
    
    
    
    
    
    
    
    400,000
    
    
    $
    5.00
    
    
    
    2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Victor Gura

Chief
Scientific
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 14,Officer
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    $
    5.00
    
    
    
    2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Peter Sotola
Former
President*
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 44




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##### Table of Contents



Compensation Of Directors
  DIRECTOR COMPENSATION
 Non-EquityFees
    
    
    
    
    
    
    
    
    
    Incentive
    
    Non-Qualified
    
    AllEarned or
    
    Stock
    
    Option
    
    Plan
    
    Deferred
    
    OtherPaid in
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    CompensationName
    
    Cash ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings ($)
    
    ($)
    
    Total ($)Terren S. Peizer
    
    
    
    
    
    
    
    
    
    $
    105,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    105,632
 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 Equity Compensation Plans
  Equity Compensation Plan Information
 Number of securitiesremaining availablefor future issuanceNumber of securities
    
    
    
    
    
    
    under equityto be issued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of outstanding
    
    
    exercise price of
    
    
    (excluding securitiesoptions, warrants and
    
    
    outstanding options,
    
    
    reflected in columnrights
    
    
    warrants and rights
    
    
    (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity
compensation plans
approved by
security holders
    
    
    1,600,000
    
    
    $
    5.00
    
    
    
    400,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,600,000
    
    
    $
    5.00
    
    
    
    400,000
 45




---



##### Table of Contents



Security Ownership of Certain Beneficial Owners
  Amount andnature ofName and address of beneficial
    
    beneficial
    
    Percent ofowner(1)
    
    ownership
    
    classTerren S. Peizer(2)
    
    
    9,600,000
    
    
    
    68
    %Marc G. Cummins(3)
    
    
    428,572
    
    
    
    3
    %Jay A. Wolf(4)
    
    
    357,143
    
    
    
    3
    %Nicholas S. Lewin(5)
    
    
    35,714
    
    
    
    *Daniel S. Goldberger
    
    
    
    
    
    
    Victor Gura
    
    
    
    
    
    
    Hervé de Kergrohen
    
    
    
    
    
    
    Robert S. Stefanovich
    
    
    
    
    
    
    All directors and executive officers as a group
(8 persons)
    
    
    10,421,429
    
    
    
    73
    %
 
 *
    
    Less than one percent.(1)
    
    Unless otherwise indicated, the address of all of the above named persons is c/o
Xcorporeal, Inc., 11150 Santa Monica Blvd., Suite 340, Los Angeles, California 90025.(2)
    
    Includes 9,600,000 shares held of record by Consolidated National, LLC, of which
Mr. Peizer is the sole managing member and beneficial owner.(3)
    
    Includes 428,572 shares held of record by Prime Logic Capital, LLC, CPS
Opportunities, and GPC LXI, LLC. Mr. Cummins is a Managing Partner of Prime Capital, LLC.
He disclaims beneficial ownership of the reported securities except to the extent of his
pecuniary interest therein.(4)
    
    Includes 357,143 shares held of record by Trinad Capital Master Fund Ltd. (the
Master Fund), that may be deemed to be beneficially owned by Trinad Management, LLC, the
investment manager of the Master Fund and Trinad Capital LP; a controlling stockholder of
the Master Fund; Trinad Advisors GP, LLC, the general partner of Trinad Capital LP; and Jay
Wolf a director of the issuer and a managing director of Trinad Management, LLC and a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims beneficial ownership of
the reported securities except to the extent of his pecuniary interest therein.(5)
    
    Includes 27,514 shares held of record by Paizon Capital, which is beneficially
owned and controlled by Mr. Lewins immediate family members. Mr. Lewin disclaims
beneficial ownership of these shares.  46




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##### Table of Contents



Item 12. Certain Relationships and Related Transactions
 Transactions with Related Persons
    Director Independence
  
 Item 13: Exhibits
 No.
    
    Description2.1
    
    Merger Agreement(1)3.1
    
    Certificate of Incorporation(1)3.2
    
    Bylaws(1)4.1
    
    Form of Common Stock certificate(2)4.2
    
    Stock Purchase Agreement(3)4.3
    
    Registration Rights Agreement(4)10.1*
    
    Indemnification Agreement for directors(1)10.2*
    
    Xcorporeal, Inc. 2006 Incentive Compensation Plan(1)10.3*
    
    Employment Agreement of Daniel S. Goldberger(1)10.4
    
    License Agreement(1)10.5
    
    Irrevocable Option Agreement(5)10.6
    
    Contribution Agreement(5)10.7*
    
    Employment Agreement of Victor Gura, M.D.(6)10.8
    
    Form of Innovation, Proprietary Information and Confidentiality Agreement(7)14.1
    
    Code of Ethics16.1
    
    Letter from Amisano Hanson, Chartered Accountants, dated February 13, 2007(8)31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contracts, compensatory plans or arrangements.(1) Incorporated by reference to exhibit of the same number to quarterly report on
Form 10-QSB filed November 17, 2006.(2)
    
    Incorporated by reference to exhibit of the same number to registration statement
on Form S-3 filed December 22, 2006.(3)
    
    Incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed
November 27, 2006.(4)
    
    Incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed
November 27, 2006.(5)
    
    Incorporated by reference to exhibit of the same number to amended quarterly
report on Form 10-QSB/A filed April 16, 2007.(6)
    
    Incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed
December 1, 2006.(7)
    
    Incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed
January 3, 2007.(8)
    
    Incorporated by reference to exhibit of the same number to amended current report
on Form 8-K/A filed March 23, 2007. 47




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##### Table of Contents



Item 14: Principal Accountant Fees and Services
 Audit Fees
  Audit-Related Fees
  Tax Fees
  Pre-Approval Policy for Audit Services
  48




---



##### Table of Contents



SIGNATURES
  XCORPOREAL, INC.By:
    
    /s/ DANIEL S. GOLDBERGERDaniel S. Goldberger, President and ChiefOperating Officer (Principal Executive Officer)
  Signature
    
    Title(s)
    
    Date/s/ TERREN S. PEIZER

Terren S. Piezer
    
    Chairman of the Board of Directors
    
    April 16, 2007/s/ DANIEL S. GOLDBERGER
 (
Daniel S. Goldberger
    
    President, Chief Operating Officer
(Principal Executive Officer) and Director
    
    April 16, 2007/s/ ROBERT S. STEFANOVICH

Robert S. Stefanovich
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    April 16, 2007/s/ MARC G. CUMMINS

Marc G. Cummins
    
    Director
    
    April 16, 2007/s/ VICTOR GURA, M.D.

Victor Gura, M.D.
    
    Chief Medical and Scientific
Officer and Director
    
    April 16, 2007/s/ HERVÉ DE KERGROHEN, M.D.

Hervé de Kergrohen, M.D.
    
    Director
    
    April 16, 2007/s/ JAY A. WOLF

Jay A. Wolf
    
    Director
    
    April 16, 2007/s/
NICHOLAS S. LEWIN

Nicholas S. Lewin
    
    Director
    
    April 16, 2007
 49