**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


**x**
                QUARTERLY
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF 1934FOR
                    THE QUARTERLY PERIOD ENDED**JUNE
                    30, 2008**p
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF 1934FOR
                    THE TRANSITION PERIOD FROM __________TO
                    __________





Commission
      file number **001-31608**





**XCORPOREAL,
      INC.**


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            **75-2242792**(State
                or other jurisdiction of
              incorporation
                or organization)
            (IRS
                Employer Identification Number)





**12121
      Wilshire Blvd., Suite 350, Los Angeles, California 90025**


(Address
      of principal executive offices)





**(310)
      923-9990**


(Issuer’s
      telephone number)





Check
      whether the issuer (1) filed all reports required 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 x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.




oLarge accelerated filer
            oAccelerated fileroNon-accelerated filer
            xSmaller reporting company





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.





**Class**
            **Outstanding
                as of August 6, 2008**Common
                Stock, $0.0001 par value
            14,704,687
                shares











**INDEX**





PART
                I — FINANCIAL INFORMATION
            2Item
                1. Interim Financial Statements
            2Balance
                Sheets at June 30, 2008 (unaudited) and December 31, 2007
            2Statements
                of Operations (unaudited) for the three and six months ended June
                30, 2008
                and June 30, 2007 and the period from inception (May 4, 2001) to
                June 30,
                2008
            3Statements
                of Cash Flows (unaudited) for the six months ended June 30, 2008
                and June
                30, 2007 and the period from inception (May 4, 2001) to June 30,
                2008
            4Statement
                of Stockholders Equity (Deficit) for the six months ended June 30,
                2008
                and the period from inception (May 4, 2001) to June 30, 2008
                (unaudited)
            5Notes
                to the Interim Financial Statements
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            12Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            15Item
                4. Controls and Procedures
            16PART
                II — OTHER INFORMATION
            17Item
                1. Legal Proceedings
            17Item
                1A. Risk Factors
            17Item
                2. Unregistered Sales of Equity Securities ; Use of Proceeds from
                Registered Securities
            18Item
                6. Exhibits
            18Signatures
            19




1







**PART
      I — FINANCIAL INFORMATION**





**ITEM
      1. Financial Statements**





**XCORPOREAL,
      INC.**


**(a
      Development Stage Company)**


**BALANCE
      SHEETS**




**June
                  30,**
              
              **December
                  31,****2008**
              
              **2007****(Unaudited)****ASSETS**CurrentCash
                  and cash equivalents
              
              $
              67,987
              
              $
              106,495Marketable
                  securities, at fair value
              
              
              9,241,096
              
              
              16,401,898Restricted
                  cash
              
              
              67,873
              
              
              68,016Prepaid
                  Expenses & Other Current Assets
              
              
              361,425
              
              
              408,303Total
                  current assets
              
              
              9,738,381
              
              
              16,984,712Property
                  and equipment, net
              
              
              320,250
              
              
              266,912Other
                  assets
              
              
              892
              
              
              922Total
                  Assets
              
              $
              10,059,523
              
              $
              17,252,546**LIABILITIES**CurrentAccounts
                  payable
              
              $
              1,491,152
              
              $
              1,125,239Accrued
                  professional fees
              
              
              1,371,905
              
              
              425,228Accrued
                  royalties
              
              
              208,333
              
              
              83,333Accrued
                  compensation
              
              
              140,946
              
              
              196,541Accrued
                  other liabilities
              
              
              105,075
              
              
              68,946Payroll
                  liabilities
              
              
              64,505
              
              
              11,926Deferred
                  rent
              
              
              38,309
              
              
              -Other
                  current liabilities
              
              
              115,400
              
              
              115,400Total
                  Current Liabilities
              
              
              3,535,625
              
              
              2,026,613**Commitments
                  and contingencies****STOCKHOLDERS'
                  EQUITY**Preferred
                  Stock, $0.0001 par value, 10,000,000 sharesauthorized,
                  none outstanding
              
              
              -
              
              
              -Common
                  Stock, $0.0001 par value, 40,000,000 sharesauthorized,
                  14,704,687 and 14,372,472 outstanding onJune
                  30, 2008 and December 31, 2007, respectively
              
              
              1,470
              
              
              1,437Additional
                  paid-in capital
              
              
              39,786,986
              
              
              36,822,316Deficit
                  accumulated during the development stage
              
              
              (33,264,558
              )
              
              (21,597,820
              )Total
                  Stockholders' Equity
              
              
              6,523,898
              
              
              15,225,933Total
                  Liabilities & Stockholders' Equity
              
              $
              10,059,523
              
              $
              17,252,546


See
      accompanying notes to interim financial statements.




2





**XCORPOREAL,
      INC.**


**(a
      Development Stage Company)**


**STATEMENTS
      OF OPERATIONS**


**(Unaudited)**




**May
                  4, 2001 (Date****Three
                  Months Ended**
              
              **Six
                  Months Ended**
              
              **of
                  Inception) to****June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**
              
              **2008**Operating
                  Expenses:Selling,
                  general and administrative
              
              $
              1,895,013
              
              $
              1,611,188
              
              $
              5,644,652
              
              $
              5,590,288
              
              $
              20,047,344Research
                  and development
              
              
              3,473,480
              
              
              1,482,037
              
              
              6,205,972
              
              
              2,688,134
              
              
              14,634,464Depreciation
                  and amortization
              
              
              26,076
              
              
              3,862
              
              
              48,584
              
              
              5,383
              
              
              80,850Loss
                  before other income and income taxes
              
              
              (5,394,569
              )
              
              (3,097,087
              )
              
              (11,899,208
              )
              
              (8,283,805
              )
              
              (34,762,658
              )Interest
                  and other income
              
              
              78,196
              
              
              308,060
              
              
              234,070
              
              
              619,926
              
              
              1,501,300Loss
                  before income taxes
              
              
              (5,316,373
              )
              
              (2,789,027
              )
              
              (11,665,138
              )
              
              (7,663,879
              )
              
              (33,261,358
              )Income
                  taxes
              
              
              -
              
              
              -
              
              
              1,600
              
              
              -
              
              
              3,200Net
                  Loss
              
              $
              (5,316,373
              )
              $
              (2,789,027
              )
              $
              (11,666,738
              )
              $
              (7,663,879
              )
              $
              (33,264,558
              )Basic
                  and diluted loss per share
              
              $
              (0.36
              )
              $
              (0.20
              )
              $
              (0.81
              )
              $
              (0.54
              )Weighted
                  average number of shares outstanding
              
              
              14,593,485
              
              
              14,200,050
              
              
              14,488,473
              
              
              14,200,050




See
      accompanying notes to interim financial statements.




3




**XCORPOREAL,
      INC.**


**(a
      Development Stage Company)**


**STATEMENTS
      OF CASH FLOWS**


**(Unaudited)**


**May
                  4, 2001 (Date****Six
                  Months Ended**
              
              **of
                  Inception) to****June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008****Cash
                  flows used in operating activities**Net
                  Loss for the Period
              
              $
              (11,666,738
              )
              $
              (7,663,879
              )
              $
              (33,264,558
              )**Adjustments
                  to reconcile net loss to net cash (used in) operating
                  activities:**Stock
                  Based Compensation
              
              
              2,081,958
              
              
              1,483,464
              
              
              6,067,694Non-employee
                  Stock Based Compensation
              
              
              84,745
              
              
              2,795,124
              
              
              5,164,665Common
                  Stock Issuance for consulting services rendered
              
              
              798,000
              
              
              -
              
              
              896,000Depreciation
              
              
              48,554
              
              
              5,383
              
              
              80,742Net
                  Change in assets and liabilities:Decrease
                  (increase) in Prepaid Expenses & Other Current Assets
              
              
              46,878
              
              
              (80,640
              )
              
              (361,425
              )Decrease
                  (increase) in Other Assets
              
              
              30
              
              
              -
              
              
              (892
              )Increase
                  (decrease) in Accounts Payable and Accrued Liabilities
              
              
              1,470,703
              
              
              (815,824
              )
              
              3,344,543Increase
                  in Deferred Rent
              
              
              38,309
              
              
              -
              
              
              38,309Increase
                  in Other Current Liabilities
              
              
              -
              
              
              -
              
              
              115,401Net
                  Cash Used in Operating Activities
              
              
              (7,097,561
              )
              
              (4,276,372
              )
              
              (17,919,521
              )**Cash
                  Flows from Investing Activities**Capital
                  Expenditures
              
              
              (101,892
              )
              
              (58,100
              )
              
              (400,992
              )Restricted
                  Cash
              
              
              143
              
              
              (83,050
              )
              
              (67,873
              )Purchase
                  of marketable securities
              
              
              (8,598,102
              )
              
              (25,000,000
              )
              
              (33,598,102
              )Sale
                  of marketable securities
              
              
              15,758,904
              
              
              2,323,422
              
              
              24,357,006Net
                  Cash Provided by (Used in) Investing Activities
              
              
              7,059,053
              
              
              (22,817,728
              )
              
              (9,709,961
              )**Cash
                  Flows from Financing Activities**Capital
                  Stock issued
              
              
              -
              
              
              -
              
              
              27,434,349Advances
                  from related party
              
              
              -
              
              
              -
              
              
              64,620Additional
                  Proceeds from the Sale of Common Stock in 2006
              
              
              -
              
              
              -
              
              
              198,500Net
                  Cash Provided by Financing Activities
              
              
              -
              
              
              -
              
              
              27,697,469Increase/(decrease)
                  in cash during the period
              
              
              (38,508
              )
              
              (27,094,100
              )
              
              67,987Cash,
                  beginning of the period
              
              
              106,495
              
              
              27,440,987
              
              
              -Cash,
                  end of the period
              
              $
              67,987
              
              $
              346,887
              
              $
              67,987Supplemental
                  disclosure of cash flow information; cash paid for:Interest
              
              $
              -
              
              $
              -
              
              $
              -Income
                  taxes
              
              $
              1,600
              
              $
              -
              
              $
              3,200




See
      accompanying notes to interim financial statements.




4






**XCORPOREAL,
      INC.**


**(a
      Development Stage Company)**


**STATEMENTS
      OF STOCKHOLDERS’ EQUITY (DEFICIENCY)**


**For
      the Period May 4, 2001 (Inception) to June 30, 2008**


**(Unaudited)**


**Common
                    Stock**
                
                **AdditionalPaid-in**
                
                **Deficit**AccumulatedDuringDevelopment**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 pershare
                
                
                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 placementfees
                    of $2,058,024d
                
                
                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 in2006
                
                
                
                
                
                
                
                
                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
                )
                
                15,225,933Common
                    stock issued as compensation for consultingservices
                    at $3.61 per share
                
                
                200,000
                
                
                20
                
                
                721,980
                
                
                
                
                
                722,000Warrants
                    granted for consulting services
                
                
                
                
                
                
                
                
                75,489
                
                
                
                
                
                75,489Stock-based
                    compensation expense
                
                
                
                
                
                
                
                
                1,121,118
                
                
                
                
                
                1,121,118Net
                    loss for the period
                
                
                
                
                
                
                
                
                
                
                
                (6,350,365
                )
                
                (6,350,365
                )Balance
                    as of March 31, 2008
                
                
                14,572,472
                
                
                1,457
                
                
                38,740,903
                
                
                (27,948,185
                )
                
                10,794,175Common
                    stock issued as compensation for consultingservices
                    at $3.80 per share
                
                
                20,000
                
                
                2
                
                
                75,998
                
                
                
                
                
                76,000Cashless
                    exercise of warrants
                
                
                112,215
                
                
                11
                
                
                (11
                )
                
                
                
                
                0Warrants
                    granted for consulting services
                
                
                
                
                
                
                
                
                9,256
                
                
                
                
                
                9,256Stock-based
                    compensation expense
                
                
                
                
                
                
                
                
                960,840
                
                
                
                
                
                960,840Net
                    loss for the period
                
                
                
                
                
                
                
                
                
                
                
                (5,316,373
                )
                
                (5,316,373
                )Balance
                    as of June 30, 2008
                
                
                14,704,687
                
                $
                1,470
                
                $
                39,786,986
                
                $
                (33,264,558
                )
                $
                6,523,898


See
      accompanying notes to interim financial statements.




5




**XCORPOREAL,
      INC.**


**(a
      Development Stage Company)**


**NOTES
      TO INTERIM FINANCIAL STATEMENTS**


**June
      30, 2008**


**(Unaudited)**





**Note
      1 — Interim Reporting**





While
      information presented in the accompanying interim financial statements is
      unaudited, it includes all adjustments, which are, in the opinion of management,
      necessary to present fairly the financial position, results of operations and
      cash flows for the interim period presented. Except for the accrual for the
      Licensor Expenses discussed in Note 11-License Agreement below, all adjustments
      are of a normal recurring nature. It is suggested that these interim financial
      statements be read in conjunction with our December 31, 2007 financial
      statements.





The
      results of operations for the period ended June 30, 2008 are not necessarily
      indicative of the results that can be expected for the year ended December
      31,
      2008.





**Note
      2 — Nature of Operations and Going Concern Uncertainty**





On
      October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc. (referred
      to hereinafter as Operations), our newly-formed wholly-owned merger subsidiary,
      merged with and into Operations, which became our wholly-owned subsidiary and
      changed its name to “Xcorporeal Operations, Inc.” We changed our name from CT
      Holdings Enterprises, Inc. (CTHE) to “Xcorporeal, Inc.” and amended our
      certificate of incorporation and bylaws to read substantially as Operations.
      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 Operations common stock was then converted into one share of
      our
      common stock. In addition, we assumed all outstanding Operations options and
      warrants to purchase Operations 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 Operations owned over 97%
      of
      the outstanding voting common stock of CTHE immediately after the merger and
      CTHE was a public shell company, Operations is considered the accounting
      acquirer and the transaction is considered to be a recapitalization of
      Operations.





Historical
      financial statements prior to the merger were restated to be those of
      Operations. The merger is accounted for as if it were an issuance of the common
      stock of Operations to acquire our net assets, accompanied by a
      recapitalization. Historical stockholders’ equity of Operations 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 Operations are carried forward at their
      predecessor carrying amounts. Retained deficiency of Operations is carried
      forward after the merger. Operations prior to the merger are those of
      Operations. Earnings per share for periods prior to the merger are restated
      to
      reflect the number of equivalent shares received by Operations’s stockholders.
      The costs of the transaction will be expensed to the extent they exceed cash
      received from CTHE. References to "we," "us, "our" and the "company" after
      consummation of the merger include CTHE and Operations.





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.





We
      expect
      to incur negative cash flows and net losses for the foreseeable future. Based
      upon our current plans, we believe that our existing cash reserves will not
      be
      sufficient to meet our operating expenses and capital requirements before we
      achieve profitability. Accordingly, we may seek to raise additional funds
      through public or private placement of shares of preferred or common stock
      or
      through public or private financing. Our ability to meet our cash obligations
      as
      they become due and payable will depend on our ability to sell securities,
      borrow funds, reduce operating costs or some combination thereof. We may not
      be
      successful in raising necessary funds on acceptable terms, or at all. As a
      result of these conditions, there is substantial doubt about our ability to
      continue as a going concern. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




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 and $11.7 million
      in the six months ended June 30, 2008. In addition, we invested $25.0 million
      in
      high grade money market funds and marketable securities of which we sold $15.8
      million of the investments, leaving a balance of $9.2 million as of June 30,
      2008. The final product design of the PAK will be completed shortly 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 increase 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.




6




**Note
      3 — 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.





*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.




**Note
      4 - Legal Proceedings**





On
      December 1, 2006, Operations initiated arbitration against National Quality
      Care, Inc. (NQCI) for NQCI's failure to fully perform its obligations under
      the
      License Agreement dated September 1, 2006. On September 1, 2006, Operations
      also
      entered into a Merger Agreement with NQCI which contemplated that Operations
      would acquire NQCI as a wholly owned subsidiary pursuant to a triangular merger,
      or would issue to NQCI shares of common stock in consideration of the assignment
      of the technology relating to the WAK and other medical devices (the “Technology
      Transaction”). The merger was not consummated.





On
      June
      9, 2008, the arbitrator issued an Interim Award granting specific performance
      of
      the Technology Transaction. The Interim Award stated that the total aggregate
      shares of stock to be received by NQCI at the Closing should equal 48% of all
      Operations shares outstanding as of the date of the Merger Agreement. On
      September 1, 2006, there were 10,000,000 shares of Operations common stock
      outstanding. Copies of the License Agreement and Merger Agreement are attached
      as exhibits to our amended current report on Form 8-K/A filed with the
      Securities and Exchange Commission on June 11, 2008.





On
      August
      4, 2008, the arbitrator issued a Second Interim Award, stating that 9,230,000
      shares of our common stock should be issued to NQCI to effectuate the Technology
      Transaction. The arbitrator found that, with the exception of shareholder
      approval, virtually all conditions to Closing the Technology Transaction have
      been waived. The award further states that, if we or our stockholders do not
      approve the issuance of our stock to effectuate the Technology Transaction,
      all
      of the Technology covered by the License will be declared the sole and exclusive
      property of NQCI, and the arbitrator will schedule additional hearings to
      address whether the PAK technology is included within that Technology, and
      whether NQCI is entitled to compensatory damages and the amount of damages,
      if
      any, under these circumstances. The arbitrator has also stated that NQCI is
      entitled to recover reasonable attorneys’ fees. NQCI has filed a motion seeking
      $3.9 million in fees, which we have opposed. Each of the Interim Awards state
      that it is an interim award subject to further proceedings, and is not intended
      to be a final award subject to a motion to confirm before a court of competent
      jurisdiction.





The
      Second Interim Award also states that—contrary to the assertion made by NQCI in
      its current report on Form 8-K filed on June 10, 2008—the License Agreement will
      remain in full force and effect until the Technology Transaction closes or
      the
      arbitrator determines that it will never close. NQCI has made a claim for
      reimbursement of approximately $690,000 in expenses under the License Agreement
      which were accrued under “Accrued Professional Fees” as of June 30,
      2008.




The
      above interim awards are not yet binding or final.
      Therefore, no liability for the above awards has been accrued as no reliable
      estimate can currently be made.





**Note
      5 — Cash Equivalents and Marketable Securities**





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 June 30, 2008, all of our cash was held in high grade
      money market funds and marketable securities.





Restricted
      cash represents deposits secured as collateral for a bank credit card
      program.





**Note
      6 — Fair Value Measurements**





Effective
      January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value, and expands disclosures about fair value measurements. This statement
      does not require any new fair value measurements; rather, it applies to other
      accounting pronouncements that require or permit fair value measurements. In
      February 2008, FSP FAS 157-2, “Effective Date of FASB Statement
      No. 157”, was issued, which delays the effective date of SFAS 157 to
      fiscal years and interim periods within those fiscal years beginning after
      November 15, 2008 for non-financial assets and non-financial liabilities,
      except for items that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually). We elected to defer the
      adoption of the standard for these non-financial assets and
      liabilities.




7




Fair
      value is defined under SFAS 157 as the price that would be received to sell
      an
      asset or paid to transfer a liability in the principal or most advantageous
      market in an orderly transaction between market participants on the measurement
      date. SFAS 157 also establishes a three-level hierarchy, which requires an
      entity to maximize the use of observable inputs and minimize the use of
      unobservable inputs when measuring fair value.





Beginning
      January 1, 2008, assets and liabilities recorded at fair value in the balance
      sheet are categorized based upon the level of judgment associated with the
      inputs used to measure their fair value. Level inputs, as defined by SFAS 157,
      are as follows:





·
            Level
                I - inputs are unadjusted, quoted prices for identical assets or
                liabilities in active markets at the measurement
                date.





·
            Level
                II - inputs, other than quoted prices included in Level I, that are
                observable for the asset or liability through corroboration with
                market
                data at the measurement date.





·
            Level
                III - unobservable inputs that reflect management’s best estimate of what
                market participants would use in pricing he asset or liability at
                the
                measurement date.





The
      following tables summarize fair value measurements by level at June 30, 2008
      for
      assets and liabilities measured at fair value on a recurring basis:


**Level
                  I**
              
              **Level
                  II**
              
              **Level
                  III**
              
              **Total**Cash
                  and cash equivalents
              
              $
              67,987
              
              $
              -
              
              $
              -
              
              $
              67,987Marketable
                  securities:Commercial
                  paper
              
              
              3,787,047
              
              
              -
              
              
              -
              
              
              3,787,047Corporate
                  securities fixed rate
              
              
              660,336
              
              
              -
              
              
              -
              
              
              660,336Money
                  market fund
              
              
              4,793,713
              
              
              -
              
              
              -
              
              
              4,793,713Restricted
                  cash
              
              
              67,873
              
              
              -
              
              
              -
              
              
              67,873Total
                  assets
              
              $
              9,376,956
              
              $
              -
              
              $
              -
              
              $
              9,376,956




Short-term
      investments classified as available-for-sale were as follows:


**June
                  30, 2008****Aggregate
                  Fair****Value**
              
              **Gross
                    Unrealized**Gains / (Losses)
              
              **Estimated
                    Fair**ValueCommercial
                  paper
              
              
              3,787,047
              
              
              -
              
              
              3,787,047Corporate
                  securities fixed rate
              
              
              660,336
              
              
              -
              
              
              660,336Total
              
              $
              4,447,383
              
              $
              -
              
              $
              4,447,383




Xcorporeal
      reviews impairments associated with the above in accordance with SFAS No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities,” and FASB
      Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments,” to determine the
      classification of the impairment as temporary or other-than-temporary.
      Xcorporeal considers these investments not to be temporarily impaired as of
      June
      30, 2008.





There
      were no gross unrealized gains or losses as of June 30, 2008.




**Note
      7 - Property and Equipment**





Property
      and equipment consist of the following at June 30, 2008:





Property
                and equipment
            
            $
            400,992Accumulated
                depreciation
            
            
            (80,742
            )Property
                and equipment, net
            
            $
            320,250




8




Depreciation
      expense for the three and six months ended June 30, 2008 and 2007 was $26,061
      and $48,554, and $3,847 and $5,334, respectively.





**Note
      8 - Leases**





As
      of
      February 22, 2008, we entered into a 5 year lease agreement and relocated our
      corporate office to a location in Los Angeles, CA. The total lease payments
      will
      be $1,096,878 over a 5 year period. As of June 30, 2008, our remaining total
      lease payments are $1,062,062.





The
      following is a schedule by years of future minimum lease payments required
      under
      the 5-year corporate office lease as of June 30, 2008:


Year
                  ending December 31:2008
              
              $
              104,448
              
              
              (1)2009
              
              
              215,8592010
              
              
              224,6502011
              
              
              233,5282012
              
              
              242,8422013
              
              
              40,735
              
              
              (2)Total
                  minimum payments required
              
              $
              1,062,062




(
                  1
                  ) excludes lease payments made through June 30, 2008(
                  2
                  ) initial term of the lease agreement ends February
                  2013




On
      May
      15, 2008, we executed the second amendment to the sublease agreement for office
      and warehouse space from Aubrey Group, Inc. Pursuant to the amendment, we
      acquired additional office and warehouse space. In addition, our monthly
      sublease rent increased to $8,715 through December 31, 2008. As of June 30,
      2008, our remaining total sublease payments are $52,288 for this one year
      sublease agreement.





**Note
      9 — Interest Income**





Interest
      income of $82,226 and $234,694, and $308,060 and $619,926 was reported for
      the
      three and six months ended June 30, 2008 and 2007, respectively.





**Note
      10 — Related Party Transactions**





Pursuant
      to a consulting agreement effective December 1, 2007, Daniel S. Goldberger,
      director, provides consulting services as interim Chief Executive Officer 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. From execution
      through June 30, 2008, Mr. Goldberger was compensated $92,500 for his
      services.





Our
      Chief
      Medical and Scientific Officer maintains an office located in Beverly Hills,
      California. Pursuant to a reimbursement agreement effective January 29, 2008,
      we
      reimburse 50% of the rental and 50% of his monthly parking. The term of the
      agreement commenced on April 23, 2007, the 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. From
      commencement through June 30, 2008, we reimbursed our Chief Medical and
      Scientific Officer $1,239 and $24,386 for 50% of the monthly parking and rental,
      respectively.





**Note
      11 — 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. Operations
      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 $458,333 in royalty expenses covering the minimum royalties
      from commencement of the License Agreement through June 30, 2008. The License
      Agreement expires in 2105. As of June 30, 2008, we made one payment of the
      minimum annual royalty of $250,000.




9




The
      License Agreement also stipulates the reimbursement of reasonable and necessary
      expenses incurred in the ordinary course of business consistent with past
      practices (“Licensor Expenses”) until the Closing or the termination of the
      Merger Agreement. NQCI has made a claim for reimbursement of approximately
      $690,000 in expenses under the License Agreement which were accrued under
“Accrued Professional Fees” as of June 30, 2008. See Note 4 - Legal Proceedings
      for further additional information related to this License Agreement.





**Note
      12 — 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 Operations 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, net 450,000 of which have since been canceled or expired, that
      were granted by Operations under its 2006 Incentive Compensation
      Plan.





As
      of
      June 30, 2008, there were 137,500 optioned shares outstanding and 3,762,500
      shares available under the 2007 Incentive Compensation Plan.





***Stock
      Options to Employees, Officer and Directors***





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.





In
      the
      three months ended June 30, 2008, we granted options to purchase an aggregate
      of
      35,000 shares of common stock to three employees. The options vest over 5 years,
      are exercisable at $7.00 per share, and expire in 2018.





We
      reported $960,840 and $2,081,958 in stock-based compensation expense for
      employees, officers, and directors for the three and six months ended June
      30,
      2008, respectively. For the three and six months ended June 30, 2007, we
      reported $844,400 and $1,483,464 in stock-based compensation expense for
      employees, officers, and directors, respectively.





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 six months endedJune
                  30, 2008Expected
                  dividend yields
              
              
              zeroExpected
                  volatility
              
              
              136
              %Risk-free
                  interest rate
              
              
              3.53-3.81
              %Expected
                  terms in years
              
              
              10
                  years




***Warrants
      and Stock Options to Non-Employees***





In
      the
      six months ended June 30, 2008, there were no issuance of warrants. However,
      there were cashless exercises of warrants in the three months ended June 30,
      2008.





We
      reported $9,256 and $84,745 in stock-based compensation expense for consultants
      for the three and six months ended June 30, 2008, respectively. We reported
      $137,489 and $2,795,124 in stock-based compensation expense for consultants
      for
      the three and six months ended June 30, 2007, respectively.





Compensation
      for options granted to non-employees has been determined in accordance with
      SFAS
      No. 123R, 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.




10





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 six months ended
                June
                  30, 2008Expected
                  dividend yields
              
              
              zeroExpected
                  volatility
              
              
              136
              %Risk-free
                  interest rate
              
              
              2.36-4.69
              %Expected
                  terms in years
              
              
              4.30-9.37
                  years




The
      following table shows the change in unamortized compensation expense for stock
      options and warrants issued to employees, officers, directors and non-employees
      during the six months ended June 30, 2008:


Stock
                    Options andWarrants
              
              
              
              Unamortized
                  CompensationOutstanding
              
              
              
              ExpenseJanuary
                  1, 2008
              
              
              4,674,221
              
              
              
              
              $
              18,228,742Granted
                  in the period
              
              
              55,000
              
              
              
              
              
              207,447Forfeited
                  in the period
              
              
              (285,000
              )
              
              
              
              
              (1,355,844
              )Expensed
                  in the period
              
              
              -
              
              
              
              
              
              (3,167,215
              )Exercised
                  in the period
              
              
              (325,000
              )
              
              (1)
              
              
              -June
                  30, 2008
              
              
              4,119,221
              
              
              
              
              $
              13,913,130




(1)
      The
      cashless exercises of the granted 325,000 warrant shares resulted in the
      issuance of an aggregate of 112,215 shares of our common stock.


WeightedNumber
                  of
              
              AverageOptions
                  and
              
              ExerciseWarrants
              
              PriceStock
                  Options and WarrantsBalance
                  at January 1, 2008
              
              
              4,674,221
              
              $
              6.01Granted
              
              
              55,000
              
              
              7.00Exercised
              
              
              (325,000
              )
              
              1.00Forfeited
              
              
              (285,000
              )
              
              7.00Balance
                  at June 30, 2008
              
              
              4,119,221
              
              $
              6.35




**Note
      13 — Stockholders’ Equity**





On
      April
      2, 2008, 20,000, shares of our common stock were granted as compensation for
      consulting services rendered to us.





On
      April
      9, 2008, Consolidated National, LLC (CNL), a limited liability company whose
      managing member is our Executive Chairman, sold 3,167,404 shares of our common
      stock in a private placement. Approximately 230,000 shares were sold to our
      officers and directors. We did not receive any proceeds from this sale by or
      for
      the account of the selling stockholder.





On
      June
      30, 2008, we issued an aggregate of 112,215 shares of our common stock pursuant
      to cashless exercise of warrants by three warrant holders.





**Note
      14 — Product Development Agreement**





In
      July
      2007, we entered into an agreement with Aubrey Group, Inc., an FDA-registered
      third-party contract developer and manufacturer of medical devices for the
      design and development of a Portable Artificial Kidney ("PAK"). The PAK will
      be
      designed for use as an Intermittent as well as a Continuous Renal Replacement
      Therapy (CRRT) in the hospital with medical supervision. The development is
      expected to be completed by the end of 2008 and projected labor and material
      costs are estimated at approximately $5.1 million over the term. The agreement
      can be terminated at any time with 30 business days notice. From commencement
      through June 30, 2008, we incurred $2,553,387 in expense for the services
      rendered under this agreement.




11




**Note
      15 — Subsequent Events**





On
      August
      4, 2008, we relocated our laboratory to our Irvine subleased
      facility.





On
      August
      4, 2008, the arbitrator issued a Second Interim Award, stating that 9,230,000
      shares of our common stock should be issued to NQCI to effectuate the Technology
      Transaction. The arbitrator found that, with the exception of shareholder
      approval, virtually all conditions to Closing the Technology Transaction have
      been waived. The award further states that, if we or our stockholders do not
      approve the issuance of our stock to effectuate the Technology Transaction,
      all
      of the Technology covered by the License will be declared the sole and exclusive
      property of NQCI, and the arbitrator will schedule additional hearings to
      address whether the PAK technology is included within that Technology, and
      whether NQCI is entitled to compensatory damages and the amount of damages,
      if
      any, under these circumstances. The arbitrator has also stated that NQCI is
      entitled to recover reasonable attorneys’ fees.





**ITEM
      2. Management’s Discussion and Analysis or Plan of Operation.**





*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our financial statements and the related notes,
      and
      the other financial information included in this report.*





**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.





**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
                PAK for hospital Renal Replacement Therapy
                (RRT);




•
            A
                PAK for home hemodialysis; and




•
            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. We have
      completed our functional prototype of the product, which is currently undergoing
      bench testing, and will submit a 510(k) filing with the FDA during the fourth
      quarter of 2008. We plan to commercialize the product after receiving approval
      from the FDA. Timing of FDA approval is uncertain at this time.




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. 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. Clinical trials are anticipated to commence
      within 12 months.




12




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. We plan to continue our development of this
      product over the next 12 months **.**




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.





**Research
      and Development**





***R&D
      Team***





We
      have
      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 will continue development
      of our products utilizing The Aubrey Group in conjunction with our existing
      team.





We
      incurred $3.5 million and $6.2 million in research and development costs in
      the
      three and six months ended June 30, 2008, respectively. This compares to $1.5
      million and $2.7 million incurred in the three and six months ended June 30,
      2007.





***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
      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.





**Management’s
      Discussion and Analysis**





***Results
      of Operations for the three and six months ended June 30,
      2008.***





We
      have
      not generated any revenues since inception. We incurred a net loss of $5.3
      million and $11.7 million for the three and six months ended June 30, 2008,
      respectively, compared to a net loss of $2.8 million and $7.7 million for the
      three and six months ended June 30, 2007, respectively. The increase in net
      loss
      was primarily due to (i) research, development and other expenses related to
      advancing our kidney failure treatment technologies, (ii) stock compensation
      expense related to options and warrants granted to directors, officers,
      employees, and consultants, (iii) legal fees, and (iv) increased company
      personnel. At June 30, 2008, we had positive working capital of $6.2 million
      compared to positive working capital of $15.0 million at the beginning of the
      year.





***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
      June 30, 2008, we had cash, cash equivalents and marketable securities of
      approximately $9.3 million. We are currently expending cash at a rate of
      approximately $1.2 million per month. In addition, we may become obligated
      to
      pay damages, costs or legal fees in connection with the ongoing arbitration
      described under Part II, Item 1. Legal Proceedings, in amounts yet to be
      determined. **** At
      present rates, we will have to raise additional funds during the next twelve
      months. We may not be successful in doing so on terms acceptable to us, and
      the
      inability to raise capital could require us to curtail our current plans in
      order to decrease spending, which could have a material adverse effect on our
      plan of operation. Our ability to execute on our current business plan is
      dependent upon our ability to obtain equity financing, develop and market our
      products, and, ultimately, to generate revenue.




13





We
      expect
      to incur negative cash flows and net losses for the foreseeable future. Based
      upon our current plans, we believe that our existing cash reserves will not
      be
      sufficient to meet our operating expenses and capital requirements before we
      achieve profitability. Accordingly, we may seek to raise additional funds
      through public or private placement of shares of preferred or common stock
      or
      through public or private financing. Our ability to meet our cash obligations
      as
      they become due and payable will depend on our ability to sell securities,
      borrow funds, reduce operating costs or some combination thereof. We may not
      be
      successful in raising necessary funds on acceptable terms, or at all. As a
      result of these conditions, there is substantial doubt about our ability to
      continue as a going concern. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.




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 and $11.7 million
      in the six months ended June 30, 2008. In addition, we invested $25.0 million
      in
      high grade money market funds and marketable securities of which we sold $15.8
      million of the investments, leaving a balance of $9.2 million as of June 30,
      2008. The final product design of the PAK will be completed shortly 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 increase 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
      PAK
      and a separate, interdisciplinary team developing the 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 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
      shortly 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.





In
      a
      clinical feasibility study conducted in London in March 2007, a research
      prototype of the WAK was successfully demonstrated 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. 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 $3.5 million and $6.2 million in research and development costs in
      the
      three and six months ended June 30, 2008, respectively. This compares to $1.5
      million and $2.7 million incurred in the three and six months ended June 30,
      2007.





**Contractual
      Obligations and Commercial Commitments**


**Contractual
                  Obligations and Commercial Commitments****Less
                  than 1**
              
              
              
              
              
              **More
                  than 5****Contractual
                  Obligations:**
              
              **Total**
              
              **year**
              
              **1
                  - 3 years**
              
              **3
                  - 5 years**
              
              **years****Capital
                  Lease Obligations**
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**Operating
                  Lease Obligations (1)**
              
              
              1,264,424
              
              
              194,649
              
              
              786,199
              
              
              283,576
              
              
              -**Research
                  & Development Contractual Commitments**
              
              
              162,148
              
              
              162,148
              
              
              -
              
              
              -
              
              
              -**Other
                  Liabilities**
              
              
              97,167
              
              
              97,167
              
              
              -
              
              
              -
              
              
              -$
              1,523,737
              
              $
              453,963
              
              $
              786,199
              
              $
              283,576
              
              $
              -




(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 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 $3.0 million for 2008 under this agreement.





**Off-Balance
      Sheet Arrangements**




14




As
      of
      June 30, 2008, 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.





***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.





Short-term
      investments classified as available-for-sale were as follows:


**June
                  30, 2008****Aggregate
                  Fair**
              
              **Gross
                  Unrealized**
              
              **Estimated
                  Fair****Value**
              
              **Gains
                  / (Losses)**
              
              **Value**Commercial
                  paper
              
              
              3,787,047
              
              
              -
              
              
              3,787,047Corporate
                  securities fixed rate
              
              
              660,336
              
              
              -
              
              
              660,336Total
              
              $
              4,447,383
              
              $
              -
              
              $
              4,447,383




Xcorporeal
      reviews impairments associated with the above in accordance with SFAS No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities,” and FASB
      Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments,” to determine the
      classification of the impairment as temporary or other-than-temporary.
      Xcorporeal considers these investments not to be temporarily impaired as of
      June
      30, 2008.





There
      were no gross unrealized gains or losses as of June 30, 2008.





*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 our
      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.





**ITEM
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





We
      invest
      our cash in short term high grade commercial paper, certificates of deposit,
      money market accounts, and marketable securities. We consider any liquid
      investment with an original maturity of three months or less when purchased
      to
      be cash equivalents. We classify investments with maturity dates greater than
      three months when purchased as marketable securities, which have readily
      determined fair values and are classified as available-for-sale securities.
      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.




15





Investments
      in both fixed rate and floating rate interest earning instruments carry a degree
      of interest rate risk arising from changes in the level or volatility of
      interest rates; however, interest rate movements do not materially affect the
      market value of our portfolio because of the short-term nature of these
      investments. A reduction in the overall level of interest rates may produce
      less interest income from our investment portfolio. The market risk associated
      with our investments in debt securities is substantially mitigated by the
      frequent turnover of our portfolio.





**ITEM
      4. Controls and Procedures**




We
      conducted an evaluation, under the supervision and with the participation of
      our
      Executive Chairman (principal executive officer) and Chief Financial Officer
      (principal financial officer), of our disclosure controls and procedures (as
      defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2008. Based
      upon this evaluation, our Executive Chairman and Chief Financial Officer
      concluded that our disclosure controls and procedures were effective to ensure
      that required material information is included in this quarterly report for
      the
      period ended June 30, 2008.





There
      were no changes in our internal control over financial reporting during the
      quarter ended June 30, 2008 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




16





**PART
      II — OTHER INFORMATION**





**ITEM
      1. Legal Proceedings.**





On
      December 1, 2006, Operations initiated arbitration against National Quality
      Care, Inc. (NQCI) for NQCI's failure to fully perform its obligations under
      the
      License Agreement dated September 1, 2006. On September 1, 2006, Operations
      also
      entered into a Merger Agreement with NQCI which contemplated that Operations
      would acquire NQCI as a wholly owned subsidiary pursuant to a triangular merger,
      or would issue to NQCI shares of common stock in consideration of the assignment
      of the technology relating to the WAK and other medical devices (the “Technology
      Transaction”). The merger was not consummated.





On
      June
      9, 2008, the arbitrator issued an Interim Award granting specific performance
      of
      the Technology Transaction. The Interim Award stated that the total aggregate
      shares of stock to be received by NQCI at the Closing should equal 48% of all
      Operations shares outstanding as of the date of the Merger Agreement. On
      September 1, 2006, there were 10,000,000 shares of Operations common stock
      outstanding. Copies of the License Agreement and Merger Agreement are attached
      as exhibits to our amended current report on Form 8-K/A filed with the
      Securities and Exchange Commission on June 11, 2008.





On
      August
      4, 2008, the arbitrator issued a Second Interim Award, stating that 9,230,000
      shares of our common stock should be issued to NQCI to effectuate the Technology
      Transaction. The arbitrator found that, with the exception of shareholder
      approval, virtually all conditions to Closing the Technology Transaction have
      been waived. The award further states that, if we or our stockholders do not
      approve the issuance of our stock to effectuate the Technology Transaction,
      all
      of the Technology covered by the License will be declared the sole and exclusive
      property of NQCI, and the arbitrator will schedule additional hearings to
      address whether the PAK technology is included within that Technology, and
      whether NQCI is entitled to compensatory damages and the amount of damages,
      if
      any, under these circumstances. The arbitrator has also stated that NQCI is
      entitled to recover reasonable attorneys’ fees. NQCI has filed a motion seeking
      $3.9 million in fees, which we have opposed. Each of the Interim Awards state
      that it is an interim award subject to further proceedings, and is not intended
      to be a final award subject to a motion to confirm before a court of competent
      jurisdiction.





The
      Second Interim Award also states that—contrary to the assertion made by NQCI in
      its current report on Form 8-K filed on June 10, 2008—the License Agreement will
      remain in full force and effect until the Technology Transaction closes or
      the
      arbitrator determines that it will never close. NQCI has made a claim for
      reimbursement of approximately $690,000 in expenses under the License Agreement
      which were accrued under “Accrued Professional Fees” as of June 30,
      2008.




The
      above interim awards are not yet binding or final.
      Therefore, no liability for the above awards has been accrued as no reliable
      estimate can currently be made.





**ITEM
      1A. Risk Factors.**





****  *Investing
      in our common stock involves a high degree of risk. In addition to the
      information in this report, you should carefully consider the risks described
      under Risk Factors in Part I, Item 1 of our Annual Report on Form 10-KSB for
      the
      year ended December 31, 2007, and the revised risk factors noted below. If
      any
      of such risks actually occurs, our business, results of operations and financial
      condition will likely suffer. As a result the trading price of our common stock
      may decline, and you might lose part or all of your investment*





**An
      unfavorable result in the pending arbitration could have a material adverse
      effect on our capital structure, business and financial condition.**




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 the wearable artificial kidney
      (WAK) 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 filed counterclaims
      seeking to invalidate the License Agreement and claiming monetary damages
      against us. In interim awards, the arbitrator has found that the License
      Agreement will not survive if the Technology Transaction contemplated by the
      Merger Agreement entered into concurrently with the License Agreement fails
      to
      close. If this determination were upheld by a court of competent jurisdiction,
      we could be prevented from using the WAK technology we licensed from it. In
      addition, if it were found that our rights to the portable artificial kidney
      (PAK) are derived from licensed technology, that could significantly impact
      our
      ability to develop, manufacture and sell our PAK, which would have a material
      adverse effect on our business and results of operations.




The
      interim awards state that NQCI is entitled to reimbursement for reasonable
      attorneys’ fees. NQCI has made a claim for approximately $3.9 million in such
      fees, which we have opposed. NQCI has also made a claim for reimbursement of
      approximately $690,000 in expenses related to the License Agreement which has
      been accrued at June 30, 2008 If we ever become obligated to pay all or a
      substantial portion of such amounts, doing so could have a material adverse
      effect on our liquidity and financial ability to continue with ongoing
      operations as currently planned.




The
      interim awards also state that 9,230,000 shares of our common stock would have
      to be issued to effectuate the Technology Transaction, if Closing such a
      transaction were to be approved by our stockholders. The issuance of such shares
      would result in NQCI owning approximately 38% of our total outstanding shares,
      diluting current stockholders and giving it the ability to substantially
      influence the outcome of matters submitted to stockholders.




17




**We
      expect to incur negative cash flows and net losses for the foreseeable future
      and may not be able to continue as a going concern.**




As
      a
      result of our expectation of negative cash flows and net losses for the
      foreseeable future, based on our current plans, we believe our existing cash
      reserves will not be sufficient to meet our operating expenses and capital
      requirements before we achieve profitability.  Our ability to meet our cash
      obligations as they become due will depend on our ability to secure financing
      on
      acceptable terms.  Unless we are able to raise capital sufficient to
      support our operations there will be substantial doubt of our ability to
      continue as a going concern.





**Approximately
      42% 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
      April 9, 2008, CNL, a limited liability company whose managing member is our
      Executive Chairman, directly owned 6,232,596 shares, which represent
      approximately 42.4% of our 14,704,687 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.





**Sales
      of common stock by our existing stockholders, or the perception that such sales
      may occur, could depress our stock price.**





**** The
      market price of our common stock could decline as a result of sales by, or
      the
      perceived possibility of sales by, our existing stockholders, including
      stockholders who recently purchased their shares from CNL. Most of our
      outstanding shares were registered on a Form S-4 registration statement in
      connection with our October 2007 merger, and are eligible for public resale.
      Approximately half of our shares of common stock are currently held by our
      affiliates and may be sold pursuant to an effective registration statement
      or in
      accordance with the volume and other limitations of Rule 144 under the
      Securities Act of 1933, as amended, or pursuant to other exempt transactions.
      Future sales of common stock by significant stockholders, including those who
      acquired their shares in private placements or who are affiliates, or the
      perception that such sales may occur, could depress the price of our common
      stock.





**ITEM
      2. Unregistered Sales of Equity Securities; Use of Proceeds from Registered
      Securities.**





In
      April
      2008, we issued 20,000 shares of restricted common stock to Steven Solomon,
      our
      former Chief Executive Officer, as compensation for pre and post merger
      consulting services. We issued the shares in reliance upon the exemption from
      registration provided by Section 4(2) of the Securities Act of 1933, as amended,
      in a transaction not involving any public offering.





In
      April 2008, we re-issued 20,000 shares of restricted common stock to Rachel
      Glicksman pursuant to the request of CEOCast, Inc. and our Board approval.
      The
      initial authorization was for the issuance of the 20,000 shares directly to
      CEOCast, Inc. as compensation for investor relations services. We issued the
      shares in reliance upon the exemption from registration provided by Section
      4(2), in a transaction not involving any public offering.





The
      above
      shares were registered for resale in a registration statement on Form S-3 filed
      under the Securities Act of 1933, which was declared effective on April 18,
      2008.




**ITEM
      6. Exhibits.**





**No.**
            
            **Description
                of Exhibit**31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200232.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002





18





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.


Date:
                August 14, 2008
            By:
            /s/
                Robert WeinsteinRobert
                Weinstein
              Chief
                Financial Officer
              (Principal
                Financial Officer and Principal
              Accounting
                Officer)





19