UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549









FORM
10-K





[X]
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934





For
the fiscal year ended December 31, 2007





OR





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


Commission
file number: 000-51362





ALSIUS
CORPORATION


(Exact
name of registrant as specified in its charter)


Delaware
            20-2620798(State
      of incorporation)
            (I.R.S.
      Employer Identification No.)15770
      Laguna Canyon Road, Suite 150
              Irvine,
      California
            92618(Address
      of principal executive offices)
            (Zip
      code)


Registrant's
telephone number, including area code: (949) 453-0150





Securities
registered pursuant to Section 12(b) of the Act:





Title of each
      class:
            Name of each exchange
      on which registered:Common
      Stock, $0.0001 Par Value Per Share
            The
      Nasdaq Capital Market





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.  Yes [_]   No [X ]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.  Yes [_]   No [X]





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes
[X]  No [_]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]





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


Large
      accelerated filer [_]
            Accelerated
      filer [_]Non-accelerated
      filer [_]
            Smaller
      reporting company [X]





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the
Act).  Yes [_]   No [X]





The
aggregate market value of the registrant's voting stock held by non-affiliates
of the registrant (based on the closing price as reported on the Nasdaq Capital
Market on June 30, 2007) was approximately $60 million. Shares of voting stock
held by each officer and director and by each shareholder affiliated with a
director have been excluded from this calculation because such persons may be
deemed to be affiliates. This determination of officer or affiliate status is
not necessarily a conclusive determination for other purposes. The number of
outstanding shares of the registrant’s Common Stock as of March 7, 2008 was
21,076,134.





Documents
Incorporated by Reference





Portions
of the registrant’s Proxy Statement for the 2008 Annual Meeting of Shareholders
to be held on July 16, 2008 are incorporated by reference into Part III of
this Form 10-K.













FORWARD-LOOKING
STATEMENTS





In
addition to historical information, this Annual Report on Form 10-K contains
statements relating to future results of Alsius Corporation (including certain
projections and business trends) that are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the safe harbor created by those sections. Our actual results may differ
materially from those projected as a result of certain risks and uncertainties.
These risks and uncertainties include those set forth herein and those detailed
from time to time in our other Securities and Exchange Commission
filings.  These forward-looking statements are made only as of the
date hereof, and we undertake no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise, except as otherwise required by law.

































ALSIUS
CORPORATION





TABLE
OF CONTENTS





PAGEPART
      IItem
      1.
            Business
            3Item
      1A.
            Risk
      Factors
            7Item
      1B.
            Unresolved
      Staff Comments
            18Item
      2.
            Properties
            18Item
      3.
            Legal
      Proceedings
            18Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            18PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            19Item
      6.
            Selected
      Financial Data
            20Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            22Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            34Item
      8.
            Financial
      Statements and Supplementary Data
            35Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            68Item
      9A(T).
            Controls
      and Procedures
            68Item
      9B.
            Other
      Information
            68PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            69Item
      11.
            Executive
      Compensation
            69Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            69Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            69Item
      14.
            Principal
      Accountant Fees and Services
            69PART
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            70
















PART
I





Item
      1.
            Business





General


On June
21, 2007, Ithaka Acquisition Corp., a Delaware corporation
(”Ithaka”),  completed its acquisition of Alsius Corporation, a
privately held California corporation (“Alsius Medical”), through a merger of a
wholly owned subsidiary with and into Alsius
Medical.   Ithaka was a publicly traded blank check company
formed in 2005 to acquire an unidentified operating business in the
healthcare industry.  In the merger, Alsius Medical became a wholly
owned subsidiary of Ithaka, and Ithaka changed its name to Alsius
Corporation. As a result, Alsius Corporation succeeded Ithaka as the
reporting registrant for purposes of this report.  Alsius Corporation
is now a publicly traded Delaware holding company operating through its
wholly owned subsidiary, Alsius Medical Corporation.  Alsius
Corporation and its operating subsidiary are referred to collectively as
“Alsius,” “we,” “us,” and the “Company”.  Alsius Corporation’s common
stock trades on NASDAQ under the symbol “ALUS”.  For accounting
purposes, the merger was treated as a reverse acquisition with Alsius Medical
being the accounting acquirer. Therefore, the Company’s historical
financial statements reflect those of Alsius Medical, the operating
subsidiary.




Alsius
Medical was incorporated in December 1991, and recapitalized and reorganized its
operations and business in November 1998 to focus on intravascular temperature
management. In June 2001, Alsius opened a branch office, Alsius Service Center,
in Wateringen, The Netherlands, to provide field support for its products in
Europe.




Alsius is
a commercial-stage medical device company that develops, manufactures and sells
proprietary, innovative products to precisely control patient temperature in
hospital critical care settings. Controlling body temperature, through cooling
and warming, is standard of care for patients in critical condition and those
undergoing a variety of surgical procedures. As has been well documented,
temperature management improves outcomes and reduces complications in patients
being treated for a range of conditions such as cardiac arrest, stroke and head
trauma, as well as during cardiothoracic surgery.




We market
a comprehensive suite of catheter-based intravascular temperature management
products that, based on management’s experience and knowledge of the industry
and discussions with physicians, address an unmet clinical need for effective,
accurate, easy-to-use and cost-effective control of body temperature in critical
care patients. Our products consist of the CoolGard and Thermogard systems and
four families of single-use catheters—Cool Line, Icy, Fortius and Quattro.
The CoolGard and Thermogard systems are computer-controlled temperature
regulation systems that circulate cool or warm saline in a closed-loop circuit
through balloons that surround our catheters.  Our catheters are
inserted into a major vein through a patient’s neck or groin and achieve rapid
and precise temperature management through contact with the patient’s blood
flow. A key feature of our catheters is their ability to function as central
venous catheters, which are routinely used in the treatment of critically ill
patients to administer drugs and fluids, draw blood and monitor blood pressure.
Unlike conventional external temperature management products, such as cooling
and warming blankets and ice packs, our intravascular products cool and warm the
patient from the inside out, which we believe more effectively manages body
temperature and allows caregivers easier access to administer patient
care.




We
operate in one reportable business segment through our operating subsidiary,
Alsius Medical. See Note 14 to the Notes to Consolidated Financial
Statements — Segment Reporting, for a summary of revenues by customer
location for the years ended December 31, 2007, 2006 and 2005.





Our
principal corporate office is located at 15770 Laguna Canyon Road, Suite 150,
Irvine, CA  92618, and our main telephone number at that location is
949-453-0150.  Our common stock trades on the Nasdaq Capital Market
under the symbol ALUS.


3


Strategy




Our goal
is to be the leading worldwide provider of medical products for temperature
management in hospital critical care settings. The key elements of our strategy
include:







·
            Leverage our first mover
      advantage. Based on our experience in the acute care temperature
      management market, we believe we are the worldwide leader in sales of
      intravascular temperature management products which will enable us to
      continue to set the industry standard for novel temperature management. We
      have an established sales, marketing, distribution and service
      infrastructure, which we intend to leverage to support our growth
      worldwide.




·
            Drive adoption. We will
      continue to drive adoption of our products by promoting awareness among
      leading hospitals and critical care practitioners, including participating
      in clinical trials, training physicians and supporting the adoption of
      temperature management treatment
guidelines.




·
            Increase system installations
      and catheter use. Our goal is to increase system installations at
      target hospitals and drive catheter use among existing customers. We
      intend to increase sales through expansion of our U.S. direct sales force,
      and through our distributors in existing markets in Europe, Canada and
      Australia, and expand into China, Japan and other Asian
      countries.




·
            Enhance existing products and
      develop new products. We will continue to improve the design of our
      current products and expand our pipeline of future products. We intend to
      continually enhance our systems, software and catheters to deliver more
      effective and easier-to-use temperature management
    products.




·
            Improve margins through scale
      and efficiency. We are focused on improving gross margins by
      lowering our raw material and manufacturing costs. We expect to realize
      economies-of-scale as sales increase. We expect that future operating
      margins and gross margins will be achieved through a combination of
      increased sales, as we continue to penetrate worldwide markets for our
      products, and the successful implementation of cost reduction initiatives
      and absorption of fixed and partially fixed costs through increased
      production levels. Further discussion, including the basis for
      management’s belief in its ability to reduce costs and increase margins,
      is discussed in Management’s Discussion and Analysis of Financial
      Condition and Results of Operations in this annual
  report.









Research
and Development




We intend
to continue to invest in research and development to enhance our CoolGard and
Thermogard systems and family of catheters and develop new products, based on
customer feedback and demand. We work closely with leading critical care
physicians and nurses to better understand unmet needs and new applications in
temperature management. Product enhancements may include increased system power
to achieve faster cooling and warming, changes in catheter design to accommodate
new applications as well as refinements that lower manufacturing costs. As of
December 31, 2007, we had 22 full-time employees in the research and development
group.





We
incurred research and development expenses of $3.9 million,
$2.9 million and $3.5 million in 2007, 2006 and 2005,
respectively.





Manufacturing




We lease
approximately 27,000 square feet of space at our Irvine, California,
headquarters. We design, manufacture and test our products at our headquarters,
which is compliant with ISO and FDA standards. Product quality, cost reduction
and inventory management are top priorities for our manufacturing
operations.  We believe our existing facilities are adequate to
support our manufacturing requirements for the foreseeable
future.


4




We
assemble the CoolGard and Thermogard systems and catheters from components and
subassemblies that we purchase from outside sources. We have flexibility with
our suppliers to adjust the number of components and subassemblies as well as
the delivery schedules. Production requirements are based on sales forecasts.
Lead times for components and subassemblies may vary significantly depending on
the size of the order, time required to fabricate and test the components or
subassemblies, specific supplier requirements and current market demand for the
components and subassemblies. We seek to reduce the potential for disruption of
supply by maintaining sufficient inventory and identifying additional suppliers,
where possible. However, we currently purchase certain of our components and
subassemblies from single source suppliers. If we lost a single-source supplier,
we would need to qualify new suppliers, or to redesign components, which could
cause delays in our manufacturing. To date, we have not experienced any
significant delays in obtaining any components or subassemblies.





Customers,
Marketing and Sales




We began
selling our products in the United States in April 2004 and, as of December 31,
2007, had established a U.S. installed base of over 217 systems in 116
hospitals, of which 185 had been sold and 32 were under evaluation. We began
building our current network of independent distributors in Europe in February
2004, and as of December 31, 2007, had established a European installed base of
312 systems in over 161 hospitals, of which 291 had been sold and 21 were under
evaluation. In other parts of the world as of December 31, 2007, we had an
installed base of 34 systems, of which 31 had been sold and 3 were under
evaluation.




In
2007, we had approximately 136 customers. We measure customers as those
companies that have placed at least one order with us in the preceding
twelve-month period.  In 2007, 2006 and 2005 our largest customer, a
European distributor, accounted for approximately 15%, 24% and 20%,
respectively, of our net sales. The loss of our largest customer would have a
material adverse effect on us. However, we believe that our relationship with
our largest customer is good and there is a low  risk of loss of this
customer at this time.




We
typically provide the CoolGard and Thermogard systems to potential customers for
an evaluation period, during which time we sell catheters to these hospitals for
patient treatment. The majority of hospitals that have evaluated our products
have purchased one or more systems and a supply of catheters.




We market
our products worldwide to acute-care hospitals that have dedicated critical care
units which provide advanced care for cardiac arrest, brain injury,
cardiothoracic and trauma, burn and surgery patients. These are typically
university and large community hospitals that have a level one or two trauma
service designation and have a neuro-intensive care unit, medical intensive care
unit, coronary care unit or emergency room. There are over 2,000 of these
hospitals in the United States and a comparable number outside of the United
States.




We have
FDA clearance to market our products in the United States for fever control in
certain neuro-intensive care patients and temperature management in cardiac and
neuro surgery patients, and are exploring ways to obtain clearance for cardiac
arrest. We have broader clearance to market our products in Europe, Canada and
Australia, including clearance for cardiac arrest, and we are in the process of
obtaining clearances to sell products in China, Japan and other Asian
countries.




United
States




In the
United States we sell, market and distribute our products through a direct sales
force supported by clinical application specialists. As of December 31, 2007, we
employed 15 direct sales people, a director of sales, a vice president of
worldwide sales and marketing, two regional sales managers, a corporate accounts
manager, a government-military accounts manager, five clinical application
specialists and a director of clinical education. Our clinical application
specialists are trained nurse practitioners who assist with product service and
installation, provide clinical education and promote catheter use among
customers. Our sales strategy is to target hospitals that are early adopters of
new technologies and have large critical care units that may purchase multiple
systems.




International




We sell
our products internationally through a network of independent distributors, each
of which has exclusive rights to sell our products in a particular country or
countries. As of December 31, 2007, we had a network of 31 distributors
covering over 39 countries. We encourage our distributors to educate customers
on the clinical efficacy, performance, ease of use, value and other advantages
of our products. We provide our international distributors with clinical
support, regional sales assistance and marketing materials. We have a European
service center in the Netherlands to provide ongoing support to our customers
and distributors. International sales accounted for 49%, 57% and 62% of total
sales in 2007, 2006 and 2005, respectively.


5





Competition




We principally compete with
companies that sell conventional temperature management products such as cooling
and warming blankets, ice packs and other external devices. We also compete with
companies that sell newer surface temperature management products, such as
Medivance, Inc., a privately held company that sells self-regulating cooling
pads. Additionally, we compete with companies that have developed other
intravascular approaches that are either pre-commercialization or in early
stages of commercialization. These companies offer a smaller selection of
catheters, which we believe have significantly less functionality than our
catheters. In particular, we are the only temperature management company that
sells catheters that can be inserted into the neck as well as the groin and that
can function as a standard central venous catheter with multiple working ports.
To compete effectively, we have to demonstrate that our products are attractive
alternatives to other devices and treatments. We compete with other products on
the basis of performance, safety, cost and ease of use. We believe our products
compete favorably on the basis of these factors.





Despite
what we believe are the benefits of our products, manufacturers of cooling and
warming blankets may have more established products and customer relationships
than we do, which could inhibit our market penetration efforts. We believe
potential customers may feel they need to recoup the cost of products that they
have already purchased from our competitors and therefore may choose not to
purchase our products, or may delay such purchases. Some of our current and
potential competitors may have significantly greater financial, research and
development, manufacturing and sales and marketing resources than we
have.





In
addition, competitors that market what we believe to be less effective
solutions, such as  surface cooling and warming blankets and pads,
often do so on the basis that such devices are less invasive than our catheters,
which must be placed in a vein by a surgeon or other
specialist.  We strive to educate customers on the benefits of our
superior effectiveness at regulating patient temperature, ease of patient access
compared to surface devices, and the fact that a significant majority of
patients eligible for our catheters would already be receiving a similar
central venous catheter.





Intellectual
Property and Proprietary Rights




We have
invested considerable resources in our intellectual property strategy and rely
on a combination of patents, copyrights, trademarks and trade secret laws, as
well as confidentiality and invention assignment agreements, to protect our
innovations. As of December 31, 2007, our products were covered by 34 issued
U.S. patents. We also have U.S. patent applications pending directed to current
and future products. As of December 31, 2007, our products were covered
internationally by five issued patents. We have other foreign patent
applications pending directed to current and future products. We intend to file
for additional patents to strengthen our intellectual property rights. We
believe our patent portfolio provides a competitive advantage in our key
markets, particularly for inducing hypothermia with a catheter in specified
indications and for fever control using a central venous catheter. Our patents
covering these key markets generally expire between 2018 and 2022. Alsius,
CoolGard, Cool Line, Icy and Fortius are registered trademarks in the United
States and the European Union.




We
require our employees, consultants and certain vendors to sign confidentiality
and invention assignment agreements. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or assignability
terms of their agreements. Despite measures taken to protect our intellectual
property, unauthorized parties may copy aspects of our products or obtain and
use information that we regard as proprietary.





Employees





As of
December 31, 2007, we had approximately 100 employees. None of our employees are
covered by collective bargaining agreements. We believe our future success will
depend in large part upon our continued ability to attract, motivate, develop
and retain highly skilled and dedicated employees.


6





Available
Information





We
maintain an Internet website at www.alsius.com.  Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, along with our annual report
to shareholders and other information related to our company, are available free
of charge on this site as soon as reasonably practicable after we electronically
file or furnish these reports with the Securities and Exchange
Commission.  Our Internet website and the information contained
therein or connected thereto are not intended to be incorporated into this
annual report on Form 10-K.





Item
      1A.
            Risk
      Factors





Our
business, financial condition and results of operations can be impacted by a
number of risk factors, any one of which could cause our actual results to vary
materially from recent results or from our anticipated future
results.   Any of these risks could materially and adversely
affect our business, financial condition and results of operations, which in
turn could materially and adversely affect the price of our common stock or
other securities.








Risks
Related to Our Business




We
have not yet been able to finance our operations with the cash generated from
our business. If we do not generate cash sufficient to finance our operations,
we will need additional financing to continue our growth.




We have
not yet generated sufficient cash from operations to finance our business. Our
audited financial statements have been prepared assuming that we would continue
as a going concern. Operations to date have been financed principally through
the private placement of equity securities, debt securities convertible to
equity, and the approximately $40.0 million of net cash we acquired in the
merger with Ithaka. We have not reported an operating profit for any year since
our inception.  From our inception through December 31, 2007, we had
accumulated losses of $98.2 million, and at December 31, 2007 had cash
and cash equivalents of $24.4 million to finance operations. We expect
to incur net losses for the foreseeable future. These losses may be substantial
and we may never achieve or maintain profitability. These factors raise
substantial doubt about our ability to continue as a going concern.




Our cash
and cash equivalents on hand, and our projected cash flows, are not
anticipated to be sufficient to take us to cash flow positive based on our
business plan.  We will therefore need to finance our growth through
additional debt or equity financing or reduce costs significantly. Any
additional financing that we may require in the future may not be available at
all or, if available, may be on terms unfavorable to us. Our inability to
finance our growth, either internally or externally, would limit our growth
potential and our ability to implement our business strategy.





The
long sales cycle for our systems may cause revenue and operating results to vary
significantly quarter to quarter and year to year.




The
decision to purchase our CoolGard and Thermogard systems and catheters often
involves a significant commitment of resources and a lengthy evaluation process.
We need to convince hospitals and critical care providers that our products are
more effective than, and provide advantages over, competing temperature
management products. Hospital purchases often involve a committee decision
requiring approval of multiple decision makers including physicians, nurses and
administrators. As a result, our sales process varies by hospital and country.
In addition, a hospital typically uses funds from its capital equipment budget
to purchase our CoolGard and Thermogard systems. Budget constraints and the need
for multiple approvals within the hospital may delay the purchase decision for
our products. This can result in a lengthy sales process, sometimes as long as
six months to a year. The long sales cycle for our system may cause our revenue
and operating results to vary significantly quarter to quarter and year to
year.  In particular, in the second half of 2007, we experienced unit
sales significantly lower than our prior forecasts, due primarily to longer
sales cycles as customers evaluate a variety of alternative products to manage
patient temperature, in addition to our products.


7





We
depend on several large customers for our international sales, and a loss of or
decline in sales to such customers may significantly reduce our
revenue.




A
significant portion of our sales in Europe are to a few key
distributors.  In 2006, Euromed and Fuchs Medical accounted for 24%
and 4%, respectively, of our revenue. In 2007, Elan accounted for 15% of our
revenue and Euromed and Fuchs Medical each accounted for 3%, respectively, of
our revenue. From time to time, other international distributors may also
account for a large portion of our revenue. Our contract with Euromed covered
Austria and Germany. We decided to terminate our contract with Euromed effective
May 2007, in order to enter into a new contract with Elan for Austria and
Germany (which had previously acted as Euromed’s subdistributor of our products
in Germany). Our contracts with Elan and other international distributors do not
assure us significant minimum purchase volume. If a contract with a distributor
is terminated for cause or by us for convenience, the distributor will have no
obligation to purchase products from us. Our contracts with future distributors
will typically have similar terms, and will not assure us of long-term minimum
purchase volumes. The loss of, or any sudden decline in business from, any
significant distributor, likely would lead to a significant decline in our
revenue. We may not be able to retain this or other large customers or any other
significant distributor. If we were to lose any large distributor, it may take
significant time to replace the distributor and the revenue generated by them,
and we may not ultimately be able to do so.





Our
ability to market our CoolGard and Thermogard systems and accompanying
disposable catheters in the United States is limited to fever control in
neuro-intensive care patients and temperature management in cardiac and neuro
surgery patients. If we want to expand our marketing claims to cardiac arrest or
other uses, we will need to obtain additional FDA clearances or approvals, which
may be expensive and time-consuming and may not be successful.




In the
United States, the Food and Drug Administration, or FDA, has only cleared our
CoolGard and Thermogard systems for use with our Cool Line catheter for fever
reduction, as an adjunct to other antipyretic therapy, in intubated and sedated
patients with cerebral infarction and intracerebral hemorrhage who require
access to central venous circulation. Our CoolGard and Thermogard systems used
with our Icy or Fortius catheter have been cleared in the United States only for
use in cardiac surgery patients to achieve and maintain normothermia during
surgery and in recovery and intensive care, and to induce, maintain and reverse
mild hypothermia in neuro surgery patients in surgery and in recovery and
intensive care. These clearances restrict our ability to market our products in
the United States for treatment outside these specific cleared
indications.




In 2004,
we submitted a 510(k) notification to the FDA to have our products cleared for
cardiac arrest. In March 2005, the FDA convened a meeting of the Circulatory
System Devices Panel to consider the data submitted in the 510(k) notification.
Following that meeting in 2005, we withdrew our request for cardiac arrest
clearance because the FDA stated that it would require additional safety and
efficacy data from a randomized, controlled human clinical trial. We decided not
to conduct such a trial at that time because we wanted to focus on marketing our
products for their cleared indications. In the future, we intend to obtain the
required clinical data to support a renewed submission for cardiac arrest
clearance by participating in clinical trials in collaboration with others or
conducting our own human clinical trials. Additionally, we may pursue FDA
clearances or approvals to market our products for other applications, such as
inducing hypothermia in patients with stroke or acute myocardial infarction.
These trials may be expensive and time-consuming, and we cannot assure you that
the FDA will ultimately grant our clearance or approval for such
indications.




We
may lose significant revenue and incur significant liability if it is determined
under FDA regulations that we are promoting off-label use of our
products.




If we do
not obtain FDA clearance for cardiac arrest, or other indications, we may be at
risk for liabilities and lost revenue as a result of off label use.  A
significant portion of our current revenue is, and anticipated future revenue
increasingly will be, derived from the sale of our products to treat cardiac
arrest. We have regulatory clearances to sell our products in Europe, Canada and
in other countries outside the United States to treat cardiac arrest, but we do
not have FDA clearance to sell our products in the United States to treat
cardiac arrest. In the United States, the use of our products to treat cardiac
arrest is and will be considered off-label use unless and until we receive
regulatory clearance for use of our systems and catheters to treat cardiac
arrest patients. We intend to conduct a clinical trial for cardiac arrest
approval in the United States, which we expect to begin in 2008 and, if
successful, conclude with an FDA clearance in 2011. There is no assurance,
however, that such a clearance will be obtained.


8





We do not
track how physicians use our products after they are purchased, and cannot
identify what percentage of our revenues are derived from off-label use. We are
aware, however, that physicians in the United States are using our products
off-label to treat cardiac arrest, and expect this use to increase. We believe
this is due in large part to the 2006 American Heart Association recommendation
that cooling be used to treat cardiac arrest. We have received increasing
inquiries from U.S. physicians interested in using our products to treat cardiac
arrest, in addition to cleared indications. In addition, in order to gather
general market data and help us work with the FDA to design a clinical trial for
cardiac arrest, in 2006 our field personnel began to ask hospitals why they are
interested in purchasing our products. Of approximately 300 U.S. hospitals
queried, over half indicated they are interested in cooling cardiac arrest
patients, in addition to our cleared indications. We have also seen a similar
level of interest in Europe, where our products are cleared for cardiac arrest.
Based on these interest levels, we estimate it is possible that between 20% and
40% of our current U.S. revenues (or between 10% and 20% of our worldwide
revenues) could be derived from off-label use. We also estimate that over time
up to 50% of our U.S. revenues (or approximately 25% of our worldwide revenues)
could be derived from purchases of our products to treat cardiac
arrest.




Under the
Federal Food, Drug and Cosmetic Act and other laws, we are prohibited from
promoting our products for off-label uses. This means that we may not make
claims about the safety or effectiveness of our systems and catheters for the
treatment of cardiac arrest patients, and may not proactively discuss or provide
information on the use of our products for the treatment of cardiac arrest
patients, with very limited exceptions. Physicians, however, may lawfully choose
to purchase our products and use them off-label. For example, we have clearance
to sell our products to induce, maintain and reverse hypothermia in neurosurgery
patients. A physician could use the same product to induce, maintain and reverse
hypothermia in cardiac arrest patients, which would be an off-label
use.




The FDA
and other regulatory agencies actively enforce regulations prohibiting promotion
of off-label uses and the promotion of products for off-label uses. A company
that is found to have improperly promoted off-label uses may be subject to
significant liability, including civil and administrative remedies, and even
criminal sanctions. Due to these constraints, our sales and marketing efforts
focus only on cleared indications for its products. When a hospital or physician
expresses interest in potential off-label use, our field personnel (sales
representatives and clinical specialists) have been trained to limit their
discussion or training of our products only to their general attributes for
cooling and warming of the patient, and the on-label indications. Our clinical
applications specialists work in hospitals to instruct physicians and nurses on
how to use our CoolGard and Thermogard systems, and how to run the system once
our catheter has been inserted into the patient. The specialists do not,
however, select which patients receive treatment or assist in the insertion of
the catheter, both of which are done by the physician. The specialists thus do
not determine the type of treatment (i.e., on-label or off-label) for which our
products are used, and products are used in the same manner whether the patient
is receiving an on- or off-label treatment. We do, upon request, disseminate
information relating to the use of our products for off-label uses such as
cardiac arrest. The FDA Modernization Act permits companies to respond in a
non-promotional manner to unsolicited requests from doctors and hospitals for
off label-information. We respond to such requests in a manner we believe is
permitted under the FDA Modernization Act, by providing copies of and citations
to articles that discuss off-label uses.




We do not
believe any of our activities constitute promotion of off-label use. Should the
FDA determine, however, that our activities constitute promotion of off-label
use, the FDA could bring action to prevent us from distributing our products
within the United States for the off-label use, could impose fines and penalties
on us and our executives, and could prohibit us from participating in government
healthcare programs such as Medicare and Medicaid. We could be required to
substantially change our sales, promotion and educational activities. If we are
prevented from distributing our products in the United States to treat cardiac
arrest, we could lose an estimated 10% and 20% of our current revenues, and up
to 25% based on future estimates. FDA actions concerning the promotion of
off-label uses are typically expensive, disruptive and burdensome, and generate
negative publicity. As a result, such an action could affect our reputation
generally and interfere with our ability to sell our products even for approved
uses. This would have an even greater negative impact on our sales and financial
condition, and may require us to raise additional capital, which may not be
available, or, if available may be dilutive to existing
shareholders.


9





In
addition to liability under FDA regulations, we may also incur significant
liability related to off-label use under other federal and state laws and
regulations.




In
addition to potential FDA action, other federal and state authorities could
bring action against us if they believe our activities constitute promotion of
off-label use. The Federal False Claims Act, and similar state laws, imposes
civil liability on any person or entity who submits, or causes the submission of
a false or fraudulent claim to the U.S. or state governments. Damages under such
laws can be significant, including fines and penalties. The Federal False Claims
Act also allows a private individual or entity to sue on behalf of the
government to recover the civil penalties and treble damages. The U.S.
Department of Justice has enforced the Federal False Claims Act against
pharmaceutical manufacturers whose promotional practices were found to have
included the off-label promotion of drugs. These cases were brought on the
grounds that the off-label promotion resulted in the submission of false claims
to federal and state healthcare entitlement programs such as Medicare and
Medicaid. Such manufacturers have entered into settlements with the federal
government under which they paid amounts and entered into agreements that
require substantial reporting and remedial actions. The federal authorities, and
state equivalents, may likewise seek to enforce the False Claims Act against
medical device manufacturers, which may result in similar penalties and have an
adverse effect on our U.S. sales. Action could also be brought against us under
the Federal Anti-Kickback Act and the Health Insurance Portability and
Accountability Act (HIPAA), and equivalent state laws, if we were deemed to have
induced physicians to make false claims for services provided. This action can
be brought regardless of whether the false claims related to on-label or an
off-label use. The probability of success of such an action would be
significantly increased if there were an existing finding that our products were
misbranded or adulterated, which could result if the products were considered to
be marketed for off-label uses.




We
face uncertainty related to pricing, reimbursement and health care reform, which
could reduce our revenue. In addition, if we are found to be marketing our
products for off-label uses, we can be barred from federal and state
reimbursement programs, which could jeopardize all of our U.S.
sales.




Sales of
our products depend in part on the availability of coverage and reimbursement
from third-party payors such as government insurance programs, including
Medicare and Medicaid, private health insurers, health maintenance organizations
and other health care related organizations. Both the federal and state
governments in the United States, and foreign governments, continue to propose
and pass new legislation affecting coverage and reimbursement policies, which
are designed to contain or reduce the cost of health care. There may be future
changes that result in reductions in current coverage and reimbursement levels
for our products, and we cannot predict the scope of any future changes or the
impact that those changes would have on our operations.




Adoption
of our products by the medical community in the United States may be limited if
doctors and hospitals do not receive full reimbursement for our products.
Currently, existing procedure codes only cover reimbursement for a portion of
the cost of our products. We do not have a specific Current Procedural
Terminology, or CPT, reimbursement code for our products in the United States.
The use of our product is paid for via two mechanisms. It is expensed within
general Diagnosis Related Groups (DRG) and there is a small remuneration
provided to the physician for a central line insertion. All our catheters have
central line features. There are no disease specific billing codes that apply to
the use of our product in the off label cardiac arrest indication. Physicians
and hospitals have been using reimbursement codes related to central venous
catheters or other critical care codes for our products, which provide only
partial reimbursement.




Current
cost control initiatives may decrease coverage and payment levels for existing
and future products and, in turn, the price that we can charge for any existing
product or those that we develop or market in the future. For example, the
Medicare Modernization Act revised the Medicare payment methodology for many
drugs covered under Medicare. We cannot predict the full impact of the new
payment methodologies on our business. We are also impacted by efforts by
private third-party payors to control costs. We are unable to predict all
changes to the coverage or reimbursement methodologies that will be employed by
private or government payors. Any denial of private or government payor coverage
or inadequate reimbursement for procedures performed using our products could
harm our business and reduce our revenue.


10





If  we
are found by the FDA or other federal or state authorities to be marketing our
products for off-label uses, we may be temporarily or permanently barred from
participating in government sponsored healthcare programs such as Medicare and
Medicaid. We estimate that up to 25% of our current revenues may come from
Medicare and Medicaid reimbursement to our customers. However, if we are barred
from participating in such programs, hospitals may refuse to purchase our
products altogether. As a result, such a ban from participating in these
programs could jeopardize all of our U.S. sales.




The
FDA has required that we place a warning label on our Cool Line catheter and
that we collect safety data on the Cool Line. If the FDA concludes that the Cool
Line catheters pose a statistically significant safety risk, it could require
that we conduct additional clinical studies or recall the Cool Line in the
United States, which could materially impact the sales and marketability of our
Cool Line Products in the United States.




We
obtained 510(k) clearances for the current indications for which we market our
products. However, the FDA may seek to limit or revoke our clearances if safety
or effectiveness problems develop. In 2002, we completed a 296-patient
randomized, controlled clinical trial in support of our initial regulatory
submission to the FDA. Based on the trial results, in August 2003, the FDA
granted us 510(k) clearance for our CoolGard system and Cool Line catheter for
treatment of fever reduction in patients with cerebral infarction and
intracerebral hemorrhage. As a result of higher mortality rates in the clinical
trial among patients treated for fever reduction following subarachnoid
hemorrhage and primary traumatic brain injury, the FDA did not clear the Cool
Line for these two indications. In addition, the FDA required that we place a
warning label on our Cool Line catheter which states that the Cool Line is not
cleared for treatment of these two indications, and discloses the mortality data
associated with the two cleared and two non-cleared indications.




The FDA
also required that we conduct a post market surveillance, or PMS, study of
200 patients treated with our Cool Line versus 200 patients from the
same hospitals treated with conventional fever control therapies. In February
2006, we filed a report with the FDA on the first 83 patients in the PMS
study, which we believed showed good safety results.  In 2007 we requested
and obtained approval from the FDA for a retrospective surveillance without
informed consent in an effort to increase the rate of enrollment. As of February
2008 we had a total of 169 patients enrolled in the PMS study. However, if these
results or subsequent PMS safety data ultimately cause the FDA to conclude that
our Cool Line catheters pose a statistically significant safety risk, the FDA
could require that we conduct additional clinical studies or recall the Cool
Line in the United States. Either of these potential FDA actions could
materially impact the sales and marketability of our Cool Line products in the
United States.




We
have a limited history of commercial sales that makes it difficult to predict
future performance and could impair our ability to grow revenue or achieve or
maintain profitability.




We were
incorporated in December 1991, and recapitalized and reorganized our operations
and business in November 1998 to focus on intravascular temperature management.
We began very limited sales of earlier versions of our products in Europe in
December 2000 and began a more significant international sales launch of our
current products in February 2004, when we started building a current network of
independent distributors. We began sales in the United States in April 2004
through our own direct sales force. Consequently, we have a limited history of
commercial sales of our products, which hinders us from accurately predicting
sales and managing our inventory levels. As we expand our business, managing our
inventory levels may become more difficult and may affect our cash position and
results of operations. Our inability to forecast future revenue or estimated
life cycles of products may result in inventory-related charges that would
negatively affect our gross margins and results of operations.




If
we are unable to achieve continued market penetration with conventional
temperature management products, we will be unable to compete
effectively.




We
principally compete with companies that sell conventional temperature management
products such as cooling and warming blankets, ice packs and other external
devices. We also compete against companies with newer surface temperature
management products, such as Medivance, Inc., a privately held company that
sells self-regulating cooling pads. Additionally, we compete with companies that
have developed other intravascular approaches that are either
pre-commercialization or in early stages of commercialization. Competition with
these companies could result in price-cutting, reduced profit margins and loss
of market share. We may also face competition from manufacturers of
pharmaceuticals and other products that have not yet been
developed.


11





Our
ability to compete effectively depends upon our ability to distinguish our
products and includes such factors as:




•
            product
      performance;




•
            development
      of successful distribution channels, both domestically and
      internationally;




•
            success
      and timing of new product development and
  introductions;




•
            intellectual
      property protection; and




•
            quality
      of customer support.




Cooling
and warming blankets are more widely used and less expensive than our products.
Newer surface cooling pads have been on the market for approximately the same
amount of time as our products and are currently offered at prices similar to
those offered for our products. If our potential customers have already
purchased competing products, they may feel the need to recoup the cost of those
products before they consider purchasing our products, even if they believe our
products are superior. If we are unable to achieve continued market penetration,
we will be unable to compete effectively. In addition, some of our current and
potential competitors may have significantly greater financial, research and
development, manufacturing and sales and marketing resources than we do. Our
competitors could use their greater financial resources to acquire other
companies to gain enhanced name and brand recognition and market share, as well
as new technologies or products that could effectively compete with our
products.





In
addition, competitors that market surface cooling and warming blankets and pads
often do so on the basis that such devices are less invasive than our catheters,
which must be placed in a vein by a surgeon or other specialist.  We
strive to educate customers on the benefits of our superior effectiveness at
regulating patient temperature, ease of patient access compared to surface
devices, and the fact that a significant majority of patients eligible for our
catheters would already be receiving a similar central venous
catheter.  However, in situations where a patient might not ordinarily
receive a central venous catheter, or in situations where a standard catheter
may be indicated but caregivers do not want to try our relatively newer
catheter, we may not be able to compete effectively against less invasive
temperature management products.




Our
products are subject to product defects, recalls or failures, which could harm
our financial results.




In
manufacturing our products, we depend on third parties to supply various
components. Many of these components require a significant degree of technical
expertise to produce. Complex medical devices, such as our CoolGard and
Thermogard systems, can experience performance problems in the field that
require corrective action. If our suppliers fail to produce components to our
specifications, or if the suppliers or we use defective materials or poor
workmanship in the manufacturing process, the reliability and performance of our
products will be compromised. We cannot assure you that our testing procedures
will adequately identify all defects in our products or that component failures,
manufacturing errors, or inadequate labeling, that could result in an unsafe
condition or injury to the operator or the patient, will not occur. If any
defects occur, we may incur warranty or repair costs, be subject to claims for
damages related to product defects, be required to recall products, or
experience manufacturing, shipping or other delays or interruptions as a result
of these defects. Any recall would divert management attention and financial
resources and could expose us to product liability or other claims, which may
not be adequately covered by insurance, and may harm our reputation with
customers. A recall involving our CoolGard or Thermogard systems could be
particularly harmful to our business and financial results, because our CoolGard
and Thermogard systems are necessary components that allow our catheters to
work.








12


Risks
Related to Our Operations




We
are subject to risks associated with international sales that could harm our
financial condition and results of operations.




International
sales accounted for 49% and 57% of our revenue for 2007 and 2006, respectively.
Although we intend to increasingly focus on sales in the United States, we
believe that a significant percentage of our future revenue will continue to
come from international sales. In particular, we rely on a network of
third-party distributors to market and sell our products in
non-U.S. markets. The success of our international sales depends upon a
number of factors beyond our control, including the effectiveness and skill of
our distributors and their willingness to commit resources and prioritize the
sale of our products. These parties may not have the same interests as we do in
marketing our products. If these distributors do not actively sell our products,
we may be unable to increase or maintain our current level of international
revenue. In order to grow our business and expand the territories into which we
sell our products internationally, we will need to attract additional skilled
distributors in key geographic areas. We cannot assure you that distributors
will be available on acceptable terms.







Additionally,
international sales are subject to a number of other risks,
including:




•
            reduced
      protection for intellectual property rights in some
    countries;




•
            export
      restrictions, trade regulations and foreign tax
  laws;




•
            fluctuating
      foreign currency exchange rates;




•
            foreign
      certification and regulatory
requirements;




•
            customs
      clearance and shipping
delays; and




•
            political
      and economic instability.




Additionally,
our products and manufacturing facilities are subject to review and inspection
by foreign regulatory agencies. Foreign authorities have become increasingly
stringent and we and our distributors may be subject to more rigorous regulation
in the future. Our failure or the failure of our distributors to comply with
foreign regulations may restrict our and our distributors’ ability to sell our
products internationally.




Risks
Related to Our Regulatory Environment




If
we fail to maintain U.S. Food and Drug Administration and other government
clearances for our current products and indications, or if we fail to obtain
clearances for additional products and indications, our business would be
significantly harmed.




Compliance
with FDA, state and other regulations is complex, expensive and time-consuming.
The FDA and state authorities have broad enforcement powers. Federal and state
regulations, guidance, notices and other issuances specific to medical devices
regulate, among other things:





•
            product
      design, development, manufacturing and
labeling;




•
            product
      testing, including electrical testing, transportation testing and
      sterility testing;




•
            pre-clinical
      laboratory and animal testing;




•
            clinical
      trials in humans;




•
            product
      safety, effectiveness and quality;




•
            product
      manufacturing, storage and
distribution;




13





•
            pre-market
      clearance or approval;




•
            record
      keeping and document retention
procedures;




•
            product
      advertising, sales and promotion;




•
            PMS
      and medical device reporting, including reporting of deaths, serious
      injuries or other adverse events or device
      malfunctions; and




•
            product
      corrective actions, removals and
recalls.




Our
failure to comply with any of the foregoing could result in enforcement actions
by the FDA or state agencies, which may include fines, injunctions, penalties,
recalls or seizures of our products, operating restrictions or shutdown of
production. Any noncompliance may also result in denial of our future requests
for 510(k) clearance or pre-market approval (PMA) of new products, new
intended uses or modifications to existing products and could result in the
withdrawal of previously granted 510(k) clearance or PMA. If any of these events
were to occur, we could lose customers and our product sales, business, results
of operations and financial condition would be harmed.




We
may be unable to obtain or maintain international regulatory qualifications,
clearances or approvals for our current or future products and indications,
which could harm our international business.




Sales of
our products outside the United States are subject to foreign regulatory
requirements that vary widely from country to country. In addition, exports of
medical devices from the United States are regulated by the FDA. We have
obtained a Conformité Européenne, or CE Mark, in Europe for temperature
management in patients for whom a central venous catheter is warranted. We have
obtained a regulatory license to market our products in Canada for cooling and
warming critical care patients, including for cardiac arrest. We have also
obtained regulatory clearance to market our products in Australia for cooling
and warming critical care patients, and have applied for similar clearances in
China, Japan and other Asian countries. Complying with international regulatory
requirements can be an expensive and time-consuming process and clearance or
approval is not certain. The time needed to obtain clearance or approvals, if
required by other countries, may be longer than that required for FDA clearance
or approvals, and the requirements for such clearances may be more expensive.
Foreign clearances may significantly differ from FDA requirements, and we may be
unable to obtain or maintain regulatory qualifications, clearances or approvals
in other countries. If we experience delays in receiving necessary
qualifications, clearances or approvals to market our products outside the
United States, or if we fail to receive those qualifications, clearances or
approvals, we may be unable to market our products in international
markets.




We
may be subject to production halts and penalties if we or our third-party
vendors fail to comply with FDA manufacturing regulations, which could harm our
business.




We are
required to comply with the FDA’s Quality System Regulation, or QSR, which
applies to our facility and the facilities of our third-party component
manufacturers and sterilizers. The QSR sets forth minimum standards for the
design, production, quality assurance packaging, sterilization, storage and
shipping of our products. Our products are also covered by FDA regulation that
imposes record keeping, reporting, product testing and product labeling
requirements. These requirements include affixing warning labels to our
products, as well as incorporating certain safety features in the design of our
products. The FDA enforces the QSR and performance standards through periodic
unannounced inspections. We and our third-party component manufacturers,
suppliers and sterilization providers are subject to FDA inspections at all
times. Our failure or the failure of our component manufacturers, suppliers and
sterilization providers to take satisfactory corrective action in response to an
adverse QSR inspection or failure to comply with applicable performance
standards could result in enforcement actions, including a public warning
letter, a shutdown of manufacturing operations, a recall of products, and civil
or criminal penalties.





Future
enhancements of our products or new products we may develop may require new
clearances or approvals or require that we cease selling such products until new
clearances or approvals are obtained, which would harm our revenue and future
profitability.


14





We plan
to make modifications to our CoolGard and Thermogard systems and such
modifications may require that we apply for additional 510(k) clearances. Any
modification to a 510(k)-cleared device that would constitute a change in its
intended use, design or manufacture could require a new 510(k) clearance or,
possibly, a PMA. If the FDA requires that we submit a new 510(k) or PMA
application for the modifications, we may be required to cease promoting or to
recall the modified product until we obtain clearance or approval. In addition,
we could be subject to fines or other penalties. We may not be able to obtain
additional 510(k) clearances or PMAs for new products or for modifications to,
or additional indications for, our existing products in a timely fashion, or at
all. Delays in obtaining future clearances would adversely affect our ability to
introduce new or enhanced products in a timely manner, which in turn would harm
our revenue and future profitability.




We
will spend considerable time and money complying with federal, state and foreign
regulations in addition to FDA regulations, and, if we are unable to fully
comply with such regulations, we could face substantial penalties.




In
addition to FDA regulations, we are subject to extensive U.S. federal and
state regulations and the regulations of foreign countries in which we conduct
business. The laws and regulations that affect our business, in addition to the
Federal Food, Drug and Cosmetic Act and FDA regulations include, but are not
limited to:




•
            state
      consumer, food and drug laws, including laws regulating
      manufacturing;




•
            the
      federal anti-kickback statute, which prohibits compensation for arranging
      a good or service paid for under federal health care
    programs;




•
            Medicare
      regulations regarding reimbursement and laws prohibiting false
      reimbursement claims;




•
            federal
      and state laws protecting the privacy of patient medical information,
      including the Health Insurance Portability and Accountability
      Act;




•
            the
      Federal Trade Commission Act and similar laws regulating advertising and
      consumer protection; and




•
            regulations
      similar to the foregoing outside the United
  States.




If our
operations are found to be in violation of any health care laws or regulations,
we may be subject to civil and criminal penalties, exclusion from Medicare,
Medicaid and other government programs and curtailment of our operations. If we
are required to obtain permits or licenses under these laws, we may be subject
to additional regulation and incur significant expense. The risk of being found
in violation of these laws is increased by the fact that many of them have not
been fully or clearly interpreted by the regulatory authorities or the courts,
and their provisions are subject to a variety of interpretations. Any action
against us for violation of these laws, even if we successfully defend against
it, could cause us to incur significant legal expenses, divert our management’s
attention from the operation of our business and damage our
reputation.





We
depend upon a limited number of suppliers for the components of our products,
making us vulnerable to supply shortages and price fluctuations, which could
affect our customer demand and our revenue could decline.




Many of
the components and materials used in our products are manufactured by a limited
number of suppliers, and in some cases one supplier. Any supply interruption or
an increase in demand beyond our suppliers’ capabilities could harm our ability
to manufacture our products until a new source of supply is identified and
qualified, which could result in lower revenue. Identifying and qualifying
additional suppliers for the components used in our products, if required, may
not be accomplished quickly or at all and could involve significant costs. If
supply interruptions were to occur, our ability to meet customer demand would be
impaired and customers may decide to cancel orders or switch to competitive
products. Switching components or materials may require product redesign and new
submissions to the FDA that could significantly delay production or, if the FDA
refuses to approve the changes, stop us from manufacturing and selling our
products.


15





Our
success depends on our ability to manage our business as we increase the scale
of our operations.




It may be
difficult for us to control costs if we significantly expand our sales,
marketing and manufacturing capacities. Changes in manufacturing and rapid
expansion of personnel may mean that less experienced people are producing and
selling our products, which could result in unanticipated costs and disruptions
to our operations. Our success in growing our business will depend upon our
ability to implement improvements in our operational systems, realize economies
of scale, manage multiple development projects, and continue to expand, train
and manage our personnel and distributors worldwide. If we cannot scale and
manage our business to expand sales of our products, we may not achieve our
desired growth and our financial results may suffer.




We
have no experience manufacturing our products in large volumes and at a cost
that would enable widespread commercial use.




We have
only produced our CoolGard and Thermogard systems and our catheters in low
volumes to date. We have no experience in large-volume manufacturing of our
systems and catheters. As we manufacture more, we may encounter problems
controlling cost and quality. If we cannot manufacture a sufficient supply of
our products at required quality levels, market acceptance of our products may
be negatively impacted.




We
depend on key personnel to operate our business effectively, and the loss of key
personnel could harm us.




Our
success depends on the skills, experience, technical knowledge and efforts of
our officers and other key employees. Alsius does not have employment contracts
that require any of its officers or other key employees to remain with Alsius
for any period. Any of our officers and other key employees may terminate their
employment at any time. In addition, we do not maintain key person life
insurance policies covering any of our employees. The loss of any of our senior
management could disrupt our business.




We
will need to strengthen our internal controls over financial reporting in order
to ensure that we are able to report financial results accurately and on a
timely basis. If we fail to achieve and maintain effective controls and
procedures for financial reporting, we could be unable to provide timely and
accurate financial information.




Prior to
our merger with Ithaka Acquisition Corp. in June 2007, we operated as a
relatively small privately held company.  We have identified several
areas of our internal controls over financial reporting that we will need to
strengthen so that we can meet our reporting obligations as a public company in
a timely and accurate manner. However, we cannot assure you that material
weaknesses, significant deficiencies and control deficiencies in our internal
controls over financial reporting will not be identified when we are required to
conclude on the effectiveness of our internal control over financial reporting.
We will incur substantial expenses relating to improving our internal control
over financial reporting. Our accounting and financial reporting functions may
not currently have all of the necessary resources to ensure that we will not
have significant deficiencies or material weaknesses in our system of internal
control over financial reporting. The effectiveness of our internal control over
financial reporting may in the future be limited by a variety of factors
including:





•
            faulty
      human judgment and simple errors, omissions or
  mistakes;




•
            inappropriate
      management override of policies and
  procedures; and




•
            the
      possibility that any enhancements to disclosure controls and procedures
      may still not be adequate to assure timely and accurate financial
      information.




If we
fail to achieve and maintain effective controls and procedures for financial
reporting, we could be unable to provide timely and accurate financial
information.  In accordance with Section 404 of the Sarbanes Oxley Act
of 2002, we will be required to file an auditor’s attestation report on the
effectiveness of our internal control over financial reporting when we file our
annual report for a fiscal year ending on December 31, 2008.


16




If
a natural or man-made disaster strikes our facility, we may be unable to
manufacture products for a substantial amount of time and our revenue could
decline.




We only
have one manufacturing facility, which is located in Irvine, California. We are
vulnerable to damage from natural disasters, such as earthquakes, fire, floods
and similar events. If any disaster were to occur, our ability to operate our
business could be seriously impaired. Our facility and the equipment that we use
to produce our products could require substantial lead-time to repair or
replace. In the event of a disaster, we would not have the ability to
immediately shift production to another facility or rely on third-party
manufacturers. If we were to shift production from one facility to another, we
would need FDA authorization to manufacture the product in the new facility.
This could take up to six months and we may not be able to outsource
manufacturing during that time. We currently carry business interruption
insurance with a policy limit of $5.2 million. Our insurance coverage may
not be sufficient in scope or amount to cover potential losses, and we do not
plan to purchase additional insurance to cover such losses due to the cost of
such coverage. Any significant losses that are not recoverable under our
insurance policies could seriously impair our business and financial
condition.







Risks
Related to Intellectual Property




Intellectual
property rights may not provide adequate protection for our products, which
could adversely affect our competitive position and may permit others to compete
against us more effectively.




We rely
on patent, copyright, trade secret and trademark laws and confidentiality
agreements to protect our technology and products. As of December 31, 2007, our
products were covered by 34 issued U.S. patents. We also have
U.S. patent applications pending directed to current and future products.
As of December 31, 2007, our products were covered internationally by five
issued patents. We have other foreign patent applications pending directed to
current and future products. Our patents covering our key markets generally
expire between 2018 and 2022. Our foreign patents and applications include
patents filed initially in certain countries and patents filed initially in the
United States for which it then sought foreign coverage by way of the Patent
Cooperation Treaty, or PCT. We cannot be certain which, if any, of its patents
individually or as a group will permit us to gain or maintain a competitive
advantage. Additionally, our patent applications may not issue as patents or, if
issued, may not issue in a form that will provide meaningful protection against
competitors or against competitive technologies. Furthermore, the issuance of a
patent is not conclusive as to its validity or enforceability. Any patents we
obtain may be challenged, invalidated or legally circumvented by third parties.
Consequently, competitors could market products and use manufacturing processes
that are substantially similar to, or superior to, ours. Competitors could
reverse engineer our products and attempt to replicate them, design around
our protected technologies or develop their own competitive technologies that
fall outside of our intellectual property rights. In addition, the laws of many
foreign countries will not protect our intellectual property rights to the same
extent as the laws of the United States.




We use
trademarks to protect our company name and certain of our product names. Alsius,
CoolGard, Thermogard, Cool Line, Icy and Fortius are registered trademarks in
the United States and the European Union. We may also rely on common law
protections from time-to-time for unregistered trademarks. Since no registration
is required in order to establish common law rights to a trademark, it can be
difficult to discover whether anyone has trademark rights in a particular mark.
If we have to change our name or the name of our products due to infringement,
we may experience a loss in goodwill associated with our brand name, customer
confusion and a loss of sales.




We also
seek to protect our intellectual property using confidentiality agreements with
our employees, consultants and certain vendors. However, we may not be able to
prevent the unauthorized disclosure or use of our technical knowledge or other
trade secrets by consultants, vendors, former employees or current employees
despite confidentiality agreements and other legal restrictions. Monitoring the
unauthorized use and disclosure of our intellectual property is difficult, and
we do not know whether the steps we have taken to protect its intellectual
property will be effective.




If our
intellectual property rights are not adequately protected, our competitive
position could be adversely affected.


17





Our
products could infringe the intellectual property rights of others. This may
lead to costly litigation, result in payment of substantial damages or royalties
and prevent us from using technology essential to our products.




In the
medical device industry there is often extensive litigation and administrative
proceedings regarding patent infringement and intellectual property rights. We
cannot assure you that our products or methods do not infringe the patents or
other intellectual property rights of others. Intellectual property litigation,
with or without merit, is expensive and time-consuming and could divert
management’s attention. If our products and their uses are successfully
challenged, we could be required to pay substantial damages and be prohibited
from using technologies essential to our products without the permission of
their owners. We do not know whether permission to use others’ intellectual
property would be available to us on satisfactory terms, or whether we could
redesign our products to avoid infringement. We expect that any competitive
advantage we may enjoy from our technologies, such as those of our CoolGard and
Thermogard systems and catheters, may diminish over time as companies create
their own innovations. We will only be able to protect our technologies from
unauthorized use by others to the extent that we can pay to enforce our rights,
including through litigation.








Item
      1B.
            Unresolved
      Staff Comments





None.





Item
      2.
            Properties







We do not
own real property. Our principal executive office is located at 15770 Laguna
Canyon Road, Suite 150, Irvine, California 92618, where we lease
approximately 27,000 square feet under a lease that expires on
December 31, 2008 with an option to extend the lease for an additional
three-year term at market rates. We believe our existing facilities are adequate
for our current needs.  We also lease approximately 1,450 square
feet in Wateringen, the Netherlands, for our European service center. This lease
expires on May 31, 2010.





Item
      3.
            Legal
      Proceedings





We are
not a party to any material pending or threatened litigation.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders





No
matters were submitted to a vote of our shareholders during the quarter ended
December 31, 2007.





18


PART
II





Item
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities







Our
units, common stock and warrants are traded on the Nasdaq Capital Market under
the symbols ALUSU, ALUS, and ALUSW, respectively. Prior to the close of our
merger with Ithaka on June 21, 2007, the units, common stock and warrants traded
on the OTCBB under the symbols ITHKU, ITHK and ITHKW,
respectively.  The following table sets forth the range of high and
low closing bid prices for the units, common stock and warrants for the periods
indicated. The over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily reflect
actual transactions.





Units
            
            
            Common Stock
            
            
            WarrantsHigh
            
            
            Low
            
            
            High
            
            
            Low
            
            
            High
            
            
            LowFiscal
      year ended December 31, 2007:Fourth
      quarter
            
            $
            8.38
            
            
            $
            3.75
            
            
            $
            6.19
            
            
            $
            2.77
            
            
            $
            1.35
            
            
            $
            0.35Third
      quarter
            
            
            8.50
            
            
            
            8.49
            
            
            
            6.35
            
            
            
            6.06
            
            
            
            1.52
            
            
            
            1.20Second
      quarter
            
            
            6.40
            
            
            
            6.40
            
            
            
            5.15
            
            
            
            5.10
            
            
            
            0.70
            
            
            
            0.66First
      quarter
            
            
            6.69
            
            
            
            6.30
            
            
            
            5.52
            
            
            
            5.40
            
            
            
            0.58
            
            
            
            0.41Fiscal
      year ended December 31, 2006:Fourth
      quarter
            
            $
            6.75
            
            
            $
            5.90
            
            
            $
            5.50
            
            
            $
            5.33
            
            
            $
            0.60
            
            
            $
            0.34Third
      quarter
            
            
            6.35
            
            
            
            5.90
            
            
            
            5.34
            
            
            
            5.25
            
            
            
            0.51
            
            
            
            0.34Second
      quarter
            
            
            6.85
            
            
            
            6.10
            
            
            
            5.49
            
            
            
            5.25
            
            
            
            0.77
            
            
            
            0.47First
      quarter.
            
            
            6.72
            
            
            
            5.93
            
            
            
            5.42
            
            
            
            5.10
            
            
            
            0.73
            
            
            
            0.42








At March
7, 2008, there were approximately 35 holders of record of our common
stock.





We have
never paid cash dividends on our common stock. We currently intend to retain any
earnings for use in our business, and do not anticipate paying cash dividends in
the foreseeable future.  In addition, under the terms of the Term Loan
with Merrill Lynch Capital (recently acquired by GE Capital), we are restricted
from paying cash dividends on our common stock. We are restricted from making
certain distributions, including cash dividends. We are currently in compliance
with such restrictions.




Securities
Authorized For Issuance Under Equity Compensation Plans




Set forth
in the table below is information regarding outstanding equity awards made
through equity compensation plans as of the end of the most recently completed
fiscal year.







Equity
Compensation Plan Information




Plan
      category
            Number
      of
              securities
      to be
              issued
      upon exercise of
              outstanding
      options,
              warrants
      and rights
            Weighted-
              average
      exercise
              price
              of
      outstanding
              options,
              warrants
      and
              rights
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in column (a))(a)
            (b)
            (c)Equity
      compensation plans approved by security holders206
      Equity Incentive Plan
            2,742,850
            $5.08
            107,150Equity
      compensation plans not approved by security holders
            N/A
            N/A
            N/ATotal
            2,742,850
            $5.08
            107,150





For
information regarding securities authorized for issuance under the Company’s
equity compensation plans, see Part II, Item 8, Note 7 of this
Report.





19





Item
6.  Selected Financial Data





The
following table sets forth certain financial data regarding Alsius Corporation
and should be read in conjunction with the consolidated financial statements and
notes thereto (see Item 15, “Financial Statements” and Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”).  The income statement and balance sheet data presented below
have been derived from Alsius Corporation’s consolidated financial
statements.  The merger between Alsius Medical and Ithaka in June 2007 was
accounted for as a purchase in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 141, “Business Combinations,” resulting in a new basis of
accounting subsequent to the transaction.  The newly merged company adopted
the name Alsius Corporation and is the registrant today.




The
merger with Ithaka, a publicly traded blank check acquisition company, was
accounted for as a reverse acquisition. Under this method of accounting, Alsius
Medical, the privately held operating company purchased by Ithaka, was the
acquiring company for financial reporting purposes. In accordance with
applicable guidance, the merger was considered to be a recapitalization. 
Accordingly, it was treated as the equivalent of Alsius Medical issuing stock
for the net monetary assets of Ithaka accompanied by a recapitalization. The net
monetary assets of Ithaka, primarily cash, were stated at their fair value,
which was equivalent to the carrying value, and accordingly no goodwill or other
intangible assets were recorded.  The accumulated deficit of Alsius Medical
was carried forward to the recapitalized company. The results below reflect
those of Alsius Medical for the period before the merger closed on June 21,
2007.  After June 21, 2007, the results reflect those of Ithaka and
Alsius combined.






Fiscal
      Year Ended2007(3)
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(in
      thousands, except per share amounts)Statement
      of Operations Data:Revenue
            
            $
            9,114
            
            
            $
            5,979
            
            
            $
            3,223
            
            
            $
            1,641
            
            
            $
            977Cost
      of revenue (1)
            
            
            7,341
            
            
            
            6,167
            
            
            
            3,620
            
            
            
            2,011
            
            
            
            2,000Gross
      margin
            
            
            1,773
            
            
            
            (188
            )
            
            
            (397
            )
            
            
            (370
            )
            
            
            (1,023
            )Operating
      expenses:Research
      and development (1)
            
            
            3,920
            
            
            
            2,948
            
            
            
            3,466
            
            
            
            3,331
            
            
            
            4,842Sales
      and marketing (1)
            
            
            11,211
            
            
            
            6,045
            
            
            
            4,464
            
            
            
            3,309
            
            
            
            1,451General
      and administrative (1)
            
            
            5,471
            
            
            
            4,352
            
            
            
            1,491
            
            
            
            1,348
            
            
            
            1,500Total
      operating
      expenses
            
            
            20,602
            
            
            
            13,345
            
            
            
            9,421
            
            
            
            7,988
            
            
            
            7,793Loss
      from
      operations
            
            
            (18,829
            )
            
            
            (13,533
            )
            
            
            (9,818
            )
            
            
            (8,358
            )
            
            
            (8,816
            )Interest
      income
            
            
            708
            
            
            
            76
            
            
            
            189
            
            
            
            98
            
            
            
            14Interest
      expense
            
            
            (4,149
            )
            
            
            (2,064
            )
            
            
            (373
            )
            
            
            (5
            )
            
            
            (361
            )Other
      income
      (expense)
            
            
            35
            
            
            
            (2,057
            )
            
            
            (120
            )
            
            
            45
            
            
            
            16Net
      loss
            
            $
            (22,235
            )
            
            $
            (17,578
            )
            
            $
            (10,122
            )
            
            $
            (8,220
            )
            
            $
            (9,147
            )Net
      loss per share – basic and diluted (2)
            
            $
            (1.49
            )
            
            $
            (1.60
            )
            
            $
            (0.92
            )
            
            $
            (0.75
            )
            
            $
            (0.83
            )Balance
      Sheet Data at Fiscal Year End:Cash
      and cash
      equivalents
            
            $
            24,427
            
            
            $
            647
            
            
            $
            5,309
            
            
            $
            10,335
            
            
            $
            11,770Working
      capital
      (deficit)
            
            
            25,680
            
            
            
            (8,763
            )
            
            
            5,294
            
            
            
            11,784
            
            
            
            11,908Total
      assets
            
            
            35,602
            
            
            
            6,240
            
            
            
            9,492
            
            
            
            14,137
            
            
            
            14,016Long-term
      obligations
            
            
            3,717
            
            
            
            6,468
            
            
            
            3,266
            
            
            
            8
            
            
            
            13Redeemable
      convertible preferred stock
            
            
            —
            
            
            
            46,643
            
            
            
            46,643
            
            
            
            46,643
            
            
            
            52,939Shareholders’
      equity
      (deficit)
            
            
            24,012
            
            
            
            (60,355
            )
            
            
            (43,358
            )
            
            
            (33,497
            )
            
            
            (40,062
            )








(1)
            We
      adopted Statement of Financial Accounting Standards (SFAS)
      No. 123(R), “Share-Based Payment,” on January 1, 2006. As a result,
      stock-based compensation expense included within cost of revenue and
      operating expenses in fiscal 2007 and 2006 is based on the fair value of
      all stock options. Non-cash employee stock-based compensation expense
      included in our consolidated statements of operations was as follows (in
      thousands):


20




Fiscal
      Year Ended2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Cost
      of revenue
            
            $
            238
            
            
            $
            23
            
            
            $
            4
            
            
            $
            —
            
            
            $
            —Research
      and development
            
            
            582
            
            
            
            48
            
            
            
            30
            
            
            
            —
            
            
            
            —Sales
      and marketing
            
            
            985
            
            
            
            149
            
            
            
            110
            
            
            
            —
            
            
            
            —General
      and administrative
            
            
            1,582
            
            
            
            354
            
            
            
            116
            
            
            
            —
            
            
            
            —





(2)
            For
      the periods prior to the close of our June 2007 merger with Ithaka, the
      net loss per share- basic and diluted is computed using 10,974 shares
      outstanding.   The merger was, for financial reporting
      purposes, treated as a reverse acquisition and essentially a
      recapitalization.  Because the number of shares outstanding
      following a reverse acquisition is significantly different from the number
      of shares outstanding prior to the combination, the weighted average
      shares outstanding for purposes of presenting net loss per share on a
      comparative basis has been retroactively restated to the earliest period
      presented in order to reflect the effect of the recapitalization that
      occurs in a reverse acquisition.  In effect, the reverse acquisition
      is similar to a stock split for the accounting acquirer, and retroactively
      restating the weighted average shares outstanding is consistent with the
      accounting required by SFAS No. 128, “Earnings Per Share”, for stock
      splits, stock dividends, and reverse stock
  splits.





(3)
            The results of Ithaka have been
      included in our financial statements since June 21,
      2007.








21




Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations




You should read the following
discussion and analysis in conjunction with our Consolidated Financial
Statements and related Notes thereto included in Part II, Item 8 of this Report
and the Risk Factors included in Part I, Item 1A of this report, as well as
other cautionary statements and risks described elsewhere in this
report.





Overview




We are a
commercial-stage medical device company that develops, manufactures and sells
proprietary, innovative products to precisely control patient temperature in
hospital critical care settings. Our products consist of our CoolGard and
Thermogard temperature regulation systems, which are computer-controlled cooling
and warming unit, as well as four families of single-use catheters used
exclusively with the systems—Cool Line, Icy, Fortius and Quattro. We market our
products to acute care hospitals and critical care physicians through a direct
sales force in the United States and independent distributors in international
markets. Our revenue consists primarily of sales of the CoolGard system,
single-use catheters and single use start-up kits which connect the catheter to
the system. In the first quarter of 2007, we introduced our new Thermogard
system, a computer controlled cooling and warming unit used with our catheters
that is similar to the CoolGard, but which contains additional features for use
in surgical applications.   In June 2007, we introduced our
“Hospital Monitoring Interface Accessory” (HMIA).  The HMIA
enables the caregiver to display the patient’s temperature on both the Alsius
system and the patient monitor.  The HMIA is compatible with the
majority of patient monitoring systems.




We began
selling our products in the United States in April 2004 and, as of December 31,
2007, had established a U.S. installed base of over 217 systems in 116
hospitals, of which 185 had been sold and 32 were under evaluation. We began
building a current network of independent distributors in Europe in February
2004, and as of December 31, 2007, had established a European installed base of
over 312 systems in over 161 hospitals, of which 291 had been sold and 21 were
under evaluation. In other parts of the world as of December 31, 2007, we had an
installed base of 34 systems, of which 31 had been sold and 3 were under
evaluation.  We generated revenues of $3.2 million in 2005,
$6.0 million in 2006 and $9.1 million in 2007, which represents an annual
revenue growth of 88% in 2006 and 52% in 2007. We had a net loss of
$10.1 million in 2005, $17.6 million in 2006 and $22.2 million in
2007. International sales accounted for 49% of our revenue in 2007, 57% in 2006
and 62% in 2005. We expect U.S. sales to represent a greater percentage of
our revenue as we continue to increase direct sales efforts in the United
States.





Our
revenues for 2007 were negatively impacted by the length of time it took to
close our merger with Ithaka. This extended delay in the infusion of
capital caused new catheter projects and regulatory
clearances in certain ex-US markets to fall behind schedule. Also, during
the second quarter of 2007 we noted that our sales
cycle in the United States is taking longer than originally forecast. We
believe this
extended sales cycle is due primarily to the fact
that our hospital customers conduct more thorough evaluations of new
temperature management products (including ours and our
competitors') prior to making
a purchase.   Although the sales cycle is taking longer, we
believe we are rewarded with the majority of sales to hospitals seeking to
purchase temperature management products, who have compared our products to
available alternatives.




We
have FDA clearance to market our products in the United States for fever control
in certain neuro-intensive care patients and temperature management in cardiac
and neuro surgery patients, and are exploring ways to obtain clearance for
cardiac arrest in the United States. We have broader clearance to market our
products in Europe, Canada and Australia, including clearance for cardiac
arrest, and are in the process of obtaining clearances to sell our products in
China, Japan and other Asian countries. We only market our products for
treatments in the specific cleared indications; however this does not prevent
physicians from using our products for non-cleared, or off-label, uses. As of
December 31, 2007, we had 15 direct sales people in the United States and over
31 independent international distributors covering over 39 countries. We intend
to continue to expand the size of our direct U.S. sales force and clinical
application specialists, as well as increase our network of distributors in
Europe and other countries.


22





Results
of Operations








Years
Ended December 31, 2007 and 2006




Revenue. Revenue was
$9.1 million for the year ended December 31, 2007, an increase of
$3.1 million or 52%, from $6.0 million for the year ended December 31,
2006. The increase was attributable to an increase in the sale of our catheters
and start-up kits due to our growing installed base of CoolGard and Thermogard
systems. During 2007, we sold 7,436 catheters and 6,750 start-up kits, an
increase of 32% and 42%, respectively, from the 5,613 catheters and 4,754
start-up kits sold during 2006. In addition, we increased sales of our CoolGard
and Thermogard systems from 157 in 2006 to 218 in 2007. Sales of our CoolGard
and Thermogard systems accounted for 48% and 48% of revenue and sales of
catheters and start-up kits accounted for 47% and 48% of our revenue for 2007
and 2006, respectively.  Sales in the United States accounted for 51%
of our revenue for 2007 and 43% for 2006. The increase in sales to domestic
customers, to whom we sell directly, allows us to realize higher average selling
prices.  We expect that U.S. sales will increase as a percentage
of future revenue.





Cost of revenue. Cost of
revenue consists of costs of materials, products purchased from third-parties,
manufacturing personnel, freight, depreciation of property and equipment,
royalties paid to technology licensors, manufacturing overhead, warranty
expenses and inventory reserves. Royalties paid to third parties include two
worldwide licenses related to our catheters. One license covers a coating used
on our catheters and requires that we pay a royalty of between 2.0% and 3.5% on
net revenue generated by all catheters. The other license covers technology used
in our Cool Line catheter and requires that we pay a royalty of 2.5% on net
revenue generated by the Cool Line catheter.




Cost of
revenue was $7.3 million for the year ended December 31, 2007, an increase of
$1.1 million or 18%, from $6.2 million for the year ended December 31, 2006.
Cost of revenue increased primarily due to increased sales
volume. As a percentage of revenue, cost of revenue decreased from 103% of
sales in 2006 to 81% of sales in 2007. The percentage
decrease was primarily due to higher average selling prices as a
result of an increase in sales to
domestic U.S. customers, to whom we sell directly,
versus international sales which are made
through distributors. The decrease in cost of revenue was
partially offset by increased production costs due to labor and materials
costs of $0.2 million in 2007 to replace catheter components that did not
meet quality specifications and $0.5 million increase in compensation and
benefits related to the higher headcount needed to support increased
production.  Stock based compensation also increased $0.2 million
associated with our new 2006 equity incentive plan.





Research and development
expense. Research and development expense consists of costs related to
our regulatory and product development activities. Research and development
expense has been, and we anticipate in the future will be, highest when it is
actively engaged in human clinical trials to support new regulatory clearances.
Research and development expense was $3.9 million for the year ended December
31, 2007, an increase of $1.0 million, or 34%, from $2.9 million for
the year ended December 31, 2006. The increase was primarily due $0.2 million in
clinical research costs, specifically for testing and qualification process in
Japan, and increased compensation and benefits of $0.3 million related to the
higher headcount needed to support the activities.   Stock based
compensation also increased $0.5 million associated with our new 2006 equity
incentive plan.  We expect research and development expenses to
decline as a percentage of revenue due to a larger revenue base.




Sales and marketing expense.
Sales and marketing expense consists of costs related to our direct sales force
personnel, clinical application specialists, travel, trade shows, advertising,
entertainment, and marketing materials provided to our international
distributors. Sales and marketing expense was $11.2 million for the year ended
December 31, 2007, an increase of $5.2 million, or 87%, from $6.0 million for
the year ended December 31, 2006. This increase was primarily attributable to
the growth of our direct sales force and marketing activities to support our
worldwide market expansion resulting in increased compensation costs of $1.7
million, increased travel costs of $0.9 million, increased advertising and
promotion expenses of $0.6 million, increased trade show and meeting expenses of
$0.4 million, increased public relations expense of $0.1 million, increased
commissions of $0.3 million corresponding to increase in sales, and increased
outside services expenses of $0.2 million.  Stock based compensation
also increased by $0.8 million associated with our new 2006 equity incentive
plan.   We expect that expenses associated with sales and
marketing activities will increase as we incur additional costs to support our
worldwide market expansion.


23





General and administrative
expense. General and administrative expense consists of costs related to
personnel, legal, accounting and other general operating expenses. General and
administrative expense was $5.5 million for the year ended December 31,
2007, an increase of $1.1 million or 25%, from $4.4 million for the year
ended December 31, 2006. The increase was primarily attributable to an increase
in stock based compensation of $1.2 million, initial NASDAQ filing fees of $0.1
million, increased board of directors compensation and higher insurance costs of
$0.2 million, and $0.1 million increase in consulting related to our
Sarbanes-Oxley compliance efforts.  These increases are partially
offset by decreased professional fees (legal, accounting and printing) of
$0.5 million as we undertook significant efforts in early 2006 related to
an initial public offering (IPO) prior to commencing the merger transaction with
Ithaka in late 2006.  The IPO costs were expensed when we withdrew our
offering.   We expect that general and administrative expense
will increase in absolute dollar amounts as we incur additional costs related to
operating as a public company, such as legal and accounting fees, and higher
costs for officers’ and directors’ insurance, investor relations programs and
director and professional fees.




Interest income. Interest
income was $0.7 million for the year ended December 31, 2007, an increase
of $0.6 million, or 600%, from $0.1 million for the year ended
December 31, 2006. This increase was due to the investing the cash and cash
equivalents we obtained in the merger.





Interest expense. Interest
expense was $4.0 million for the year ended December 31, 2007, an increase of
$1.9 million, or 90%, from $2.1 million for the year ended December 31,
2006. The increase in interest expense resulted from an additional $1.1 million
incurred on our convertible bridge notes issued from April 2006 through February
2007, $1.1 million incurred on promissory notes issued in February and May 2007
in connection with our loan from Merrill Lynch Capital, and $0.1 million
incurred on our borrowings from Cheyne Capital, partially offset by a decrease
in interest expense of $0.3 million related to our borrowings from Oxford
Finance which we repaid in February 2007. The interest expense on the bridge
notes included a discount associated with the warrants issued with the bridge
notes.   We expect interest expense to decline in future periods
due to the lower level of borrowings as compared to prior periods.




Other expense. Other expense
was $0.1 million for the year ended December 31, 2007, a decrease of $2.0
million, or 95%, from the $2.1 million for the year ended December 31, 2006. The
decrease is due to the changes in fair value of the warrant and embedded
derivative liabilities associated with our debt instruments.  The
underlying debt instruments were converted or repaid in 2007.




Years
Ended December 31, 2006 and 2005




Revenue.Revenue was
$6.0 million for the year ended December 31, 2006, an increase of
$2.8 million or 88%, from $3.2 million for the year ended
December 31, 2005. The increase was attributable to an increase in the sale
of our catheters and start-up kits due to our growing installed base of CoolGard
systems. During the year ended December 31, 2006, we sold 5,613 catheters
and 4,754 start-up kits, an increase of 84% and 73%, respectively, from the
3,054 catheters and 2,746 start-up kits sold during the year ended
December 31, 2005. In addition, we increased sales of our CoolGard systems
from 93 during the year ended December 31, 2005 to 157 during the year
ended December 31, 2006. Sales of our CoolGard systems accounted for 48% of
revenue and sales of our catheters and start-up kits accounted for 48% of our
revenue for the years ended December 31, 2006 and 2005. The balance of
revenues for the year ended December 31, 2006 and 2005 was comprised of
shipping and service revenue. Sales in the United States accounted for 43% of
our revenue for the year ended December 31, 2006, compared to 38% for the
year ended December 31, 2005.




Cost of revenue.Cost of
revenue consists of costs of materials, products purchased from third-parties,
manufacturing personnel, freight, depreciation of property and equipment,
royalties paid to technology licensors, manufacturing overhead, warranty
expenses and inventory reserves. Royalties paid to third parties include two
worldwide licenses related to our catheters. One license covers a coating used
on our catheters and requires that we pay a royalty of between 2.0% and 3.5% on
net revenue generated by all catheters. The other license covers technology used
in our Cool Line catheter and requires that we pay a royalty of 2.5% on net
revenue generated by the Cool Line catheter.


24




Cost of
revenue was $6.2 million for the year ended December 31, 2006, an increase
of $2.6 million or 72%, from $3.6 million for the year ended December 31,
2005. As a percentage of revenue, cost of revenue decreased from 113% of sales
in the year ended December 31, 2005 to 103% of sales in the same period in
2006. Our manufacturing costs exceeded current revenue levels due to the limited
number of CoolGard systems and catheters produced and sold in relation to fixed
and partially fixed manufacturing costs. Fixed and partially fixed manufacturing
costs are comprised of facility-related costs such as building rent, supplies,
utilities and insurance and indirect labor costs for production management and
quality assurance personnel. The percentage of cost of revenue attributed to
these fixed and partially fixed costs was 23% and 26%, respectively, for the
years ended December 31, 2006 and 2005.




During
the year ended December 31, 2006, we identified and commenced cost
reduction initiatives including the identification and qualification of
alternate suppliers to reduce component material costs, relocating manufacturing
processes in-house to reduce component material costs and production time,
initiatives to reduce production time, including acquisition of fixtures and
improved training processes which are anticipated to commence in 2007. As a
result of these initiatives and increased production levels, we have begun to
realize the benefit of absorption of fixed and partially fixed costs and cost
reductions, and expect further cost reductions to continue in 2007.




Research and development expense.Research and development expense consists of costs related to our
regulatory and product development activities. Research and development expense
has been, and we anticipate in the future will be, highest when we are actively
engaged in human clinical trials to support new regulatory clearances. Research
and development expense was $2.9 million for the year ended December 31,
2006, a decrease of $0.6 million, or 17%, from $3.5 million for the
year ended December 31, 2005. The decrease was due to a reduction in the
use of contract engineering services and product development efforts of
$0.6 million.




Sales and marketing expense.Sales and marketing expense consists of costs related to our direct sales
force personnel, clinical application specialists, travel, trade shows,
advertising, entertainment, and marketing materials provided to its
international distributors. Sales and marketing expense was $6.0 million
for the year ended December 31, 2006, an increase of $1.5 million, or 33%,
from $4.5 million for the year ended December 31, 2005. The increase was
primarily attributable to increased compensation expense of $0.6 million for our
sales personnel, increased travel and meeting expenses of $0.7 million, and
increased outside services expenses of $0.2 million.




General and administrative expense.General and administrative expense consists of costs related to
personnel, legal, accounting and other general operating expenses. General and
administrative expense was $4.4 million for the year ended
December 31, 2006, an increase of $2.9 million or 193%, from
$1.5 million for the year ended December 31, 2005. The increase was
primarily attributable to increased professional fees of $2.2 million, of
which a substantial portion was incurred in connection with the preparation and
filing of a registration statement for an initial public offering, employee
compensation expense of $0.4 million and stock based compensation expense
of $0.2 million.




Interest income.Interest
income was $0.1 million for the year ended December 31, 2006, a
decrease of $0.1 million, or 50%, from $0.2 million for the year ended
December 31, 2005. This decrease was due to lower cash and cash equivalent
balances available for investing during the year ended December 31,
2006.




Interest expense.Interest
expense was $2.1 million for the year ended December 31, 2006, an
increase of $1.7 million, or 425%, from $0.4 for the year ended
December 31, 2005. The increase in interest expense resulted from an
additional $0.1 million incurred on a promissory note issued in
May 2005 in connection with a loan from Oxford Finance Corporation and $1.5
million incurred on convertible bridge notes issued during 2006. The interest
expense on the bridge notes included a discount associated with the warrants
issued with the bridge notes.




Other expenses.Other
expenses were $2.1 million for the year ended December 31, 2006, an
increase of $2.0 million, or 2000%, from $0.1 million for the year
ended December 31, 2005. This increase was primarily due to the revaluation
adjustment of $2.2 million related to the embedded derivatives associated with
the 2006 bridge notes. This increase was offset by a $0.3 million decrease in
value of the warrants associated with the 2005 promissory note and the 2006
bridge notes.





25


Liquidity
and Capital Resources





From our
inception, and prior to the merger with Ithaka in June 2007, we financed our
operations primarily through private sales of preferred stock, with aggregate
net proceeds of $76.5 million in cash. From April 2006 through
February 2007, we borrowed an aggregate amount of $10.6 million from
existing shareholders (the 2006 bridge notes). We issued to each lending party
unsecured convertible promissory notes bearing interest at 8% per annum. In
February 2007, we borrowed $8.0 million from Merrill Lynch Capital
(recently acquired by GE Capital) of which $3.0 million was used to pay existing
debt. We issued a secured promissory note to Merrill Lynch Capital bearing
interest at 6.5% over the LIBOR rate with interest only payments for the first
six months and interest and principal payments for 30 months thereafter. In
connection with this term loan, we issued a warrant having a contractual life of
ten years. We estimated the fair value of the warrant using the Black-Scholes
option pricing model. The estimated fair value of $0.2 million resulted in
a discount to the term loan. The discount will be amortized to interest expense
using the effective interest method over the life of the term loan.





In May
2007, we and Merrill Lynch Capital amended our promissory note to provide for an
additional $2.0 million of borrowing for an aggregate total of $10.0 million.
The second tranche of $2.0 million was funded on May 11, 2007 with interest
at the same rate as the original note and it was repaid upon the close of the
Ithaka merger in June 2007. In connection with the second tranche, we did not
issue any additional warrants but we did incur a fee of $150,000, which was paid
out of proceeds.  In June 2007, we borrowed $1.5 million in an
unsecured promissory note from a financing company, Cheyne Capital, a
shareholder of Ithaka.  The interest rate on this note was 15% and we
incurred a fee of 7.5% which was paid out of proceeds.  We repaid this
unsecured promissory note in July 2007.  We consummated our merger
with Ithaka in June 2007, and in that transaction we acquired approximately
$40.0 million of net cash and cash equivalents (see Note 3 of the accompanying
Notes to Consolidated Financial Statements).




We have
incurred significant net losses since inception and have relied on our ability
to obtain financing.  As of December 31, 2007, we had $24.4 million in
cash and cash equivalents to finance operations.  We expect
operating losses and negative cash flows to continue for the foreseeable future
as we incur additional costs and expenses related to expanding sales and
marketing, continuing product development, and obtaining FDA and foreign
regulatory approvals for new indications. These factors raise substantial doubt
about our ability to continue as a going concern. Our ability to meet our
obligations in the ordinary course of business is dependent upon our ability to
establish profitable operations, or to secure other sources of financing to fund
operations. Before we can achieve cash flow positive operations through
increased sales, we believe it will be necessary to raise working capital
through debt or additional equity financing in 2008. However, there can be no
assurance that such financing can be successfully completed on terms acceptable
to us.








Years
Ended December 31, 2007 and 2006




As of
December 31, 2007, we had cash and cash equivalents of $24.4 million, working
capital of $25.7 million and an accumulated deficit of $98.2
million.




Cash flows used in operating
activities. Net cash used in operations was $20.7 million for the year
ended December 31, 2007 and $11.9 million for the year ended December 31, 2006.
The net cash used in each of these periods primarily reflects the net loss for
those periods, offset by non-cash charges such as depreciation and amortization,
stock-based compensation, amortization of debt discounts and the change in fair
value of warrant liabilities associated with the May 2005 and February 2007
secured promissory notes and Merrill Lynch Capital Term Loan and the change in
the fair value of the warrant liabilities and embedded derivatives associated
with our 2006 Bridge Notes.  Non-cash charges for depreciation and
amortization, stock-based compensation, amortization of debt discounts and the
change in fair value of warrant liabilities and embedded derivatives totaled
$6.5 million and $4.3 million for the years ended December 31, 2007 and 2006,
respectively, representing a $2.2 million increase. This increase was comprised
of a $1.4 million increase in discount amortization associated with the 2006
bridge notes, and increase in stock-based compensation of $2.8 million during
2007, offset by a decrease of $2.1 million of change in fair value of warrant
liabilities associated with our debt instruments since we converted or repaid
our debt instruments in 2007.


26





For the
year ended December 31, 2007, operating assets and liabilities aggregated to a
net decrease of cash of $5.0 million, representing an increased level of all
operating assets and liabilities, primarily related to building inventories by
$4.3 million to support our increased sales growth.




Cash flows used in investing
activities. Net cash provided by investing activities was $40.6 million
for the year ended December 31, 2007 and  consisted of $41.5 million
in net cash received in the merger with Ithaka, offset by $0.9 million in
capital expenditures. Net cash used in investing activities ws $0.3 million
for the year ended December 31, 2006, and consisted of capital expenditures. We
expect our capital expenditures to increase in future periods to support the
growth of our infrastructure. We anticipate that our current operating facility
will be appropriate to support our manufacturing demands for the foreseeable
future.




Cash flows from financing
activities. Cash flows from financing activities were $3.9 million for
the year ended December 31, 2007 and $7.5 million for the year ended December
31, 2006. Cash flows from financing activities in 2007 reflected $1.5
million in proceeds from the 2006 Bridge Notes, $10.0 million in proceeds from
the promissory notes issued in February and May 2007 to Merrill Lynch Capital,
and $1.5 million in proceeds on the unsecured Cheyne Capital promissory note,
offset by $3.1 million for the payment in full of the 2005 promissory note with
Oxford Finance Corporation, $3.1 million in repayment of the borrowings from
Merrill Lynch and $1.5 million in full repayment of our borrowings from Cheyne
Capital.   We also paid $0.3 million in debt issuance costs on these
borrowings.  In 2007 we also spent $0.9 million to repurchase common
stock warrants we acquired in the merger.





Cash
flows from financing activities in the year ended December 31, 2006 were $7.5
million and represents $9.1 million in proceeds from the 2006 Bridge Notes,
offset by $1.5 million in principal payments on the 2005 promissory
note.




Years
Ended December 31, 2006 and 2005




As of
December 31, 2006, we had cash and cash equivalents of $0.6 million,
working capital of ($9.0) million and an accumulated deficit of $76.0
million.




Cash flows used in operating
activities.Net cash used in operations was $11.9 million for the year
ended December 31, 2006 and $9.4 million for the year ended
December 31, 2005. The net cash used in each of these periods primarily
reflects the net loss for those periods, offset by non-cash charges such as
depreciation and amortization, stock-based compensation, amortization of debt
discounts and the change in fair value of warrant liabilities associated with
the May 2005 secured promissory note and the change in the fair value of the
warrant liabilities and embedded derivatives associated with our 2006 bridge
notes.




Non-cash
charges for depreciation and amortization, stock-based compensation,
amortization of debt discounts and the change in fair value of warrant
liabilities and embedded derivatives totaled $4.3 million and $0.9 million for
the year ended December 31, 2006 and December 31, 2005, respectively,
representing a $3.4 million increase. This increase was comprised of a $2.2
million increase in value of the embedded derivatives and increased discount
amortization expense of $1.2 million, both associated with the 2006 bridge
notes, as well as an increase in stock-based compensation of $0.3 million during
the year ended December 31, 2006. This increase was offset by the $0.3
million decrease in value of the warrants associated with the 2006 bridge
notes.




For the
year ended December 31, 2005, operating assets and liabilities aggregated
to a net use of cash of $0.1 million, primarily related to increased accounts
receivable of $0.6 million, offset by increased accounts payable and accrued
liabilities of $0.4 million and inventory of $0.1 million.





For the
year ended December 31, 2006, operating assets and liabilities aggregated
to a net provision of cash of $1.4 million, primarily related to increased
accounts payable and accrued liabilities of $2.7 million. This provision of cash
was partially offset by an increase in inventories, other current assets and
accounts receivable of $0.6 million, $0.2 million and $0.5 million,
respectively. The increase in accounts payable and accrued liabilities relates
to increases in professional fees associated with the proposed merger
transaction with Ithaka of $0.5 million, increase in inventory and manufacturing
related items of $1.0 million, increases aggregating $0.6 million in
accruals associated with the increase in employee compensation including bonus,
vacation and commission accruals, as well as an increase in accrued interest of
$0.3 million related to the 2006 Bridge Notes and marketing related payables of
$0.1 million.


27




Cash flows used in investing
activities.Net cash used in investing activities was $0.3 million for
the year ended December 31, 2006 and 2005. However, we expect our capital
expenditures to increase in future years to support the growth of its
infrastructure. We anticipate that our current operating facility will be
appropriate to support our manufacturing demands for the foreseeable
future.




Cash flows from financing
activities.Cash flows from financing activities were $7.5 million for
the year ended December 31, 2006 and $4.6 million for the year ended
December 31, 2005. Cash flows from financing activities in 2006 reflected
$9.1 million in proceeds from the 2006 bridge notes, offset by $1.5 million in
principal payments on the 2005 promissory note. Cash flows from financing
activities in 2005 reflects the $4.9 million in proceeds note from Oxford
Finance Corporation less principal payments of $0.4 million.







Uses
of Capital Resources




We expect
to use our capital to fund sales and marketing, manufacturing, research and
development, and for general corporate purposes. We expect to increase the
number of employees including the size of our U.S. sales force and clinical
application specialists and increase our sales and marketing efforts
internationally. From time-to-time we may acquire businesses, technology or
products that complement our business, which may require substantial outlays of
capital resources. No acquisitions are currently pending. As a result of the
June 2007 merger with Ithaka, we will incur additional costs related to
operating as a public company, such as legal and accounting fees, and higher
costs for officers’ and directors’ insurance, investor relations programs and
director and professional fees and other costs associated with public reporting
requirements and compliance. Our use of capital resources depends upon a number
of factors, including future expenses to expand and support our sales and
marketing efforts, the rate of market acceptance of our current and future
products, the resources we devote to developing and supporting our products,
costs relating to changes in regulatory policies or laws that affect our
operations, costs of filing, prosecuting, defending and enforcing our
intellectual property rights, and possible acquisitions and joint
ventures.




Duke
University previously prepared a submission to obtain a National Institutes of
Health (NIH) grant to fund a cardiac arrest clinical trial. However, we do not
believe NIH funding is imminent and we plan to meet with the FDA in 2008 to
discuss other options and will plan accordingly after that
meeting.  As of December 31, 2007, no amounts have been paid by
us.





The
following table summarizes information about our material contractual
obligations as of December 31, 2007:







Contractual
      Obligations
            
            Total
            
            
            Less Than
              1
      Year
            
            
            1-3
              Years
            
            
            3-5
              Years
            
            
            More Than
              5
      Years(in
      thousands)Operating
      leases
            
            $
            447
            
            
            $
            361
            
            
            $
            86
            
            
            $
            —
            
            
            $
            —Long-term
      debt
            
            $
            6,933
            
            
            $
            3,200
            
            
            $
            3,733
            
            
            $
            —
            
            
            $
            —Capital
      leases
            
            $
            107
            
            
            $
            25
            
            
            $
            82
            
            
            $
            —
            
            
            $
            —







Operating leases. We lease
our facility under a noncancelable operating lease which, as amended in
May 2006, expires in December 2008 with an option to extend the lease for
an additional three-year term at market rates. Under the lease, we are required
to pay for insurance, taxes, utilities and building maintenance, commonly known
as a “triple net” lease. We also lease a small space for our European service
center in Wateringen, the Netherlands, under a lease that expires on
May 31, 2010.  In November 2007, we entered into a new operating
lease commitment for an automobile, under a lease that expires in November
2011.




28






Long-term
debt.  The senior secured credit facility with Merrill Lynch
Capital, entered into in February 2007 and amended in May
2007,  consists of a $10.0 million term loan with an interest rate of
one month LIBOR plus 6.50%, and the outstanding balance at December 31, 2007 is
$6.9 million.   The term loan requires interest only payments for
the first six months and interest and principal payments for each month
thereafter through February 2010.  Based on the current interest rate
at December 31, 2007, we estimate that our interest payments for the next year
will be $638 and over the subsequent three years will be
$268.





Capital leases. In June 2006,
we entered into a new lease commitment for computer equipment over a period of
63 months for a total value of $106. In November 2006, we entered into a new
lease commitment for office equipment over a period of 60 months for a total
value of $14. In April 2007, we entered into a new lease commitment for
machinery and equipment over a period of 48 months for a total value of
$14.





Uncertain Tax Liabilities. At
December 31, 2007, we had uncertain tax positions which ultimately could result
in a tax payment.  As the amount of the ultimate tax payment is
contingent on the tax authorities’ assessment, it is not practical to present
annual payment information.  We believe these amounts are less than
$10 at December 31, 2007.





Off-Balance
Sheet Arrangements





Since
inception, we have not engaged in material off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.





New
Accounting Pronouncements




In June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force
(“EITF”) Issue No. 06-03, How Taxes Collected from Customers
and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (that
is, Gross versus Net
Presentation).The EITF reached a consensus that the presentation of
taxes on either a gross or net basis is an accounting policy decision that
requires disclosure. EITF 06-03 is effective for the first interim or annual
reporting period beginning after December 15, 2006. Taxes collected from
the Company’s customers are and have been recorded on a net basis. The Company
has no intention of modifying this accounting policy. As such, the adoption of
EITF 06-03 did not have an effect on the Company’s consolidated financial
position, results of operations and cash flows.





In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. In February 2008, the FASB issued
Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement
No. 157, which defers the implementation for the non-recurring nonfinancial
assets and liabilities from fiscal years beginning after November 15 , 2007 to
fiscal years beginning after November 15, 2008. The provisions of
SFAS No. 157 will be applied prospectively. The statement provisions
effective as of January 1, 2008, do not have a material effect on the
company’s consolidated financial position, results of operations and cash flows.
Management does not believe that the remaining provisions will have a material
effect on the company’s consolidated financial position and results of
operations and cash flows when they become effective on January 1,
2009.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial
Liabilities—Including
an Amendment of SFAS No. 115. SFAS No. 159 provides
reporting entities an option to measure certain financial assets and liabilities
and other eligible items at fair value on an instrument-by-instrument basis.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting date. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 159 did not have an impact on its consolidated financial position,
results of operations and cash flows.







29




In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. SFAS
No. 141(R) requires reporting entities to record fair value estimates of
contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under EITF
95-3 to be recorded as a component of purchase accounting.  In
addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax
assets and uncertain tax positions after the measurement period will impact
income tax expense. SFAS No. 141(R) is effective for fiscal periods beginning
after December 15, 2008 and should be applied prospectively for all business
acquisitions entered into after the date of adoption. The Company does not
expect the adoption of SFAS No. 141(R) to have an impact on its consolidated
financial position, results of operations and cash flows.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements—an amendment of ARB No. 51.
SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported
as a component of shareholders’ equity, (ii) that net income attributable to the
parent and to the noncontrolling interest be separately identified in the
consolidated statement of operations, (iii) that changes in a parent’s ownership
interest while the parent retains its controlling interest be accounted for as
equity transactions, (iv) that any retained noncontrolling equity investment
upon the deconsolidation of a subsidiary by initially measured at fair value,
and (v) that sufficient disclosures are provided that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning
after December 15, 2008. The Company is currently evaluating the impact the
adoption of SFAS No. 160 will have on its consolidated financial position,
results of operations and cash flows.





Critical
Accounting Policies





Our
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. The preparation
of financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities, revenue and expenses, and
disclosures of contingent assets and liabilities as of the date of the financial
statements. On a periodic basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable, inventories, warranty,
stock-based compensation, warrants and embedded derivatives. We use historical
experience and other assumptions as the basis for making estimates. Actual
results could differ from those estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
financial statements.




Revenue. We generate revenue
primarily from the sale of our CoolGard and Thermogard systems, three families
of single-use catheters and single-use start-up kits, one of which is required
with each catheter used. In the United States, we sell our products through a
direct sales force and are paid directly by the hospital purchasing our
products. Outside of the United States, we sell our products to distributors at
a discount to the list price and are paid directly by the distributor, who then
sells to the hospital. Our revenue recognition policy is the same for both
domestic customers and distributors.




We
recognize revenue in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition, which
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred and title and the risks and rewards of ownership have been transferred
to the customer or services have been rendered; (3) the price is fixed or
determinable; and (4) collectability is reasonably assured. Persuasive
evidence of an arrangement consists of a purchase order for domestic customers
and a distributor agreement with a purchase order for sales to international
distributors. Delivery has occurred and title and the risks and rewards of
ownership are transferred to the customer when the product has been shipped or
received by the customer in accordance with the terms of the related purchase
order. The price is fixed and determinable upon the receipt of a customer
purchase order, which includes a stated purchase price. The majority of our
arrangements include FOB shipping point terms. We use judgment when determining
whether collection is reasonably assured and rely on a number of factors,
including past transaction history with the customer and management evaluations
of the credit worthiness of the customer. If we determine that collection is not
reasonably assured, we would defer revenue until such time that collection is
reasonably assured.


30





We
evaluate whether the separate deliverables in its arrangements can be unbundled.
Sales of the CoolGard and Thermogard systems domestically to hospitals include
separate deliverables consisting of the CoolGard or Thermogard system,
disposables used with the system, installation and training. For these sales, we
apply the residual value method in accordance with Emerging Issues Task Force
(“EITF”) No. 00-21, Revenue Arrangements with Multiple
Deliverables, which requires the allocation of the total arrangement
consideration less the fair value of the undelivered elements, which consist of
installation and training, to the delivered elements. Through December 31, 2007,
there were a limited number of undelivered elements resulting in a minimal
amount attributed to the undelivered elements. Installation and training are not
included in arrangements with sales to distributors.





Explicit
return rights are not offered to customers; however, we may accept returns in
limited circumstances. We do not offer return rights for expired products to our
customers. We assess levels of inventory in the distribution channel through
regular communications with distributors by international sales and service
personnel. The amount of returns through December 31, 2007 has been minimal. A
sales return allowance has not been established because we believe returns will
be insignificant.




We enter
into equipment loan agreements with stated terms of primarily six-months with
certain customers whereby the CoolGard or Thermogard system is placed at the
customer’s site for their evaluation and use. During this time, the customer
purchases disposables. There are no stated minimum purchase requirements. We
account for these arrangements in accordance with SFAS No. 13, Accounting for Leases, and
have classified these arrangements as operating leases. The consideration for
the rental portion of the arrangement is considered to be contingent and is
recorded when earned. We currently do not charge a rental fee during the
evaluation period.  The amount of revenue attributable to the lease
element of these arrangements was less than 10% of the Company’s total revenue
for all periods presented. The CoolGard or Thermogard system is classified as
evaluation equipment on the balance sheet and is depreciated over its estimated
economic life of five years with depreciation included as a component of cost of
revenue.




During
2005, we began to offer extended warranty contracts, which are separately sold
to non-distributor customers. Revenue is recorded on a straight-line basis over
the period of the contract, which is one year. The amount of deferred revenue
through December 31, 2007 was minimal.





Accounts receivable. We
record accounts receivable based on the invoice amount and do not charge
interest on outstanding balances. Allowances for doubtful accounts are estimated
for losses resulting from the inability of our customers to make required
payments. We analyze accounts receivable and historical bad debts, customer
credit, current economic trends and changes in customer payment trends when
evaluating the adequacy of the allowance for doubtful accounts. Account balances
are charged-off against the allowance when it is determined that the receivable
will not be recovered.




Inventory. Inventory,
consisting of finished goods, work-in-progress and raw materials is stated at
the lower of cost (first-in, first-out) or market. Inventory reserves are
established when conditions indicate that the selling price could be less than
cost due to physical deterioration, usage, obsolescence, reductions in estimated
future demand and reductions in selling prices. Our catheters have an expiration
date of two years from the date of manufacture, which we have established based
on safety standards. We balance the need to maintain strategic inventory levels
with the risk of obsolescence due to changing technology and customer demand
levels. Unfavorable changes in market conditions may result in a need for
additional inventory reserves that could adversely impact our financial
results.




Warranty reserve. We provide
a 12 month warranty from date of purchase for domestic customers and a
15 month warranty from date of purchase for distributors on our CoolGard
and Thermogard systems, which covers parts, labor and shipping costs. We also
allow our domestic customers one year from the date of purchase and our
distributors two years from the date of purchase or the expiration date,
whichever is shorter, to exchange any catheter or start-up kit that contains a
defect. Accordingly, we have established a warranty reserve for our products. We
estimate the costs that may be incurred under the warranties and record a
liability for the amount of such costs at the time the products are sold.
Factors that affect the warranty liability include the number of units sold,
historical and anticipated rates of warranty claims, and costs per claim, which
requires management to make estimates about future costs. We periodically assess
the adequacy of the recorded warranty liabilities and adjust the amounts as
necessary. Although we test our products in accordance with our quality programs
and processes, the warranty obligation is affected by product failure rates and
service delivery costs incurred in correcting a product failure. Revisions to
the originally estimated warranty liability would be required should actual
product failure rates or service costs differ from original estimates, which are
based on historical data.


31





Stock-based compensation. We
applied the principles of Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for
Stock Issued to Employees prior to January 1, 2006, which requires
us to record compensation expense equal to the excess of the estimated fair
value of our common stock over the employee option’s exercise price on the grant
date, the intrinsic value, and record such compensation expense over the stock
option’s vesting period. Effective January 1, 2006, we adopted the
provisions of SFAS 123(R) using the prospective transition method. Under
the prospective transition method, only new awards, or awards that have been
modified, repurchased or cancelled after January 1, 2006, are accounted for
using the fair value method. We will continue to account for awards outstanding
as of January 1, 2006 using the accounting principles under APB
No. 25. We also issue stock options to non-employees and apply the
principles of EITF No. 96-18, Accounting for Equity Instruments
that Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, which requires that such equity instruments
are recorded at their fair value and periodically adjusted as the stock options
vest. The fair value of our non-employee stock options is estimated using the
Black-Scholes option pricing model, which requires the use of management’s
judgment in estimating the inputs used to determine fair value. Management’s
estimate of the fair value of our common stock impacts compensation expense
recorded in the results of operations for both employees and
non-employees.




Another
variable that impacts the estimated fair value of both our employee and
nonemployee stock options granted after January 1, 2006 is the
volatility of the common stock. Prior to the completion of the merger with
Ithaka in June 2007, Alsius Medical’s common stock was not publicly
traded.  Therefore estimates were based on the volatility of comparable
public companies for stock options granted after January 1, 2006. Changes in
these estimates may impact the estimated value of the non-employee stock options
and the related compensation expense recorded in the statement of
operations.




In
determining exercise prices for stock options prior to the merger with Ithaka in
June 2007, we did not obtain contemporaneous valuations by an unrelated
valuation specialist, but instead relied on our board of directors, the members
of which we believe have extensive experience in the medical device market and a
majority of which is comprised of non-employee directors, to determine a
reasonable estimate of the then-current fair value of the common stock. Because
we did not have any outside equity financings since September 2004, and
because there had been no liquidity in our common stock, our board of directors
determined the fair value of the common stock on the date options were granted
based on several factors, including the liquidation preferences of our preferred
stock, progress against regulatory and product development milestones, our
financial condition and the likelihood of achieving a liquidity event such as an
initial public offering or a sale of the company.




During
the first six months of 2006, as we considered an initial public offering, we
reassessed the valuations of common stock relating to option grants during the
year ended December 31, 2005. We considered the expected value of our
common stock in a planned initial public offering, in addition to our increasing
sales, and favorable valuations of comparable publicly-traded medical device
companies. As a result, the estimated fair value of our common stock in 2005 was
greater than the exercise price of the stock options. We used a market-based
approach in determining the fair value of our common stock as of each grant
date, and also considered the following factors:




•
            successive
      quarters of increased U.S. and international sales during 2005, which, by
      the end of the first six
              months
      of 2006 we believed evidenced its commercial
  traction;




•
            our
      progress in developing its U.S. and international sales and marketing
      infrastructure;




•
            our
      growing installed base of systems in hospitals and increasing catheter
      utilization; and




•
            increased
      receptivity of the public capital markets to early stage medical device
      initial public offerings.





32





During
the third quarter of 2006, as we changed our strategy from pursuing an initial
public offering of our common stock to entering into a merger transaction with
Ithaka, we reassessed the valuation model used in determining the fair value of
common stock from a market-based approach to a probability weighted approach for
a sale transaction or a recapitalization event. These new approaches included
the following factors:




•
            the
      proposed merger terms whereby eight million shares of Ithaka common stock
      would be issued as
              consideration
      for the merger;




•
            the
      potential of an additional six million shares of Ithaka common stock would
      be issued as Milestone Shares
              if
      certain revenue targets were achieved in fiscal
  2007-2009;




•
            the
      amount of unsecured promissory notes which would have to be satisfied in
      accordance with their terms
              prior
      to any consideration being issued to our shareholders;
  and




•
            the
      priority position of preferred stockholders, particularly the Series F
      preferred stockholders,
              to
      common stockholders.




After
consideration of the above factors, we determined that the estimated fair value
of our common stock since September 30, 2006 was minimal. We did not grant
any stock options between March 31, 2006 and June 30, 2007.




The
aggregate intrinsic value recorded for employee stock options granted during the
year ended December 31, 2005 was $1.2 million. We recognized
$0.09 million as compensation expense in 2005, $0.3 million in 2006
and $3.38 million in 2007, respectively, related to employee option grants. In
addition, we recognized $0.2 million of compensation expense in 2005,
($0.05) million in 2006 and $0.01 million in 2007 respectively, for the
fair value of options granted to non-employees.




Effective
January 1, 2006, we account for stock options granted using
SFAS No. 123(R), Share-Based Payment, which
has replaced SFAS No. 123 and APB 25. Under
SFAS No. 123(R), companies are no longer able to account for
share-based compensation transactions using the intrinsic method in accordance
with APB 25, but will be required to account for such transactions using a
fair-value method and recognize the expense in the statements of operations. We
adopted the provisions of SFAS 123(R) using the prospective transition
method. Under the prospective transition method, only new awards, or awards that
have been modified, repurchased or cancelled after January 1, 2006, are
accounted for using the fair value method.




Warrants. We issued warrants
in 2005, 2006 and during the six months ended June 30, 2007 in connection with
certain borrowings. We applied the principles of FSP 150-5, Issuer’s Accounting under FASB
Statement No. 150 for Freestanding Warrants and Other Similar Instruments
on Shares that are Redeemable, to record the warrants as liabilities
based on their estimated value on the issuance date. The warrant is carried at
its fair value with decreases or increases in fair value at each reporting date
recorded as other income (expense). The fair value of the warrants is estimated
using the Black-Scholes pricing model, which requires the use of management’s
judgment in estimating the inputs used to determine fair value.





Embedded Derivatives. In 2006
and during the three months ended March 31, 2007, we issued certain promissory
notes (the “2006 Bridge Notes”). The 2006 Bridge Notes provide for a payment
equal to 150% of the principal and accrued interest in the event there is a sale
transaction of substantially all of the assets of the Company or a change in
control in the form of the acquirer’s stock. This provision was determined to be
an embedded derivative and was valued separately from the notes. The estimated
fair value is determined using a present value analysis and management’s
estimate of the probability of a sale transaction. The embedded derivative was
recorded as a liability at its estimated fair value with decreases or increases
in fair value at each reporting date recorded as other income
(expense).




Income Taxes. Effective
January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB Statement No.
109, Accounting for Income
Taxes. FIN 48 provides guidance on the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. In
accordance with FIN 48, a tax position is a position in a previously filed tax
return or a position expected to be taken in a future tax filing that is
reflected in measuring current or deferred income tax assets and liabilities.
Tax positions are recognized only when it is more likely than not (likelihood of
greater than 50%), based on technical merits, that the position will be
sustained upon examination. Tax positions that meet the more likely than not
threshold should be measured using a probability weighted approach as the
largest amount of tax benefit that is greater than 50% likely of being realized
upon settlement. The adoption of FIN 48 did not have a material impact on our
financial position, results of operations or cash flows.




33


Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk





Substantially
all of our revenue is denominated in U.S. dollars, including sales to its
international distributors. Only a small portion of our revenue and expenses is
denominated in foreign currencies, principally the Euro. Our Euro expenditures
primarily consist of the cost of maintaining our office in the Netherlands,
including the facility and employee-related costs. A 10% increase in the value
of the U.S. dollar relative to the Euro or a 10% decrease in the relative
value of the dollar would have a negligible impact on current costs or revenue.
To date, we have not entered into any hedging contracts. Future fluctuations in
the value of the U.S. dollar may, however, affect the price competitiveness
of our products outside the United States.




We invest
our excess cash primarily in U.S. Treasury Bills with maturities less than
90 days. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk-sensitive instruments, positions or
transactions to any material extent. Accordingly, we believe that, while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments. Due to the short-term nature of these investments, a 1% change in
market interest rates would not have a significant impact on the total value of
our portfolio as of December 31, 2007.













34


Item
      8.
            Financial
      Statements and Supplementary Data





ALSIUS
CORPORATION


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share data)





December
      31,
              2007
            
            
            December
      31,
              2006ASSETSCurrent
      Assets:Cash and cash
      equivalents
            
            $
            24,427
            
            
            $
            647Accounts receivable, net of
      allowances of $44 and $13
            
            
            2,162
            
            
            
            1,517Inventories
            
            
            6,680
            
            
            
            2,368Prepaid expenses
            
            
            284
            
            
            
            189Total current
    assets
            
            
            33,553
            
            
            
            4,721Property
      and equipment, net
            
            
            1,034
            
            
            
            360Evaluation
      equipment, net
            
            
            673
            
            
            
            636Other
      assets
            
            
            342
            
            
            
            523TOTAL
            
            $
            35,602
            
            
            $
            6,240LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)Current
      Liabilities:Accounts payable
            
            $
            2,732
            
            
            $
            2,361Accrued
    liabilities
            
            
            1,916
            
            
            
            1,785Current portion of long-term
      debt
            
            
            3,200
            
            
            
            9,318Current portion of capital lease
      obligation
            
            
            25
            
            
            
            20Total current
      liabilities
            
            
            7,873
            
            
            
            13,484Long-term
      debt—less current portion
            
            
            3,569
            
            
            
            1,343Warrant
      liabilities and embedded derivatives
            
            
            —
            
            
            
            5,030Capital
      lease obligation
            
            
            82
            
            
            
            95Other
      liabilities
            
            
            66
            
            
            
            —Commitments
      and Contingencies (Note 13)Redeemable
      convertible preferred stock
            
            
            —
            
            
            
            46,643Shareholders’
      Equity (Deficit):Preferred  stock,
      $0.0001 par value—1,000,000 shares authorized; no shares issued or
      outstanding
            
            
            —
            
            
            
            —Common
      stock, $0.0001 par value—75,000,000 shares authorized; 18,253,500
      shares issued and outstanding at December 31, 2007
            
            
            2
            
            
            
            —Common
      stock, no par value—20,000,000 shares authorized; 78,942
      shares issued and outstanding at December 31, 2006
            
            
            —
            
            
            
            16,430Additional
      paid-in capital
            
            
            122,237
            
            
            
            —Deferred
      stock-based compensation
            
            
            —
            
            
            
            (793
            )Accumulated
      deficit
            
            
            (98,227
            )
            
            
            (75,992
            )Total shareholders’ equity
      (deficit)
            
            
            24,012
            
            
            
            (60,355
            )TOTAL
            
            $
            35,602
            
            
            $
            6,240














See
accompanying notes to consolidated financial statements.


35


ALSIUS
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)





Year Ended December 31,2007
            
            
            2006
            
            
            2005Revenue
            
            $
            9,114
            
            
            $
            5,979
            
            
            $
            3,223Cost
      of revenue (includes stock-based compensation expense of $238, $23 and
      $4)
            
            
            7,341
            
            
            
            6,167
            
            
            
            3,620Gross
      margin
            
            
            1,773
            
            
            
            (188
            )
            
            
            (397
            )Operating
      expenses:Research
      and development (includes stock-based compensation expense of $582, $48
      and $30)
            
            
            3,920
            
            
            
            2,948
            
            
            
            3,466Sales
      and marketing (includes stock-based compensation expense of $985, $149 and
      $110)
            
            
            11,211
            
            
            
            6,045
            
            
            
            4,464General
      and administrative (includes stock-based compensation expense of $1,582,
      $354 and $116)
            
            
            5,471
            
            
            
            4,352
            
            
            
            1,491Total
      operating expenses
            
            
            20,602
            
            
            
            13,345
            
            
            
            9,421Loss
      from operations
            
            
            (18,829
            )
            
            
            (13,533
            )
            
            
            (9,818
            )Interest income
            
            
            708
            
            
            
            76
            
            
            
            189Interest
      expense
            
            
            (4,149
            )
            
            
            (2,064
            )
            
            
            (373
            )Other  income
      (expense)
            
            
            35
            
            
            
            (2,057
            )
            
            
            (120
            )Net
      loss
            
            $
            (22,235
            )
            
            $
            (17,578
            )
            
            $
            (10,122
            )Net
      loss per share - basic and diluted
            
            $
            (1.49
            )
            
            $
            (1.60
            )
            
            $
            (0.92
            )Weighted
      average shares outstanding - basic and diluted
            
            
            14,873,916
            
            
            
            10,974,100
            
            
            
            10,974,100











See
accompanying notes to consolidated financial statements.


36


ALSIUS
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)






Year Ended December
      31,2007
            
            
            2006
            
            
            2005Cash
      flows from operating activitiesNet
      loss
            
            $
            (22,235
            )
            
            $
            (17,578
            )
            
            $
            (10,122
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            421
            
            
            
            378
            
            
            
            413Loss
      on disposal of assets
            
            
            7
            
            
            
            —
            
            
            
            39Increase
      (decrease) in fair value of warrant liabilities and embedded
      derivatives
            
            
            (38
            )
            
            
            2,058
            
            
            
            108Amortization
      of debt issuance costs
            
            
            62
            
            
            
            81
            
            
            
            —Amortization
      of discounts on promissory notes
            
            
            2,684
            
            
            
            1,241
            
            
            
            50Stock-based
      compensation
            
            
            3,387
            
            
            
            574
            
            
            
            260Provision
      for bad debt expense
            
            
            31
            
            
            
            2
            
            
            
            22Changes
      in operating assets and liabilities, net of merger:Accounts
      receivable
            
            
            (676
            )
            
            
            (534
            )
            
            
            (611
            )Inventories
            
            
            (4,312
            )
            
            
            (556
            )
            
            
            111Prepaid
      expenses
            
            
            (50
            )
            
            
            (60
            )
            
            
            (16
            )Other
      assets
            
            
            164
            
            
            
            (231
            )
            
            
            (26
            )Accounts
      payable
            
            
            (919
            )
            
            
            1,721
            
            
            
            (14
            )Accrued
      liabilities
            
            
            773
            
            
            
            1,026
            
            
            
            435Net
      cash used in operating activities
            
            
            (20,701
            )
            
            
            (11,878
            )
            
            
            (9,351
            )Cash
      flows from investing activitiesCash
      paid for property and equipment
            
            
            (650
            )
            
            
            (109
            )
            
            
            (120
            )Cash
      paid for evaluation equipment
            
            
            (259
            )
            
            
            (189
            )
            
            
            (134
            )Net
      cash received in merger
            
            
            41,478
            
            
            
            —
            
            
            
            —Net
      cash provided by (used in) investing activities
            
            
            40,569
            
            
            
            (298
            )
            
            
            (254
            )Cash
      flows from financing activitiesProceeds
      from exercise of common stock options
            
            
            —
            
            
            
            7
            
            
            
            1Payment
      of debt issuance costs
            
            
            (347
            )
            
            
            —
            
            
            
            —Common
      stock warrant retirement
            
            
            (167
            )
            
            
            —
            
            
            
            —Common
      stock warrant repurchases
            
            
            (907
            )
            
            
            —
            
            
            
            —Proceeds
      from issuance of long-term debt
            
            
            13,030
            
            
            
            9,070
            
            
            
            4,941Principal
      payments under long-term debt
            
            
            (7,675
            )
            
            
            (1,534
            )
            
            
            (358
            )Principal
      payments under capital lease obligations
            
            
            (22
            )
            
            
            (29
            )
            
            
            (5
            )Net
      cash  provided by financing activities
            
            
            3,912
            
            
            
            7,514
            
            
            
            4,579Net
      increase (decrease) in cash and cash equivalents
            
            
            23,780
            
            
            
            (4,662
            )
            
            
            (5,026
            )Cash
      and cash equivalents at beginning of year
            
            
            647
            
            
            
            5,309
            
            
            
            10,335Cash
      and cash equivalents at end of year
            
            $
            24,427
            
            
            $
            647
            
            
            $
            5,309Cash
      paid during the year for:Income
      taxes
            
            $
            85
            
            
            $
            1
            
            
            $
            1Interest
            
            $
            862
            
            
            $
            426
            
            
            $
            264Non-cash
      transactionsUnpaid
      property and equipment included in accounts payable
            
            $
            208
            
            
            $
            —
            
            
            $
            —Property
      and equipment acquired under capital lease
            
            $
            14
            
            
            $
            124
            
            
            $
            —





See
accompanying notes to consolidated financial statements.


37


ALSIUS
CORPORATION


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)


(in
thousands, except share data)








Common
      StockShares
            
            
            Amount
            
            
            Additional
              Paid
      In
              Capital
            
            
            Deferred
      Stock-
              Based
              Compensation
            
            
            Accumulated
              Deficit
            
            
            TotalBalances
      as of January 1, 2005
            
            
            54,528
            
            
            $
            14,795
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (48,292
            )
            
            $
            (33,497
            )Exercise
      of stock options
            
            
            2,456
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1Deferred
      stock-based compensation
            
            
            
            
            
            
            1,183
            
            
            
            
            
            
            
            (1,183
            )
            
            
            
            
            
            
            —Compensation
      for non-employee stock options
            
            
            
            
            
            
            168
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            168Amortization
      of stock-based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            92
            
            
            
            
            
            
            
            92Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (10,122
            )
            
            
            (10,122
            )Balances
      as of December 31, 2005
            
            
            56,984
            
            
            
            16,147
            
            
            
            
            
            
            
            (1,091
            )
            
            
            (58,414
            )
            
            
            (43,358
            )Exercise
      of stock options
            
            
            21,958
            
            
            
            7
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7Compensation
      for non-employee stock options
            
            
            
            
            
            
            (47
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (47
            )Stock-based
      compensation
            
            
            
            
            
            
            323
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            323Amortization
      of stock-based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            298
            
            
            
            
            
            
            
            298Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,578
            )
            
            
            (17,578
            )Balances
      as of December 31, 2006
            
            
            78,942
            
            
            
            16,430
            
            
            
            —
            
            
            
            (793
            )
            
            
            (75,992
            )
            
            
            (60,355
            )Amortization
      of stock-based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            141
            
            
            
            
            
            
            
            141Stock-based
      compensation
            
            
            
            
            
            
            88
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            88Elimination
      of Alsius historical equity accounts
            
            
            (78,942
            )
            
            
            (16,518
            )
            
            
            16,518
            
            
            
            
            
            
            
            
            
            
            
            —Elimination
      of deferred stock-based compensation
            
            
            
            
            
            
            
            
            
            
            (652
            )
            
            
            652
            
            
            
            
            
            
            
            —Conversion
      of preferred stock into Merger Shares
            
            
            4,902,527
            
            
            
            1
            
            
            
            46,669
            
            
            
            
            
            
            
            
            
            
            
            46,670Conversion
      of Bridge Notes and accrued interest into Merger Shares
            
            
            3,097,473
            
            
            
            
            
            
            
            17,036
            
            
            
            
            
            
            
            
            
            
            
            17,036Equity
      effects of reverse merger
            
            
            10,974,100
            
            
            
            1
            
            
            
            44,445
            
            
            
            
            
            
            
            
            
            
            
            44.446Reclassification
      of warrant liability to equity
            
            
            
            
            
            
            
            
            
            
            215
            
            
            
            
            
            
            
            
            
            
            
            215Common
      stock warrant repurchase program
            
            
            
            
            
            
            
            
            
            
            (907
            )
            
            
            
            
            
            
            
            
            
            
            (907
            )Common
      stock warrant retirement program
            
            
            
            
            
            
            
            
            
            
            (167
            )
            
            
            
            
            
            
            
            
            
            
            (167
            )Redemption
      of redeemable common stock
            
            
            (720,600
            )
            
            
            
            
            
            
            (4,078
            )
            
            
            
            
            
            
            
            
            
            
            (4,078
            )Stock-based
      compensation (SFAS 123R)
            
            
            
            
            
            
            
            
            
            
            3,158
            
            
            
            
            
            
            
            
            
            
            
            3,158Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (22,235
            )
            
            
            (22,235
            )Balances
      as of December 31, 2007
            
            
            18,253,500
            
            
            $
            2
            
            
            $
            122,237
            
            
            $
            —
            
            
            $
            (98,227
            )
            
            $
            24,012








See
accompanying notes to consolidated financial statements.


38





1.  The
Company and Basis of Presentation (in thousands except share and per share
data)





On June
21, 2007, Ithaka Acquisition Corp., a Delaware corporation ( “Ithaka”),
completed its acquisition of Alsius Corporation, a privately held California
corporation (“Alsius Medical”), through a merger of a wholly owned merger
subsidiary with and into Alsius Medical.   Ithaka was a publicly
traded blank check company formed in 2005 to acquire an unidentified operating
business in the healthcare industry.  In the merger, Alsius Medical
became a wholly owned subsidiary of Ithaka, and Ithaka changed its name to
Alsius Corporation.  As a result, Alsius Corporation succeeded Ithaka
as the reporting registrant for purposes of this report.  Alsius
Corporation  is now a publicly traded Delaware holding company
operating through its wholly owned subsidiary, Alsius Medical
Corporation.  Alsius Corporation and its operating subsidiary are
referred to collectively as “Alsius,” “we,” “us,” and the
“Company”.  Alsius Corporation’s common stock trades on NASDAQ under
the symbol “ALUS”.  See Note 3 for further details on the
merger.  For accounting purposes, the merger was treated as a reverse
acquisition with Alsius Medical being the accounting acquirer. Therefore, the
Company’s historical financial statements reflect those of Alsius
Medical.




Alsius
Medical was incorporated in December 1991, and recapitalized and reorganized its
operations and business in November 1998 to focus on intravascular temperature
management. In June 2001, a branch office, Alsius Service Center, in Wateringen,
The Netherlands, was established to provide field support for its products in
Europe. Alsius Medical develops, manufactures, markets and sells, proprietary
catheter-based products for rapid cooling and temperature control of patients
with severe neuronal injury, including those who have suffered stroke, traumatic
brain injury and cardiac arrest. In August 2003, Alsius Medical received United
States Food and Drug Administration (FDA) clearance to market its CoolGard ® 3000
Thermal Regulation System (the “CoolGard system”) and Cool Line ® catheter
for use in fever control. In addition, in October 2003, Alsius Medical received
FDA clearance to market its Icy TM and
Fortius TM
catheters in combination with the CoolGard ® 3000
Thermal Regulation System for use in normothermia in cardiac surgery and
hypothermia in neuro surgery.  Alsius Medical began to market and sell
its products in the United States during the year ended
December 31, 2004.




The
Company has incurred significant net losses since inception, and has relied on
its ability to obtain financing, which to date has been through a merger as
discussed in Note3, the sale
of redeemable convertible preferred stock (Note 10) and the issuance of
promissory notes (Note 5). Management expects operating losses and negative cash
flows to continue for the foreseeable future as the Company incurs additional
costs and expenses related to continued development of the Company’s products,
and obtaining FDA approval for new indications. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The
accompanying financial statements have been prepared on a going concern basis
that contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include
adjustments relating to the recoverability of recorded asset amounts or the
amounts or classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company’s ability to meet
its obligations in the ordinary course of business is dependent upon its ability
to establish profitable operations, or to secure other sources of financing to
fund operations. Management intends to increase sales, and raise working capital
through debt or additional equity financing. However, there can be no assurance
the Company will be able to increase sales or that such financing can be
successfully completed on terms acceptable to the Company.








2.   Significant
Accounting Policies





Principles
of Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All intercompany accounts and transactions
have been eliminated in consolidation.  The results of Ithaka are
included in the consolidated financial statements since the date of the
merger.




Management
Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions. These affect the reported amounts of assets
and liabilities and disclosure of contingent assets or liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management has identified revenue, accounts receivable, inventory, warranty
reserve, stock-based compensation, warrants, embedded derivatives and income
taxes as areas where significant estimates and assumptions have been made in
preparing the financial statements. The Company also evaluates the need for the
deferred income tax valuation allowance.


39





Fair
Value of Financial Instruments




Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities. These instruments approximate fair value
because of their short maturity. The carrying value of the promissory notes is
considered to approximate fair value due to its short maturity and interest rate
that approximates current rates.




Foreign
Currency Remeasurement




The
functional currency of the Company’s branch located in The Netherlands is the
U.S. dollar. Its local currency statements are remeasured into
U.S. dollars using the current exchange rate for monetary assets and
liabilities and the historical exchange rate for nonmonetary assets and
liabilities. Revenues and expenses are remeasured using the average exchange
rate for the period, except items related to nonmonetary assets and liabilities,
which are remeasured using historical exchange rates. All remeasurement gains
and losses are included in determining net loss and have not been significant
for all periods presented.





Cash
Equivalents




The
Company considers all highly liquid investments that mature within 90 days
from the date of purchase to be cash equivalents. At December 31, 2007,
cash equivalents consisted of money market funds of $23,903.  At
December 31, 2006, cash equivalents consisted of money market funds and treasury
bills of $157.  The Company classified its treasury bills as held to
maturity and recorded them at amortized cost, which approximated fair value.
Cost is determined using the specific identification method.




Concentration
of Risk




The
Company maintains its cash accounts in a commercial bank. At December 31,
2007 and 2006, cash on deposit was in excess of the federally insured limit of
$100.




Customers
that account for greater than 10 percent of revenue or accounts receivable are
provided below.







Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Revenue
            
            Percent of
              Total
              Revenue
            
            
            Revenue
            
            Percent of
              Total
              Revenue
            
            
            Revenue
            
            Percent of
              Total
              RevenueCustomer A
            
            $
            308
            
            3
            %
            
            $
            1,449
            
            24
            %
            
            $
            644
            
            20
            %Customer B
            
            
            1,395
            
            15
            %
            
            
            —
            
            —
            
            
            
            —
            
            —







As
      of December 31,2007
            
            
            2006Receivable
              Balance
            
            Percent of
              Total
              Receivables
            
            
            Receivable
              Balance
            
            Percent of
              Total
              ReceivablesCustomer A
            
            $
            29
            
            1
            %
            
            $
            537
            
            35
            %Customer B
            
            
            429
            
            20
            %
            
            
            —
            
            —





40





Many of
the components and materials used in the Company’s products are manufactured by
a limited number of suppliers. Any supply interruption or an increase in demand
beyond the suppliers’ capabilities could have an adverse impact on the Company’s
business. There is one supplier for a key component used in the Company’s
CoolGard and Thermogard systems, and one supplier for a key component used in
the Company’s catheters. Management believes it can identify alternative
sources, if necessary, but it is possible such sources may not be identified in
sufficient time to avoid an adverse impact on its business.




Accounts
Receivable




Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company specifically analyzes accounts receivable and historical bad debts,
customer credit, current economic trends and changes in customer payment trends
when evaluating the adequacy of the allowance for doubtful accounts. Account
balances are charged-off against the allowance when it is determined that the
receivable will not be recovered.




The
changes in the allowance for doubtful accounts is provided below.





Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Beginning
      balance
            
            $
            13
            
            
            $
            27
            
            
            $
            5Provision
      for bad debt
            
            
            31
            
            
            
            2
            
            
            
            22Write-offs,
      net of recoveries
            
            
            —
            
            
            
            (16
            )
            
            
            —Ending
      balance
            
            $
            44
            
            
            $
            13
            
            
            $
            27




Inventories




Inventories
are comprised of raw materials, work-in-process and finished goods, and are
stated at the lower of cost (first-in, first-out) or market. The Company records
a provision for excess and obsolete inventory based on historical usage and
future product demand. Once established, the write-downs of inventories for
excess and obsolete inventory are considered permanent adjustments to the cost
basis of the inventories.




Long-lived
Assets




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates potential impairment by comparing the carrying amount of the
asset with the estimated undiscounted future cash flows associated with the use
of the asset and its eventual disposition. Should the review indicate that the
asset is not recoverable, the Company’s carrying value of the asset would be
reduced to its estimated fair value, which is measured by future discounted cash
flows. During the years ended December 31, 2007, 2006 and 2005 there have been
no such impairments.




Property
and Equipment




Property
and equipment, including assets under capital leases, are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful lives of the
respective assets as follows:




Machinery
      and equipment
            3
      to 5 yearsComputer
      equipment
            3 yearsFurniture
      and fixtures
            5 yearsLeasehold
      improvements
            Shorter
      of the useful life of the improvements or the lease
  term




Leasehold
improvements are amortized over the life of the remaining lease term.
Expenditures for major renewals and betterments are capitalized, while minor
replacements, maintenance and repairs, which do not extend the asset lives, are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation and amortization are removed from the accounts
and any gain or loss is included in operations.


41





Evaluation
Equipment




Evaluation
equipment consists of CoolGard and Thermogard systems placed at hospitals under
the Company’s equipment loan agreements and are depreciated using the
straight-line method over their estimated economic life of five years. As of
December 31, 2007 and 2006 the cost of evaluation equipment was $1,109 and
$998 and accumulated depreciation was $436 and $362, respectively. For the years
ended December 31, 2007, 2006 and 2005, $222, $219 and $205, respectively, was
recorded as a component of cost of revenue for the depreciation of the
equipment.




Stock-Based
Compensation




Effective
January 1, 2006 the Company adopted Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based Payment, which
revises SFAS No. 123, Accounting for Stock-Based
Compensation issued in 1995. Prior to the adoption of SFAS 123(R)
the Company accounted for stock-based employee compensation arrangements using
the intrinsic value method in accordance with the provisions and related
interpretations of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB No. 25”). The Company adopted SFAS 123(R)
applying the “prospective transition method” under which it continues to account
for nonvested equity awards outstanding at the date of adoption of
SFAS 123(R) in the same manner as they had been accounted for prior to
adoption, that is, it would continue to apply APB No. 25 in future periods
to equity awards outstanding at the date it adopted
SFAS 123(R).




As of
December 31, 2006 there was $255 of unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under share-based
compensation plans using the fair value method of SFAS 123(R). As of December
31, 2006, the cost was expected to be recognized over a weighted-average period
of 3.05 years, using the graded vested attribution method.   In
the merger effective on June 21, 2007 (Note 3), due to the liquidation
preferences of the Company’s redeemable convertible preferred stock and the
terms and conditions of the Company’s Bridge Notes, all outstanding stock
options of the Company were cancelled, therefore any unrecognized compensation
related to nonvested share-based compensation arrangements was
cancelled.  Compensation cost of $88 was recognized for the year ended
December 31, 2007 (for the period prior to June 21, 2007, the date of the
merger).  There were no stock option grants in the six months ended
June 30, 2007.  See Note 7 regarding stock option grants in the six
months ended December 31, 2007.




Calculating
stock-based compensation expense requires the input of highly subjective
assumptions, including the expected term of the stock-based awards, stock price
volatility, and pre-vesting option forfeitures. The estimate of expected term of
options granted under the 2004 Plan was determined by analyzing historical data
on employees’ stock option exercises. The estimate of expected term of options
granted under the 2006 Plan was calculated using the simplified method, as
prescribed in SEC Staff Accounting Bulletin No. 110.  Prior to the
merger with Ithaka in June 2007, the Company was a private entity with no
historical data on volatility of its stock.  Therefore, the expected
volatility used was based on volatility of similar entities (referred to as
“guideline companies”) for stock options granted after January 1, 2006. In
evaluating similarity, the Company considered factors such as industry, stage of
life cycle, size, and financial leverage. The assumptions used in calculating
the fair value of stock-based awards represent the Company’s best estimates, but
these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, stock-based compensation expense could be materially different in
the future. In addition, the Company is required to estimate the expected
forfeiture rate and only recognize expense for those shares expected to vest.
The Company estimates the forfeiture rate for options granted after January 1,
2006 under the 2004 Plan based on historical experience of its stock-based
awards that are granted, exercised and cancelled. For options granted under the
2006 Plan, the forfeiture rate used was based on the estimated forfeiture rates
of similar entities. If its actual forfeiture rate is materially different from
its estimate, the stock-based compensation expense could be significantly
different from what it has recorded in the current period.




The
risk-free rate for periods within the contractual life of the option is based on
United States treasury yield for a term consistent with the expected life of the
stock option in effect at the time of grant. The Company has never declared or
paid any cash dividends and does not presently plan to pay cash dividends in the
foreseeable future. Prior to the adoption of SFAS 123(R), the Company did
not record any tax benefits resulting from the exercise of options due to
uncertainty surrounding the timing of realizing the benefits of its deferred tax
assets in future periods. The Company has elected to use the graded vesting
attribution approach to record compensation expense. Shares of common stock
issued upon exercise of stock options will be from previously unissued
shares.


42







The
weighted-average fair value per share of the options granted was $3.33 for the
year ended December 31, 2007, and was $3.98 for the year ended December 31,
2006. The fair value of the stock options at the date of grant was estimated
using the Black-Scholes option-pricing model with the following
assumptions:





Year
      Ended
              December
      31, 2007
            
            
            Year
      Ended
              December
      31, 2006Dividend
      Yield
            
            
            0.00%
            
            
            
            0.00%Volatility
            
            
            67%
            
            
            
            61%Weighted-average
      risk-free interest rate
            
            
            4.89%
            
            
            
            4.82%Expected
      life
            
            6.0-6.25
      years
            
            
            5.61-5.88
      years





The
Company accounts for equity instruments issued to nonemployees in accordance
with the provisions of 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 (“EITF 96-18”). Under EITF 96-18, stock option
awards issued to nonemployees are accounted for at fair value using the
Black-Scholes option pricing model. Management believes the fair value of the
stock options is more reliably measurable than the fair value of services
received. The fair value of each nonemployee stock award is remeasured each
period until a commitment date is reached, which is the vesting date, using the
attribution method in FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans. For nonemployee
awards, deferred stock-based compensation is not reflected in shareholders’
deficit until a commitment date is reached.




SFAS 123
was replaced by SFAS 123(R); accordingly, the Company no longer follows
SFAS 123 when accounting for nonemployee stock option, but continues to
apply the principles of EITF 96-18. When specific guidance does not exist
in EITF 96-18 for nonemployee stock options, the Company follows the
principles of SFAS 123(R). There was no impact to the financial statements
for nonemployee stock options as a result of the adoption of SFAS
123(R).




Revenue
Recognition




The
Company sells its products domestically to customers through its direct sales
force, and internationally through distributors. Revenue is recognized in
accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred and title and the risks and rewards of ownership have been transferred
to the customer or services have been rendered; (3) the price is fixed or
determinable; and (4) collectibility is reasonably assured. Price
protection, stock rotation rights and sales incentive programs are not offered
to customers.




The
Company evaluates whether the separate deliverables in its arrangements can be
unbundled. Sales of the CoolGard and Thermogard systems domestically to
hospitals include separate deliverables consisting of the product, disposables
used with the CoolGard and Thermogard system, installation and training. For
these sales, the Company applies the residual value method in accordance with
EITF 00-21, Revenue
Arrangements with Multiple Deliverables, which requires the allocation of
the total arrangement consideration less the fair value of the undelivered
elements, which consist of installation and training, to the delivered elements.
As of  December 31, 2007 and 2006 there were minimal amounts
attributed to the undelivered elements. Installation and training are not
included in arrangements with sales to distributors.


43





Explicit
return rights are not offered to customers; however, the Company may accept
returns in limited circumstances. The amount of returns through December 31,
2007 has been minimal. A sales return allowance has not been established since
management believes returns will be insignificant.




The
Company enters into equipment loan agreements with stated terms of primarily six
months with certain customers whereby the CoolGard or Thermogard system is
placed at the customer’s site for their evaluation and use. During this time,
the customer purchases disposables. There are no stated minimum purchase
requirements. The Company accounts for these arrangements in accordance
with SFAS No. 13, Accounting for Leases, and
has classified these arrangements as operating leases. The consideration for the
rental portion of the arrangement is considered to be contingent and is recorded
when earned.  We currently do not charge a rental fee during the
evaluation period.  The amount of revenue attributable to the lease
element of these arrangements was less than 10% of the Company’s total revenue
for all periods presented. The CoolGard or Thermogard system is classified as
evaluation equipment and is depreciated over its estimated economic life of five
years with depreciation included as a component of cost of revenue.





During
2005, the Company began to offer extended warranty contracts, which are
separately sold to non-distributor customers. Revenue is recorded on a
straight-line basis over the period of the contract, which is generally one
year. The amount of deferred revenue has historically been minimal.




Product
Warranty




The
Company provides a 12 month warranty from the date of purchase for domestic
customers and a 15 month warranty from the date of purchase for
distributors on its CoolGard and Thermogard systems, which covers parts, labor
and shipping costs. The Company will also accept returns for disposables with
defects one year from the date of purchase for domestic customers and the
shorter of two years or the expiration date of the disposables for distributors.
Warranty costs are estimated at the time of sale based on historical experience.
Estimated warranty expenses are recorded as an accrued liability, with a
corresponding provision to cost of revenue.




Changes
in the Company’s product warranty liability were as follows:





Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Beginning
      balance
            
            $
            156
            
            
            $
            202
            
            
            $
            23Provision
      for estimated warranty costs
            
            
            79
            
            
            
            185
            
            
            
            240Warranty
      expenditures
            
            
            (128
            )
            
            
            (231
            )
            
            
            (61
            )Ending
      balance
            
            $
            107
            
            
            $
            156
            
            
            $
            202







Cost
of Revenue





Cost of
revenue consists of costs of materials, products purchased from third-parties,
manufacturing personnel, freight, depreciation of property and equipment,
royalties paid to technology licensors, manufacturing overhead, warranty
expenses and inventory reserves. Royalties paid to third parties include two
worldwide licenses related to our catheters. One license covers a coating used
on our catheters and requires that we pay a royalty of between 2.0% and 3.5% on
net revenue generated by all catheters. The other license covers technology used
in our Cool Line catheter and requires that we pay a royalty of 2.5% on net
revenue generated by the Cool Line catheter.





Shipping
and Handling




Charges
to customers for shipping and handling are included as a component of revenue.
Shipping and handling costs are expensed as incurred and recorded as a component
of cost of revenue.




44


Research
and Development




Research
and development expenses consist of engineering personnel salaries and benefits,
prototype supplies, and consulting fees related to product development. Research
and development costs are expensed as incurred.




Advertising




Advertising
costs are expensed as incurred. Included in sales and marketing expense for the
years ended December 31, 2007, 2006 and 2005 was $682, $275, and $212,
respectively.




Income
Taxes




We
account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.  The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.





We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider all available
positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies
and recent financial operations.  In the event we were to determine
that we would be able to realize our deferred income tax assets in the future in
excess of their net recorded amount, we would make an adjustment to the
valuation allowance which would reduce the provision for income
taxes.





Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN
48”), Accounting for
Uncertainty in Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 provides guidance on the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. In accordance with
FIN 48, a tax position is a position in a previously filed tax return or a
position expected to be taken in a future tax filing that is reflected in
measuring current or deferred income tax assets and liabilities. Tax positions
are recognized only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position will be sustained upon
examination. Tax positions that meet the more likely than not threshold should
be measured using a probability weighted approach as the largest amount of tax
benefit that is greater than 50% likely of being realized upon settlement. The
adoption of FIN 48 did not have a material impact on the Company’s financial
position, results of operations or cash flows.





Net Loss Per
Share




The
merger with Ithaka, as discussed in Note 3, for financial reporting purposes was
treated as a reverse acquisition.  Because the number of shares
outstanding following a reverse acquisition is significantly different from the
number of shares outstanding prior to the combination, the weighted average
shares outstanding for purposes of presenting net loss per share on a
comparative basis has been retroactively restated to the earliest period
presented in order to reflect the effect of the reverse acquisition.  In
effect, the reverse acquisition is similar to a stock split for the accounting
acquirer, and retroactively restating the weighted average shares outstanding is
consistent with the accounting required by SFAS No. 128, Earnings Per Share, for stock
splits, stock dividends, and reverse stock splits.






45





New
Accounting Pronouncements





In June
2006, the FASB ratified the consensus reached on Emerging Issues Task Force
(“EITF”) Issue No. 06-03, How Taxes Collected from Customers
and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (that
is, Gross versus Net
Presentation).The EITF reached a consensus that the presentation of
taxes on either a gross or net basis is an accounting policy decision that
requires disclosure. EITF 06-03 is effective for the first interim or annual
reporting period beginning after December 15, 2006. Taxes collected from
the Company’s customers are and have been recorded on a net basis. The Company
has no intention of modifying this accounting policy. As such, the adoption of
EITF 06-03 did not have an effect on the Company’s consolidated financial
position, results of operations and cash flows.





In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. In February 2008, the FASB issued
Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement
No. 157, which defers the implementation for the non-recurring nonfinancial
assets and liabilities from fiscal years beginning after November 15 , 2007 to
fiscal years beginning after November 15, 2008. The provisions of
SFAS No. 157 will be applied prospectively. The statement provisions
effective as of January 1, 2008, do not have a material effect on the
company’s consolidated financial position, results of operations and cash flows.
Management does not believe that the remaining provisions will have a material
effect on the company’s consolidated financial position and results of
operations and cash flows when they become effective on January 1,
2009.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial
Liabilities—Including
an Amendment of SFAS No. 115. SFAS No. 159 provides
reporting entities an option to measure certain financial assets and liabilities
and other eligible items at fair value on an instrument-by-instrument basis.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting date. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 159 did not have an impact on its consolidated financial position,
results of operations and cash flows.





In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations. SFAS
No. 141(R) requires reporting entities to record fair value estimates of
contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed under EITF
95-3 to be recorded as a component of purchase accounting.  In
addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax
assets and uncertain tax positions after the measurement period will impact
income tax expense. SFAS No. 141(R) is effective for fiscal periods beginning
after December 15, 2008 and should be applied prospectively for all business
acquisitions entered into after the date of adoption. The Company does not
expect the adoption of SFAS No. 141(R) to have an impact on its consolidated
financial position, results of operations and cash flows.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements—an amendment of ARB No. 51.
SFAS No. 160 requires (i) that noncontrolling (minority) interests be reported
as a component of shareholders’ equity, (ii) that net income attributable to the
parent and to the noncontrolling interest be separately identified in the
consolidated statement of operations, (iii) that changes in a parent’s ownership
interest while the parent retains its controlling interest be accounted for as
equity transactions, (iv) that any retained noncontrolling equity investment
upon the deconsolidation of a subsidiary by initially measured at fair value,
and (v) that sufficient disclosures are provided that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning
after December 15, 2008. The Company is currently evaluating the impact the
adoption of SFAS No. 160 will have on its consolidated financial position,
results of operations and cash flows.


46





3.  Merger
with Ithaka





On June
21, 2007, Ithaka’s stockholders approved the merger of Alsius Medical with and
into Ithaka’s wholly owned merger subsidiary.  The merger
consideration consisted of 8,000,000 shares of Ithaka’s common stock (the
“Merger Shares”) in exchange for all of the issued and outstanding equity
securities of Alsius Medical. Of the 8,000,000 shares issued in
consideration, 4,902,527 shares were issued to preferred stock holders and
3,097,473 shares were issued to the Bridge Notes holders. The par value of the
Merger Shares was $0.0001. In addition, Alsius Medical’s shareholders also have
the right to receive up to an aggregate of 6,000,000 additional performance
shares (the “Milestone Shares”) if the combined company meets certain revenue
targets in fiscal years 2007 through 2009.  In 2007, the revenue
targets were not met and no Milestone Shares were granted. Additionally, Ithaka
agreed to fund bonuses totaling $3,000 to management, employees, two
non-employee directors and certain consultants of Alsius Medical.  The
$3,000 bonus paid by Ithaka was included as part of the merger consideration.
The Company accounted for the amount as a reduction of the net proceeds received
from Ithaka in return for the issuance of the stock. This treatment was based on
the fact that the amount was specifically negotiated by the parties as “merger
consideration” as set forth in the merger agreement.  There was no
service requirement in order to earn the bonus.  Due to liquidation
preferences in Alsius Medical’s Series A-F redeemable convertible preferred
stock and the terms and conditions of the unsecured convertible promissory
notes, the allocation of the Merger Shares resulted in the holders of the Bridge
Notes and Series F preferred stock receiving their pro rata share, and the
holders of the other equity instruments (Series A-E, common stock, and common
stock options) did not receive any Merger Shares. The accumulated balance
due to the Bridge Note holders was converted at an agreed price of $5.50 per
share. This resulted in the recording of additional paid-in capital of $17,036,
the amount due to the holders. The Series F redeemable convertible preferred
stock was converted at the market price of $5.66 per share at the date of the
merger. In addition, due to the underlying terms and conditions of the Series F
redeemable convertible preferred stock warrants at the time of the merger (a
qualifying sale), all Series F redeemable convertible preferred stock warrants
were cancelled (Note 8), and all existing Alsius Medical equity instruments were
cancelled (Note 6).





Holders
of 972,100 shares of Ithaka’s common stock voted against the merger and elected
to convert their shares into a pro rata portion of Ithaka’s trust fund. This
redeemable common stock was accounted for as mezzanine equity at the time of the
merger as it was uncertain whether such amounts would ultimately be redeemed in
cash or remain as outstanding common stock of the Registrant.  The
conversion rights required the holder of the stock to deliver its stock
certificate to the Registrant’s transfer agent by August 15, 2007 in order to
receive the applicable cash payment. If not executed by August 15, 2007, the
stockholder forfeited its right to receive cash payment for the
shares.  Through December 31, 2007, the Registrant redeemed $4,078
(720,600 shares) of the redeemable common stock.




Additionally,
as discussed above, as part of consideration paid at the close of the merger,
Ithaka agreed to fund bonus payments to the management, employees, two
non-employee directors and certain consultants of Alsius Medical totaling
$3,000.  The merger agreement entitles these individuals to receive an
additional amount of up to $2,000 upon the achievement of the above mentioned
revenue targets in fiscal years 2007 through 2009.  The $3,000 has
been accounted for as part of the purchase price.  Future payments
will be expensed as earned.





The
merger was accounted for under the purchase method of accounting as a reverse
acquisition, with Alsius Medical as the accounting acquirer.  As part
of the merger, Ithaka’s common stock of 10,974,100 shares, which consisted of
9,866,392 common shares and 1,107,708 units convertible into common shares, at
$0.0001 par value, where converted into common stock of Alsius Medical, This
resulted in the recording of additional paid-in capital of $73,732. For
accounting purposes, the merger has been treated as the equivalent of Alsius
Medical issuing stock for the net assets of Ithaka, accompanied by a
recapitalization.  The net assets of Ithaka are stated at their fair
values, which are considered to approximate historical cost, with no goodwill or
other intangible assets recorded.  The accumulated deficit of Alsius
Medical is carried forward after the merger and the operations prior to the
merger are those of Alsius Medical.  The results of operations of
Ithaka are included in the accompanying consolidated financial statements
commencing June 22, 2007.


47





The
purchase price allocation is as follows:




Cash
      and cash equivalents
            
            $
            50,000Prepaid
      expenses
            
            
            98Accounts
      payable
            
            
            (1,082
            )Accrued
      liabilities
            
            
            (126
            )Redeemable
      common stock
            
            
            (4,078
            )Management
      bonuses
            
            
            (3,000
            )Transaction
      costs
            
            
            (1,444
            )Net
      assets acquired
            
            $
            40,368





The
Milestone Shares and the additional $2,000 in management bonuses have not been
included in the above purchase price allocation.  If the revenue
targets are achieved and the Milestone Shares are issued and/or the management
bonuses are paid, the fair value of the consideration will be recorded as an
additional capital adjustment.




Prior to
the Merger, the Company’s authorized capital stock consisted of 20,000,000
shares of common stock, of which 78,942 shares were issued and outstanding at
December 31, 2006. All stock has no par value.  All of the
Company’s prior common stock was eliminated.









4.  Supplemental Financial Statement
Data





Inventories
consist of the following:




December
      31,
              2007
            
            
            December 31,
              2006Raw
      materials
            
            $
            3,775
            
            
            $
            1,418Work-in-process
            
            
            1,747
            
            
            
            727Finished
      goods
            
            
            1,158
            
            
            
            223$
            6,680
            
            
            $
            2,368




Property
and equipment consists of the following:





December
      31,
              2007
            
            
            December
      31,
              2006Machinery
      and equipment
            
            $
            1,113
            
            
            $
            706Computer
      equipment
            
            
            536
            
            
            
            391Furniture
      and fixtures
            
            
            186
            
            
            
            175Leasehold
      improvements
            
            
            270
            
            
            
            1383,105
            
            
            
            1,410Accumulated
      depreciation and amortization
            
            
            (1,071
            )
            
            
            (1,050
            )$
            1,034
            
            
            $
            360







Depreciation
and amortization expense was $191, $140 and $161 for the years ended
December 31, 2007, 2006, and 2005, respectively. The amounts of property
and equipment under capital leases as of December 31, 2007 and 2006 were
$139 and $124 with accumulated amortization of $55 and $13,
respectively.


48





Accrued
liabilities consist of the following:




December
      31,
              2007
            
            
            December 31,
              2006Bonus
            
            $
            480
            
            
            $
            602Inventory
            
            
            23
            
            
            
            18Vacation
            
            
            320
            
            
            
            250Warranty
            
            
            107
            
            
            
            156Interest
            
            
            69
            
            
            
            358Professional
      services
            
            
            453
            
            
            
            118Payroll
      and related
            
            
            42
            
            
            
            43Commission
            
            
            232
            
            
            
            118Royalties
            
            
            38
            
            
            
            43Deferred
      revenue
            
            
            60
            
            
            
            9Other
            
            
            92
            
            
            
            70$
            1,916
            
            
            $
            1,785




Other
income (expense) consists of the following:




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Foreign
      currency
      remeasurement
            
            $
            (3
            )
            
            $
            —
            
            
            $
            (12
            )Increase
      in fair value of loan premium liabilities (Note 5)
            
            
            (474
            )
            
            
            (2,156
            )
            
            
            —Decrease
      (increase) in fair value of warrant liabilities
            
            
            512
            
            
            
            99
            
            
            
            (108
            )$
            35
            
            
            $
            (2,057
            )
            
            $
            (120
            )





5.
Long-Term Debt





The
components of long-term debt were as follows:





December
      31,
              2007
            
            
            December 31,
              2006Secured
      Promissory Note, net of discount of $60
            
            $
            —
            
            
            $
            3,0482006
      Bridge Notes, net of discount of $1,513
            
            
            —
            
            
            
            7,613Senior
      Secured Credit Facility, net of discount of $164
            
            
            6,769
            
            
            
            —6,769
            
            
            
            10,661Less:
      current portion
            
            
            (3,200
            )
            
            
            (9,318
            )Long-term
      portion
            
            $
            3,569
            
            
            $
            1,343




Secured
Promissory Note




In May
2005, the Company entered into a $5,000 secured promissory note with a financing
company that requires interest only payments of $44 for the first three months
and interest and principal payments of $163 for each month thereafter through
September 2008. In conjunction with the secured promissory note, the Company
issued a warrant exercisable into 116,667 shares of Series F preferred
stock at an exercise price of $3.00 per share. The Series F preferred
stock is redeemable; accordingly, the proceeds from the promissory note were
first allocated to the $188 estimated fair value of the warrant with the $4,812
remaining balance allocated to the promissory note (Note 8). The secured
promissory note has an effective interest rate of 13.29% and is collateralized
by substantially all of the Company’s assets.


49





In
February 2007, the secured promissory note was paid in full.   In
June 2007, prior to the merger (Note 3), the warrant to purchase Series F
preferred stock was exercised on a cashless basis for 8,308 shares of Series F
preferred stock.





2006
Bridge Notes





In June
2007, in connection with the merger (Note 3), and in accordance with the terms
of the instruments as described below, the outstanding principal amount of the
2006 Bridge Notes ($10,656), related accrued interest ($702) and the 150% Loan
Premium ($5,679), totaling $17,036, was converted into 3,097,473 shares of
common stock at $5.50 per share, the fair value of the common stock on the date
of the merger. The warrants associated with these 2006 Bridge Notes were
cancelled in the merger in accordance with their existing terms and
conditions.




Following
are the specific terms of the 2006 Bridge Notes, the warrants issued with the
2006 Bridge Notes and the fair value allocations recorded in the accompanying
consolidated financial statements through the date of the conversion, June 21,
2007.





On
April 13, 2006, the Company issued unsecured convertible promissory notes
for an aggregate amount of $4,214 from existing shareholders with an interest
rate of 8% (the “April 2006 Bridge Notes”), and on August 18, 2006, the
Company issued unsecured convertible promissory notes for an aggregate amount of
$1,941 (the “August Bridge Notes”) under the same terms as the April 2006 Bridge
Notes. In October 2006, the Company entered into an agreement that provided for
borrowings of $2,500, with the commitment amount eligible to be increased by an
additional $2,000 upon the unanimous consent of the Company’s board of
directors. Under these terms, the Company borrowed $1,000 on October 13,
2006 (the “October 2006 Bridge Notes”), $1,000 on November 15, 2006 (the
“November 2006 Bridge Notes”), $1,000 on December 15, 2006 (the “December
2006 Bridge Notes”), $1,000 on January 12, 2007 (the “January 2007 Bridge
Notes”), and $500 on February 2, 2007 (the “February 2007 Bridge Notes”)
(collectively, the “2006 Bridge Notes”). Maturity was the earlier of
August 31, 2007, an event of default, or the closing of a sale transaction
as defined in the agreement. Principal and accrued interest converted
automatically into unregistered shares of common stock upon the closing of an
initial public offering, or into shares of Series F preferred stock at
$3.00 per share if an initial public offering did not close by August 31,
2007. Automatic conversion of the principal and accrued interest into shares of
Series F preferred stock was also provided upon closing of an equity financing
arrangement. Upon conversion in an initial public offering, the principal amount
of the 2006 Bridge Notes and accrued interest would convert into the number of
shares of common stock that resulted by dividing eighty percent of the initial
public offering price into the total principal and accrued interest then
outstanding.




In
conjunction with the 2006 Bridge Notes, the Company issued warrants exercisable
into common stock at a price per share equal to the public offering price in the
event an initial public offering was completed by August 31, 2007. The
number of shares into which the warrants are convertible was equal to twenty
percent of principal amount of the notes divided by the initial public offering
stock price. In the event an initial public offering was not completed by
August 31, 2007, the warrants were convertible into shares of Series F
preferred stock. The number of shares of Series F preferred stock would
equal twenty percent of the principal amounts of the notes divided by
$3.00.




At the
time of the issuance of the 2006 Bridge Notes, an initial public offering was
not a certain event and the warrants were convertible into preferred stock that
was classified as mezzanine equity. Accordingly, at their issue dates, the
warrants were recorded as liabilities under FSP 150-5, Issuer’s Accounting under FASB
Statement No. 150 for Freestanding Warrants and Other Similar Instruments
on Shares that are Redeemable, based on their estimated fair values at
issuance. Subsequent changes in the fair values were recorded as non-operating
income (loss). See Note 8 for the fair value assumptions of these
warrants.




The 2006
Bridge Notes also provided for a payment equal to 150% of the principal and
accrued interest in the event there is a sale transaction, which is defined as
the sale of all or substantially all of the assets of the Company or when there
is a change in control (Note 3). This provision was determined to be an embedded
derivative (the “Loan Premium”) that required bifurcation and separate
measurement apart from the notes. The value of the Loan Premium liability was
recorded based on its estimated fair value at issuance. Subsequent changes in
the fair values were recorded as non-operating income (loss). The remaining
proceeds were allocated to the 2006 Bridge Notes.


50





The
allocation of the proceeds to the fair value of the warrants and Loan Premiums
resulted in the 2006 Bridge Notes being recorded at discounts to their face
amounts. These discounts were amortized to interest expense using the effective
interest method through the expected term of the notes. The activity for the
warrants and Loan Premiums is presented below.







April
              2006
            
            
            August
              2006
            
            
            October
              2006
            
            
            November
              2006
            
            
            December
              2006
            
            
            January
              2007
            
            
            February
              2007Estimated
      fair value on issuance date for Loan Premium (embedded
      derivative)
            
            $
            104
            
            
            $
            820
            
            
            $
            475
            
            
            $
            475
            
            
            $
            461
            
            
            $
            475
            
            
            $
            238Estimated
      fair value on issuance date of the warrant
            
            $
            332
            
            
            $
            —
            
            
            $
            3
            
            
            $
            3
            
            
            $
            3
            
            
            $
            3
            
            
            $
            1Remaining
      proceeds allocated to 2006 Bridge Notes
            
            $
            3,778
            
            
            $
            1,121
            
            
            $
            522
            
            
            $
            522
            
            
            $
            536
            
            
            $
            522
            
            
            $
            261Effective
      interest rate
            
            
            10.19
            %
            
            
            34.82
            %
            
            
            50.27
            %
            
            
            60.03
            %
            
            
            71.16
            %
            
            
            100.36
            %
            
            
            136.09
            %




Senior
Secured Credit Facility




On
February 22, 2007, and amended on May 11, 2007, the Company entered into a
senior secured credit facility with Merrill Lynch Capital (recently acquired by
GE Capital) consisting of an $10,000 term loan (the “Term Loan”) with an
interest rate of one month LIBOR plus 6.50%. Approximately $3,000 of the total
amount borrowed was used to repay in full the Company’s secured promissory note
issued in May 2005.  At December 31, 2007, $6,933 of the Term Loan was
outstanding. The Term Loan requires interest only payments for the first six
months and interest and principal payments for each month thereafter through
February 2010.




In
connection with the issuance of the Term Loan in February 2007, the Company
issued a warrant to Merrill Lynch Capital with a contractual term of 10 years.
If the contemplated merger between the Company and Ithaka (Note 3) was not
completed before August 24, 2007, then on or after August 24, 2007,
the warrant would have been exercised into 80,000 shares of Series F
preferred stock of the Company at an exercise price of $3.00 per share unless
prior to August 24, 2007, the Company issued a new series of preferred
stock. If a new series of preferred stock was issued, the warrant would have
been exercisable into the new series of preferred stock. The number of shares
would have been determined by dividing $240 by the lowest share price paid for
the new series of preferred stock. The $206 estimated fair value of the warrants
issued in February 2007 was recorded as a liability, resulting in a discount to
the Term Loan at issuance. The discount is being amortized to interest expense
using the effective interest method over the term of the Term
Loan.   The $206 estimated fair value of the warrants was
recorded as a liability, resulting in a discount to the Term Loan at
issuance.




In
connection with the close of the merger in June 2007, a measurement date for
this warrant was achieved, and the warrant issued to Merrill Lynch Capital
became exercisable into 43,716 shares of common stock at an exercise price of
$5.49 per share.   As the warrant is now exercisable into common
stock, the fair value of the warrant as of the date of the merger was $215 and
reclassified from a liability to equity.





Under the
terms of the Term Loan, the Company is restricted from making certain
distributions, including cash dividends.  The Company is currently in
compliance with such restrictions. We are currently in compliance with, or have
obtained an appropriate waiver for, all required covenants.





Unsecured
Promissory Note





On June
12, 2007, the Company entered into a $1,500 unsecured promissory note with a
financing company, Cheyne Capital, a shareholder of Ithaka.  Interest
accrued at the simple rate of 15% per annum and was payable
monthly.  The maturity date of this note was March 31, 2008, and can
be repaid earlier without penalty.  All amounts due under this
unsecured promissory note were subordinated to the Senior Secured Credit
Facility.  The Company paid a 7.5% fee on the $1,500 in borrowings,
and such fee was recorded as a prepaid expense.  The prepaid was being
amortized to interest expense using the effective interest method over the term
of the unsecured promissory note.  This note was repaid in full in
July 2007.


51





As of
December 31, 2007, principal payments for long-term debt are as
follows:





Year
      ending December 31,2008
            
            $
            3,2002009
            
            
            3,2002010
            
            
            533$
            6,933





6.  Authorized
Capital Stock





Concurrent
with the close of the merger in June 2007, all outstanding shares of Alsius
Medical’s Series A-F redeemable convertible preferred stock were exchanged for
the Merger Shares (Note 3) or the potential right to receive Merger Shares, and
concurrently cancelled.  There are no authorized or outstanding shares
of Series A-F redeemable convertible preferred stock at December 31,
2007.





The
Registrant’s authorized capital now consists of 1,000,000 shares of $0.0001 par
value preferred stock and 75,000,000 shares of $0.0001 par value common
stock.   The designations, voting and other rights and
preferences of the preferred stock may be determined from time to time by the
Board of Directors.





The
number of shares of common stock of the Registrant that have been reserved for
issuance as of December 31, 2007:





StocStock
      options (Note 7)
            
            
            3,275,000Common
      stock warrants (Notes 5, 7 and 9 )
            
            
            17,434,71620,709,716


7.  Stock
Options







1992
Plan




The 1992
Incentive Stock Plan (the “1992 Plan”) provided for the grant of options and
stock purchase rights to purchase up to a maximum of 11,000 shares of
Alsius Medical’s common stock to employees, officers, consultants and directors.
The 1992 Plan included incentive stock options (“ISOs”), nonqualified stock
options (“NSOs”) and stock purchase rights. The right to exercise ISOs and NSOs
and stock purchase rights vested at a rate in accordance with the individual
stock option agreements, which has been immediate to four years for employees
and three to four years for non-employees. Options expire within a period of not
more than 10 years from the date of grant. ISOs granted to an employee who, at
the time the option is granted, owns stock representing more than 10% of the
voting power of all classes of stock of the Company, expire within a period of
not more than five years from the date of grant. Options expire between thirty
and ninety days after termination of employment depending on the circumstances.
The 1992 Plan ended in 2002 and no further options have been
granted.   All options outstanding under the 1992 Plan were
cancelled in the merger effective June 21, 2007.


52





A summary
of option activity under the 1992 Plan is as follows:





Shares Under
      OptionEmployee
            
            
            Non-employee
            
            
            Total
            
            
            Weighted
              Average
              Exercise Price
              Per
      ShareOutstanding
      at December 31, 2005
            
            
            5,650
            
            
            
            619
            
            
            
            6,269
            
            
            
            246Forfeited
            
            
            (100
            )
            
            
            —
            
            
            
            (100
            )
            
            
            50Outstanding
      at December 31, 2006
            
            
            5,550
            
            
            
            619
            
            
            
            6,169
            
            
            
            249Forfeited
            
            
            (1,276
            )
            
            
            (30
            )
            
            
            (1,306
            )
            
            
            50Canceled
      in the merger
            
            
            (4,274
            )
            
            
            (589
            )
            
            
            (4,863
            )
            
            
            249Outstanding
      at December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Exercisable
      at December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Vested
      and expected to vest as of December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —







2004
Plan




The 2004
Stock Incentive Plan (the “2004 Plan”) provided for the grant of options and
stock purchase rights to purchase up to a maximum of 2,100,000 shares of
Alsius Medical’s common stock to employees, officers, consultants and directors.
The 2004 Plan included ISOs, NSOs and stock purchase rights. For ISOs and NSOs,
the exercise price per share shall be no less than 110% of the fair market value
per share on the date of grant for an individual who, at the time of grant, owns
stock representing more than 10% of the voting power of all classes of stock of
Alsius Medical. The right to exercise ISOs and NSOs and stock purchase rights
vests at a rate in accordance with the individual stock option agreements, which
has been immediate to four years for employees, and immediate to three years for
non-employees. Options expire within a period of not more than 10 years from the
date of grant. ISOs granted to an employee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
classes of stock of Alsius Medical, expire within a period of not more than five
years from the date of grant. Options expire between thirty days and six months
after termination of employment depending on the circumstances. No stock
purchase rights have been granted through the merger.  All options
outstanding under the 2004 Plan were cancelled in the merger effective June 21,
2007.





A summary
of option activity under the 2004 Plan is as follows:





Shares Under
      OptionEmployee
            
            
            Non-employee
            
            
            Total
            
            
            Weighted
              Average
              Exercise
              Price Per
              Share
            
            
            Weighted
              Average
              Contractual
              Life
      (Years)Outstanding
      at December 31, 2005
            
            
            1,579,530
            
            
            
            156,638
            
            
            
            1,736,168
            
            
            $
            0.30Granted
            
            
            159,600
            
            
            
            7,500
            
            
            
            167,100
            
            
            
            0.30Exercised
            
            
            (21,958
            )
            
            
            —
            
            
            
            (21,958
            )
            
            
            0.30Forfeited
            
            
            (33,548
            )
            
            
            —
            
            
            
            (33,548
            )
            
            
            0.30Outstanding
      at December 31, 2006
            
            
            1,683,624
            
            
            
            164,138
            
            
            
            1,847,762
            
            
            
            0.30
            
            
            
            7.7Forfeited
            
            
            (9,877
            )
            
            
            —
            
            
            
            (9,877
            )
            
            
            0.30
            
            
            
            7.7Canceled
      in the merger
            
            
            (1,673,747
            )
            
            
            (164,138
            )
            
            
            (1,837,885
            )
            
            
            0.30
            
            
            
            7.7Outstanding
      at December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Exercisable
      at December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Vested
      and expected to vest as of December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —





53





2006
Plan




In
connection with the merger, the Company adopted the new 2006 Equity Incentive
Plan (the “2006 Plan”).  The 2006 Plan provides for the grant of
options to purchase up to a maximum of 2,850,000 shares of the Company’s common
stock to employees, officers, consultants and directors.   The
number of shares reserved for issuance under the 2006 Plan will be increased on
the first day of each fiscal year from 2008 through 2016 to 3% of the fully
diluted shares of common stock outstanding on the last day of the immediately
preceding fiscal year; provided, however, that the percentage shall be reduced
to 2% from and after the time when the Company calls its warrants for redemption
(Note 9).  The 2006 Plan includes ISOs and NSOs. For ISOs and NSOs,
the exercise price per share shall be no less than 110% of the fair market value
per share on the date of grant for an individual who, at the time of grant, owns
stock representing more than 10% of the voting power of all classes of stock of
the Company. The right to exercise ISOs and NSOs vests at a rate in accordance
with the individual stock option agreements, which has been immediate to four
years for employees, and immediate to three years for non-employees. Options
expire within a period of not more than 10 years from the date of grant. ISOs
granted to an employee who, at the time the option is granted, owns stock
representing more than 10% of the voting power of all classes of stock of the
Company, expire within a period of not more than five years from the date of
grant. Options expire between thirty days and six months after termination of
employment depending on the circumstances.





A summary
of option activity under the 2006 Plan is as follows:




Shares
      Under OptionEmployee
            
            Non-employee
            
            Total
            
            Weighted
              Average
              Exercise Price
              Per
      Share
            
            Weighted
              Average
              Contractual
              Life
      (Years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at December 31, 2006
            —
            
            —
            
            —
            
            $
            —
            
            —
            
            —Granted
            2,742,550
            
            15,000
            
            2,757,550
            
            
            5.08Forfeited
            (14,700
            )
            —
            
            (14,700
            )
            
            4.89Exercised
            —
            
            —
            
            —
            
            
            —Outstanding
      at December 31, 2007
            2,727,850
            
            15,000
            
            2,742,850
            
            
            5.08
            
            9.51
            
            $
            3,786Exercisable
      at December 31, 2007
            20,916
            
            —
            
            20,916
            
            
            5.10
            
            9.51
            
            $
            29Vested
      and expected to vest as of December 31, 2007
            2,482,344
            
            15,000
            
            2,497,344
            
            
            5.08
            
            9.51
            
            $
            3,447




54





The
following table summarizes stock options outstanding at December 31,
2007:





Outstanding
            
            
            ExercisableRange
      of
              Exercise Prices
            
            
            Number
              of Shares
            
            
            Average
              Remaining
              Contractual
              Life (Years)
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              of Shares
            
            
            Weighted-
              Average
              Exercise
              Price$
            4.03
            
            
            
            62,300
            
            
            9.59
            
            
            $
            4.03
            
            
            
            —
            
            
            $
            —5.00
            
            
            
            3,300
            
            
            9.59
            
            
            
            5.00
            
            
            
            —
            
            
            
            —5.10
            
            
            
            2,664,450
            
            
            9.51
            
            
            
            5.10
            
            
            
            20,916
            
            
            
            5.106.08
            
            
            
            12,800
            
            
            9.57
            
            
            
            6.08
            
            
            
            —
            
            
            
            —2,742,850
            
            
            
            
            
            
            
            
            
            
            
            20,916





As of
December 31, 2007 there was $5,191 of unrecognized compensation expense related
to nonvested share-based compensation arrangements granted under share-based
compensation plans using the fair value method of SFAS 123(R). As of December
31, 2007, the cost was expected to be recognized over a weighted-average period
of 3.15 years, using the graded vested attribution
method.





IPO
Option




In
Ithaka’s initial public offering in August 2005, an option was issued to the
underwriter of the initial public offering (the “IPO Option”) to purchase
425,000 units at an exercise price of $7.50 per unit.  A unit consists
of one share of common stock and two redeemable common stock purchase
warrants.  Ithaka accounted for the fair value of the IPO Option as an
expense of its offering resulting in a charge directly to stockholders’
equity.  As of December 31, 2007, the IPO Option is outstanding and
exercisable.





The IPO
Option may be exercised for cash or on a “cashless” basis, at the holder’s
option, such that the holder may use the appreciated value of the Option (the
difference between the exercise prices of the Option and the underlying warrants
and the market price of the units and underlying securities) to exercise the
option without the payment of any cash. The unit purchase option agreement
governing the IPO Option, as amended, states that the option may expire
unexercised or unredeemed and expire worthless if there is no effective
registration statement and states that in no event would Ithaka be obligated to
pay cash or otherwise “net cash settle” the Option or the Warrants underlying
the Option.  On December 19, 2007, the Registrant filed a registration
statement on Form S-3 to register the shares that may be issued upon exercise of
warrants and the registration statement is currently effective to allow the
exercise of the warrants.


55




8.  Series
F Preferred Stock Warrants




In
May 2005, the Company issued a warrant exercisable into 116,667 shares
of Series F preferred stock in connection with the secured promissory note
at an exercise price of $3.00 per share. The warrant was exercisable over a
period of eight years. The $188 estimated fair value of the warrant on its
issuance date was estimated using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 40.01%,
risk free interest rate of 3.93%; and term of eight years. The warrant was
exercisable either through the cash payment of the exercise price or through net
share settlement at the option of the holder.  Prior to its exercise
in June 2007, the warrant was carried at its fair value with decreases or
increases in fair value at each reporting date recorded as other income
(expense).  The warrant was classified as a liability as it was
exercisable into redeemable preferred stock.





In
conjunction with the 2006 Bridge Notes, the Company issued warrants exercisable
into shares of Series F preferred stock in the event the Company does not
complete an IPO, or common stock if an IPO is completed. The fair value of the
warrants on their issuance dates was estimated using the Black-Scholes option
pricing model as follows:




April
              2006
            
            
            August
              2006
            
            
            October
              2006
            
            
            November
              2006
            
            
            December
              2006
            
            
            January
              2007
            
            
            February
              2007Estimated fair value on issuance
      date
            
            $
            332
            
            
            $
            —
            
            
            $
            3
            
            
            $
            3
            
            
            $
            3
            
            
            $
            3
            
            
            $
            1Dividend
      yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
      volatility
            
            
            58
            %
            
            
            59
            %
            
            
            60
            %
            
            
            60
            %
            
            
            60
            %
            
            
            60
            %
            
            
            60
            %Risk
      free interest rate
            
            
            4.96
            %
            
            
            5.18
            %
            
            
            4.77
            %
            
            
            4.69
            %
            
            
            4.62
            %
            
            
            4.77
            %
            
            
            4.77
            %Tar
            
            3.72 years
            
            
            3.62 years
            
            
            3.45 years
            
            
            3.37 years
            
            
            3.29 years
            
            
            3.64 years
            
            
            3.58 years




The
warrants are cancelled in the event of a sales transaction. Based on the
probability of a sale transaction, the 2006 Bridge Note warrants were estimated
to have minimal value. The warrants were exercisable either through the cash
payment of the exercise price or through net share settlement at the option of
the holder.  Prior to their cancellation upon the merger with Ithaka
in June 2007, the 2006 Bridge Note warrants were carried at their fair value
with decreases or increases in fair value at each reporting date recorded as
other income (expense). The warrants were classified as liabilities as they were
exercisable into redeemable preferred stock.





The
Company estimated the fair value of the warrant issued to Merrill Lynch Capital
in February 2007 using the Black-Scholes option pricing model and assigned a
probability to each outcome described in Note 5- Senior Secured Credit Facility.
The fair value of the warrant on its issuance date was determined based on the
following assumptions: dividend yield of 0%, expected volatility of 60%, risk
free interest rates of 4.67% and 4.68%; and the contractual warrant term. The
resultant estimated fair value of $206 was initially recorded as a warrant
liability with decreases or increases in fair value at each reporting date
recorded as other income (expense). The warrant is exercisable either through
cash payment of the exercise price or through net share settlement at the option
of the holder.





There are
no outstanding Series F preferred stock warrants at December 31,
2007.




9.  Common
Stock Warrants




For
accounting purposes, the Company is treated as having assumed the Registrant’s
17,698,200 then outstanding redeemable common stock purchase warrants in the
merger in June 2007. Each warrant entitles the registered holder to purchase one
share of common stock of the Registrant at a price of $5.00 per share, subject
to adjustment as discussed below. The warrants expire on April 17, 2009.
The Registrant may call the warrants for redemption if all of the following
conditions are met:





•
            
            in
      whole and not in part;




•
            
            at
      a price of $0.01 per warrant at any time after the warrants become
      exercisable;




•
            
            upon
      not less than 30 days’ prior written notice of redemption to each warrant
      holder; and




•
            
            if,
      and only if, the reported last sale price of the common stock equals or
      exceeds $8.50 per share for any
              20
      trading days within a 30 trading day period ending on the third business
      day prior to the notice of
              redemption
      to warrant holders.





56





The
exercise price and number of shares of common stock issuable on exercise of the
warrants may be adjusted in certain circumstances including in the event of a
stock dividend, a recapitalization, reorganization, merger or consolidation.
However, the warrants will not be adjusted for issuances of common stock at a
price below the exercise price.




The
warrants can be exercised on a cashless basis in connection with any
redemption.  The warrant holders do not have the rights or privileges
of holders of common stock and any voting rights until they exercise their
warrants and receive shares of common stock. After the issuance of shares of
common stock upon exercise of the warrants, each holder will be entitled to one
vote for each share held of record on all matters to be voted on by
stockholders.  No warrants will be exercisable and the Registrant will not
be obligated to issue shares of common stock unless, at the time a holder seeks
to exercise such warrant, a prospectus relating to the common stock issuable
upon exercise of the warrants is current and the common stock has been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of the warrants.  On December 19,
2007, the Registrant filed a registration statement on Form S-3 to register the
shares that may be issued upon exercise of warrants and the registration
statement is currently effective to allow the exercise of the
warrants.




IPO
Warrants




In the
Registrant’s initial public offering in August 2005, 8,500,000 units were
sold.  In addition, in September 2005 the Registrant consummated the
closing of an additional 349,100 units, which were subject to the underwriters’
over-allotment option.  A unit consisted of one share of common stock
and two redeemable common stock purchase warrants (the “IPO
Warrants”).  Each IPO Warrant entitles the holder to purchase one
share of common stock at an exercise price of $5.00 commencing June 21, 2007 and
expiring four years from the effective date of the initial public offering. As
of December 31, 2007, 16,541,000 IPO Warrants are outstanding.




The IPO
Warrants are redeemable, at the Registrant’s option, with the prior consent of
the underwriter of the IPO, at a price of $.01 per IPO Warrant upon 30 days’
notice after the IPO Warrants become exercisable, only in the event that the
last sale price of the common stock is at least $8.50 per share for any 20
trading days within a 30 trading day period ending on the third day prior to the
date on which notice of redemption is given. The warrant agreement governing the
IPO Warrants, as amended, states that the warrants may expire unexercised or
unredeemed and expire worthless if there is no effective registration statement
and states that in no event would the Registrant be obligated to pay cash or
other consideration to the holder of warrants or otherwise “net cash settle” any
warrant exercise.





Warrant
Repurchase Program





On August
9, 2007, the Company's board of directors authorized a warrant repurchase
program for the Company to deploy up to $3.0 million to repurchase outstanding
warrants from time to time in the open market, through block trades or
otherwise, pursuant to applicable securities laws. Through December 31, 2007,
the Company repurchased 1,157,200 warrants for cash of $0.9
million.  The Company has terminated this program.




Warrant
Retirement Program





In
December 2007, the Company’s board of directors authorized a new warrant
retirement program whereby the holders of any warrant could, for the period of
December 19, 2007 to January 18, 2008, exercise their warrants on amended
terms.  For each 5.5 warrants surrendered on a cashless exercise
basis, the holder could receive one share of common stock.  In
addition, the holder could also exercise one additional warrant by paying a
reduced exercise price of $3.25 per share.   Through December 31,
2007, the Company incurred $167 in direct and incremental cost related to the
warrant retirement program, these cost have been recorded as a reduction of
additional paid-in capital as of December 31, 2007.  See Note 17 for
the final results of the warrant retirement program.


57





10.  Redeemable
Convertible Preferred Stock





There was
no redeemable convertible preferred stock authorized, issued or outstanding at
December 31, 2007 (Notes 3 and 6). Redeemable convertible preferred stock at
December 31, 2006, including the associated rights and preferences, was as
follows:





(Dollars
      in thousands)
            
            Authorized
              Shares
            
            
            Shares
              Outstanding
            
            
            Carrying
              Value
            
            
            Liquidation
              ValueSeries
      A
            
            
            718
            
            
            
            718
            
            
            $
            64
            
            
            $
            81Series
      B
            
            
            148
            
            
            
            148
            
            
            $
            74
            
            
            $
            74Series
      C-D
            
            
            1,582,546
            
            
            
            1,582,026
            
            
            $
            902
            
            
            $
            15,820Series
      E
            
            
            1,422,435
            
            
            
            1,422,435
            
            
            $
            21,056
            
            
            $
            21,337Series
      F
            
            
            8,344,600
            
            
            
            8,319,141
            
            
            $
            24,547
            
            
            $
            74,872







Voting




Each
share of preferred stock has voting rights equal to the number of shares of
common stock into which it is then convertible.




Conversion




Each
share of preferred stock is convertible at any time at the option of the holder
into the number of shares of common stock which results from dividing the
conversion price per share in effect for such series at the time of conversion
into the per share conversion value of such series (“Conversion Rate”). The
conversion price per share of Series A, Series B, Series C-D,
Series E and Series F is $3.00 and the per share conversion value of
Series A, Series B, Series C-D and Series E is $3.00
resulting in an initial conversion rate of one share of preferred stock for one
share of common stock. The conversion price of each series will be subject to
adjustment from time to time in the event of a combination of shares of common
stock, certain subsequent sales of common stock, grants of stock options, stock
splits, stock dividends, or the distributions of common stock. Conversion is
automatic in the event of a public offering of the Company’s common stock if the
aggregate gross proceeds exceed $20,000 and the per share price is at least
$15.00 per share.




Each
share of Series A, Series B, Series C-D, Series E and
Series F preferred stock will automatically convert into shares of common
stock at its then effective Conversion Rate upon the agreement of the holders of
63% of the then outstanding shares of preferred stock.




Dividends




Dividends
on Series F preferred stock are noncumulative, and if declared, payable at
$0.25 per share per annum on each share, in preference and prior to any
payment of any dividend on the common stock or on the Series A,
Series B, Series C-D and Series E preferred stock of the Company.
No dividends were declared through December 31, 2006.




Dividends
on Series A, Series B, Series C-D and Series E are
noncumulative and, if declared, are payable at the rate of $8.75, $40.00, $2.05
and $1.20 per annum on each share of Series A, Series B,
Series C-D and Series E preferred stock, respectively. No dividends
were declared through December 31, 2006.




Thereafter,
the holders of common stock and Series A, Series B, Series C-D,
Series E and Series F preferred stock are entitled, when and if
declared by the Board of Directors, to receive dividends, provided however that
no such dividend may be declared or paid on any shares of common stock or
Series A, Series B, Series C-D, Series E or Series F
preferred stock unless at the same time an equivalent dividend is declared or
paid on all outstanding shares of common stock and each such series of preferred
stock. The dividend on any such series of preferred stock will be at the same
rate per share as would be payable on the share of common
stock.


58




Liquidation
and Redemption




In the
event of liquidation, dissolution or winding up of the Company, either voluntary
or involuntary, including an acquisition, merger or sale which results in a
change in the majority shareholders of the Company, the holders of Series F
preferred stock will be entitled to receive, prior to and in preference to any
distribution of any of the assets or surplus funds to the holders of common
stock, Series A, Series B, Series C-D and Series E preferred
stock, an amount equal to $6.00 per share, plus a further amount equal to
any dividends declared but unpaid on such shares of Series F preferred
stock. If upon liquidation, dissolution or winding up of the Company, the assets
and surplus funds of the Company are insufficient to provide for the cash
payment to the holders of the Series F preferred stock described above, all
such assets of the Company as are legally available for distribution will be
paid to the holders of the Series F preferred stock on a pro rata basis in
proportion to the number of shares owned by each holder.




Thereafter,
the holders of Series A, Series B, Series C-D, Series E and
Series F preferred stock will be entitled to receive, prior to and in
preference to any distribution of any of the assets or surplus funds of the
Company to the holders of common stock, an amount equal to $112.50, $500.00,
$10.00, $15.00 and $3.00 per share, respectively, plus a further amount
equal to any dividends declared but unpaid on such shares. If upon liquidation,
dissolution or winding up of the Company, the assets and surplus funds of the
Company are insufficient to provide for the cash payment to the holders of
Series A, Series B, Series C-D, Series E and Series F
preferred stock described above, all such assets and surplus funds of the
Company as legally available for distribution will be paid to the holders of
Series A, Series B, Series C-D, Series E and Series F
preferred stock on a pro rata basis in proportion to the product of the
liquidation preference of each share and the number of shares owned by each
holder.




After the
payment or setting apart of payment to the holders of the Series A,
Series B, Series C-D, Series E and Series F preferred stock
of the preferential amounts described above, the holders of common stock and the
holders of Series C-D, Series E and Series F preferred stock will
be entitled to receive the remaining assets of the Company pro rata based
on the number of shares of common stock held by each holder, assuming conversion
of all Series C-D, Series E and Series F preferred
stock.




The
change in control provision of the preferred stock is not solely in the
Company’s control; accordingly, the preferred stock is classified as redeemable.
The preferred stock will not be accreted to its redemption amount until such
time the change in control is probable.




Anti-Dilution




Series C-D,
Series E and Series F preferred stock contain an anti-dilution
provision, which provides for adjustment of the conversion price in the event
Additional Shares of Common Stock, as defined, are issued for consideration per
share less than the conversion price for the Series C-D, Series E, or
Series F preferred stock.




Registration
Rights




The
holders of certain shares of common stock, the holders of common stock issuable
upon the exercise of warrants and the holders of common stock issuable upon
conversion of the Series A, Series B, Series C-D, Series E
and Series F preferred stock are entitled to certain rights with respect to
the registration of their shares under the Securities Act. The holders of common
stock or common stock issuable upon conversion of such securities (“Registrable
Securities”) are entitled to the registration rights described
below.






Demand
Registration Rights




At any
time beginning six months following an initial public offering, the holders of
at least 40% of the shares of Registrable Securities are entitled to certain
demand registration rights pursuant to which they may require the Company to
file a registration statement under the Securities Act with respect to their
shares of common stock so long as aggregate proceeds will be greater than
$8,000. The Company is required to use its best efforts to effect any such
registration, but is not required to effect more than two of these demand
registrations.


59




Piggyback
Registration Rights




If the
Company registers any securities under the Securities Act, the holders of
Registrable Securities are entitled to notice of such registration. The Company
is required to include the shares of such holders of Registrable Securities in
the registration, except in the case where the managing underwriter of an
initial public offering requires a limitation of the number of shares due to
marketing factors, in which case the underwriters may limit or exclude all such
shares from the initial public offering.




S-3
Registration Rights




The
holders of preferred stock are entitled to demand registration rights whereby
they may require the Company to file registration statements under the
Securities Act on Form S-3 with respect to their shares of common stock and
the Company is required to use its best efforts to effect such registrations.
The Company is not required to effect such a registration if the aggregate price
to the public is less than $1,000 or one such registration is in the
twelve-month period prior to a request to effect such registration.








11.  Income
Taxes





The
Company has a history of continuing operating losses; accordingly, no federal
income taxes have been incurred. The Company has established a valuation
allowance against its deferred tax assets due to the uncertainty surrounding the
realization of such assets. Management periodically evaluates the recoverability
of the deferred tax assets. At such time as it is determined that it is more
likely than not that deferred tax assets are realizable, the valuation allowance
will be reduced.




The
reconciliation of the income tax provision computed at federal statutory rates
to income tax expense/(benefit) is as follows:




Year Ended
      December 31,2007
            
            
            2006
            
            
            2005Provision
      at statutory rate
            
            
            34
            %
            
            
            34
            %
            
            
            34
            %State
      taxes, net of federal benefit
            
            
            0
            
            
            
            4
            
            
            
            7Expiring
      Net Operating Losses and Credits
            
            
            (75
            )
            
            
            0
            
            
            
            0Convertible
      Debt Interest
            
            
            (5
            )
            
            
            0
            
            
            
            0Stock
      Options
            
            
            (5
            )
            
            
            0
            
            
            
            0Valuation
      allowance
            
            
            51
            
            
            
            (38
            )
            
            
            (41
            )0
            %
            
            
            0
            %
            
            
            0
            %




60


The
components of the net deferred tax asset are as follows:




December 31,2007
            
            
            2006Net
      operating loss carryforwards
            
            $
            17,394
            
            
            $
            30,298Capitalized
      costs
            
            
            10,514
            
            
            
            11,824Tax
      credits
            
            
            102
            
            
            
            3,424Reserves
            
            
            60
            
            
            
            211Inventory
            
            
            108
            
            
            
            46Property
      and equipment
            
            
            148
            
            
            
            173Amortization
            
            
            1,086Other
            
            
            391
            
            
            
            295Total
      deferred tax assets
            
            
            29,803
            
            
            
            46,271Valuation
      allowance
            
            
            (29,803
            )
            
            
            (46,271
            )Net
      deferred tax assets
            
            $
            —
            
            
            $
            —







The
Company has elected to recognize interest and penalties with respect to
unrecognized tax benefits in income tax expense. The Company has identified no
uncertain tax position for which it is reasonably possible that the total amount
of unrecognized tax benefits will significantly increase or decrease within 12
months.  The total amount of unrecognized tax benefits and related
penalties and interest is not material as of December 31, 2007. The Company
does not anticipate any material change in the total amount of unrecognized tax
benefits to occur within the next twelve months.




The
Company is subject to taxation in the U.S. and various state jurisdictions. It
will no longer be subject to U.S. federal or state examinations by tax
authorities for years before 2003.




At
December 31, 2007, the Company had both federal and state net operating loss
(“NOL”) carryforwards of approximately $45,283 and $34,248, respectively. The
net operating loss carryforwards for federal purposes began to expire in 2007,
and the net operating loss carryforwards for state purposes began expiring in
2006. The Company has research and experimentation credit carryforward for
federal and state purposes of approximately $50 and $52,
respectively.  The research and experimentation credits begin to
expire in 2010 for federal purposes and carry forward indefinitely for state
purposes. Due to uncertainties surrounding our ability to generate future
taxable income to realize these assets, a full valuation allowance has been
established to offset the net deferred tax assets.




The
Company recently completed an analysis on whether an ownership change had
occurred with the consummation of the merger in June 2007 or whether there have
been multiple ownership changes since our formation.  There may be
additional such ownership changes in the future. If we have experienced an
ownership change at any time since our formation, utilization of the NOL
carryforwards would be subject to an annual limitation under Section 382 of
the Internal Revenue Code of 1986, as amended, as well as similar state
provisions, which is determined by first multiplying the value of our stock at
the time of the ownership change by the applicable long-term, tax-exempt rate,
and then could be subject to additional adjustments, as required. Any limitation
may result in expiration of a portion of the NOL carryforwards before
utilization.  We have determined that we have incurred three ownership
changes since our inception, and the June 2007 merger with Ithaka has resulted
in approximately $33.2 million of federal NOL carryforwards and $24.0 million of
state NOL carryforwards that will expire unutilized as a result of the Section
382 limitations.


61







12.  Net
Loss Per Share




Basic
loss per share is based on the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per share also includes the effect
of stock options, warrants and other common stock equivalents outstanding during
the period. In periods of a net loss position, basic and diluted weighted
average shares are the same.
 
 The
merger with Ithaka in June 2007 was, for financial reporting purposes, treated
as a reverse acquisition. Because the number of shares outstanding following a
reverse acquisition is significantly different from the number of shares
outstanding prior to the combination, the weighted average shares outstanding
for purposes of presenting net loss per share on a comparative basis has been
retroactively restated to the earliest period presented in order to reflect the
effect of the reverse acquisition.  In effect, the reverse acquisition
is similar to a stock split for the accounting acquirer, and retroactively
restating the weighted average shares outstanding is consistent with the
accounting required by SFAS No. 128, Earnings Per Share, for stock
splits, stock dividends, and reverse stock splits.
 
 Accordingly,
10,974,100 shares of common stock were deemed to be outstanding at the beginning
of the earliest period presented. Basic net loss per share is computed by
dividing net loss available to common shareholders by the weighted average
number of common stock outstanding during the reporting period. There is no
dilutive effect on net loss per share in the years presented. The computations
for basic and diluted net loss per share from continuing operations are as
follows:




2007
              
              
              2006
              
              
              2005Net
      loss
              
              $
              (22,235
              )
              
              $
              (17,578
              )
              
              $
              (10,122
              )Net
      loss per share - Basic and diluted
              
              $
              (1.49
              )
              
              $
              (1.60
              )
              
              $
              (0.92
              )Weighted
      average shares outstanding:Basic
      and diluted
              
              
              14,873,916
              
              
              
              10,974,100
              
              
              
              10,974,100





Potentially
dilutive securities that have been excluded from net loss per share computations
due to the net loss position are:




Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Stock
      options (Note 7)
              
              
              3,167,850
              
              
              
              425,000
              
              
              
              425,000Common
      stock warrants (Notes 5, 7 and 9)
              
              
              17,434,716
              
              
              
              18,548,200
              
              
              
              18,548,20020,602,566
              
              
              
              18,973,200
              
              
              
              18,973,200




13.  Commitments
and Contingencies




Operating
Leases




The
Company leases its facility under a noncancelable operating lease which, as
amended, expires in December 2008 with an option to extend the lease for an
additional three-year term at market rates. Under the lease, the Company is
required to pay for insurance, taxes, utilities and building
maintenance.




The
Company leases its facility under a noncancelable operating lease for the Alsius
Service Center in Wateringen, The Netherlands which expires in
2010.





The
Company leases an automobile under an operating lease which expires in
2011.




As of
December 31, 2007, future minimum lease payments on the operating leases are as
follows:




Year
      Ending December 31,2008
            
            $
            3612009
            
            
            452010
            
            
            282011
            
            
            13$
            447




Rent
expense for the years ended December 31, 2007, 2006 and 2005 was $424, $383 and
$310, respectively.










62


Capital
Leases




As of
December 31, 2007, capital lease payments are due in monthly installments
through October 2011 for a total of $107.  Future minimum payments are
$25, $27, $30 and $25 for the years ended December 31, 2008, 2009, 2010 and
2011, respectively.




401(k)
Plan




The
Company has a 401(k) plan that covers substantially all employees. Employer
contributions to the plan are at the discretion of the Board of Directors. The
Company elected to make no contributions for each year since the inception of
the plan. The Company paid administrative expenses on behalf of the plan of $3,
$3, and $5, respectively, for the years ended December 31, 2007, 2006, and
2005.





Indemnifications




Each of
the Registrant and Alsius Medical indemnifies its directors, and may indemnify
its officers and other agents, to the maximum extent permitted under the
Delaware General Corporation Law and the California Corporations Code,
respectively. The indemnities do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make. The Company
has not recorded any liability for these indemnities in the accompanying balance
sheets.





14.  Segment
Information





The
Company operates in a single reporting segment. The following enterprise wide
disclosure was prepared on a basis consistent with the preparation of the
financial statements.




The
Company derives significant revenue from outside the United States. Revenue by
geographic area, based on the customer location, was as follows:




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005United
      States
            
            $
            4,621
            
            
            $
            2,592
            
            
            $
            1,227Austria*
            
            
            308
            
            
            
            1,449
            
            
            
            644Germany*
            
            
            1,395
            
            
            
            —
            
            
            
            —France
            
            
            560
            
            
            
            321
            
            
            
            119Rest
      of Europe
            
            
            1,710
            
            
            
            1,565
            
            
            
            1,159Other
            
            
            520
            
            
            
            52
            
            
            
            74$
            9,114
            
            
            $
            5,979
            
            
            $
            3,223





No other
country represented more that 10 percent of total revenue.





* Prior
to May 2007, sales to end users in both Germany and Austria were conducted
through a distributor in Austria, and were reflected as Austrian
sales.   Beginning in May 2007, sales in both Germany and Austria
have been conducted predominantly through a distributor in Germany, and are
reflected as German sales.




The
Company’s revenue by product category was as follows:




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Disposables
            
            $
            4,254
            
            
            $
            2,893
            
            
            $
            1,529CoolGard  and
      Thermogard systems
            
            
            4,393
            
            
            
            2,837
            
            
            
            1,555Services
            
            
            467
            
            
            
            249
            
            
            
            139$
            9,114
            
            
            $
            5,979
            
            
            $
            3,223








63


The Company’s long-lived assets located in its country of
domicile and internationally were as follows:




December
      31,
              2007
            
            
            December
      31,
              2006United
      States
            
            $
            1,564
            
            
            $
            881International
            
            
            143
            
            
            
            115$
            1,707
            
            
            $
            996




15.  Related
Parties





The
Company paid approximately $731, $709 and $84 in legal fees for the years ended
December 31, 2007, 2006, and 2005, respectively, to a law firm whose partner is
the corporate secretary of the Company. Included in accounts payable and accrued
expenses at December 31, 2007 and 2006 is approximately $235 and $189,
respectively, due to this law firm.





The
Company paid approximately $83 in professional fees for the year ended December
31, 2007, to an executive recruiting firm whose principal is the spouse of a
Vice President of the Company. Included in accounts payable and accrued expenses
at December 31, 2007 is approximately $1 due to this executive
recruiting firm.





In
connection with the services rendered in the years ended December 31, 2007, for
the procurement of the Company’s directors’ and officers’ insurance policies,
the Company paid Woodruff-Sawyer & Co. a commission of
$28.   Stephen R. Sawyer is a partial owner of
Woodruff-Sawyer & Co. and the brother of Ms. Hutton, one of the
Company’s directors. Ms. Hutton has no financial ownership or interest in
Woodruff-Sawyer & Co. and did not participate in the selection of
Woodruff-Sawyer & Co. as the Company’s insurance
broker.  There are no amounts included in accounts payable and accrued
expenses at December 31, 2007 due to Woodruff-Sawyer & Co.





The
Company paid approximately $113 in legal fees for the year ended December 31,
2007 to a law firm whose partner is a holder of stock options of the Company.
Included in accounts payable and accrued expenses at December 31, 2007 is
approximately $6 due to this law firm.  In 2007, the Company paid $120
to the partner of this law firm for his participation in the Management
Incentive Plan associated with the completion of the merger transaction with
Ithaka.  In addition, the Company has a balance of $8 in accrued
expenses at December 31, 2007 representing a bonus payment due to the partner of
this law firm.




16.
Subsequent Events
 
 The
warrant retirement program (Note 9) was completed on January 18,
2008.  A total of 14,301,002 warrants were exercised, which consisted
of 14,029,081 warrants tendered for 2,550,742 shares of common stock, and
271,921 warrants exercised for cash proceeds of $0.9 million. After the
program there is a remaining balance of 2,239,998 redeemable common stock
purchase warrants outstanding.
 64








17.  Quarterly
Results of Operations (Unaudited)





The
following is a summary of the Company’s unaudited quarterly results of
operations for fiscal 2007 and 2006 (in thousands, except share
and per share data).





Fiscal Quarter EndedFiscal
      2007
            
            December 31
            
            
            September 30
            
            
            June 30
            
            
            March 31Revenues
            
            $
            2,709
            
            
            $
            1,880
            
            
            $
            2,500
            
            
            $
            2,025Gross
      margin
            
            
            754
            
            
            
            608
            
            
            
            331
            
            
            
            80Net
      loss
            
            
            (5,665
            )
            
            
            (5,252
            )
            
            
            (4,959
            )
            
            
            (6,359
            )Net
      loss per share, basic and diluted (1)
            
            
            (0.31
            )
            
            
            (0.29
            )
            
            
            (0.42
            )
            
            
            (0.58
            )Fiscal Quarter EndedFiscal
      2006
            
            December 31
            
            
            September 30
            
            
            June 30
            
            
            March 31Revenues
            
            $
            1,958
            
            
            $
            1,772
            
            
            $
            1,227
            
            
            $
            1,022Gross
      margin
            
            
            324
            
            
            
            256
            
            
            
            (252
            )
            
            
            (516
            )Net
      loss
            
            
            (4,827
            )
            
            
            (4,576
            )
            
            
            (4,533
            )
            
            
            (3,642
            )Net
      loss per share, basic and  diluted (1)
            
            
            (0.44
            )
            
            
            (0.42
            )
            
            
            (0.41
            )
            
            
            (0.33
            )




(1) For
the periods prior to the close of the June 2007 merger with Ithaka, the net loss
per share- basic and diluted is computed using 10,974,100 shares
outstanding.   The merger was, for financial reporting purposes,
treated as a reverse acquisition.  Because the number of shares
outstanding following a reverse acquisition is significantly different from the
number of shares outstanding prior to the combination, the weighted average
shares outstanding for purposes of presenting net loss per share on a
comparative basis has been retroactively restated to the earliest period
presented in order to reflect the effect of the recapitalization that occurs in
a reverse acquisition.  In effect, the reverse acquisition is similar to a
stock split for the accounting acquirer, and retroactively restating the
weighted average shares outstanding is consistent with the accounting required
by SFAS No. 128, “Earnings Per Share”, for stock splits, stock dividends, and
reverse stock splits.
















65







REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Shareholders of


Alsius
Corporation and Subsidiaries


Irvine,
California




We have
audited the accompanying consolidated balance sheet of Alsius Corporation and
subsidiaries (the "Company") as of December 31, 2007, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended.  These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of the Company for the years
ended December 31, 2006 and 2005, before the effects of the adjustments to
retroactively apply the change in accounting discussed in Note 12 to the
consolidated financial statements, were audited by other auditors whose report,
dated March 14, 2007, expressed an unqualified opinion on those
statements.




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




In our
opinion, such 2007 consolidated financial statements present fairly, in all
material respects, the financial position of Alsius Corporation and subsidiaries
as of December 31, 2007, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.




We have
also audited the adjustments to the 2006 and 2005 consolidated financial
statements to retroactively apply the change in accounting for net loss per
share in 2006 and 2005, as discussed in Note 12 to the consolidated
financial statements. Our procedures included (1) comparing the amounts shown in
the loss per share disclosures for 2006 and 2005 to the Company's underlying
accounting analysis, (2) comparing the previously reported shares outstanding
and income statement amounts per the Company's accounting analysis to the
previously issued consolidated financial statements, and (3) recalculating the
additional shares to give effect to the reverse acquisition and testing the
mathematical accuracy of the underlying analysis. In our opinion, such
retroactive adjustments are appropriate and have been properly applied. However,
we were not engaged to audit, review, or apply any procedures to the 2006 and
2005 consolidated financial statements of the Company other than with respect to
the retroactive adjustments, and accordingly, we do not express an opinion or
any other form of assurance on the 2006 and 2005 consolidated financial
statements taken as a whole.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations raise substantial doubt about the Company’s ability to continue
as a going concern. Management’s plans concerning these matters are also
discussed in Note 1. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.









/s/
DELOITTE & TOUCHE LLP






Costa
Mesa, California


March 13,
2008







66







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the Board of Directors and Shareholders
of


Alsius
      Corporation




In our
opinion, the consolidated balance sheet as of December 31, 2006and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flowsfor each of
two years in the period ended December 31, 2006, before the effects of the
adjustments to retrospectively restate net loss per share for all periods as a
result of the merger with Ithaka Acquisition Corp. described in Note 12, present
fairly, in all material respects, the financial position of Alsius Corporation
and its subsidiaries at December 31, 2006, and the results of their operations
and theircash
flows for each of the two years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America (the 2006 financial statements before the effects of the adjustments
discussed in Note 12 are not presented herein).  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.  We conducted our audits, before the effects of the
adjustments described above, of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 2 to the financial
statements (not separately presented herein), the Company has suffered recurring
losses from operations which raises a substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to this matter are
also discussed in Note 2 (not separately presented herein). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  As
discussed in Note 2 to the financial statements, the Company changed the manner
in which it accounts for share-based compensation in 2006.
 
 We were
not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively restate net loss per share for all periods as a result of the
merger with Ithaka Acquisition Corp. described in Note 12and accordingly, we do
not express an opinion or any other form of assurance about whether such
adjustments are appropriate and have been properly applied.  Those
adjustments were audited by other auditors.






/s/
      PRICEWATERHOUSECOOPERS
  LLP




PricewaterhouseCoopers
      LLP


Orange
      County, California


March 14,
      2007








67








Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure





In
connection with the closing of the merger with Ithaka on June 21, 2007, the
Registrant made the decision to change its independent registered public
accounting firm.  This matter was reported on Form 8-K, Item 4.01, on
June 27, 2007 (File No. 000-51362), and is herein incorporated by
reference.





Also, in
connection with the closing of the merger with Ithaka on June 21, 2007, Alsius
Medical made the decision to change its independent registered public accounting
firm.  This matter was reported on Post-Effective Amendment #1 to Form
S-3 filed on October 26, 2007 (File No. 333-124521), and is herein incorporated
by reference.





Item
      9A(T).
            Controls
      and Procedures





Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered by this report. Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were effective as
of December 31, 2007.








Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
fourth quarter of fiscal 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





This
annual report does not include a report of management's assessment regarding
internal control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.





Item
      9B.
            Other
      Information





Not
applicable.








68


PART
III





Certain
information required by Part III is omitted from this Annual Report in that the
registrant will file its definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on July 16, 2008 pursuant to Regulation 14A of the
Exchange Act (the Proxy Statement) not later than 120 days after the end of the
fiscal year covered by this Annual Report, and certain information included in
the Proxy Statement is incorporated herein by reference.





Item
      10.
            Directors,
      Executive Officers and Corporate
Governance





(a)
            Executive
      Officers — The information required by this Item is incorporated herein by
      reference to the section entitled “Executive Officers” in the Proxy
      Statement.





(b)
            Directors
      — The information required by this Item is incorporated herein by
      reference to the section entitled “Election of Directors” in the Proxy
      Statement.





(c)
            Audit
      Committee and Audit Committee Financial Expert – Certain information
      required by this Item is incorporated herein by reference to the section
      entitled “Report of the Audit Committee” in the Proxy
      Statement.  The board of directors has determined that Mr.
      Gregory Waller, is an “audit committee financial expert” and “independent”
      as defined under applicable SEC and Nasdaq
  rules.





(d)
            We
      adopted our “Code of Ethics,” that applies to all employees, including our
      executive officers. A copy of the Code of Ethics is posted on our Internet
      site at www.alsius.com.  In the event that we make any amendment
      to, or grant any waivers of, a provision of the Code of Ethics that
      applies to the principal executive officer, principal financial officer,
      or principal accounting officer that requires disclosure under applicable
      SEC rules, we intend to disclose such amendment or waiver and the reasons
      therefor on our Internet site.





(e)
            Section
      16(a) Beneficial Ownership Reporting Compliance – The information required
      by this Item is incorporated herein by reference to the section entitled
      “Other Matters – Section 16(a) Beneficial Ownership Reporting Compliance”
      in the Proxy Statement.





Item
      11.
            Executive
      Compensation





The
information required by this Item is incorporated herein by reference to the
sections entitled “Executive Compensation” and “Directors’ Compensation” in the
Proxy Statement.





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





The
information required by this Item is incorporated herein by reference to the
sections entitled “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in the Proxy
Statement.





Item
      13.
            Certain
      Relationships and Related Transaction, and Director
      Independence





The
information required by this Item is incorporated herein by reference to the
section entitled “Certain Relationships and Related Transactions” in the Proxy
Statement.





Item
      14.
            Principal
      Accountant Fees and Services





The
information required by this Item is incorporated herein by reference to the
section entitled “Ratification of Selection of Independent Auditors – Principal
Accounting Fees and Services” in the Proxy Statement.


69


PART
IV





Item
      15.
            Exhibits
      and Financial Statement Schedules





(a)  Listing
of Documents





(1)
            Financial Statements.
      The Company’s Consolidated Financial Statements included in Item 8
      hereof, as required at December 31, 2007 and 2006, and for the years
      ended December 31, 2007, 2006 and 2005, consist of the
      following:


PageConsolidated
      Balance Sheets
            36Consolidated
      Statements of Operations
            37Consolidated
      Statements of Cash Flows
            38Consolidated
      Statements of Shareholders’ Equity (Deficit)
            39








All other
schedules have been omitted since the required information is not present in
amounts sufficient to require submission of the schedule, or because the
required information is included in the consolidated financial statements or
notes thereto.





(2)  Exhibits





Exhibit
      Number23.1
            Consent
      of Current Independent Registered Public Accounting
Firm23.2
            Consent
      of Predecessor Independent Registered Public Accounting
    Firm31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification of
      Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




_______





(b)
Exhibits





See
subsection (a) (2) above.





(c)
Financial Statement Schedules





See
subsections (a) (1) above.


70


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on March 13, 2008.




ALSIUS
      CORPORATIONBy:
              /s/  William
      J.
      WorthenWilliam
      J. Worthen
                President
      and Chief Executive Officer















71


Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed on March 13, 2008 by the following persons on behalf of
the registrant and in the capacities indicated:








Signature
            Title/s/William
      J. Worthen
            President
      and Chief Executive OfficerWilliam J.
    Worthen
            (Principal
      Executive Officer)/s/ Brett L.
    Scott
            Chief
      Financial OfficerBrett L. Scott
            (Principal
      Financial and Accounting Officer)/s/ Paul A.
    Brooke
            Chairman
      of the BoardPaul A. Brooke/s/ Eric M.
    Hecht
            DirectorEric M.Hecht/s/ Wende S.
    Hutton
            DirectorWende S. Hutton/s/ Jack W.
      Lasersohn
            DirectorJack W.
    Lasersohn/s/ Gregory D.
      Waller
            DirectorGregory D.
    Waller/s/ Kurt C.
    Wheeler
            DirectorKurt C. Wheeler










72


EXHIBIT INDEX





Exhibits
            Description







23.1
            Consent
      of Current Independent Registered Public Accounting
Firm23.2
            Consent
      of Predecessor Independent Registered Public Accounting
    Firm31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification of
      Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


__________