**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, 2007**





Commission
      file number **001-31608**









**XCORPOREAL,
      INC.**


(Name
      of
      small business issuer in its charter)





**Delaware**
            **75-2242792**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)**12121
                Wilshire Blvd., Suite 350**
            **Los
                Angeles, California 90025**(Address
                of principal executive offices)
            (City,
                State and Zip Code)





Issuer’s
      telephone number **(310)
      923-9990**





Securities
      registered under Section 12(b) of the Exchange Act: None





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





**Common
      stock, $0.0001 par value per share**


(Title
      of
      class)





Check
      whether issuer (1) filed all reports to be filed by Section 13 or 15(d) of
      the
      Exchange Act during the past 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 R No £





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this Form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. £




1





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





State
      issuer’s revenues for its most recent fiscal year: **$0**





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, as of a specified date within the past 60 days: **$14,188,320
      as of March 18, 2008**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: **14,372,472
      shares of common stock as of March 18, 2008**





Transitional
      Small Business Disclosure Format (Check one): Yes £ No R











2





**TABLE
      OF CONTENTS**





Forward
                Looking Statements
            
            4PART
                I
            
            5Item
                1. Description of Business
            
            5Item
                2: Description of Property
            
            15Item
                3: Legal Proceedings
            
            15Item
                4: Submission of Matters to a Vote of Security Holders
            
            16PART
                II
            
            17Item
                5: Market for Common Equity and Related Stockholder Maters
            
            17Item
                6: Management’s Discussion and Analysis or Plan of
                Operation
            
            18Item
                7: Financial Statements
            
            22Item
              8:
              Changes In and Disagreements with Accountants on Accounting andFinancial
              Disclosure
            
            40Item
                8A. Controls and Procedures
            
            40PART
                III
            
            42Item
                9. Directors, Executive Officers, Promoters, Control Persons and
                Corporate
                Governance; Compliance with Section 16(a) of the Exchange
                Act
            
            42Item
                10. Executive Compensation
            
            45Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            
            49Item
                12. Certain Relationships and Related Transactions
            
            50Item
                13: Exhibits
            
            51Item
                14: Principal Accountant Fees and Services
            
            51


3


**Forward
      Looking Statements**





This
      report contains “forward-looking statements” within the meaning of the Private
      Securities Litigation Reform Act of 1995 with respect to the financial
      condition, results of operations, business strategies, operating efficiencies
      or
      synergies, competitive positions, growth opportunities for existing products,
      plans and objectives of management, markets for stock of Xcorporeal and other
      matters. Statements in this report that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
      Section 21E of the Exchange Act and Section 27A of the Securities Act. Such
      forward-looking statements, including, without limitation, those relating to
      the
      future business prospects, revenues and income of Xcorporeal, wherever they
      occur, are necessarily estimates reflecting the best judgment of the senior
      management of Xcorporeal on the date on which they were made, or if no date
      is
      stated, as of the date of this report. These forward-looking statements are
      subject to risks, uncertainties and assumptions, including those described
      in
      the “Risk Factors” described below, that may affect the operations, performance,
      development and results of our business. Because the factors discussed in this
      report could cause actual results or outcomes to differ materially from those
      expressed in any forward-looking statements made by us or on our behalf, you
      should not place undue reliance on any such forward-looking statements. New
      factors emerge from time to time, and it is not possible for us to predict
      which
      factors will arise. In addition, we cannot assess the impact of each factor
      on
      our business or the extent to which any factor, or combination of factors,
      may
      cause actual results to differ materially from those contained in any
      forward-looking statements.





You
      should understand that the following important factors, in addition to those
      discussed above and in the “Risk Factors” could affect our future results and
      could cause those results to differ materially from those expressed in such
      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.





Although
      we believe that our expectations are reasonable, we cannot assure you that
      our
      expectations will prove to be correct. Should any one or more of these risks
      or
      uncertainties materialize, or should any underlying assumptions prove incorrect,
      actual results may vary materially from those described in this annual report
      as
      anticipated, believed, estimated, expected or intended.





We
      undertake no obligation to publicly update or revise any forward-looking
      statements, whether as a result of new information, future events or any other
      reason. All subsequent forward-looking statements attributable to us or any
      person acting on our behalf are expressly qualified in their entirety by the
      cautionary statements contained or referred to herein. In light of these risks,
      uncertainties and assumptions, the forward-looking events discussed in this
      report may not occur.


4


**PART
      I**





**Item
      1. Description of Business**





**Business**





***Overview***




We
      are a
      medical device company developing an innovative *extra-corporeal* platform
      technology to be used in devices to replace the function of various human
      organs. These
      devices will seek to provide patients with improved, efficient and cost
      effective therapy. The
      platform leads to three initial products:




·  A
      Portable Artificial Kidney (PAK) for hospital Renal Replacement Therapy
      (RRT)




·  A
      PAK for
      home hemodialysis




·  A
      Wearable Artificial Kidney (WAK) for continuous ambulatory
      hemodialysis




For
      the
      hospital market, we are developing a portable, multifunctional renal replacement
      device that will offer cost-effective therapy for those patients suffering
      from
      Acute Renal Failure (ARF) causing a rapid decline in kidney function. In
      the
      U.S., the disease affects more than 200,000 patients annually with a mortality
      rate approaching 50%, according to a study published in the Clinical Journal
      of
      American Society of Nephrology in 2006. The
      Xcorporeal platform technology is designed for the hospital market since the
      technology is designed to provide cost-effective, continuous therapy. We have
      completed our functional prototype of the product, which is currently undergoing
      bench testing, and will submit a 510(k) filing with the Food and Drug
      Administration (FDA) during the fourth quarter of 2008.




We
      also
      plan to commercialize a home hemodialysis device for the End Stage Renal Disease
      (ESRD) market, comprised of patients in whom the kidneys have ceased to
      function. Our devices are intended to combine the best attributes of currently
      marketed home hemodialysis machines to create hemodialysis devices that offer
      patients convenient, durable and truly portable treatments at home. We believe
      our devices will provide a cost-effective alternative to current home treatment
      modalities, due to their ability to offer hemodialysis without the need for
      large quantities of dialysate fluid or purified water. We have also completed
      our functional prototype of the product, which is currently undergoing bench
      testing, and we will submit a 510(k) with the FDA during the second half of
      2009.




Our
      WAK
      is a device for the chronic treatment of ESRD. We have successfully demonstrated
      a prototype system that weighs less than 6 kg., is battery operated, and can
      be
      worn by an ambulatory patient. Our miniature, wearable device will enable
      continuous (up to 24 hours × 7 days per week) renal replacement therapy on a
      chronic basis at home. Increasing dialysis time has previously been shown to
      reduce morbidity and improve quality of life in ESRD patients. The WAK has
      recently been featured in articles written by the Los Angeles Times, The Lancet,
      Kidney International, and various other medical periodicals.




We
      are a
      development stage company, have been unprofitable since our inception, and
      will
      incur substantial additional operating losses for at least the next twelve
      months as we continue to implement commercial operations and allocate
      significant and increasing resources to research, development, clinical trials,
      and other activities. Accordingly, our historical operations and financial
      information are not indicative of our future operating results, financial
      condition, or ability to operate profitably as a commercial enterprise.





Since
      we
      began implementing our current business model on August 31, 2006, we have
      accomplished the following milestones:





·
            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





·
            Advanced
                the development of our technology.




5




For
      the
      coming year, we plan to test and develop the technology for our *extra-corporeal* platform. We will also implement our validation and verification strategy
      including bench testing, clinical testing and regulatory strategy in the U.S.
      and abroad. Some of our products may qualify for the 510(k) regulatory process
      in the U.S. based on the existence of predicate devices. Other products, for
      example our WAK, are likely to require a full PMA review which will be longer
      and more expensive.





While
      we
      may eventually exploit our technology’s potential Congestive Heart Failure (CHF)
      applications through licensing or strategic arrangements, we will focus
      initially on the renal replacement applications described above.





**Research
      and Development**





***R&D
      Team***





We
      haves
      recruited and currently employ a talented interdisciplinary team of scientists
      and engineers who are developing our products. The team includes engineering
      leaders from within the dialysis field who provide state of the art as well
      as
      historical insights into dialysis equipment. The team also includes seasoned
      engineers from related medical fields providing us with cutting edge technology
      in the areas of fluidics, sensors and electronics. In addition, we have retained
      a medical device consulting firm, The Aubrey Group, Inc., an FDA-registered
      third-party contract developer and manufacturer of medical devices, to provide
      engineering support in the development of the PAK.





We
      incurred $7.1 million and $1.3 million in research and development costs in
      2007
      and 2006, respectively.





***Portable
      Artificial Kidney***





The
      PAK
      is a multifunctional device that will perform hemodialysis, hemofiltration,
      and
      ultrafiltration under direct medical supervision. A variation of this device
      will be developed for chronic home hemodialysis. An initial prototype of the
      PAK, capable of performing the basic functions of a hemodialysis machine, and
      demonstrating our unique new fluidics circuit, was completed at the end of
      2007.
      Further refinements of this prototype including the addition of safety sensors
      and electronic controls is now in progress. The final product design of the
      PAK
      will be completed by mid 2008 and units will undergo final verification and
      validation prior to a 510(k) submission for clinical use under direct medical
      supervision. A clinical study will not be required for this
      submission.





***Wearable
      Artificial Kidney***





A
      clinical feasibility study with a research prototype of the WAK was conducted
      in
      London in March 2007. In that study, the WAK was successfully tested in eight
      patients with end-stage renal disease. Patients were treated for up to 8 hours
      with adequate clearances of urea and creatinine. The device was well tolerated
      and patients were able to conduct activities of normal daily living including
      walking and sleeping. There were no serious adverse events although clotting
      of
      the dialyzer occurred in two patients. To our knowledge, this is the first
      successful demonstration of a Wearable Artificial Kidney in man.





This
      year
      we are making substantial improvements to the WAK design intended to move it
      from a feasibility prototype to a product prototype. These include improvement
      of the heparin pumping system intended to address the dialyzer clotting problem,
      the addition of safety sensors required for commercial dialysis equipment,
      the
      addition of electrical controls to provide a convenient user interface,
      improvements to the blood flow circuit and further miniaturization of the device
      to improve fit to the human body. Additional clinical studies will be conducted
      upon completion of the prototype.




***Third-party
      Arrangements***





In
      July
      2007, we entered into an agreement with Aubrey for the design and development
      of
      subsystems of the PAK. The PAK will be designed for intermittent hemodialysis
      or
      Continuous Renal Replacement Therapy (CRRT) in a clinical setting as well as
      for
      treatments in a home setting. The development is expected to be complete by
      the
      end of 2008. Total labor and material costs over the term of the Aubrey
      agreement are budgeted at approximately $5.1 million, though we can terminate
      the agreement at any time with 30 business days notice.





We
      also
      contract with other third parties to assist in our research and development
      efforts and to supplement our internal resources while we continue to grow
      our
      organization.





6




**Government
      Regulation**





***US
      Regulation***





We
      are
      subject to extensive government regulation relating to the development and
      marketing of our products. Due to the relatively early nature of our development
      efforts, we have not yet confirmed with the FDA its view of the regulatory
      status of any of our products .





To
      support a regulatory submission, the FDA may require clinical studies to show
      safety and effectiveness. While we cannot currently state the nature of the
      studies the FDA may require due to our early stage of product development,
      it is
      likely that some products we attempt to develop will require time-consuming
      clinical studies in order to secure approval.





Outside
      the US, our ability to market potential products is contingent upon receiving
      market application authorizations from the appropriate regulatory authorities.
      These foreign regulatory approval processes may involve differing requirements
      than those of the FDA, but also generally include many, if not all, of the
      risks
      associated with the FDA approval process described above, depending on the
      country involved.





In
      the
      US, medical devices are classified into three different classes, Class I, II
      and
      III, on the basis of controls deemed reasonably necessary to ensure the safety
      and effectiveness of the device. Class I devices are subject to general
      controls, including labelling, pre-market notification and adherence to the
      FDA’s Good Manufacturing Practices (GMP), Class II devices are subject to
      general and special controls, including performance standards, post-market
      surveillance, patient registries and FDA guidelines, and Class III devices
      are
      those which must receive pre-market approval by the FDA to ensure their safety
      and effectiveness, that is, life-sustaining, life-supporting and implantable
      devices, or new devices, which have been found not to be substantially
      equivalent to legally marketed devices. Because of their breakthrough nature,
      some of our devices may be considered Class III.




Before
      new class II medical devices, such as most of our products, can be marketed,
      marketing clearance must be obtained through a pre-market notification under
      Section 510(k) of the Federal Food, Drug and Cosmetic (FDC) Act. Noncompliance
      with applicable requirements can result in fines, injunctions, civil penalties,
      recall or seizure of products, total or partial suspension of production,
      refusal to authorize the marketing of new products or to allow us to enter
      into
      supply contracts and criminal prosecution. A 510(k) clearance will typically
      be
      granted by the FDA, if it can be established that the device is substantially
      equivalent to a “predicate device,” which is a legally marketed Class I or II
      device or a pre-amendment Class III device (that is, one that has been marketed
      since a date prior to May 28, 1976), for which the FDA has not called for
      pre-market approval (PMA). The FDA has been requiring an increasingly rigorous
      demonstration of substantial equivalence, which may include a requirement to
      submit human clinical trial data. It generally takes 4 to 12 months from the
      date of a 510(k) submission to obtain clearance, but it may take
      longer.





If
      clearance or approval is obtained, any device manufactured or distributed by
      us
      will be subject to pervasive and continuing regulation by the FDA. We will
      be
      subject to routine inspection by the FDA and will have to comply with the host
      of regulatory requirements that usually apply to medical devices marketed in
      the
      U.S. including labelling regulations, GMP requirements, Medical Device Reporting
      (MDR) regulation which requires a manufacturer to report to the FDA certain
      types of adverse events involving its products, and the FDA’s prohibitions
      against promoting products for unapproved or “off-label” uses.





***European
      Community***





International
      Organization for Standards (ISO) standards were developed by the European
      Community (EC) as a tool for companies interested in increasing productivity,
      decreasing cost and increasing quality. The EC uses ISO standards to provide
      a
      universal framework for quality assurance and to ensure the good quality of
      products and services across borders. The ISO standards (it is now ISO13485)
      have facilitated trade throughout the EC, and businesses and governments
      throughout the world are recognizing the benefit of the globally accepted
      uniform standards. Any manufacturer we utilize for purposes of producing our
      products (including us, if we manufacture any of our own products) will be
      required to obtain ISO certification to facilitate the highest quality products
      and the easiest market entry in cross-border marketing. This will enable us
      to
      market our products in all of the member countries of the EC. We also will
      be
      required to comply with additional individual national requirements that are
      outside the scope of those required by the European Economic Area.




7





Any
      medical device that is legally marketed in the US may be exported anywhere
      in
      the world without prior FDA notification or approval. The export provisions
      of
      the FDC Act apply only to unapproved devices. While FDA does not place any
      restrictions on the export of these devices, certain countries may require
      written certification that a firm or its devices are in compliance with US
      law.
      In such instances FDA will accommodate US firms by providing a Certificate
      for
      Foreign Government. In cases where there are devices which the manufacturer
      wishes to export during the interim period while their 510(k) submission is
      under review, exporting may be allowed without prior FDA clearance under certain
      limited conditions.





**Competition**





We
      compete directly and indirectly with other biotechnology and healthcare
      equipment businesses, including those in the dialysis industry. The major
      competitors for our platform technology are those companies manufacturing and
      selling dialysis equipment and supplies. We anticipate that some of our primary
      competitors will be companies such as Baxter, Fresenius, Gambro, NxStage and
      B
      Braun. We will compete with these companies in the critical care markets as
      well
      as dialysis clinics, and the home and wearable application markets. In many
      cases, these competitors are larger and more firmly established than we are.
      In
      addition, our competitors have greater marketing and development budgets and
      greater capital resources than our company. Others are working on portable
      and
      wearable peritoneal dialysis machines and competitors are working on portable
      hemodialysis machines, but we are not aware of any other wearable hemodialysis
      machines currently under development.





**License
      Agreement**





On
      September 1, 2006, we entered into the License Agreement with National Quality
      Care, Inc. (NQCI) pursuant to which we obtained exclusive rights to our
      technology relating to the treatment of kidney failure and other applications,
      with no geographic restrictions, that will last for a period of ninety-nine
      years or until the expiration of NQCI’s proprietary rights in each item of
      intellectual property, if earlier. As consideration for granting the license,
      we
      agreed to reimburse designated costs and expenses of our licensor, and pay
      a
      minimum royalty of 7% of net sales, with an annual minimum royalty of
      $250,000.





**Patents
      and Trademarks**





We
      have
      exclusive licenses to three issued US patents, U.S. Patent No. 7,309,323
      entitled “Wearable continuous renal replacement therapy device,” No. 7,276,042
      entitled “Low hydraulic resistance cartridge,” and No. 6,960,179 entitled
“Wearable continuous renal replacement therapy device.” We also have exclusive
      licenses to several pending U.S. patent applications, including U.S. Patent
      Application No. 11/500,572 entitled “Dual-ventricle pump cartridge, pump, and
      method of use in a wearable continuous renal replacement therapy device.”





In
      addition to our exclusive licenses, we are actively protecting inventions that
      are commercially important to our business by developing our own intellectual
      property and filing and prosecuting our own patents. We currently have 14
      pending U.S. patent applications.





We
      also
      have pending applications to register our trademarks, “Xcorporeal” and
“Xcorporeal WAK.”





**Business
      Development**





***Formation,
      Merger and Name Change***





We
      were
      incorporated in the State of Delaware in 1992. Prior to March 13, 2006, when
      we
      changed our name to CT Holdings Enterprises, Inc., we were engaged in an
      unrelated business. As of June 30, 2007, we did not conduct any active business
      and were considered a “shell” company under applicable federal securities laws.
      On August 10, 2007, we entered into a merger agreement with Xcorporeal, Inc.
      (“pre-merger Xcorporeal”), which conducted the business described in this
      report. The merger became effective on October 12, 2007. Pre-merger Xcorporeal
      became our wholly-owned subsidiary and changed its name to Xcorporeal
      Operations, Inc. We changed our name from CT Holdings Enterprises, Inc. to
      Xcorporeal, Inc. All of our former officers and directors resigned, and all
      of
      the officers and directors of pre-merger Xcorporeal became our officers and
      directors effective as of October 12, 2007. As used in this report, the terms
      “Xcorporeal”, “Company”, “we”, “our” and like references mean Xcorporeal, Inc.,
      a Delaware corporation, and prior to October 12, 2007, our subsidiary now known
      as Xcorporeal Operations, Inc.




8





On
      August
      31, 2006, we entered into a Contribution Agreement with Consolidated National,
      LLC (CNL), which is owned and controlled by our current Executive Chairman,
      giving us the right to enter into a License Agreement with NQCI. We issued
      9,600,000 shares of common stock, a 96% voting interest in our company, to
      CNL
      in exchange for all of its right, title, and interest to the name “Xcorporeal”
and related trademark applications and domain names, and the right to enter
      into
      the License Agreement. Prior to the August 31, 2006 transaction, Xcorporeal
      Operations, Inc. was a shell corporation.





On
      September 1, 2006, we entered into a License Agreement with NQCI, pursuant
      to
      which it obtained the exclusive rights to the technology relating to our
      congestive heart failure treatment, kidney failure treatment, and other medical
      devices. As a result, we became a developmental stage company focused on
      researching, developing, and commercializing technology and products related
      to
      the treatment of kidney failure and congestive heart failure.





On
      December 1, 2006, we initiated arbitration proceedings against NQCI for its
      breach of the License Agreement, which remains pending. On December 29, 2006,
      NQCI served us with a written notice purporting to terminate the License
      Agreement for unspecified alleged breaches. On January 2, 2007, we advised
      NQCI
      that we did not consent to termination of the License Agreement, that we have
      not breached the License Agreement, and that NQCI has no right to unilaterally
      terminate the License Agreement in any event. Accordingly, the License Agreement
      cannot be terminated.





***Delaware
      Amended and Restated Certificate of Incorporation***





Effective
      October 12, 2007 and pursuant to the August 10, 2007 merger agreement, we
      changed our name to “Xcorporeal, Inc.” and amended and restated our certificate
      of incorporation and bylaws to read as the certificate of incorporation and
      bylaws of pre-merger Xcorporeal. Pre-merger Xcorporeal amended its certificate
      of incorporation to change its name to “Xcorporeal Operations, Inc.” As a
      result, our authorized common stock changed from 60,000,000 shares to 40,000,000
      common shares, and our authorized preferred stock changed from 1,000,000 shares
      to 10,000,000 shares resulting in total authorized capital stock of 50,000,000
      shares with a par value of $0.0001





***Terminated
      Merger Agreement***





On
      September 1, 2006, we entered into a Merger Agreement with NQCI which
      contemplated that we would acquire NQCI as a wholly owned subsidiary pursuant
      to
      a triangular merger, or we would issue to NQCI shares of our common stock in
      consideration of the assignment of the technology relating to our WAK and other
      medical devices.





The
      merger was not consummated, and the Merger Agreement expired by its own terms
      on
      December 31, 2006. In addition, on December 29, 2006, NQCI served written notice
      that it was terminating the Merger Agreement, and on January 2, 2007, we
      consented to the termination. Accordingly, the Merger Agreement is now
      terminated. We will not be proceeding with any merger with NQCI.





**Employees**





At
      December 31, 2007, we had approximately 20 full-time employees. During 2008,
      we
      plan to add additional employees, particularly in the areas of product
      development, regulatory affairs, and quality assurance. We expect our headcount
      to reach approximately 30 employees by the end of the year. We also utilize,
      whenever appropriate, contract and part-time professionals in order to conserve
      cash and resources.





**Reports
      to Security Holders**





We
      will
      send an annual report including audited financial statements to all of our
      stockholders of record. Anyone may obtain a copy of our annual report without
      charge by writing us at: Investor Relations, Xcorporeal, Inc, 12121 Wilshire
      Blvd. Suite 350, Los Angeles, California 90025.





We
      file
      reports with the Securities and Exchange Commission (SEC) in accordance with
      the
      Securities Exchange Act of 1934, as amended, including annual reports on Form
      10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy
      statements and other information.




9





The
      public may read and copy any materials we file with the SEC at the SEC’s Public
      Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
      information on the operation of the Public Reference Room by calling the SEC
      at
      1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
      site that contains reports, proxy and information statements, and other
      information regarding issuers that file electronically with the SEC, which
      can
      be found at 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
      are in
      the early stage of operations and development, and have only a limited operating
      history on which to base an evaluation of our business and prospects, having
      commenced operations in August 2006 in accordance with our new business plan
      and
      entry into the medical devices industry. In addition, our operations and
      developments are subject to all of the risks inherent in the growth of an early
      stage company. We will be subject to the risks inherent in the ownership and
      operation of a company with a limited operating history such as regulatory
      setbacks and delays, fluctuations in expenses, competition, the general strength
      of regional and national economies, and governmental regulation. Any failure
      to
      successfully address these risks and uncertainties would seriously harm our
      business and prospects. We may not succeed given the technological, marketing,
      strategic and competitive challenges we will face. The likelihood of our success
      must be considered in light of the expenses, difficulties, complications,
      problems and delays frequently encountered in connection with the growth of
      a
      new business, the continuing development of new technology, and the competitive
      and regulatory environment in which we operate or may choose to operate in
      the
      future. We have generated no revenues to date, and there can be no assurance
      that we will be able to successfully develop our products and penetrate our
      target markets.




**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.**




We
      have
      not generated revenues or become profitable, may never do so, and may not
      generate sufficient working capital to cover the cost of operations. Our
      existing cash, cash equivalents and marketable securities may not be sufficient
      to fund our business until we can become cash flow positive and we may never
      become cash flow positive. No party has guaranteed to advance additional funds
      to us to provide for any operating deficits. Until we begin generating revenue,
      we may seek funding through the sale of equity, or securities convertible into
      equity, which could result in further dilution to our then existing
      stockholders. If we raise additional capital through the incurrence of debt,
      our
      business may be affected by the amount of leverage we incur, and our borrowings
      may subject us to restrictive covenants. Additional funding may not be available
      to us on acceptable terms, or at all. If we are unable to obtain adequate
      financing on a timely basis, we may be required to delay, reduce or stop
      operations, any of which would have a material adverse effect on our business.




**Our
      success will depend on our ability to retain our managerial personnel and to
      attract additional personnel.**




Competition
      for desirable personnel is intense, and we cannot guarantee that we will be
      able
      to attract and retain the necessary staff. The loss of members of managerial,
      sales or scientific staff could have a material adverse effect on our future
      operations and on successful development of products for our target markets.
      The
      failure to maintain our management, particularly our Executive Chairman, Chief
      Financial Officer and Chief Medical and Scientific Officer, and to attract
      additional key personnel could materially adversely affect our business,
      financial condition and results of operations. Although we will provide
      incentive compensation to attract and retain our key personnel, we cannot
      guarantee that these efforts will be successful.




We
      will
      need to expand our finance, administrative, product development, sales and
      marketing, and operations staff. There are no assurances that we will be able
      to
      make such hires. In addition, we may be required to enter into relationships
      with various strategic partners and other third parties necessary to our
      business. Planned personnel may not be adequate to support our future
      operations, management may not be able to hire, train, retain, motivate and
      manage required personnel or management may not be able to identify, manage
      and
      exploit existing and potential strategic relationships and market opportunities.
      If we fail to manage our growth effectively, it could have a material adverse
      effect on our business, results of operations and financial condition.




10




**We
      need to develop our financial and reporting processes, procedures and controls
      to support our anticipated growth.**




We
      have
      begun investing in our financial and reporting systems. To comply with our
      public reporting requirements, and manage the anticipated growth of our
      operations and personnel, we will be required to continue to improve existing
      or
      implement new operational and financial systems, processes and procedures,
      and
      to expand, train and manage our employee base. Our current and planned systems,
      procedures and controls may not be adequate to support our future operations.




The
      laws
      and regulations affecting public companies, including the provisions of the
      Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the Securities
      and
      Exchange Commission, will result in increased costs to us as we evaluate the
      implications of any new rules and respond to their requirements. New rules
      could
      make it more difficult or more costly for us to obtain certain types of
      insurance, including director and officer liability insurance, and we may be
      forced to accept reduced policy limits and coverage or incur substantially
      higher costs to obtain the same or similar coverage. In addition, the need
      to
      comply with any new rules and regulations will continue to place significant
      demands on our financial and accounting staff, financial, accounting and
      information systems, and our internal controls and procedures, any of which
      may
      not be adequate to support our anticipated growth. We cannot predict or estimate
      the amount of the additional costs we may incur or the timing of such costs
      to
      comply with any new rules and regulations, or if compliance can be achieved.




**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.**




Even
      if
      we obtain sufficient funding, no assurance can be given that we will be able
      to
      design or have designed parts necessary for the manufacture of our products
      or
      complete the development of our proposed products within our anticipated time
      frames, if at all. Such a situation could have a material adverse effect upon
      our ability to remain in business.




**The
      success of our business will depend on our ability to develop and protect our
      intellectual property rights, which could be expensive.**




Patent
      and other proprietary rights are essential to our business. Our success depends
      to a significant degree on our ability to obtain and enforce patents and
      licenses to patent rights, both in the U.S. and in other countries. We cannot
      be
      certain that the patents that we license from others will be enforceable and
      afford protection against competitors. Our patent rights may not provide us
      with
      proprietary protection or competitive advantages against competitors with
      similar technologies. Even if such patents are valid, we cannot guarantee that
      competitors will not independently develop alternative technologies that
      duplicate the functionality of our technology.




We
      also
      rely on trademarks, copyrights, trade secrets and know-how to develop, maintain
      and strengthen our competitive positions. While we protect our proprietary
      rights to the extent possible, we cannot guarantee that third parties will
      not
      know, discover or develop independently equivalent proprietary information
      or
      techniques, that they will not gain access to our trade secrets or disclose
      our
      trade secrets to the public. Therefore, we cannot guarantee that we can maintain
      and protect unpatented proprietary information and trade secrets.
      Misappropriation of our intellectual property would have an adverse effect
      on
      our competitive position and may cause us to incur substantial litigation costs.




**We
      may be subject to claims that we infringe the intellectual property rights
      of
      others, and unfavorable outcomes could harm our business** .




Our
      future operations may be subject to claims, and potential litigation, arising
      from our alleged infringement of patents, trade secrets or copyrights owned
      by
      other third parties. We will fully comply with the law in avoiding such
      infringements. However, within the medical devices industry, established
      companies have actively pursued such infringements, and have initiated such
      claims and litigation, which has made the entry of competitive products more
      difficult. We may experience such claims or litigation initiated by existing,
      better-funded competitors. Court-ordered injunctions may prevent us from
      bringing new products to market, and the outcome of litigation and any resulting
      loss of revenues and expenses of litigation may substantially affect our ability
      to meet our expenses and continue operations.




**Confidentiality
      agreements with employees, licensees and others may not adequately prevent
      disclosure of trade secrets and other proprietary
      information.**




In
      order
      to protect our proprietary technology and processes, we rely in part on
      confidentiality provisions in our agreements with employees, licensees, and
      others. These agreements may not effectively prevent disclosure of confidential
      information and may not provide an adequate remedy in the event of unauthorized
      disclosure of confidential information. In addition, others may independently
      discover trade secrets and proprietary information. Costly and time-consuming
      litigation could be necessary to enforce and determine the scope of our
      proprietary rights, and failure to obtain or maintain trade secret protection
      could adversely affect our competitive business position.




11




**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.**




Our
      proposed products will compete directly against equipment produced by Fresenius
      Medical Care AG, Baxter Healthcare Corporation, Gambro AB, NxStage Medical,
      Inc., B Braun, and others, each of which markets one or more FDA-cleared medical
      devices for the treatment of acute or chronic kidney failure.




Each
      of
      these competitors offers products that have been in use for a longer time than
      our products and are more widely recognized by physicians, patients and
      providers. Most of our competitors have significantly more financial and human
      resources, more established sales, service and customer support infrastructures
      and spend more on product development and marketing than we do. Many of our
      competitors also have established relationships with the providers of dialysis
      therapy. Most of these companies manufacture additional complementary products
      enabling them to offer a bundle of products and have established sales forces
      and distribution channels that may afford them a significant competitive
      advantage.




The
      healthcare business in general, and the market for our products in particular,
      is competitive, subject to change and affected by new product introductions
      and
      other market activities of industry participants, including increased
      consolidation of ownership of clinics by large dialysis chains. If we are
      successful, our competitors are likely to develop products that offer features
      and functionality similar to our proposed products. Improvements in existing
      competitive products or the introduction of new competitive products may make
      it
      more difficult for us to compete for sales, particularly if those competitive
      products demonstrate better safety, convenience or effectiveness or are offered
      at lower prices. If we are unable to compete effectively against existing and
      future competitors and existing and future alternative treatments and
      pharmacological and technological advances, it will be 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.**




No
      independent studies with regard to the feasibility of our proposed business
      plan
      have been conducted by any independent third parties with respect to our present
      and future business prospects and our capital requirements. In addition, there
      can be no assurances that our products or our treatment modality for ESRD will
      find sufficient acceptance in the marketplace to enable us to fulfil our long
      and short term goals, even if adequate financing is available and our products
      are approved to come to market, of which there can be no assurance.




**An
      unfavorable result in the pending arbitration could have a material adverse
      effect on our business.**




We
      consider the protection of our proprietary technology for treatment of kidney
      failure, which we have licensed and are developing, to be critical to our
      business prospects. We obtained the rights to some of our most significant
      patented and patent-pending technologies through a License Agreement with
      National Quality Care, Inc. (NQCI). On December 1, 2006 we initiated arbitration
      against NQCI for failure to fully perform its obligations under our License
      Agreement. NQCI has filed counterclaims seeking to invalidate the License
      Agreement and claiming monetary damages against us. If NQCI were to prevail
      on
      some or all of its claims, we could be prevented from using some or all of
      the
      patented technology we licensed from it. That could significantly impact our
      ability to use and develop our technologies, which would have a material adverse
      effect on our business and results of operations.




**Our
      ability to utilize net** **operating loss carry forwards may be limited.**




At
      December 31, 2007, we had net operating loss carry forwards (NOLs) for federal
      and state income tax purposes of approximately $12.2 million and of $12.0
      million, respectively. The NOLs for federal and state income tax purposes begin
      to expire in 2021. These NOLs may be used to offset future taxable income,
      to
      the extent we generate any taxable income, and thereby reduce or eliminate
      our
      future Federal and California income taxes otherwise payable. Section 382 of
      the
      Internal Revenue Code imposes limitations on a corporation’s ability to utilize
      NOLs if it experiences an “ownership change” as defined in Section 382.  In
      general terms, an ownership change may result from transactions that have the
      effect of increasing the percentage ownership of certain stockholders in the
      stock of a corporation by more than 50 percentage points over a three-year
      period. In the event of an ownership change, a corporation’s utilization of NOLs
      generated prior to the ownership change is subject to an annual limitation
      determined by multiplying the value of the corporation at the time of the
      ownership change by the “applicable long-term tax-exempt rate,” as defined in
      the Internal Revenue Code. Any unused annual limitation may be carried over
      to
      later years.





12




**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.**




The
      healthcare industry is highly regulated and continues to undergo significant
      changes as third-party payers, such as Medicare and Medicaid, traditional
      indemnity insurers, managed care organizations and other private payers increase
      efforts to control cost, utilization and delivery of healthcare services.
      Healthcare companies are subject to extensive and complex federal, state and
      local laws, regulations and judicial decisions. In addition, clinical testing,
      manufacture, promotion and sale of our proposed products are subject to
      extensive regulation by numerous governmental authorities in the U.S.,
      principally the FDA, and corresponding foreign regulatory agencies. Compliance
      with laws and regulations enforced by regulatory agencies that have broad
      discretion in applying them may be required for our medical products developed
      or used by us. Many healthcare laws and regulations applicable to our business
      are complex, applied broadly and subject to interpretation by courts and
      government agencies. Regulatory, political and legal action and pricing
      pressures could prevent us from marketing some or all of our products and
      services for a period of time or permanently. Moreover, changes in existing
      regulations or adoption of new regulations or policies could prevent us from
      obtaining, or affect the timing of, future regulatory approvals or clearances.
      We cannot assure you that we will be able to obtain necessary regulatory
      clearances or approvals on a timely basis, or at all, or that we will not be
      required to incur significant costs in obtaining or maintaining such foreign
      regulatory approvals. Delays in receipt of, or failure to receive, such
      approvals or clearances, the loss of previously obtained approvals or clearances
      or the failure to comply with existing or future regulatory requirements could
      have a material adverse effect on our business, financial condition and results
      of operations.




Any
      enforcement action by regulatory authorities with respect to past or future
      regulatory non-compliance could have a material adverse effect on our business,
      financial condition and results of operations. Non-compliance with applicable
      requirements can result in fines, injunctions, civil penalties, recall or
      seizure of products, total or partial suspension of production, refusal to
      authorize the marketing of new products or to allow us to enter into supply
      contracts and criminal prosecution.




Even
      if
      our proposed products are approved for market, we will be subject to continuing
      regulation. We will continuously be subject to routine inspection by the FDA
      and
      will have to comply with the host of regulatory requirements that usually apply
      to medical devices marketed in the U.S. including labelling regulations, Quality
      System requirements, MDR regulations (which requires a manufacturer to report
      to
      the FDA certain types of adverse events involving its products), and the FDA’s
      prohibitions against promoting products for unapproved or “off-label” uses. Our
      failure to comply with applicable regulatory requirements could result in
      enforcement action by the FDA, which could have a material adverse effect on
      our
      business, financial condition and results of operations.




In
      addition, the criteria of foreign laws, regulations and requirements are often
      vague and subject to change and interpretation. Failure to comply with
      applicable international regulatory requirements can result in fines,
      injunctions, civil penalties, recalls or seizures of products, total or partial
      suspensions of production, refusals by foreign governments to permit product
      sales and criminal prosecution. Furthermore, changes in existing regulations
      or
      adoption of new regulations or policies could prevent us from obtaining, or
      affect the timing of, future regulatory approvals or clearances. There can
      be no
      assurance that we will be able to obtain necessary regulatory clearances or
      approvals on a timely basis, or at all, or that we will not be required to
      incur
      significant costs in obtaining or maintaining such foreign regulatory approvals.
      Delays in receipt of, or failure to receive, such approvals or clearances,
      the
      loss of previously obtained approvals or clearances or the failure to comply
      with existing or future regulatory requirements could have a material adverse
      effect on our business, financial condition and results of operations. Any
      enforcement action by regulatory authorities with respect to past or future
      regulatory non-compliance could have a material adverse effect on our business,
      financial condition and results of operations.




**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.**




The
      medical devices industry is subject to rapid and substantial technological
      development and product innovations. To be successful, we must respond to new
      developments in technology, new applications of existing technology and new
      treatment methods. Our response may be stymied if we require, but cannot secure,
      rights to essential third-party intellectual property. We may compete against
      companies offering alternative treatment systems to ours, some of which have
      greater financial, marketing and technical resources to utilize in pursuing
      technological development and new treatment methods. Our financial condition
      and
      operating results could be adversely affected if our medical device products
      fail to compete favourably with these technological developments, or if we
      fail
      to be responsive on a timely and effective basis to competitors’ new devices,
      applications, treatments or price strategies.




13




**Product
      liability claims could adversely affect our results of operations.**




The
      risk
      of product liability claims, product recalls and associated adverse publicity
      is
      inherent in the testing, manufacturing, marketing and sale of medical products.
      In an effort to minimize our liability we purchase product liability insurance
      coverage. In the future, we may not be able to secure product liability
      insurance coverage on acceptable terms or at reasonable costs when needed.
      Any
      liability for mandatory damages could exceed the amount of our coverage. A
      successful product liability claim against us could require us to pay a
      substantial monetary award. Moreover, a product recall could generate
      substantial negative publicity about our products and business and inhibit
      or
      prevent commercialization of other future product candidates.




**Risks
      Related to Our Common Stock**




**O** **ur
      stock price is volatile, and the value of your investment may decline.**




Our
      common stock is traded on the American Stock Exchange, and trading volume is
      often limited and sporadic. As a result, the trading price of our common stock
      on AMEX is not necessarily a reliable indicator of our fair market value. The
      price at which our common stock trades is highly volatile, and may fluctuate
      as
      a result of a number of factors, including the number of shares available for
      sale in the market, quarterly variations in our operating results, actual or
      anticipated announcements of new data, studies, products or services by us
      or
      competitors, regulatory investigations or determinations, acquisitions or
      strategic alliances by us or our competitors, recruitment or departures of
      key
      personnel, the gain or loss of significant customers, changes in the estimates
      of our operating performance, market conditions in our industry and the economy
      as a whole.




**Over
      65% 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.**




As
      of
      December 31, 2007, Consolidated National, LLC (CNL), a limited liability company
      whose managing member is our Executive Chairman, directly owned 9,400,000
      shares, which represent approximately 65.4% of our 14,372,472 shares of
      outstanding common stock. As a result, CNL presently and is expected to continue
      to have the ability to determine the outcome of issues submitted to our
      stockholders. The interests of this stockholder may not always coincide with
      our
      interests or the interests of other stockholders, and it may act in a manner
      that advances its best interests and not necessarily those of other
      stockholders. One consequence to this substantial stockholder’s interest is that
      it may be difficult for investors to remove management of the company. It could
      also deter unsolicited takeovers, including transactions in which stockholders
      might otherwise receive a premium for their shares over then current market
      prices.




**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.**




In
      the
      event that we are required to issue any additional shares or enter into private
      placements to raise financing through the sale of equity securities, investors’
interests in our company will be diluted and investors may suffer dilution
      in
      their net book value per share depending on the price at which such securities
      are sold. If we issue any such additional shares, such issuances also will
      cause
      a reduction in the proportionate ownership and voting power of all other
      stockholders. Further, any such issuance may result in a change in our control.




**We
      have never paid cash dividends and do not intend to do so.**




We
      have
      never declared or paid cash dividends on our common stock. We currently plan
      to
      retain any earnings to finance the growth of our business rather than to pay
      cash dividends. Payments of any cash dividends in the future will depend on
      our
      financial condition, results of operations and capital requirements, as well
      as
      other factors deemed relevant by our board of directors.




**We
      will need additional financing.**




We
      will
      need additional financing to maintain and expand our business, and such
      financing may not be available on favorable terms, if at all. We may finance
      our
      business through the private placement or public offering of equity or debt
      securities. If we raise additional funds by issuing equity securities, such
      financing may result in further dilution to our stockholders. Any equity
      securities issued also may provide for rights, preferences or privileges senior
      to those of holders of our common stock. If we raise additional funds by issuing
      additional debt securities, these debt securities would have rights, preferences
      and privileges senior to those of holders of our common stock, and the terms
      of
      the debt securities issued could impose significant restrictions on our
      operations. If we raise additional funds through collaborations and licensing
      arrangements, we might be required to relinquish significant rights to our
      technology or products, or to grant licenses on terms that are not favorable
      to
      us. Additional financing may not be available on favorable terms, if at all.
      If
      we need funds and cannot raise them on acceptable terms, we may not be able
      to
      execute or business plan and our shareholders may lose substantially all of
      their investment.





14





**We
      became a publicly traded company through a merger with a public shell company,
      and we could be liable for unanticipated liabilities of our predecessor
      entity.**




We
      became
      a publicly traded company through a merger effective October 12, 2007 between
      Xcorporeal, Inc. and CT Holdings Enterprises, Inc., a publicly traded shell
      company that had previously provided management expertise including consulting
      on operations, marketing and strategic planning and a single source of capital
      to early stage technology companies. Although we believe the shell company
      had
      substantially no assets and liabilities as of the merger, we may be subject
      to
      claims related to the historical business of the shell, as well as costs and
      expenses related to the merger.





**Item
      2: Description of Property**





**Description
      of Real Estate**





We
      currently lease 4,352 square feet of corporate office space located at 12121
      Wilshire Blvd., Suite 350, Los Angeles, California 90025, for monthly rent
      of
      $17,408 for the first year under a lease expiring February 28, 2013. We also
      lease 1,068 square feet of office and warehouse space for our product
      development located at Aubrey Group, Inc, 6 Cromwell, Suite 100, Irvine,
      California 92618 for monthly rent of $2,863 under a lease expiring December
      31,
      2008. Additionally, we lease two corporate apartments, approximately 550 and
      800
      square feet respectively, located in Irvine, for combined monthly rent of
      $3,760. All of the space is in good condition and we expect it to remain
      suitable to meet our needs for the foreseeable future.





**Investment
      Policies**





We
      invest
      available cash in short-term commercial paper, certificates of deposit, money
      market funds, and high grade marketable securities. We consider any liquid
      investment with an original maturity of three months or less when purchased
      to
      be cash equivalents. Investments, including certificates of deposit with
      maturity dates greater than three months when purchased and which have readily
      determined fair values are classified as available-for-sale investments and
      reflected in current assets as marketable securities at fair market value.
      Our
      investment policy requires that all investments be investment grade quality
      and
      no more than ten percent of our portfolio may be invested in any one security
      or
      with one institution. At December 31, 2007, all of our cash was held in high
      grade money market funds and marketable securities.




Our
        investments consisted of the following:


**Years
                  Ended December 31,****2007**
              
              **2006**Commercial
                  Paper
              
              $
              10,283,818
              
              $
              -Corporate
                  Obligation
              
              
              2,245,770
              
              
              -Money
                  Market Fund
              
              
              3,872,310
              
              
              -$
              16,401,898
              
              $
              -




**Item
      3: Legal Proceedings**





On
      December 1, 2006, we initiated arbitration against National Quality Care,
      Inc. (NQCI) for its failure to fully perform its obligations under our
      License Agreement. On December 29, 2006, NQCI filed suit against us in Los
      Angeles County Superior Court entitled *National
      Quality Care, Inc. v. Victor Gura, M.D., et al.* ,
      Case
      No. BC364140. On January 5, 2007, we filed a petition to compel
      arbitration, and NQCI subsequently stipulated to resolve all claims in the
      pending arbitration. On March 20, 2007, the lawsuit was dismissed without
      prejudice. The
      arbitration hearing was completed on February 29, 2008, briefing should be
      completed by late April, and the arbitrator is expected to render an award
      next
      quarter. Based on the evidence presented at the hearing, we do not believe
      there
      is any reasonable likelihood that NQCI will prevail on its claims.




15





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





We
      held
      our annual meeting of stockholders on November 26, 2007. Two proposals were
      submitted to stockholders for approval, each of which passed with voting results
      as follows:





1.
      Election of Directors:





For
            
            WithholdTerren
                S. Peizer
            
            
            9,850,654
            
            
            38Daniel
                S. Goldberger
            
            
            9,848,655
            
            
            2,037Victor
                Gura, M.D.
            
            
            9,850,651
            
            
            41Jay
                A. Wolf
            
            
            9,850,667
            
            
            25Kelly
                McCrann
            
            
            9,850,664
            
            
            28Marc
                G. Cummins
            
            
            9,850,666
            
            
            26Dr.
                Hans-Dietrich Polaschegg
            
            
            9,850,647
            
            
            45





2.
      Ratify
      our 2007 Incentive Compensation Plan:


For
              
              Against
              
              Abstain
              
              Broker
                  Non-Vote9,848,106
              
              2,546
              
              40
              
              0





16




**PART
      II**





**Item
      5: Market for Common Equity and Related Stockholder Maters**





**Market
      Information**





Our
      common stock is traded on the American Stock Exchange under the symbol “XCR.”
Our stock was previously quoted on the Over-The-Counter Bulletin Board under
      the
      symbol “XCPL” prior to December 7, 2007, “CTHE” prior to February 2006, and
“CITN” before that time. Immediately prior to our merger on October 12, 2007, a
      one-for-8.27 reverse split of our common stock was executed. Historical stock
      prices prior to October 12, 2007 have been adjusted for the stock
      split.





As
      of
      March 13, 2008, there were approximately 770 record holders of our common stock,
      representing approximately 2,500 beneficial owners. Following is a list by
      fiscal quarters of the split-adjusted closing sales prices of our
      stock:








HIGH
            
            LOWYEAR
                ENDED DECEMBER 31, 20074thQuarter
            
            $
            14.06
            
            $
            4.273rdQuarter
            
            
            17.45
            
            
            3.392ndQuarter
            
            
            6.62
            
            
            4.301STQuarter
            
            
            13.89
            
            
            2.40





YEAR
                ENDED DECEMBER 31, 20064thQuarter
            
            $
            6.95
            
            $
            4.053rdQuarter
            
            
            8.68
            
            
            2.892ndQuarter
            
            
            4.56
            
            
            3.551STQuarter
            
            
            5.21
            
            
            2.89





**Dividends**





We
      have
      not paid any cash dividends to date and do not anticipate or contemplate paying
      dividends in the foreseeable future. It is the present intention of management
      to utilize all available funds for the development of our business.





**Securities
      Authorized For Issuance Under Equity Compensation Plans**





The
      following table provides information about our common stock that may be issued
      upon the exercise of equity instruments under all of our existing equity
      compensation plans as of December 31, 2007:


Plan
                    Category
              
              Number
                  of securities to be issued upon exercise of outstanding option,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))(
                  a
                  )
              
              (
                  b
                  )
              
              (
                  c
                  )Equity
                  compensation plans approved by security holders
              
              
              3,797,500
              
              $
              6.26
              
              
              3,712,500Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              -
              
              
              -Totals
              
              
              3,797,500
              
              $
              6.26
              
              
              3,712,500




In
      connection with our October 12, 2007 merger, options to purchase 3,880,000
      shares of common stock that had been granted under pre-merger Xcorporeal’s 2006
      Incentive Compensation Plan were assumed by us under the merger agreement.
      Any
      options or warrants of ours outstanding prior to the merger were cancelled
      upon
      effectiveness of the merger. In addition, our 2007 Incentive Compensation Plan
      was approved by our board and a majority of our shareholders at the same time
      and in the same manner that the merger agreement was approved, and was ratified
      by our stockholders on November 26, 2007. There are 3,900,000 shares of common
      stock reserved for issuance under our 2007 Incentive Compensation Plan, in
      addition to the options to purchase 3,880,000 shares of common stock assumed
      by
      us in the merger.




17





**Item
      6: Management’s Discussion and Analysis or Plan of
      Operation**





**Results
      of Operations for the years ended December 31, 2007 and
      2006**





We
      have
      not generated any revenues since inception. We incurred a net loss of
      $17,074,051 for the year ended December 31, 2007, compared to net loss of
      $4,380,212 for the year ended December 31, 2006. The increase in net loss was
      primarily due to (i) research, development and other expenses related to
      advancing our proprietary and licensed kidney failure treatment technologies,
      the company incurred research and development costs totaling $7,141,170 in
      2007,
      $2,870,081 was related to research and development on the wearable artificial
      kidney and $4,271,089 related to the portable artificial kidney device (ii)
      stock compensation expense related to options and warrants granted to directors,
      officers, employees and consultants totaled $6,638,794 in 2007 and $1,651,524
      was directly related to R&D and $4,987,270 stock based compensation was
      related to general operations, and (iii) $2,687,573 legal and audit fees were
      incurred during 2007. At December 31, 2007, we had positive working capital
      of
      $14,958,099 compared to positive working capital of $25,397,733 at the beginning
      of the year. At December 31, 2007, our total assets were $17,252,546, compared
      to $27,535,543 at the beginning of the year, which consisted primarily of cash
      from the sale of our common stock sold in December 2006.





**Interest
      Income**





Interest
      income of $1,179,443 and $82,200 was reported for the years ended December
      31,
      2007 and 2006, respectively.





**Liquidity
      and Capital Resources**





We
      expect
      to incur operating losses and negative cash flows for the foreseeable future.
      During the fourth quarter 2006, we raised approximately $27.3 million (net
      of
      placement fees of $2.1 million) through a private placement. Our ability to
      execute on our current business plan is dependent upon our ability to develop
      and market our products, and, ultimately, to generate revenue.





As
      of
      December 31, 2007, we had cash, cash equivalents and marketable securities
      of
      approximately $16.6 million. We are currently expending cash at a rate of
      approximately $1.2 million per month. At present rates, we will not have to
      raise additional funds during the next twelve months.





Upon
      receipt of the approximate $27.3 million raised through private placement,
      we
      strategically began our operating activities and research and development
      efforts which resulted in a net loss of $17.1 million in 2007. In addition,
      we
      invested $25.0 million in high grade money market funds and marketable
      securities of which we sold $8.6 million of the investments, leaving a balance
      of $16.4 million as of December 31, 2007. From the sale of our common stock
      in
      2006, we received additional proceeds of $0.2 million in 2007 and was used for
      operating as well as investing activities.





As
      mentioned above, the final product design of the PAK will be completed by mid
      2008 and units will undergo final verification and validation prior to a 510(k)
      submission to the FDA for clinical use under direct medical supervision. We
      intend to submit this 510(k) filing during the fourth quarter of 2008. It
      generally takes 4 to 12 months from the date of a 510(k) submission to obtain
      clearance from the FDA, although it may take longer. We expect that our monthly
      expenditures will decrease as we reduce our spending on research and development
      costs as well as labor and material costs relating to the Aubrey agreement,
      and
      shift resources towards developing a marketing plan for the PAK.





**Research
      and Development**





We
      employ
      an interdisciplinary team of scientists and engineers who are developing the
      Portable Artificial Kidney (PAK) and the Wearable Artificial Kidney (WAK).
      In
      addition, we have retained Aubrey to assist with the engineering of the PAK.
      The
      PAK will be engineered to perform both hemodialysis, hemofiltration and
      ultrafiltration under direct medical supervision. A variation of this device
      will be developed for chronic home hemodialysis. An initial prototype of the
      PAK, capable of performing the basic functions of a hemodialysis machine, and
      demonstrating our unique new fluidics circuit, was completed at the end of
      2007.
      Further refinements to this prototype including the addition of safety sensors
      and electronic controls is now in progress. The final product design of the
      PAK
      will be completed by mid 2008 and units will undergo final verification and
      validation prior to a 510(k) submission for clinical use under direct medical
      supervision. A clinical study is not required for this submission.




18





We
      have
      completed a clinical study with the WAK since the acquisition of the technology
      from NQCI in September of 2006. In a clinical feasibility study conducted in
      London in March 2007, a research prototype of the WAK was successfully tested
      in
      eight patients with end-stage renal disease. Patients were successfully treated
      for up to 8 hours with adequate clearances of urea and creatinine. The device
      was well tolerated and patients were able to conduct activities of normal daily
      living including walking and sleeping. There were no serious adverse events
      although clotting of the dialyzer occurred in two patients. To our knowledge,
      this is the first successful demonstration of a Wearable Artificial Kidney
      in
      man. This year we are making substantial improvements to the WAK design intended
      to move it from a feasibility prototype to a product prototype. These include
      improvement of the heparin pumping system intended to address the dialyzer
      clotting problem, the addition of safety sensors required for commercial
      dialysis equipment, the addition of electrical controls to provide a convenient
      user interface, improvements to the blood flow circuit and further
      miniaturization of the device to improve fit to the human body. Additional
      clinical studies will be conducted upon completion of the prototype





We
      incurred $7.1 million and $1.3 million in research and development costs in
      2007
      and 2006, respectively.





**Contractual
      Obligations and Commercial Commitments**


**Contractual
                  Obligations:**
              
              **Total**
              
              **Less
                  than 1 year**
              
              **1
                  - 3 years**
              
              **3
                  - 5 years**
              
              **More
                  than 5 years****Capital
                  Lease Obligations**
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**Operating
                  Lease Obligations (1)**
              
              
              234,575
              
              
              58,774
              
              
              163,814
              
              
              11,987
              
              
              -**Research
                  & Development Contractual Commitments**
              
              
              187,200
              
              
              187,200
              
              
              -
              
              
              -
              
              
              -**Other
                  Liabilities**
              
              
              225,806
              
              
              225,806
              
              
              -
              
              
              -
              
              
              -$
              647,581
              
              $
              471,780
              
              $
              163,814
              
              $
              11,987
              
              $
              -




(1)
      Operating lease commitments for our corporate office facility, product
      development facility, Dr. Gura’s office which is a related party transaction,
      and two corporate apartments.





The
      table
      excludes the following subsequent contractual obligations:




·
            New
                equipment leases entered into in 2008 with total lease payments of
                $62,208
                over a 3 year period





·
            New
                lease entered into in 2008 for the Company’s new corporate office space.
                The total lease payments are $1,096,878 over a 5 year
                period





·
            New
                research and development agreements entered into in 2008 with total
                payments of $214,935 over a period of no greater than 1
                year





The
      table
      also excludes the agreement with Aubrey in relation to the PAK development
      which
      can be terminated at any time with 30 business days notice. Due to the
      successful rate of the development, we anticipate coming under the agreement’s
      approximate budget of $5.1 million. With the expected completion by end of
      2008,
      we estimate we will incur cost of $2.4 million for 2008 under this
      agreement.





**Off-Balance
      Sheet Arrangements**





As
      of
      December 31, 2007, we had no off-balance sheet arrangements that have or are
      reasonably likely to have a current or future effect on our financial condition,
      results of operations or cash flows.





**Legal
      Proceedings**





We
      are
      involved in arbitration against NQCI as described above. From time to time,
      we
      may be involved in litigation relating to claims arising out of our operations
      in the normal course of business. As of the date of this report, we are not
      currently involved in any legal proceeding that we believe would have a material
      adverse effect on our business, financial condition or operating
      results.




19





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      is
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. Generally
      accepted accounting principles require management to make estimates, judgments
      and assumptions that affect the reported amounts of assets, liabilities,
      revenues and expenses, and the disclosure of contingent assets and liabilities.
      We base our estimates on experience and on various other assumptions that we
      believe to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      that may not be readily apparent from other sources. Our actual results may
      differ from those estimates.





We
      consider our critical accounting policies to be those that involve significant
      uncertainties, require judgments or estimates that are more difficult for
      management to determine or that may produce materially different results when
      using different assumptions. We consider the following accounting policies
      to be
      critical:





*Marketable
      Securities*





We
      classify investments with maturity dates greater than three months when
      purchased as marketable securities. Investments, including certificates of
      deposit with maturity dates greater than three months when purchased and which
      have readily determined fair values, are classified as available-for-sale
      investments and reflected in current assets as marketable securities at fair
      market value. Our investment policy requires that all investments be investment
      grade quality and no more than ten percent of our portfolio may be invested
      in
      any one security or with one institution.





*Stock-Based
      Compensation*





Statements
      of Financial Accounting Standards (SFAS) No. 123 (revised 2004), *Share-Based
      Payment* ,
      (SFAS
      123(R)) and Securities and Exchange Commission issued Staff Accounting Bulletin
      (SAB) No. 107 (SAB 107) require the measurement and recognition of compensation
      expense for all share-based payment awards made to employees and directors
      based
      on estimated fair values. We have applied the provisions of SAB 107 in its
      adoption of SFAS 123(R).





In
      determining stock based compensation, we consider various factors in our
      calculation of fair value using a Black-Scholes pricing model. These factors
      include volatility, expected term of the options and forfeiture rates. A change
      in these factors could result in differences in the stock based compensation
      expense.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB released FASB Interpretation No. 48, *Accounting
      for*  *Uncertainty
      in Income Taxes, an interpretation of FASB Statement No. 109* (FIN
      48).
      FIN 48 clarifies the accounting and reporting for uncertainties in income tax
      law. This Interpretation prescribes a comprehensive model for the financial
      statement recognition, measurement, presentation and disclosure of uncertain
      tax
      positions taken or expected to be taken in income tax returns. This statement
      is
      effective for fiscal years beginning after December 15, 2006. We have adopted
      FIN 48 in January 2007. There was no impact on our results of operations and
      financial position upon adoption.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (SFAS
      157). SFAS 157 establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007. In February 2008, the FASB staff issued
      a staff position that delayed the effective date of SFAS No. 157 for all
      non-financial assets and liabilities except for those recognized or disclosed
      annually. The FASB also issued FAS-157-1, “application of FASB Statement No. 157
      to FASB Statement No. 13 and other Accounting Pronouncements that address Fair
      Value Measurements for Purposes of Lease Classifications or Measurements under
      SFAS Statement No. 13”. We are required to adopt the provision of SFAS 157, as
      applicable, beginning in fiscal year 2008. We are currently in the process
      of
      evaluating the expected effect of SFAS 157 on our results of operations and
      financial position.





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
      Statement No. 159, *“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”* ( *“SFAS
      No.*  *159”* ).
      SFAS
      No. 159 permits an entity to choose to measure many financial instruments and
      certain items at fair value. The objective of this standard is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reporting earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. SFAS No. 159 permits all entities to choose to measure eligible
      items at fair value at specified election dates. Entities will report unrealized
      gains and losses on items for which the fair value option has been elected
      in
      earnings at each subsequent reporting date. The fair value option: (a) may
      be
      applied instrument by instrument, with a few exceptions, such as investments
      accounted for by the equity method; (b) is irrevocable (unless a new election
      date occurs); and (c) is applied only to entire instruments and not to portions
      of instruments. SFAS No. 159 is effective as of the beginning of an entity’s
      first fiscal year that begins after November 15, 2007, which for us would be
      our
      fiscal year beginning January 1, 2008. Early adoption is permitted as of the
      beginning of the previous fiscal year provided that the entity makes that choice
      in the first 120 days of that fiscal year and also elects to apply to provision
      of FASB Statement No. 157, *“Fair
      Value*  *Measurements.”* We
      are
      currently evaluating the impact that the adoption of SFAS No. 159 will have
      on
      our consolidated financial statements.




20





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
      retains the requirement that the purchase method of accounting for acquisitions
      be used for all business combinations. SFAS 141(R) expands on the disclosures
      previously required by SFAS 141, better defines the acquirer and the acquisition
      date in a business combination, and establishes principles for recognizing
      and
      measuring the assets acquired (including goodwill), the liabilities assumed
      and
      any non-controlling interests in the acquired business. SFAS 141(R) also
      requires an acquirer to record an adjustment to income tax expense for changes
      in valuation allowances or uncertain tax positions related to acquired
      businesses. SFAS 141(R) is effective for all business combinations with an
      acquisition date in the first annual period following December 15, 2008; early
      adoption is not permitted. We will adopt this statement as of January 1, 2009.
      The impact of SFAS 141(R) will have on our consolidated financial statements
      will depend on the nature and size of acquisitions we complete after we adopt
      SFAS 141(R).





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
      160 requires that non-controlling (or minority) interests in subsidiaries be
      reported in the equity section of the company’s balance sheet, rather than in a
      mezzanine section of the balance sheet between liabilities and equity. SFAS
      160
      also changes the manner in which the net income of the subsidiary is reported
      and disclosed in the controlling company’s income statement. SFAS 160 also
      establishes guidelines for accounting for changes in ownership percentages
      and
      for deconsolidation. SFAS 160 is effective for financial statements for fiscal
      years beginning on or after December 1, 2008 and interim periods within those
      years. The adoption of SFAS 160 is not expected to have a material impact on
      our
      financial position, results of operations or cash flows.




21




**Item
      7: Financial Statements**





**CONTENTS**





**PAGE**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
            
            23**FINANCIAL
                STATEMENTS**BALANCE
                SHEETS AS OF DECEMBER 31, 2007 AND 2006
            
            
            24STATEMENTS
                OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006, AND
                THE
                PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2007
            
            
            25STATEMENTS
                OF STOCKHOLDERS’ EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31, 2007
                AND 2006, AND THE PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER
                31,
                2007
            
            
            26STATEMENTS
                OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006, AND
                THE
                PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2007
            
            
            27NOTES
                TO FINANCIAL STATEMENTS
            
            
            28





22


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**







Board
      of
      Directors and Stockholders


Xcorporeal,
      Inc.


(a
      development stage company)


(formerly
      CT Holdings Enterprises, Inc.)


Los
      Angeles, California




We
      have
      audited the accompanying balance sheets of Xcorporeal, Inc., a development
      stage
      company, as of December 31, 2007 and 2006 and the related statements of
      operations, stockholders’ equity, and cash flows for each of the two years in
      the period then ended and the period from inception (May 4, 2001) to December
      31, 2007. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free
      of
      material misstatement.  The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audits included consideration
      of
      internal control over financial reporting as a basis for designing audit procedures
      that are appropriate in the circumstances, but not for the purpose of expressing
      an opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Xcorporeal, Inc. at December 31,
      2007 and 2006, and the results of its operations and its cash flows for each
      of
      the two years in the period then ended and the period from inception (May 4,
      2001) through December 31, 2007 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.




BDO
      Seidman, LLP




Los
      Angeles. California




March
      24,
      2008














23


**XCORPOREAL,
        INC.**
 **(a
        Development Stage Company)**
 **BALANCE
        SHEETS**
  **Years
                  ended****December
                  31,****2007**
              
              **2006****ASSETS**CurrentCash
                  and cash equivalents
              
              $
              106,495
              
              $
              27,440,987Marketable
                  securities, at fair value
              
              
              16,401,898
              
              
              -Restricted
                  cash
              
              
              68,016
              
              
              -Prepaid
                  Expenses & Other Current Assets
              
              
              408,303
              
              
              90,228Total
                  current assets
              
              
              16,984,712
              
              
              27,531,215Property
                  and equipment, net
              
              
              266,912
              
              
              3,328Other
                  assets
              
              
              922
              
              
              1,000Total
                  Assets
              
              $
              17,252,546
              
              $
              27,535,543**LIABILITIES**CurrentAccounts
                  payable
              
              $
              1,125,239
              
              $
              143,606Accrued
                  compensation
              
              
              196,541
              
              
              105,969Accrued
                  placement agent fees
              
              
              -
              
              
              1,348,470Accrued
                  professional fees
              
              
              425,228
              
              
              312,208Accrued
                  royalties
              
              
              83,333
              
              
              83,333Accrued
                  other liabilities
              
              
              68,946
              
              
              15,221Payroll
                  liabilities
              
              
              11,926
              
              
              9,275Other
                  current liabilities
              
              
              115,400
              
              
              115,400Total
                  Current Liabilities
              
              
              2,026,613
              
              
              2,133,482**Commitments
                  and contingencies****STOCKHOLDERS'
                  EQUITY**Preferred
                  Stock, $0.0001 par value, 10,000,000 shares authorized, none
                  outstanding
              
              
              -
              
              
              -Common
                  Stock, $0.0001 par value, 40,000,000 shares authorized, 14,372,472
                  and
                  14,200,050 outstanding on December 31, 2007 and December 31, 2006,
                  respectively
              
              
              1,437
              
              
              1,420Additional
                  paid-in capital
              
              
              36,822,316
              
              
              29,924,410Deficit
                  accumulated during the development stage
              
              
              (21,597,820
              )
              
              (4,523,769
              )Total
                  Stockholders' Equity
              
              
              15,225,933
              
              
              25,402,061Total
                  Liabilities & Stockholders' Equity
              
              $
              17,252,546
              
              $
              27,535,543
 See
        accompanying notes to these financial statements.


24


**XCORPOREAL,
        INC.**
 **(a
        Development Stage Company)**
 **STATEMENTS
        OF OPERATIONS**
  **May
                  4, 2001 (Date****Years
                  ended**
              
              **of
                  Inception) to****December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**Operating
                  Expenses:Selling,
                  general and administrative
              
              $
              11,084,040
              
              $
              3,174,995
              
              $
              14,402,692Research
                  and development
              
              
              7,141,170
              
              
              1,287,322
              
              
              8,428,492Depreciation
                  and amortization
              
              
              32,171
              
              
              95
              
              
              32,266Loss
                  before other income and income taxes
              
              
              (18,257,381
              )
              
              (4,462,412
              )
              
              (22,863,450
              )Interest
                  and other income
              
              
              1,184,930
              
              
              82,200
              
              
              1,267,230Loss
                  before income taxes
              
              
              (17,072,451
              )
              
              (4,380,212
              )
              
              (21,596,220
              )Income
                  taxes
              
              
              1,600
              
              
              -
              
              
              1,600Net
                  Loss
              
              $
              (17,074,051
              )
              $
              (4,380,212
              )
              $
              (21,597,820
              )Basic
                  and diluted loss per share
              
              $
              (1.20
              )
              $
              (0.67
              )Weighted
                  average number of shares outstanding
              
              
              14,206,489
              
              
              6,542,312
 See
        accompanying notes to these financial statements.
  25


**XCORPOREAL,
        INC.**
 **(a
        Development Stage Company)**
 **STATEMENTS
        OF STOCKHOLDERS' EQUITY (DEFICIENCY)** **For
          the Period May 4, 2001 (Inception) to December 31,
          2007**
  **Deficit****Accumulated****Additional**
              
              **During****Common
                  Stock**
              
              **Paid-in**
              
              **Development****Shares**
              
              **Amount**
              
              **Capital**
              
              **Stage**
              
              **Total**Common
                  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 a licence rights at $0.0001 per share
              
              
              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 related party 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
              )
              
              25,402,061Capital
                  stock cancelled
              
              
              (200,000
              )
              
              (20
              )
              
              20
              
              
              
              
              
              -Common
                  stock issued pursuant to consulting agreement at $4.90 per
                  share
              
              
              20,000
              
              
              2
              
              
              97,998
              
              
              
              
              
              98,000Recapitalization
                  pursuant to merger
              
              
              352,422
              
              
              35
              
              
              (37,406
              )
              
              
              
              
              (37,371
              )Warrants
                  granted for consulting services
              
              
              
              
              
              
              
              
              2,917,309
              
              
              
              
              
              2,917,309Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              3,721,485
              
              
              
              
              
              3,721,485Additional
                  Proceeds from the Sale of Common Stock in 2006
              
              
              
              
              
              
              
              
              198,500
              
              
              
              
              
              198,500Net
                  loss for the period
              
              
              
              
              
              
              
              
              
              
              
              (17,074,051
              )
              
              (17,074,051
              )Balance
                  as of December 31, 2007
              
              
              14,372,472
              
              $
              1,437
              
              $
              36,822,316
              
              $
              (21,597,820
              )
              $
              15,225,933See
                  accompanying notes to these financial statements.


26









**XCORPOREAL,
                  INC.****(a
                  Development Stage Company)****STATEMENTS
                  OF CASH FLOWS**
  **May
                  4, 2001 (Date****Years
                  ended**
              
              **of
                  Inception) to****December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007****Cash
                  flows used in operating activities**Net
                  Loss for the Period
              
              $
              (17,074,051
              )
              $
              (4,380,212
              )
              $
              (21,597,820
              )**Adjustments
                  to reconcile net loss to net cash (used in) operating
                  activities:**Non-employee
                  Stock Based Compensation
              
              
              2,917,309
              
              
              2,162,611
              
              
              5,079,920Stock
                  Based Compensation
              
              
              3,721,485
              
              
              264,251
              
              
              3,985,736Common
                  Stock Issuance pursuant to consulting agreement
              
              
              98,000
              
              
              -
              
              
              98,000Depreciation
                  and amortization
              
              
              32,093
              
              
              95
              
              
              32,188Net
                  Change in assets and liabilities:Prepaid
                  Expenses & Other Current Assets
              
              
              (318,075
              )
              
              (90,228
              )
              
              (408,303
              )Other
                  Assets
              
              
              78
              
              
              (1,000
              )
              
              (922
              )Accounts
                  Payable and Accrued Liabilities
              
              
              (144,241
              )
              
              1,999,750
              
              
              1,873,840Other
                  Current Liabilities
              
              
              -
              
              
              115,401
              
              
              115,401Net
                  Cash (Used in)/Provided By Operating Activities
              
              
              (10,767,402
              )
              
              70,668
              
              
              (10,821,960
              )**Cash
                  Flows from Investing Activities**Capital
                  Expenditures
              
              
              (295,676
              )
              
              (3,423
              )
              
              (299,100
              )Restricted
                  Cash
              
              
              (68,016
              )
              
              -
              
              
              (68,016
              )Purchase
                  of marketable securities
              
              
              (25,000,000
              )
              
              -
              
              
              (25,000,000
              )Sale
                  of marketable securities
              
              
              8,598,102
              
              
              -
              
              
              8,598,102Net
                  Cash (Used in) Investing Activities
              
              
              (16,765,590
              )
              
              (3,423
              )
              
              (16,769,014
              )**Cash
                  Flows from Financing Activities**Capital
                  Stock issued
              
              
              -
              
              
              27,343,349
              
              
              27,434,349Advances
                  from related party
              
              
              -
              
              
              30,393
              
              
              64,620Additional
                  Proceeds from the Sale of Common Stock in 2006
              
              
              198,500
              
              
              -
              
              
              198,500Net
                  Cash Provided by Financing Activities
              
              
              198,500
              
              
              27,373,742
              
              
              27,697,469Increase/(decrease)
                  in cash during the period
              
              
              (27,334,492
              )
              
              27,440,987
              
              
              106,495Cash,
                  beginning of the period
              
              
              27,440,987
              
              
              -
              
              
              -Cash,
                  end of the period
              
              $
              106,495
              
              $
              27,440,987
              
              $
              106,495Supplemental
                  disclosure of cash flow information; cash paid for:Interest
              
              $
              -
              
              $
              -
              
              $
              -Income
                  taxes
              
              $
              -
              
              $
              -
              
              $
              -
  See
                  accompanying notes to these financial statements.





27


**XCORPOREAL,
      INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**





**1.
      NATURE AND CONTINUANCE OF OPERATIONS**





On
      October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc. (referred
      to hereinafter as pre-merger Xcorporeal),our newly-formed wholly-owned merger
      subsidiary merged with and into pre-merger Xcorporeal, which became our
      wholly-owned subsidiary and changed its name to “Xcorporeal Operations, Inc.” We
      changed our name from CT Holdings Enterprises, Inc. to “Xcorporeal, Inc.” and
      amended our certificate of incorporation and bylaws to read substantially as
      pre-merger Xcorporeal. As a result, our authorized common stock changed from
      60,000,000 shares to 40,000,000 common shares, and our authorized preferred
      stock changed from 1,000,000 shares to 10,000,000 shares, resulting in total
      authorized capital stock of 50,000,000 shares.





Immediately
      prior to the merger, we caused a one-for-8.27 reverse split of our common stock.
      Each share of pre-merger Xcorporeal common stock was then converted into one
      share of our common stock. In addition, we assumed all outstanding pre-merger
      Xcorporeal options and warrants to purchase pre-merger Xcorporeal common
      stock.





In
      this
      merger, CTHE is considered to be the legal acquirer and Xcorporeal to be the
      accounting acquirer. As the former shareholders of pre-merger Xcorporeal own
      over 97% of the outstanding voting common stock of CTHE after the merger and
      CTHE is a public shell company, pre-merger Xcorporeal is considered the
      accounting acquirer and the transaction is considered to be a recapitalization
      of pre-merger Xcorporeal.





Historical
      financial statements prior to the merger were restated to be those of pre-merger
      Xcorporeal. The merger is accounted for as if it were an issuance of the common
      stock of pre-merger Xcorporeal to acquire our net assets, accompanied by a
      recapitalization. Historical stockholders’ equity of pre-merger Xcorporeal is
      retroactively restated for the equivalent number of shares received in the
      merger, after giving effect to the difference in par value with an offset to
      paid-in capital. The assets and liabilities of pre-merger Xcorporeal are carried
      forward at their predecessor carrying amounts. Retained deficiency of pre-merger
      Xcorporeal is carried forward after the merger. Operations prior to the merger
      are those of pre-merger Xcorporeal. Earnings per share for periods prior to
      the
      merger are restated to reflect the number of equivalent shares received by
      pre-merger Xcorporeal’s stockholders. The costs of the transaction will be
      expensed to the extent they exceed cash received from CTHE.





As
      a
      result of the merger, we transitioned to a development stage company focused
      on
      researching, developing and commercializing technology and products related
      to
      the treatment of kidney failure.





**2.
      DEVELOPMENT STAGE COMPANY**





We
      are a
      development stage company, devoting substantially all of our efforts to the
      research, development and commercialization of kidney failure treatment
      technologies.





As
      mentioned above, the final product design of the PAK is scheduled to be
      completed by mid 2008 and units will undergo final verification and validation
      prior to a 510(k) submission to the FDA for clinical use under direct medical
      supervision. We intend to submit this 510(k) filing during the fourth quarter
      of
      2008. It generally takes 4 to 12 months from the date of a 510(k) submission
      to
      obtain clearance from the FDA, although it may take longer. We expect that
      our
      monthly expenditures will decrease as we reduce our spending on research and
      development costs as well as labor and material costs relating to the Aubrey
      agreement, and shift resources towards developing a marketing plan for the
      PAK.





*Risks
      and Uncertainties—* We
      operate in an industry that is subject to intense competition, government
      regulation and rapid technological change. Our operations are subject to
      significant risk and uncertainties including financial, operational,
      technological, regulatory and other risks associated with a development stage
      company, including the potential risk of business failure.





We
      will
      need additional financing to maintain and expand our business, and such
      financing may not be available on favorable terms, if at all. We may finance
      our
      business through the private placement or public offering of equity or debt
      securities. If we raise additional funds by issuing equity securities, such
      financing may result in further dilution to our stockholders. Any equity
      securities issued also may provide for rights, preferences or privileges senior
      to those of holders of our common stock. If we raise additional funds by issuing
      additional debt securities, these debt securities would have rights, preferences
      and privileges senior to those of holders of our common stock, and the terms
      of
      the debt securities issued could impose significant restrictions on our
      operations. If we raise additional funds through collaborations and licensing
      arrangements, we might be required to relinquish significant rights to our
      technology or products, or to grant licenses on terms that are not favorable
      to
      us. Additional financing may not be available on favorable terms, if at all.
      If
      we need funds and cannot raise them on acceptable terms, we may not be able
      to
      execute or business plan and our shareholders may lose substantially all of
      their investment.




28





**3.
      SUMMARY OF ACCOUNTING POLICIES**





*Cash
      and Cash Equivalents —* Cash
      equivalents are comprised of certain highly liquid investments with original
      maturities of less than three months.





*Marketable
      Securities —* We
      classify investments with maturity dates greater than three months when
      purchased as marketable securities. Investments, including certificates of
      deposit with maturity dates greater than three months when purchased and which
      have readily determined fair values, are classified as available-for-sale
      investments and reflected in current assets as marketable securities at fair
      market value. Our investment policy requires that all investments be investment
      grade quality and no more than ten percent of our portfolio may be invested
      in
      any one security or with one institution.





*Property
      and Equipment —* Property
      and equipment are stated at cost less accumulated depreciation and amortization,
      which are calculated using the straight-line method over the shorter of the
      estimated useful lives of the related assets (generally ranging from three
      to
      five years), or the remaining lease term when applicable. Gains and losses
      on
      disposals are included in results of operations at amounts equal to the
      difference between the book value of the disposed assets and the proceeds
      received upon disposal. There were no gains or losses on disposals from
      inception through the end of 2007. Expenditures for replacements and leasehold
      improvements are capitalized, while expenditures for maintenance and repairs
      are
      expensed as incurred.





*Research
      and Development —* Research
      and development is expensed as incurred. Upfront and milestone payments made
      to
      third parties in connection with research and development collaborations prior
      to regulatory approval are expensed as incurred. Payments made to third parties
      subsequent to regulatory approval are capitalized and amortized over the shorter
      of the remaining license or product patent life. At December 31, 2007, we had
      no
      such capitalized research and development costs.





*Income
      Taxes —* Under
      SFAS 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
      recognized for the future tax consequences attributable to differences between
      the consolidated financial statements and their respective tax basis. Deferred
      income taxes reflect the net tax effects of (a) temporary differences between
      the carrying amounts of assets and liabilities for financial reporting purposes
      and the amounts reported for income tax purposes, and (b) tax credit
      carry-forwards. We record a valuation allowance for deferred tax assets when,
      based on management’s best estimate of taxable income in the foreseeable future,
      it is more likely than not that some portion of the deferred income tax assets
      may not be realized.





*Earnings
      per Share —* Under
      SFAS 128, “Earnings per Share,” basic earnings per share is computed by dividing
      net income available to common stockholders by the weighted average number
      of
      common shares assumed to be outstanding during the period of computation.
      Diluted earnings per share reflect the potential dilution that could occur
      if
      securities or other contracts to issue common stock were exercised or converted
      into common stock. As we had net losses for all periods presented, basic and
      diluted loss per share are the same, as any additional common stock equivalents
      would be anti-dilutive.





*Share-Based
      Compensation —* Effective
      January 1, 2006, we adopted FASB Statement No. 123R, *Share-Based
      Payment* (“FAS
      123R”) (see Note 14). FAS 123R requires all share-based payments to employees to
      be expensed over the requisite service period based on the grant-date fair
      value
      of the awards and requires that the unvested portion of all outstanding awards
      upon adoption be recognized using the same fair value and attribution
      methodologies previously determined under FASB Statement No. 123, *Accounting
      for Stock-Based*  *Compensation* .
      We
      continue to use the Black-Scholes valuation method and applied the requirements
      of FAS 123R using the modified prospective method. Prior to January 1, 2006,
      there was no share-based compensation expense.





*Use
      of Estimates —* The
      consolidated financial statements are prepared in conformity with accounting
      principles generally accepted in the United States (“GAAP”) and, accordingly,
      include certain amounts that are based on management’s best estimates and
      judgments. Estimates are used in determining such items as provisions for sales
      discounts and returns, depreciable and amortizable lives, recoverability of
      inventories produced in preparation for product launches, amounts recorded
      for
      contingencies, environmental liabilities and other reserves, pension and other
      postretirement benefit plan assumptions, share-based compensation, acquisitions
      and taxes on income. Because of the uncertainty inherent in such estimates,
      actual results may differ from these estimates.





29




*Reclassifications
      —* Certain
      reclassifications have been made to prior year amounts to conform with the
      current year presentation.





***Recently
      Issued Accounting Standards***





In
      July
      2006, the FASB released FASB Interpretation No. 48, *Accounting
      for*  *Uncertainty
      in Income Taxes, an interpretation of FASB Statement No. 109* (FIN
      48).
      FIN 48 clarifies the accounting and reporting for uncertainties in income tax
      law. This Interpretation prescribes a comprehensive model for the financial
      statement recognition, measurement, presentation and disclosure of uncertain
      tax
      positions taken or expected to be taken in income tax returns. This statement
      is
      effective for fiscal years beginning after December 15, 2006. We have adopted
      FIN 48 in January 2007. There was no impact on our results of operations and
      financial position upon adoption.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (SFAS
      157). SFAS 157 establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007. In February 2008, the FASB staff issued
      a staff position that delayed the effective date of SFAS No. 157 for all
      non-financial assets and liabilities except for those recognized or disclosed
      annually. The FASB also issued FAS-157-1, “application of FASB Statement No. 157
      to FASB Statement No. 13 and other Accounting Pronouncements that address Fair
      Value Measurements for Purposes of Lease Classifications or Measurements under
      SFAS Statement No. 13”. We are required to adopt the provision of SFAS 157, as
      applicable, beginning in fiscal year 2008. We are currently in the process
      of
      evaluating the expected effect of SFAS 157 on our results of operations and
      financial position.





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
      Statement No. 159, *“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”* ( *“SFAS
      No.*  *159”* ).
      SFAS
      No. 159 permits an entity to choose to measure many financial instruments and
      certain items at fair value. The objective of this standard is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reporting earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. SFAS No. 159 permits all entities to choose to measure eligible
      items at fair value at specified election dates. Entities will report unrealized
      gains and losses on items for which the fair value option has been elected
      in
      earnings at each subsequent reporting date. The fair value option: (a) may
      be
      applied instrument by instrument, with a few exceptions, such as investments
      accounted for by the equity method; (b) is irrevocable (unless a new election
      date occurs); and (c) is applied only to entire instruments and not to portions
      of instruments. SFAS No. 159 is effective as of the beginning of an entity’s
      first fiscal year that begins after November 15, 2007, which for us would be
      our
      fiscal year beginning January 1, 2008. Early adoption is permitted as of the
      beginning of the previous fiscal year provided that the entity makes that choice
      in the first 120 days of that fiscal year and also elects to apply to provision
      of FASB Statement No. 157, *“Fair
      Value*  *Measurements.”* We
      are
      currently evaluating the impact that the adoption of SFAS No. 159 will have
      on
      our consolidated financial statements.





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
      retains the requirement that the purchase method of accounting for acquisitions
      be used for all business combinations. SFAS 141(R) expands on the disclosures
      previously required by SFAS 141, better defines the acquirer and the acquisition
      date in a business combination, and establishes principles for recognizing
      and
      measuring the assets acquired (including goodwill), the liabilities assumed
      and
      any non-controlling interests in the acquired business. SFAS 141(R) also
      requires an acquirer to record an adjustment to income tax expense for changes
      in valuation allowances or uncertain tax positions related to acquired
      businesses. SFAS 141(R) is effective for all business combinations with an
      acquisition date in the first annual period following December 15, 2008; early
      adoption is not permitted. We will adopt this statement as of January 1, 2009.
      The impact of SFAS 141(R) will have on our consolidated financial statements
      will depend on the nature and size of acquisitions we complete after we adopt
      SFAS 141(R).





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
      160 requires that non-controlling (or minority) interests in subsidiaries be
      reported in the equity section of the company’s balance sheet, rather than in a
      mezzanine section of the balance sheet between liabilities and equity. SFAS
      160
      also changes the manner in which the net income of the subsidiary is reported
      and disclosed in the controlling company’s income statement. SFAS 160 also
      establishes guidelines for accounting for changes in ownership percentages
      and
      for deconsolidation. SFAS 160 is effective for financial statements for fiscal
      years beginning on or after December 1, 2008 and interim periods within those
      years. The adoption of SFAS 160 is not expected to have a material impact on
      our
      financial position, results of operations or cash flows.




30





**4.
      PROPERTY AND EQUIPMENT**





Property
      and equipment consist of the following at December 31, 2007:





Property
                and equipment
            
            $
            299,100Accumulated
                depreciation
            
            
            (32,188
            )Property
                and equipment, net
            
            $
            266,912





Depreciation
      expense for the years ended December 31, 2007 and 2006 was $32,093 and $95,
      respectively.





**5.
      LEASES**





As
      of
      December 31, 2007, our corporate office was located in Los Angeles with a
      monthly rent of $10,969. For this facility, we paid total rent of $114,783
      in
      2007 and none in 2006.





Subsequently,
      as of February 22, 2008, we moved the corporate office to Los Angeles. The
      total
      lease payments will be $1,096,878 over a 5 year period.





On
      September 7, 2007, we subleased office and warehouse space from Aubrey Group,
      Inc. for our product development team with a monthly rent of $2,863. In 2007,
      we
      paid total rent of $11,071.





Subsequently,
      on January 14, 2008, we extended the sublease through December 31, 2008 and
      acquired additional office and warehouse space. $82,129 will be the total lease
      payments over the 1 year period.





Our
      Chief
      Medical and Scientific Officer maintains an office, a related party transaction,
      located in Beverly Hills, CA where he performs his duties as our Chief Medical
      and Scientific Officer. Pursuant to the reimbursement agreement effective
      January 29, 2008, we will reimburse 50% of the rental and 50% of his monthly
      parking. The term of the agreement shall commence on April 23, 2007, date of
      the
      office lease agreement, and continue until the date on which our Chief Medical
      and Scientific Officer ceases to use the remote office. The 50% rent
      reimbursement in 2007 totaled $10,648.





In
      addition to our operating facilities, we leased, commencing in 2007, two
      corporate apartments, located in Irvine, CA for combined monthly rent of $3,760.
      The cumulative rent expenditure for the corporate apartments as of December
      31,
      2007 was $13,619.





**6.
      LICENSE EXPENSES**





As
      part
      of our License Agreement with National Quality Care, Inc. (NQCI) dated September
      1, 2006, we agreed to pay reasonable and necessary expenses incurred in the
      ordinary course of business consistent with past practices, during the period
      September 1, 2006 until the date of closing or termination of the Merger
      Agreement, which occurred on December 31, 2006.





As
      of
      December 31, 2007, we paid $1,182,359 on four invoices totaling $1,494,567
      and
      the disputed balance is included under the caption ‘ *Accrued
      professional fees* ’
in
      the
      accompanying balance sheet as of December 31, 2006.





**7.
      NON-CASH TRANSACTIONS**





Investing
      and financing activities during the year ended December 31, 2007 that do not
      have a direct impact on current cash flows has been excluded from the statements
      of cash flows as follows:





a)
      Pre-merger Xcorporeal cancelled 200,000 shares of common stock pursuant to
      a
      settlement agreement with one of our stockholders





b)
      Immediately prior to the effectiveness of the merger, we caused a reverse split
      of our common stock, whereby each 8.27 issued and outstanding shares of our
      common stock were converted into one share of common stock.




31





Investing
      and financing activities during the year ended December 31, 2006 that do not
      have a direct impact on current cash flows have been excluded from the
      statements of cash flows as follows:





a)
      Pre-merger Xcorporeal cancelled 3,420,000 shares of common stock.





b)
      Pre-merger Xcorporeal issued 9,600,000 shares of common stock to acquire the
      right, title and interest to the name “Xcorporeal,” related trademarks and
      domain names, and the right to enter into the License Agreement to obtain the
      rights to technology relating to congestive heart and kidney failure treatment
      and other devices. The value of the stock was recorded at $1,000, the carryover
      basis of pre-merger Xcorporeal’s 96% stockholder immediately following the
      transaction.





c)
      A
      former director of pre-merger Xcorporeal forgave $64,620 of unpaid advances
      and
      management fees.





d)
      The
      Company assumed $37,372 of unpaid liabilities pursuant to the
      merger.





e)
      The
      Company issued common stock for consulting service totaling $98,000 in
      2007.





**8.
      LOSS PER COMMON SHARE**





The
      following table sets forth the computation of basic and diluted loss per common
      share:


**Years
                  ended****December
                  31,****2007**
              
              **2006**Numerator:Net
                  Loss
              
              $
              (17,074,051
              )
              $
              (4,380,212
              )Denominator:Weighted
                  average outstanding shares of common stock
              
              
              14,206,489
              
              
              6,542,312Loss
                  per common share:Basic
              
              
              (1.20
              )
              
              (0.67
              )Diluted
              
              $
              (1.20
              )
              $
              (0.67
              )




Diluted
      loss per common share for the years ended December 31, 2007 and 2006 does not
      include the effect of stock options and warrants (see Note 15. Stock Options
      and
      Warrants to Non-Employees) since their effect would be anti-dilutive. Options
      and warrants outstanding at December 31, 2007 and 2006 were approximately 4.7
      million and 1.9 million, respectively.





**9.
      INCOME TAXES**





The
      provision for income taxes for the years ending December 31, 2007 and 2006
      are
      summarized as follows (in thousands):





**2007**
              
              **2006**Current:Federal
              
              $
              -
              
              $
              -State
              
              
              2
              
              
              -2
              
              
              -Deferred:Federal
              
              
              -
              
              
              -State
              
              
              -
              
              
              --
              
              
              -Total
                  income tax provision
              
              $
              2
              
              $
              -




32




Deferred
      tax assets (liabilities) are comprised of the following (in
      thousands):





**2007**
            
            **2006**Deferred
                tax assets:Stock
                based compensation
            
            $
            3,611
            
            $
            967Accrued
                liability
            
            
            124
            
            
            -Total
                deferred tax assets
            
            
            3,735
            
            
            967Deferred
                tax liabilities:Fixed
                assets
            
            
            6
            
            
            -Prepaid
                expenses
            
            
            155
            
            
            -Total
                deferred tax liabilities
            
            
            161
            
            
            -




3,574
              
              
              967Net
                  operating loss
              
              
              4,834
              
              
              778Research
                  & development credits
              
              
              599
              
              
              1729,007
              
              
              1,917Valuation
                  allowance
              
              
              (9,007
              )
              
              (1,917
              )Net
                  deferred tax assets or (liabilities)
              
              $
              -
              
              $
              -




Valuation
                  Allowance on Deferred Taxes**2007**
              
              **2006**Beginning
                  balance
              
              $
              1,917
              
              $
              -Additions
              
              
              7,090
              
              
              1,917Ending
                  balance
              
              $
              9,007
              
              $
              1,917




Rate
      Reconciliation for the U.S. federal statuary rate and the effective tax
      rate:


**Years
                  ended****12/31/07
                  (%)**
              
              **12/31/06
                  (%)**Federal
                  statutory rate
              
              
              (34.00
              )
              
              (34.00
              )State
                  and local income taxes, net of federal tax benefits
              
              
              (5.83
              )
              
              (5.83
              )Permanent
                  differences
              
              
              0.68
              
              
              0.00Research
                  & development credits
              
              
              (2.72
              )
              
              (3.92
              )Effective
                  tax benefit
              
              
              (41.87
              )
              
              (43.75
              )Valuation
                  allowance
              
              
              41.87
              
              
              43.750.00
              
              
              0.00




Based
      upon the Company's development stage status and history of operating losses,
      realization of its deferred tax assets does not meet the criteria under SFAS
      109, and accordingly a valuation allowance for the entire deferred tax asset
      amount has been recorded at December 31, 2007 and 2006.





The
      valuation allowance had an increase of $7.1 million and $1.9 million in 2007
      and
      2006 respectively.




Pursuant
      to Sections 382 and 383 of the Internal Revenue Code, the utilization of net
      operating losses and other tax attributes may be subject to substantial
      limitations if certain ownership changes occur during a three-year testing
      period (as defined). In 2007 the Company determined that an ownership change
      occurred under Section 382 of the Internal Revenue Code. The utilization of
      the
      Company’s federal net operating loss carryforwards, capital loss carryforwards
      and other tax attributes related to CTHE will be limited to zero. Accordingly,
      the Company has reduced its net operating loss, capital loss and minimum tax
      credit carryforwards to the amount that the Company estimates that it would
      be
      able to utilize in the future, if profitable, considering the above
      limitations.




33





At
      December 31, 2007, the Company had net operating loss carry forwards for federal
      and state income tax purposes of approximately $12.2 million and $12.0 million,
      respectively. The NOLs for federal and state income tax purposes begin to expire
      in 2021.





In
      addition. the Company has research and development tax credits for Federal
      and
      state income tax purposes of approximately $342,402 end $256,802 respectively.
      The federal credits begin to expire in 2026 and state credits do not expire
      for
      California purposes.




During
      the year ended December 31, 2007, the Company adopted FIN 48 which clarifies
      the
      accounting for income taxes by prescribing the minimum threshold a tax position
      is required to meet before being recognized in the financial statements as
      well
      as guidance on de-recognition, measurement, classification and disclosure of
      tax
      positions. The adoption of FIN 48 by the Company did not have an effect on
      the
      Company’s financial condition or results of operations and resulted in no
      cumulative effect of accounting change being recorded as of January 1,
      2007.





**10.
      LICENSE AGREEMENT**





On
      August
      31, 2006, we entered into a Contribution Agreement with a company whose sole
      managing member is our current Chairman. We issued 9,600,000 shares of common
      stock in exchange for (a) the right, title, and interest to the name
“Xcorporeal” and related trademarks and domain names, and (b) the right to enter
      into a License Agreement with National Quality Care, Inc. (NQCI) dated September
      1, 2006 pursuant to which we obtained the exclusive rights to the technology
      relating to our kidney failure treatment and other medical devices. Pre-merger
      Xcorporeal was a shell corporation prior to the transaction. We valued the
      License Agreement at the carry-over basis of $1,000. As consideration for being
      granted the License, we agreed to pay a minimum annual royalty of $250,000,
      or
      7% of net sales. We recorded $333,333 in royalty expenses covering the minimum
      royalties from commencement of the License Agreement through December 31, 2007.
      The License Agreement expires in 2105.





**11.
      TERMINATED MERGER AGREEMENT**





On
      September 1, 2006, Pre-merger Xcorporeal entered into a Merger Agreement with
      our licensor, NQCI, which contemplated that we would either (i) acquire it
      as a
      wholly owned subsidiary pursuant to a triangular merger, or (ii) issue shares
      of
      our common stock in consideration of the assignment of the licensed technology.
      The Merger Agreement expired by its own terms on December 31, 2006. In addition,
      on December 29, 2006, NQCI served written notice that it was terminating the
      Merger Agreement, and on January 2, 2007, we consented to the termination.
      Accordingly, the Merger Agreement is now terminated. We will not be proceeding
      with any merger with NQCI. The termination of the Merger Agreement had no effect
      on the License Agreement, the Contribution Agreement, or the shares we issued
      to
      CNL.





**12.**  **COMMITMENTS
      AND CONTINGENCIES**





On
      December 1, 2006, we initiated arbitration against National Quality Care,
      Inc. (NQCI) for its failure to fully perform its obligations under our
      License Agreement. On December 29, 2006, NQCI filed suit against us in Los
      Angeles County Superior Court entitled *National
      Quality Care, Inc. v. Victor Gura, M.D., et al.* ,
      Case
      No. BC364140. On January 5, 2007, we filed a petition to compel
      arbitration, and NQCI subsequently stipulated to resolve all claims in the
      pending arbitration. On March 20, 2007, the lawsuit was dismissed without
      prejudice. The arbitration hearing was completed on February 29, 2008, briefing
      should be completed by late April, and the arbitrator is expected to render
      an
      award next quarter. Based on the evidence presented at the hearing, we do not
      believe there is any reasonable likelihood that NQCI will prevail on its
      claims.





**13.**  **STOCKHOLDERS’
      EQUITY**





During
      the fourth quarter of 2006, we completed a private placement of an aggregate
      of
      4,200,050 unregistered shares of our common stock. Our shares were issued to
      approximately 100 institutional and accredited investors, priced at $7.00 per
      share, for net proceeds of approximately $27.3 million, net of placement agent
      fees of $2.1 million. Purchasers included affiliates of our board members Marc
      Cummins and Jay Wolf. We accounted for the placement agent fees as a reduction
      in the gross proceeds of the private placement and a credit to additional
      paid-in capital. In addition, we issued 3-year warrants to purchase 100,000
      and
      29,221 shares of our common stock to two placement agents at $7.00 and $7.25
      per
      share (“Placement Agent Warrants”), respectively. The fair value of the
      Placement Agent Warrants issued is $615,810 and was determined using the
      Black-Scholes option-pricing model.




34





On
      August
      31, 2006, we issued immediately-exercisable, five-year warrants to purchase
      an
      aggregate of 325,000 shares of common stock (see Note 15. Stock Options and
      Warrants). The fair value for the consulting services provided of approximately
      $2,162,611 was recorded as a credit to additional paid-in capital and a debit
      to
      selling, general and administrative expenses. The fair value of these Warrants
      was determined using the Black-Scholes option-pricing model.





The
      private placement was exempt from registration pursuant to Rule 506 promulgated
      under Regulation D of the Securities Act of 1933, as amended, as a transaction
      not involving a public offering. We entered into registration rights agreements
      with each of the purchasers, obligating us to use best efforts to file a
      registration statement covering the purchased shares. The shares were registered
      in a Form S-4 registration statement which became effective on October
      12 th ,
      2007 in
      conjunction with the merger between Xcorporeal, Inc. and CT Holdings
      Enterprises, Inc.





On
      August
      10, 2007, pre-merger Xcorporeal cancelled 200,000 shares of common stock
      pursuant to a settlement agreement with one of our stockholders.





Immediately
      prior to the effectiveness of the merger, we caused a reverse split of our
      common stock, whereby each 8.27 issued and outstanding shares of our common
      stock were converted into one share of common stock.





**14.
      STOCK OPTIONS AND WARRANTS**





***Incentive
      Compensation Plan***





On
      October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
      Plan and the related form of option agreement that are substantially identical
      to the 2006 Incentive Compensation Plan in effect at pre-merger Xcorporeal
      immediately prior to the merger.





The
      plan
      authorizes the grant of stock options, restricted stock, restricted stock units
      and stock appreciation rights. Effective February 28, 2007, there are 3,900,000
      shares of common stock reserved for issuance pursuant to the plan (subject
      to
      adjustment in accordance with the provisions of the plan). The plan will
      continue in effect for a term of up to ten years.





On
      October 12, 2007, we also assumed options to purchase up to 3,880,000 shares
      of
      common stock that were granted by pre-merger Xcorporeal under its 2006 Incentive
      Compensation Plan.





***Stock
      Options***





The
      Compensation Committee of our Board of Directors determines the terms of the
      options granted, including the exercise price, the number of shares subject
      to
      option, and the vesting period. Options generally vest over five years and
      have
      a maximum life of ten years.





On
      August
      10, 2007 and August 15, 2007, pre-merger Xcorporeal granted options to purchase
      an aggregate of 470,000 and 325,000 shares, respectively, of common stock to
      employees, which we assumed as part of the merger. The options vest ratably
      over
      4 or 5 years, are exercisable at $7.00 per share, the fair market value of
      our
      common stock on the grant date, and expire in 2017. The fair value of such
      stock
      options was $4.8 million.





In
      connection with his August 10, 2007 resignation as an officer, Daniel Goldberger
      forfeited options to purchase 200,000 shares of common stock. He will retain
      his
      remaining 200,000 options as he continues to serve as a member of the board
      of
      directors.





On
      November 26, 2007, Nicholas Lewin was not reelected to the Board of Directors.
      Pursuant to the Resolution on Consent of the Compensation Committee, Mr. Lewin
      will provide on-going consulting services to us. In exchange for his services,
      the Compensation Committed amended his Grant to allow Mr. Lewin to continue
      to
      vest and exercise his options. The amendment causes a modification in his
      options which changes the vesting provisions from improbable to probable as
      well
      as the fair value.





We
      reported $3,721,485 and $264,251 in stock-based compensation expense for
      employees, officers and directors for the years ended December 31, 2007 and
      2006, respectively.




35





All
      compensation expense for stock options granted has been determined under the
      fair value method using the Black-Scholes option-pricing model with the
      following assumptions:




For
                  the years ended December 31,2007
              
              2006Expected
                  dividend yields
              
              
              zero
              
              
              zeroExpected
                  volatility
              
              
              110-136%
              
              
              110-135%Risk-free
                  interest rate
              
              
              4.18-4.68%
              
              
              4.57-4.60%Expected
                  terms in years
              
              
              6.25-10
                  years
              
              
              5-10
                  years




***Warrants***





On
      August
      10, 2007 and August 15, 2007, pre-merger Xcorporeal also issued stock options
      to
      two consultants to purchase 20,000 and 10,000 shares of common stock,
      respectively, in exchange for consulting services, which we also assumed. These
      stock options vest ratably over 5 years so long as the consultant continues
      to
      provide services, are exercisable at $7.00 per share, the fair market value
      of
      our common stock on the grant date and expire 2017. The resulting fair value
      of
      such stock options was $0.2 million.





We
      reported $2,917,309 and $2,162,611 in stock-based compensation expense for
      consultants for the years ended December 31, 2007 and 2006,
      respectively.





Compensation
      for options granted to non-employees has been determined in accordance with
      SFAS
      No. 123, EITF 96-18, and EITF 00-18, “Accounting for Equity Instruments that are
      Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
      Goods or Services.” Accordingly, compensation is determined using the fair value
      of the consideration received or the fair value of the equity instruments
      issued, whichever is more reliably measured.





For
      options and warrants issued as compensation to non-employees for services that
      are fully vested and non-forfeitable at the time of issuance, the estimated
      value is recorded in equity and expensed when the services are performed and
      benefit is received as provided by Financial Accounting and Standards Board
      (“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity Instruments
      That Are Issued To Other Than Employees For Acquiring or In Conjunction With
      Selling Goods Or Services.”





All
      charges for warrants granted have been determined under the fair value method
      using the Black-Scholes option-pricing model with the following
      assumptions:


For
                  the years ended December 31,2007
              
              2006Expected
                  dividend yields
              
              
              zero
              
              
              zeroExpected
                  volatility
              
              
              117-136
              %
              
              110-120
              %Risk-free
                  interest rate
              
              
              3.45-4.65
              %
              
              4.60-4.70
              %Expected
                  terms in years
              
              
              4.80-9.62
              years
              
              3-5
              years


36





The
      following tables summarize information concerning outstanding options at
      December 31, 2007 and 2006:


**Weighted****Average****Stock
                  Options**
              
              
              **Exercise
                  Price**Outstanding
                  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
              
              
              5.00Granted
              
              
              2,872,500
              
              
              7.00Exercised
              
              
              -
              
              
              -Cancelled
                  or forfeited
              
              
              (675,000
              )
              
              6.41Outstanding
                  at December 31, 2007
              
              
              3,797,500
              
              
              6.26Exercisable
                  at December 31, 2006
              
              
              -
              
              
              -Exercisable
                  at December 31, 2007
              
              
              440,000
              
              $
              5.61





The
      following tables summarize information concerning outstanding warrants at
      December 31, 2007 and 2006:


**Weighted****Average****Warrants**
                
                
                **Exercise
                    Price**Outstanding
                    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
                
                
                2.72Granted
                
                
                422,500
                
                
                7.29Exercised
                
                
                -
                
                
                -Cancelled
                    or forfeited
                
                
                -
                
                
                -Outstanding
                    at December 31, 2007
                
                
                876,721
                
                
                4.92Exercisable
                    at December 31, 2006
                
                
                454,221
                
                
                2.72Exercisable
                    at December 31, 2007
                
                
                754,221
                
                $
                4.42


The
      weighted average grant-date estimated fair value of stock options granted in
      2006 and 2007 approximated $10.3 million and 12.7 million or $6.42 and $5.79
      per
      share, respectively. The weighted average grant-date estimated fair value of
      warrants granted in 2006 and 2007 approximated $2.8 million and $2.4 million
      or
      $6.11 and $5.63 per share, respectively. At December 31, 2007, the unamortized
      compensation charges related to outstanding stock options and warrants were
      $17,818,693 and $410,049, respectively. No stock options or warrants were
      exercised during the two years ended December 31, 2007.




37


Stock
                  Options and
              
              UnamortizedWarrants
              
              CompensationOutstanding
              
              ExpenseJanuary
                  1, 2007
              
              
              2,054,221
              
              $
              10,002,154Granted
                  in the period
              
              
              3,295,000
              
              
              19,433,213Forfeited
                  in the period
              
              
              (675,000
              )
              
              (3,884,935
              )Expensed
                  in the period
              
              
              -
              
              
              (7,321,700
              )December
                  31, 2007
              
              
              4,674,221
              
              $
              18,228,732
  WeightedNumber
                    of
                
                
                AverageOptions
                    and
                
                
                ExerciseWarrants
                
                
                PriceStock
                    Options and WarrantsBalance
                    at January 1, 2007
                
                
                2,054,221
                
                $
                4.50Granted
                
                
                3,295,000
                
                
                7.04Exercised
                
                
                -
                
                
                -Forfeited
                
                
                (675,000
                )
                
                6.41Balance
                    at December 31, 2007
                
                
                4,674,221
                
                
                6.01Options
                    and warrants exercisable at December 31, 2007
                
                
                4,674,221
                
                $
                6.01


The
      weighted average remaining contractual life of the stock options that are
      exercisable as of December 31, 2007 are approximately 7.04 years. The weighted
      average remaining contractual life of the warrants that are exercisable as
      of
      December 31, 2007 approximates 3.80 years.





**15.
      RELATED PARTY TRANSACTIONS**





We
      were
      charged the following by a former director:




**Year
                ended**
              **December
                31,**
              ******2007**
            
            **2006**
            
            **May
                2, 2001**
              **(Date
                of**
              **Inception)
                to**
              **December
                31,**
              ******2007**Administrative
                services
            
            $
            -
            
            $
            3,000
            
            $
            12,000





On
      August
      7, 2007, CTHE issued 500,000 (60,460 post reverse split) shares of
      restricted common stock to Steven B. Solomon, CTHE’s then Chief Executive
      Officer, in connection with his services to CTHE and further advances of funds.
      CTHE issued the restricted common stock in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act of 1933, as amended,
      pursuant to a transaction to one accredited investor not involving any public
      offering.





Pursuant
      to a consulting agreement effective December 1, 2007, Daniel S. Goldberger,
      director, will provide consulting services as a management consultant to us
      with
      a devotion of at least 80 hours per month of services. In consideration of
      the
      services, we shall pay Mr. Goldberger $15,000 per month during the first two
      months and $12,500 per month thereafter. The term of the services is effective
      December 1, 2007 and will continue on a month to month basis.





Our
      Chief
      Medical and Scientific Officer maintains an office located in Beverly Hills,
      CA.
      Pursuant to the reimbursement agreement effective January 29, 2008, we will
      reimburse 50% of the rental and 50% of his monthly parking. The term of the
      agreement shall commence on April 23, 2007, date of the office lease agreement,
      and continue until the date on which he ceases to use the remote office to
      perform his duties as our Chief Medical and Scientific Officer. The 50% rent
      reimbursement in 2007 totaled $10,648




38




**16.
      SUBSEQUENT EVENTS**





***Lease
      for Corporate Headquarters***





Effective
      February 22, 2008, we entered into a five year lease for our corporate office
      of
      4,352 square feet for a total of monthly rent of $17,408 per month for the
      first
      year, $18,104, $18,844, $19,584, and $20,367 per month for 2009, 2010, 2011,
      and
      2012, respectively. The total lease payments will be $1,096,878 over a 5 year
      period.




39


**Item
      8. Changes In and Disagreements With Accountant on Accounting
      and**  **Financial
      Disclosure**





***Change
      in the Company’s Certifying Accountant***





Effective
      February 13, 2007, we dismissed Amisano Hanson, Chartered Accountants, and
      appointed BDO Seidman, LLP as our independent registered public accounting
      firm.
      Amisano Hanson’s reports on our consolidated financial statements for each of
      the fiscal years ended December 31, 2005 and 2004 did not contain any adverse
      opinion or disclaimer of opinion, nor were they qualified or modified as to
      uncertainty, audit scope or accounting principles, except that they expressed
      substantial doubt about our ability to continue as a going concern. In
      connection with the audits of the fiscal years ended December 31, 2005 and
      2004
      and the interim period through February 13, 2007, there have been no
      disagreements between us and Amisano Hanson on any matter of accounting
      principles or practices, financial statement disclosure or auditing scope or
      procedure, which disagreements, if not resolved to the satisfaction of Amisano
      Hanson, would have caused it to make reference in connection with their opinion
      to the subject matter of the disagreements.





**Item
      8A. Controls and Procedures**





**Disclosure
      Controls and Procedures**





Our
      management, with the participation of our Executive Chairman and Chief Financial
      Officer, conducted an evaluation of the


effectiveness
      of our disclosure controls and procedures as of the end of the period covered
      by
      this Annual Report (December 31, 2007), as is defined in Rule 13a-15(e)
      promulgated under the Securities Exchange Act of 1934, as amended. We conducted
      an evaluation of the effectiveness of our internal controls over financial
      reporting based on the framework in Internal Control - Integrated Framework
      issued by the Committee of Sponsoring Organizations of the Treadway Commission.
      Our disclosure controls and procedures are intended to ensure that the
      information we are required to disclose in the reports that we file or submit
      under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
      and reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms and (ii) accumulated and communicated to our
      management, including the Executive Chairman and Chief Financial Officer, as
      the
      principal executive and financial officers, respectively, to allow timely
      decisions regarding required disclosures.





Based
      on
      that evaluation, our Executive Chairman and Chief Financial Officer concluded
      that, as of the end of the period covered by this Annual Report, our disclosure
      controls and procedures were effective.





Our
      management has concluded that the financial statements included in this Form
      10-KSB present fairly, in all material respects our financial position, results
      of operations and cash flows for the periods presented in conformity with
      generally accepted accounting principles.





It
      should
      be noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system will be met. In addition, the design of any control system is based
      in
      part upon certain assumptions about the likelihood of future
      events.





**Management’s
      Report on Internal Control Over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the
      Exchange Act). Internal control over financial reporting is a process designed
      to provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with accounting principles generally accepted in the United States of
      America.





Our
      internal control over financial reporting includes those policies and procedures
      that (i) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of our assets,
      (ii) provide reasonable assurance that transactions are recorded as necessary
      to
      permit preparation of financial statements in accordance with accounting
      principles generally accepted in the United States of America, and that our
      receipts and expenditures are being made only in accordance with authorizations
      of our management and directors, and (iii) provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use or
      disposition of our assets that could have a material effect on the financial
      statements.




40





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





There
      have been no changes in our external controls over financial reporting during
      our most recent fiscal quarter that have materially affected, or are reasonably
      likely to materially affect our internal control over financial
      reporting.





This
      Annual Report does not include an attestation report of our independent
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by our registered
      public accounting firm pursuant to temporary rules of the SEC that permit us
      to
      provide only management’s report in this Annual Report.





***Changes
      in Internal Control Over Financial Reporting***





During
      the year ended December 31, 2007, we made the following changes in our internal
      control over financial reporting:





**•**
            In
                August 2007, we appointed a 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 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.





41





**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**





Our
      current officers and directors are listed below. Each of our directors will
      serve for one year or until their respective successors are elected and
      qualified. Our officers serve at the pleasure of the board of
      directors.





**Name**
            
            **Age**
            
            **Position**
            
            **Director**
              **Since**Terren
                S. Peizer
            
            48
            
            Executive
                Chairman of the Board
            
            2007Daniel
                S. Goldberger
            
            49
            
            Chief
                Executive Officer, Director
            
            2007Victor
                Gura, MD
            
            65
            
            Chief
                Medical & Scientific Officer, Director
            
            2007Winson
                W. Tang, MD, FACP
            
            51
            
            Chief
                Operating OfficerRobert
                Weinstein
            
            47
            
            Chief
                Financial OfficerMarc
                G. Cummins
            
            48
            
            Director
            
            2007Kelly
                J. McCrann
            
            52
            
            Director
            
            2007Hans-Dietrich
                Polaschegg, PhD
            
            65
            
            Director
            
            2007Jay
                A. Wolf
            
            35
            
            Director
            
            2007





**Terren
      S. Peizer** became
      the Chairman of our Board of Directors in August 2006 and Executive Chairman
      in
      August 2007. From April 1999 to October 2003, Mr. Peizer served as Chief
      Executive Officer of Clearant, Inc., which he founded to develop and
      commercialize a universal pathogen inactivation technology. He served as
      Chairman of its board of directors from April 1999 to October 2004 and a
      Director until February 2005. From February 1997 to February 1999, Mr. Peizer
      served as President and Vice Chairman of Hollis-Eden Pharmaceuticals, Inc.
      In
      addition, from June 1999 through May 2003 he was a Director, and from June
      1999
      through December 2000 he was Chairman of the Board, of supercomputer designer
      and builder Cray Inc., and remains its largest beneficial stockholder. Mr.
      Peizer has been the largest beneficial stockholder and held various senior
      executive positions with several technology and biotech companies. In these
      capacities he has assisted the companies with assembling management teams,
      boards of directors and scientific advisory boards, formulating business and
      financial strategies, investor and public relations, and capital formation.
      Mr.
      Peizer has been a Director, Chairman of the Board and Chief Executive Officer
      of
      Hythiam, Inc., a healthcare services management company focused on delivering
      solutions for those suffering from alcoholism and other substance dependencies,
      since September 2003. Mr. Peizer has a background in venture capital, investing,
      mergers and acquisitions, corporate finance, and previously held senior
      executive positions with the investment banking firms Goldman Sachs, First
      Boston and Drexel Burnham Lambert. He received his B.S.E. in Finance from The
      Wharton School of Finance and Commerce.





**Daniel
      S. Goldberger** has
      served as our acting Chief Executive Officer since February 2008. He served
      as
      our President and Chief Operating Officer from October 2006 to August 2007.
      Mr.
      Goldberger is the Chief Executive Officer of Sound Surgical Technologies, a
      privately held company developing ultrasonic technologies for aesthetic surgery.
      He has been the Chief Executive Officer of Glucon Inc., a privately held glucose
      monitoring business from 2004 to 2006. From 2001 to 2004, Mr. Goldberger served
      as President and as a Director of the Medical Group of OSI Systems, Inc.
      (NASDAQ: OSIS), which included the Spacelabs, Dolphin, Osteometer product lines
      with combined revenue approaching $250 million. Mr. Goldberger was also the
      co-founder of Optiscan Biomedical Corporation, where he served as Director
      from
      1994 to 2001 and also served as its Vice President from 1994 to 1998 and then
      as
      its President from 1998 to 2001. Mr. Goldberger has over 25 years of management
      experience with large and small medical device companies, including Nellcor
      and
      Square One Technology. He received his B.S.M.E. from Massachusetts Institute
      of
      Technology and his M.S.M.E. from Stanford University.





**Victor
      Gura, M.D.** became
      our Chief Medical and Scientific Officer in December 2006, and became a member
      of our Board of Directors in October, 2006. He served as Chief Scientific
      Officer of National Quality Care, Inc. from 2005 to November 2006. He was
      formerly its Chairman of the Board, President and Chief Executive Officer.
      Dr.
      Gura is board certified in internal medicine/nephrology. He has been a director
      and principal shareholder of Medipace Medical Group, Inc. in Los Angeles,
      California, since 1980. Dr. Gura has been an attending physician at Cedars-Sinai
      Medical Center since 1984 and the medical director of Los Angeles Community
      Dialysis since 1985. He also serves as a Clinical Assistant Professor at UCLA
      School of Medicine. He was a fellow at the nephrology departments at Tel Aviv
      University Medical School and USC Medical Center. Dr. Gura received his M.D.
      from School of Medicine, Buenos Aires University.




42





**Winson
      W. Tang, M.D., FACP** was
      appointed as our Chief Operating Officer in August, 2007. Dr. Tang is an
      executive with over 20 years of experience in academic medicine, biomedical
      research and the biopharmaceutical industry. Dr. Tang has held drug development
      positions of increasing responsibility at Amgen, Vertex, Tularik, and Isis
      Pharmaceuticals. During his biopharmaceutical career, he has successfully filed
      four Investigational New Drug Applications and Clinical Trial Applications,
      two
      Biologic License Applications, in-licensed a preclinical drug candidate that
      is
      now marketed (Sensipar®) and commercialized two drugs (Infergen® and Aranesp®).
      Both Sensipar® and Aranesp® are important therapies for patients with end stage
      renal disease. He was most recently the Director of Research for the Pacific
      Capital Group, a private equity group where he managed the biotech investment
      portfolio. Dr. Tang is a Diplomate of the American Board of Internal Medicine
      and a fellow of the American College of Physicians. He has published more than
      30 original research articles and book chapters. Dr. Tang is a graduate of
      The
      Albert Einstein College of Medicine and completed a Residency in Internal
      Medicine at the University of Southern California, a Clinical Fellowship in
      Nephrology at the University of California San Diego and a Research Fellowship
      in Immunology at The Scripps Research Institute.





**Robert
      Weinstein** was
      appointed as our Chief Financial Officer in August 2007. Prior to joining us,
      Mr. Weinstein served as Vice President, Director of Quality Control &
Compliance of Citi Private Equity Services (formerly BISYS Private Equity
      Services), New York, a worldwide private equity fund administrator and
      accounting service provider. In 2005, Mr. Weinstein was the Founder, Finance
      & Accounting Consultant for EB Associates, LLC, Irvington, NY, an
      entrepreneurial service organization. From 2003 to 2004, Mr. Weinstein served
      as
      the Chief Financial Officer for Able Laboratories, Inc., Cranbury, NJ, which
      filed for Chapter 11 bankruptcy protection in July 2005. In 2002, he served
      as
      Acting Chief Financial Officer for Eurotech, Ltd., Fairfax, VA, a distressed,
      publicly traded early-stage technology transfer and development company. Mr.
      Weinstein received as M.B.A, Finance & International Business from the
      University of Chicago, Graduate School of Business and a B.S. in Accounting
      from
      the State University of New York at Albany. Mr. Weinstein is a Certified Public
      Accountant (inactive) in the State of New York.





**Marc
      G. Cummins** became a
      member of our Board of Directors in November 2006. He is a Managing Partner
      of
      Prime Capital, LLC, a private investment firm focused on consumer companies.
      Prior to founding Prime Capital, Mr. Cummins was managing partner of Catterton
      Partners, a private equity investor in consumer products and service companies
      with over $1 billion of assets under management. He has served as a director
      of
      Hythiam, Inc. since 2004. Prior to joining Catterton in 1998, Mr. Cummins spent
      fourteen years at Donaldson, Lufkin & Jenrette Securities Corporation where
      he was Managing Director of the Consumer Products and Specialty Distribution
      Group, and was also involved in leveraged buyouts, private equity and high
      yield
      financings. Mr. Cummins received a B.A. in Economics, magna cum laude, from
      Middlebury College, where he was honored as a Middlebury College Scholar and
      is
      a member of Phi Beta Kappa. He also received an M.B.A. in Finance with honors
      from The Wharton School at University of Pennsylvania.





**Kelly
      J. McCrann** was
      appointed as a member of our Board of Directors in August 2007. Mr. McCrann
      is a
      senior healthcare executive with extensive experience in board governance,
      strategic leadership, profit and loss management and strategic transactions.
      He
      was most recently Senior Vice President of DaVita Inc., where he was responsible
      for all home based renal replacement therapies for the United States’ second
      largest kidney dialysis provider. Prior to that, Mr. McCrann was the Chief
      Executive Officer and President of PacifiCare Dental and Vision, Inc. Mr.
      McCrann has held positions of increasing responsibility at Professional Dental
      Associates, Inc., Coram Healthcare Corporation, HMSS, Inc. and American Medical
      International. He is a graduate of the Harvard Business School and began his
      career as a consultant for KPMG and McKinsey & Company.





**Hans-Dietrich
      Polaschegg, PhD.** serves
      as a consultant to the medical device industry. From 1979 to 1994, Dr.
      Polaschegg held positions of increasing responsibility at Fresenius AG, a global
      leader in the manufacture of dialysis products. As Head of Research and
      Development of the medical systems division of Fresenius, he designed three
      hemodialysis machines. Dr. Polaschegg holds 88 medical technology patents and
      is
      credited with inventing electrolyte balancing, thermal energy balancing, safe
      dialysate filtering, blood volume monitoring by ultrasound density, and safe
      on-line hemodiafiltration. He is a member of several international American
      and
      European standard committees including Chairman of the Extracorporeal
      Circulation and Infusion and Technology Committee. Dr. Polaschegg received
      his
      PhD in Nuclear Physics from Technical University of Vienna in
      Austria.





**Jay
      A. Wolf** became a
      member of our Board of Directors in November 2006. He has over a decade of
      investment and operations experience in a broad range of industries. His
      investment experience includes: senior and subordinated debt, private equity
      (including leveraged transactions), mergers & acquisitions and public equity
      investments. Since 2003, Mr. Wolf has served as a Managing Director of Trinad
      Capital. From 1999 to 2003, he served as the Executive Vice President of
      Corporate Development for Wolf Group Integrated Communications Ltd. where he
      was
      responsible for our acquisition program. From 1996 to 1999, Mr. Wolf worked
      at
      Canadian Corporate Funding, Ltd., a Toronto-based merchant bank in the senior
      debt department and subsequently for Trillium Growth, the firm’s venture capital
      Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
      Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
      received a Bachelor of Arts from Dalhousie University.




43





***Family
      Relationships***





There
      are
      no family relationships among any of our directors or executive
      officers.





***Legal
      Proceedings***





There
      have been no events under any bankruptcy act, no criminal proceedings and no
      judgments, injunctions, orders or decrees material to the evaluation of the
      ability and integrity of any director, executive officer, promoter or control
      person of our company during the past five years other than as noted
      above.





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





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
      and directors and persons who beneficially own more than 10% of our common
      stock
      to file with the SEC initial reports of ownership and reports of changes in
      ownership of our common stock. These insiders are required by SEC regulations
      to
      furnish us with copies of all Section 16(a) forms they file, including Forms
      3,
      4 and 5. Based solely upon our review of copies of such forms we have received,
      and other information available to us, to the best of our knowledge, except
      for
      a Form 3 describing ownership of our securities by Mr. Goldberger and a Schedule
      13D statement of acquisition of beneficial ownership by Consolidated National,
      LLC, all required forms have been filed on a timely basis.





**Code
      of Ethics**





We
      have a
      Code of Ethics that applies to all of our officers, directors and employees,
      including our principal executive officer, principal financial officer,
      principal accounting officer and controller, and others performing similar
      functions.





**Corporate
      Governance**





***Nominating
      Committee***





Prior
      to
      October 12, 2007, we did not have a nominating committee, as nominations were
      made by independent members of the board as a whole. Effective October 12,
      2007 **,** our
      board
      of directors authorized the formation of a Nominating Committee to consist
      entirely of independent directors. The committee’s primary function is to review
      and recommend potential director candidates.





The
      Nominating Committee will consider director candidates that are suggested by
      members of the board, as well as by management and stockholders. The committee
      may also retain a third-party executive search firm to identify candidates.
      The
      process for identifying and evaluating nominees for director involves reviewing
      potentially eligible candidates, conducting background and reference checks,
      interviewing the candidate and others (as schedules permit), meeting to consider
      and approve the candidate and, as appropriate, preparing and presenting to
      the
      full board an analysis with regard to particular recommended candidates. The
      Nominating Committee considers a potential candidate’s experience, areas of
      expertise, and other factors relative to the overall composition of the board.
      The committee endeavors to identify director nominees who have the highest
      personal and professional integrity, have demonstrated exceptional ability
      and
      judgment, and, together with other director nominees and members, are expected
      to serve the long term interest of our stockholders and contribute to our
      overall corporate goals. Messrs. Cummins (Chairman) and Polaschegg are members
      of the Nominating Committee.





***Audit
      Committee***





Effective
      October 12, 2007 **,** our
      board
      of directors established a separately-designated standing Audit Committee in
      accordance with section 3(a)(58)(A) of the Exchange Act. Messrs. Wolf
      (Chairman), Cummins and McCrann are members of the Audit Committee. All members
      of the Audit Committee are independent directors as defined by NASD Marketplace
      Rule 4200(a)(15) and Rule 10A-3(b)(i) under the Exchange Act.


44




***Audit
      Committee Financial Expert***





The
      board
      of directors has determined that Mr. Wolf meets the applicable requirements
      for
      audit committee financial experts as defined by Item 401(e)(2) of Regulation
      S-B.





***Compensation
      Committee***





Prior
      to
      October 12, 2007, we did not have a compensation committee, but the entire
      board
      reviewed the compensation and employee benefits of our officers. As of October
      12, 2007, our board of directors authorized the formation of a Compensation
      Committee to consist entirely of independent directors. The committee consists
      of Messrs. McCrann (Chairman) and Wolf. The Compensation Committee reviews
      and
      recommends to the board of directors for approval the compensation of our
      executive officers.





**Item
      10. Executive Compensation**





The
      following table sets forth the total compensation received by the named
      executive officer during the fiscal years ended December 31, 2007 and
      2006:





**SUMMARY
      COMPENSATION TABLE**


**Nonqualified****Non-Equity**
              
              **Deferred****Name
                  and**
              
              
              
              
              
              
              
              **Stock**
              
              **Option**
              
              **Incentive
                  Plan**
              
              **Compensation**
              
              **All
                  Other****Principal**
                **Position**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              **Awards
                  ($)**
              
              **Awards
                  ($)**
              
              **Compensation
                  ($)**
              
              **Earnings**
                **($)**
              
              **Compensation
                  ($)**
              
              **Total**
                **($)**Daniel
                  S. Goldberger, Former President & COO (1)2007
              
              $
              219,898
              
              $
              -
              
              $
              -
              
              $
              238,457
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              458,3552006
              
              $
              35,170
              
              $
              -
              
              $
              -
              
              $
              70,497
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              105,667Victor
                  Gura, Chief Medical and Scientific Officer (2)2007
              
              $
              455,000
              
              $
              -
              
              $
              -
              
              $
              855,901
              
              $
              -
              
              $
              -
              
              $
              19,500
              
              $
              1,330,4012006
              
              $
              35,000
              
              $
              -
              
              $
              -
              
              $
              88,121
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              123,121Peter
                  Sotola, Former President (3)2007
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -2006
              
              $
              3,000
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              3,000Robert
                  Stefanovich, Former Interim Chief Financial Officer (4)2007
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              305,217
              
              $
              305,2172006
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Winson
                  Tang, Chief Operating Officer2007
              
              $
              156,250
              
              $
              -
              
              $
              -
              
              $
              287,161
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              443,4112006
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Robert
                  Weinstein, Chief Financial Officer2007
              
              $
              100,128
              
              $
              21,400
              
              $
              -
              
              $
              175,564
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              297,0922006
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -


(1)
      Mr.
      Goldberger resigned as President & COO on August 10, 2007





(2)
      Dr.
      Gura receives an auto allowance pursuant to his employment
      agreement





(3)
      Mr.
      Sotola resigned as president on October 13, 2006





(4)
      Mr.
      Stefanovich served as an interim CFO with his services terminated as of December
      27, 2007. He was paid as an independent consultant.




45





**Compensation
      Agreements**





***Executive
      Chairman of the Board***





On
      August
      10, 2007, we entered into an Executive Chairman Agreement with Terren S. Peizer
      for an initial term of three years with automatic one-year renewals, which
      Executive Chairman Agreement has been assumed by us. His base compensation
      is
      $450,000 per annum as of July 1, 2007, with a signing bonus of $225,000. Mr.
      Peizer will be entitled to receive an annual bonus at the discretion of the
      Board based on performance goals and targeted at 100% of his base compensation.
      He is also eligible to participate in any equity incentive plans adopted by
      us.
      In the event Mr. Peizer’s position is terminated without good cause or he
      resigns for good reason, we will be obligated to pay Mr. Peizer in a lump sum
      an
      amount equal to three years’ base compensation bonus plus 100% of the targeted
      bonus.





***Chief
      Medical and Scientific Officer***





On
      November 30, 2006, we entered into an Employment Agreement with Victor Gura,
      M.D. for a term of four years, which Employment Agreement has been assumed
      by
      us. In October 2007, Dr. Gura became our Chief Medical and Scientific Officer,
      which position he has held with us since December 2006. Dr. Gura has been a
      member of our board of directors since October 2007, and was appointed as a
      member of our Board of Directors in October 2006. His initial annual base salary
      is $420,000. Dr. Gura is eligible to receive discretionary bonuses on an annual
      basis targeted at 50% of his annual salary. Additionally, Dr. Gura was granted
      500,000 stock options at an exercise price of $5 per share under the our 2006
      Incentive Compensation Plan. These options will vest 20% on each of the first,
      second, third, fourth and fifth anniversaries of the original grant date and
      expire November 14, 2011. He will also be granted options to purchase an
      additional 500,000 shares of our common stock upon FDA approval of our first
      product. Dr. Gura is eligible to receive reimbursement of reasonable and
      customary relocation expenses as well as health, medical, dental insurance
      coverage and insurance for accidental death and disability. In the event he
      is
      terminated by us without good cause or if he resigns for good reason, as such
      terms as are defined in the Employment Agreement, we will be obligated to pay
      Dr. Gura in a lump sum an amount equal to two year’s salary plus 200% of the
      targeted bonus. In addition all stock options granted to Dr. Gura will vest
      immediately.





***Chief
      Financial Officer***





On
      August
      10, 2007, we entered into an Employment Agreement with Robert Weinstein with
      an
      initial term of three years, with automatic one year renewals, which Employment
      Agreement has been assumed by us. His base salary is $275,000 per annum. Mr.
      Weinstein will be entitled to receive an annual bonus at the discretion of
      the
      Board based on performance goals and targeted at 50% of his annual salary.
      In
      addition to any perquisites and other fringe benefits provided to other
      executives, Mr. Weinstein received options to purchase 300,000 shares of common
      stock under our 2006 Incentive Compensation Plan at an exercise price of $7.00
      per share and vesting at a rate of 25% per year. In the event Mr. Weinstein
      is
      terminated by us without good cause or he resigns for good reason, as such
      terms
      are defined in the Employment Agreement, we will be obligated to pay Mr.
      Weinstein in a lump sum an amount equal to 12 months salary and
      benefits.





Both
      Mr.
      Weinstein’s and Dr. Gura’s agreements provide for medical insurance and
      disability benefits, severance pay if their employment is terminated by us
      without cause or due to change in our control before the expiration of their
      agreements, and allow for bonus compensation and stock option grants as
      determined by our Board of Directors. Both agreements also contain restrictive
      covenants preventing competition with us and the use of confidential business
      information, except in connection with the performance of their duties for
      us,
      for a period of one year for Mr. Weinstein and two years for Dr. Gura following
      the termination of their employment with us.





***Consultants***





Hans-Dietrich
      Polaschegg, Ph.D a director nominee has entered into a consulting agreement
      with
      us under which he will provide up to 24 hours per month of consulting services
      in return for a monthly retainer of $5,000. Any consulting services in excess
      of
      24 hours in a single month will be paid at a rate of €200 (approx. $275) per
      hour. Dr. Polaschegg has entered into our standard form of Director
      Indemnification Agreement and Confidentiality Agreement. There are no family
      relationships between Dr. Polaschegg and any of our other directors or executive
      officers. Except as described above, Dr. Polaschegg has not had a material
      interest in any of our transactions.




46





On
      January 24, 2008, we entered into a Services Agreement with Daniel Goldberger,
      a
      member of our Board of Directors and formerly our President and Chief Operating
      Officer. Under the agreement Mr. Goldberger will provide such consulting
      services as we may request from time to time. The agreement requires Mr.
      Goldberger to devote at least 80 hours per month to providing consulting
      services. The Services Agreement has a term which commenced December 1, 2007,
      and continues on a month-to-month basis until the earlier of (i) our employment
      of a Chief Executive Officer or (ii) termination by either party on five
      business days prior written notice. As compensation for providing consulting
      services, Mr. Goldberger will receive $15,000 per month for the first two months
      of the term and $12,500 per month for each month thereafter until termination
      of
      the Service Agreement. During the term of the Service Agreement, Mr. Goldberger
      will not be entitled to any additional compensation for his services as a member
      of our Board of Directors. He will be entitled to reimbursement for reasonable
      and necessary business and travel expenses. Mr. Goldberger will be included
      as a
      named insured under our existing officers and directors insurance and will
      be
      subject to the standard indemnification given to all of our officers and
      directors.





***Incentive
      Compensation Plan***





On
      October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
      Plan and the related form of option agreement that are substantially identical
      to the 2006 Incentive Compensation Plan in effect at pre-merger Xcorporeal
      immediately prior to the merger.





The
      plan
      authorizes the grant of stock options, restricted stock, restricted stock units
      and stock appreciation rights. Effective February 28, 2007, there are 3,900,000
      shares of common stock reserved for issuance pursuant to the plan (subject
      to
      adjustment in accordance with the provisions of the plan). The plan will
      continue in effect for a term of up to ten years.





On
      October 12, 2007, we also assumed options to purchase up to 3,880,000 shares
      of
      common stock that were granted by pre-merger Xcorporeal under its 2006 Incentive
      Compensation Plan.




47





**Outstanding
      Equity Awards At Fiscal Year-End**





The
      following table sets forth information concerning unexercised options; stock
      that has not vested; and equity incentive plan awards for each named executive
      officer outstanding as of December 31, 2007:





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**


**OPTION
                  AWARDS**
              
              
              **STOCK
                  AWARDS**Name
              
              Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable
              
              Number
                  of Securities Underlying Unexercised Options (#)
                  Unexercisable
              
              Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)
              
              Option
                  Exercise Price ($)
              
              Option
                  Expiration Date
              
              Number
                  of Shares or Units of Stock That Have Not Vested (#)
              
              Market
                  Value of Shares or Units of Stock That Have Not Vested ($)
              
              Equity
                  Incentive Plan Awards: Number of Unearned Shares, Units or Other
                  Rights
                  That Have Not Vested (#)
              
              Equity
                  Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                  Units,
                  or Other Rights That Have Not Vested (#)Daniel
                  S. Goldberger, Former President & COO *
              
              
              40,000
              
              
              160,000
              
              
              200,000
              
              $
              5.00
              
              
              November
                  14, 2016
              
              
              -
              
              
              -
              
              
              -
              
              
              -Victor
                  Gura, Chief Medical and Scientific Officer
              
              
              125,000
              
              
              375,000
              
              
              500,000
              
              $
              5.00
              
              
              November
                  14, 2016
              
              
              -
              
              
              -
              
              
              -
              
              
              -Terren
                  S. Peizer, Chairman of the Board
              
              
              140,000
              
              
              560,000
              
              
              700,000
              
              $
              5.00
              
              
              November
                  14, 2011
              
              
              -
              
              
              -
              
              
              -
              
              
              -Peter
                  Sotola, Former President **
              
              
              -
              
              
              -
              
              
              -
              
              $
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Winson
                  Tang, Chief Operating Officer
              
              
              -
              
              
              300,000
              
              
              300,000
              
              $
              7.00
              
              
              May
                  11, 2017
              
              
              -
              
              
              -
              
              
              -
              
              
              -Robert
                  Weinstein, Chief Financial Officer
              
              
              -
              
              
              300,000
              
              
              300,000
              
              $
              7.00
              
              
              August
                  10, 2017
              
              
              -
              
              
              -
              
              
              -
              
              
              -




*
      Mr.
      Goldberger resigned as President & COO on August 10, 2007.





**
      Mr.
      Sotola resigned as president on October 13, 2006.





**Compensation
      Of Directors**





The
      following table reflects the compensation of directors for our fiscal year
      ended
      December 31, 2007:





**DIRECTOR
      COMPENSATION**


**Fees**
              
              
              
              
              
              
              
              **Nonqualified****Earned**
              
              
              
              
              
              **Non-Equity**
              
              **Deferred****or
                  Paid in**
              
              
              
              
              
              **Incentive
                  Plan**
              
              **Compensation**
              
              **All
                  Other****Name**
              
              **Cash**
                **($)**
              
              **Stock
                  Awards ($)**
              
              **Option
                  Awards ($)**
              
              **Compensation
                  ($)**
              
              **Earnings**
                **($)**
              
              **Compensation
                  ($)**
              
              **Total**
                **($)**Terren
                  S. Peizer
              
              $
              450,000
              
              $
              -
              
              $
              820,335
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              1,270,335Marc
                  G. Cummins
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Kelly
                  J. McCrann
              
              $
              -
              
              $
              -
              
              $
              47,260
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              47,260Hans-Dietrich
                  Polaschegg
              
              $
              57,390
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              57,390Jay
                  A. Wolf
              
              $
              -
              
              $
              -
              
              $
              101,342
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              101,342




48


**Item
        11. Security Ownership of Certain Beneficial Owners and Management
        and**  **Related
        Stockholder Matters**
 
 **Equity
        Compensation Plans**


The
      following table sets forth information with respect to compensation plans as
      of
      December 31, 2007:





**Equity
      Compensation Plan Information**


Number
                  of securities to be issued upon exercise of outstanding option,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Plan
                  Category(
                  a
                  )
              
              (
                  b
                  )
              
              (
                  c
                  )Equity
                  compensation plans approved by security holders
              
              
              2,200,000
              
              $
              5.73
              
              
              3,712,500Equity
                  compensation plans not approved by security holders
              
              
              -
              
              
              -
              
              
              -Totals
              
              
              2,200,000
              
              $
              5.73
              
              
              3,712,500


**Security
      Ownership of Certain Beneficial Owners**





The
      following table sets forth the securities ownership of our directors, named
      executive officers, and any person or group who is known to us to be the
      beneficial owner of more than five percent of our common stock as of December
      31, 2007:




Amount
                  andnature
                  ofbeneficial
              
              Percent
                  ofName
                  and address of beneficial owner (1)
              
              ownership
              
              classTerren
                  S. Peizer (2)
              
              
              9,540,000
              
              
              65.7
              %Marc
                  G. Cummins (3)
              
              
              930,051
              
              
              6.5
              %Jay
                  A. Wolf (4)
              
              
              377,143
              
              
              2.6
              %Victor
                  Gura (5)
              
              
              125,000
              
              
              0.9
              %Daniel
                  S. Goldberger (6)
              
              
              40,000
              
              
              0.3
              %Kelly
                  J. McCrann
              
              
              -
              
              
              0.0
              %Hans-Dietrich
                  Polaschegg
              
              
              -
              
              
              0.0
              %Winson
                  Tang
              
              
              -
              
              
              0.0
              %Robert
                  Weinstein
              
              
              -
              
              
              0.0
              %All
                  directors and executive officers as a group (9 persons)
              
              
              11,012,194
              
              
              74.9
              %


(1)
            Unless
                otherwise indicated, the address of all of the above named persons
                is c/o
                Xcorporeal, Inc., 12121 Wilshire Blvd., Suite 350, Los Angeles, California
                90025.





(2)
            Includes
                9,400,000 shares held of record by Consolidated National, LLC, of
                which
                Mr. Peizer is the sole managing member and beneficial owner. As of
                December 31, 2007, 140,000 shares of Mr. Peizer’s stock options were
                vested and exercisable within 60
                days..





(3)
            Includes
                930,051shares 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.
                Excludes warrants to purchase 150,000 shares held by OGT, LLC, an
                affiliate of Prime Logic which Mr. Cummins disclaims beneficial ownership
                in such shares 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. As of December 31, 2007, 20,000 shares
                of
                Mr. Wolf’s stock options were vested and exercisable within 60
                days.





(5)
            As
                of December 31, 2007, 125,000 shares of Dr. Gura’s stock options were
                vested and exercisable within 60
                days.





(6)
            As
                of December 31, 2007, 40,000 shares of Mr. Goldberger’s stock options were
                vested and exercisable within 60 days.




49




Unless
      otherwise indicated, we believe that all persons named in the table have sole
      voting and investment power with respect to all shares of our common stock
      beneficially owned by them. A person is deemed to be the beneficial owner of
      securities which may be acquired by such person within 60 days from the date
      on
      which beneficial ownership is to be determined, upon the exercise of options,
      warrants or convertible securities. Each beneficial owner's percentage ownership
      is determined by assuming that options, warrants and convertible securities
      that
      are held by such person (but not those held by any other person) and which
      are
      exercisable, convertible or exchangeable within such 60 day period, have been
      so
      exercised, converted or exchanged.





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





**Transactions
      with Related Persons**





In
      connection with the contribution of the assets to our company, we issued to
      Consolidated National, LLC (CNL), of which our Chairman is the sole managing
      member and beneficial owner, an aggregate of 9,600,000 shares of common stock
      of
      which 9,400,000 shares are still held by CNL.





We
      owed
      $64,620 to Peter Sotola at August 31, 2006, a director of ours as of that date,
      consisting of unpaid advances and management fees. This amount was forgiven
      by
      the former director, who was no longer a shareholder as of the sale of his
      common stock on August 31, 2006. The debt forgiveness was accounted for as
      an
      addition to Paid in Capital.





Our
      Chief
      Medical and Scientific Officer and director of our Company, Dr. Victor Gura,
      owns 13,453,250 shares of common stock of NQCI (or approximately 24.8% of NQCI's
      common stock outstanding as of October 31, 2007) with whom we entered into
      a
      license agreement. In addition, Medipace Medical Group, Inc., an affiliate
      of
      Dr. Gura, owns 800,000 shares of common stock of NQCI (or approximately 1.5%
      of
      NQCI's common stock outstanding as of October 31, 2007).





Pursuant
      to a consulting agreement effective December 1, 2007, Daniel S. Goldberger,
      director, will provide consulting services as a management consultant to us
      with
      a devotion of at least 80 hours per month of services. In consideration of
      the
      services, we shall pay Mr. Goldberger $15,000 per month during the first two
      months and $12,500 per month thereafter. The term of the services is effective
      December 1, 2007 and will continue on a month to month basis.





Our
      Chief
      Medical and Scientific Officer maintains an office located at 9100 Wilshire
      Blvd., Suite 360W, Beverly Hills, CA 91202. Pursuant to the reimbursement
      agreement effective January 29, 2008, we will reimburse 50% of the rental and
      50% of his monthly parking. The term of the agreement shall commence on April
      23, 2007, date of the office lease agreement, and continue until the date on
      which he ceases to use the remote office to perform his duties as our Chief
      Medical and Scientific Officer.





**Director
      Independence**





Messrs.
      Cummins, McCrann, Polaschegg, and Wolf are independent directors under Section
      803(a) of the American Stock Exchange Listing Requirements.




50





**Item
      13: Exhibits**





**No.**
            
            **Description**2.1
            
            Merger
                Agreement (1)3.1
            
            Amended
                and Restated Certificate of Incorporation (1)3.2
            
            Bylaws
                (1)4.1
            
            Specimen
                of Common Stock certificate (1)10.1*
            
            Form
                of Indemnification Agreement for directors (1)10.2*
            
            Xcorporeal,
                Inc. 2007 Incentive Compensation Plan (1)10.3
            
            License
                Agreement (1)10.4*
            
            Contribution
                Agreement (1)10.5*
            
            Employment
                Agreement of Victor Gura, M.D. (1)10.6
            
            Form
                of Innovation, Proprietary Information and Confidentiality Agreement
                (1)10.7*
            
            Executive
                Chairman Agreement of Terren S. Peizer (1)10.8*
            
            Employment
                Agreement of Robert Weinstein (1)10.9*
            
            Consulting
                Agreement of Hans-Dietrich Polaschegg (1)10.10
            
            Services
                Agreement with Aubrey Group, Inc. (1)10.11*
            
            Services
                Agreement with Daniel S. Goldberger (2)14.1
            
            Code
                of Ethics (1)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 13, 2007.





(2)  Incorporated
      by reference to Exhibit 10.1 to current report on Form 8-K filed January 25,
      2008.





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





**Audit
      Fees**





Total
      fees for professional services rendered by our principal accountant for the
      audit and review of our financial statements included in our Form 10-QSBs and
      Form 10-KSBs, and services provided in connection with our other SEC filings
      for
      the year ended December 31, 2006 was $143,000. Total fees for professional
      services rendered by our principal accountant for the audit and review of our
      financial statements included in our Form 10-QSBs and Form 10-KSBs, and services
      provided in connection with our other SEC filings for the year ended December
      31, 2007 was $318,000.





**Audit-Related
      Fees**





Audit-related
      fees are for accounting technical consultations and totaled $24,000 in 2007
      and
      none in 2006.





**Tax
      Fees**





We
      paid
      no fees for professional services with respect to tax compliance, tax advice,
      or
      tax planning to our auditor in 2006 or 2007.




51





**Pre-Approval
      Policy for Audit Services**





Our
      Audit
      Committee has responsibility for the approval of all audit and non-audit
      services before we engage an accountant. All of the services rendered to us
      by
      BDO Seidman, LLP are pre-approved by the Audit Committee before the engagement
      of the auditors for such services. Our pre-approval policy expressly provides
      for the annual pre-approval of all audits, audit-related and all non-audit
      services proposed to be rendered by the independent auditor for the fiscal
      year,
      as specifically described in the auditor's engagement letter, such annual
      pre-approval to be performed by the Audit Committee.




52




**SIGNATURES**





Pursuant
      to the requirements of the Securities and Exchange Act of 1934, the Registrant
      has duly caused this Form 10-KSB to be signed on its behalf by its duly
      authorized representatives.


**XCORPOREAL,
              INC.**By:
            /s/ TERREN
              S.
              PEIZERTerren
                S. Peizer
              Executive
                ChairmanTitle




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





**Signature**
            
            **Title(s)**
            
            **Date**/s/
                TERREN S. PEIZER
              Terren
                S. Peizer
            
            Executive
                Chairman of the Board of Directors
                (Principal
                  Executive Officer)
            
            March
                24, 2008/s/
                DANIEL S. GOLDBERGER
              Daniel
                S. Goldberger
            
            Chief
                Executive Officer and Director
            
            March
                24, 2008/s/
                ROBERT WEINSTEIN
              Robert
                Weinstein
            
            Chief
                Financial Officer (Principal Financial and Accounting
                Officer)
            
            March
                24, 2008/s/
                MARC G. CUMMINS
              
              Marc
                G. Cummins
            
            Director
            
            March
                24, 2008/s/
                VICTOR GURA, M.D.
              
              Victor
                Gura, M.D.
            
            Chief
                Medical & Scientific Officer and Director
            
            March
                24, 2008/s/
                KELLY MCCRANN
              
              Kelly
                McCrann
            
            Director
            
            March
                24, 2008/s/
                HANS POLASCHEGG, PH.D.
              
              Hans
                Polaschegg, Ph.D.
            
            Director
            
            March
                24, 2008/s/
                JAY A. WOLF
              Jay
                  A. Wolf
            
            Director
            
            March
                24, 2008


53