UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-Q




---




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For the quarterly period ended September 30,
      2008




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For the transition period from 
      to




Commission
File Number: 000-51362




---

ALSIUS
CORPORATION


(Exact
name of registrant as specified in its charter)









Delaware
            20-2620798(State
      or other jurisdiction ofincorporation
      or organization)
            (I.R.S.
      EmployerIdentification
      No.)




15770
Laguna Canyon Road  Suite 150


Irvine,
California  92618


(Address
of principal executive offices) (Zip Code)




(949)
453-0150


(Registrant’s
telephone number, including area code)




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 xNo  ̈




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 the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.




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 Exchange Act). Yes  ̈No x




As of
October 31, 2008, 21,076,134 shares of the registrant’s common stock were
outstanding.








ALSIUS CORPORATION


INDEX




PagePART I
            FINANCIAL
      INFORMATIONITEM 1.
            CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS (unaudited)Condensed
      Consolidated  Balance Sheets as of September 30, 2008 and
      December 31, 2007
            3Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2008 and September 30, 2007
            4Condensed
      Consolidated Statement of Shareholders’ Equity for the nine months ended
      September 30, 2008
            5Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2008 and September 30, 2007
            6Notes
      to Unaudited Condensed Consolidated Financial Statements
            7ITEM 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            26ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            32ITEM 4T.
            CONTROLS
      AND PROCEDURES
            33PART II
            OTHER
      INFORMATIONITEM 1.
            LEGAL
      PROCEEDINGS
            33ITEM 1A.
            RISK
      FACTORS
            33ITEM 2
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            42ITEM 3
            DEFAULTS
      UPON SENIOR SECURITIES
            42ITEM 4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            43ITEM 5
            OTHER
      INFORMATION
            43ITEM 6.
            EXHIBITS
            43SIGNATURES
            44





-2-





ITEM
1.FINANCIAL
INFORMATION




ALSIUS
CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited,
in thousands, except share data)






September
      30,
              2008
            
            
            December
      31,
              2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            9,909
            
            
            $
            24,427Accounts
      receivable, net of allowances of $58 and $44
            
            
            1,921
            
            
            
            2,162Inventories
            
            
            5,
      390
            
            
            
            6,680Prepaid
      expenses
            
            
            279
            
            
            
            284Total
      current assets
            
            
            17,499
            
            
            
            33,553Property
      and equipment, net
            
            
            1,128
            
            
            
            1,034Evaluation
      equipment, net
            
            
            1,112
            
            
            
            673Other
      assets
            
            
            250
            
            
            
            342TOTAL
            
            $
            19,989
            
            
            $
            35,602LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            1,058
            
            
            $
            2,732Accrued
      liabilities
            
            
            2,040
            
            
            
            1,916Current
      portion of long-term debt
            
            
            3,216
            
            
            
            3,200Current
      portion of capital lease obligations
            
            
            27
            
            
            
            25Total
      current liabilities
            
            
            6,341
            
            
            
            7,873Long-term
      debt –less current portion
            
            
            1,288
            
            
            
            3,569Capital
      lease obligations
            
            
            62
            
            
            
            82Other
      liabilities
            
            
            49
            
            
            
            66Total
      liabilities
            
            
            7,740
            
            
            
            11,590Commitments
      and Contingencies (Note 11)Shareholders’
      Equity :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; 21,076,134 and
      18,253,500 shares issued and outstanding at September 30, 2008 and
      December 31, 2007, respectively
            
            
            2
            
            
            
            2Additional
      paid-in capital
            
            
            125,567
            
            
            
            122,237Accumulated
      deficit
            
            
            (113,320
            )
            
            
            (98,227
            )Total
      shareholders’ equity
            
            
            12,249
            
            
            
            24,012TOTAL
            
            $
            19,989
            
            
            $
            35,602






See
accompanying notes to consolidated financial statements.




-3-


ALSIUS CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited,
in thousands, except share and per share data)






Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            3,096
            
            
            $
            1,880
            
            
            $
            8,621
            
            
            $
            6,405Cost
      of revenue
            
            
            2,574
            
            
            
            1,272
            
            
            
            6,550
            
            
            
            5,386Gross
      margin
            
            
            522
            
            
            
            608
            
            
            
            2,071
            
            
            
            1,019Operating
      expenses:Research
      and development
            
            
            1,176
            
            
            
            1,002
            
            
            
            3,355
            
            
            
            2,595Sales
      and marketing
            
            
            2,892
            
            
            
            2,723
            
            
            
            9,441
            
            
            
            7,755General
      and administrative
            
            
            1,209
            
            
            
            2,104
            
            
            
            4,065
            
            
            
            3,825Total
      operating expenses
            
            
            5,277
            
            
            
            5,829
            
            
            
            16,861
            
            
            
            14,175Loss
      from operations
            
            
            (4,755
            )
            
            
            (5,221
            )
            
            
            (14,790
            )
            
            
            (13,156
            )Interest
      income
            
            
            43
            
            
            
            385
            
            
            
            230
            
            
            
            438Interest
      expense
            
            
            (150
            )
            
            
            (418
            )
            
            
            (533
            )
            
            
            (3,773
            )Other
      income (expense)
            
            
            —
            
            
            
            2
            
            
            
            —
            
            
            
            (79
            )Net
      loss
            
            $
            (4,862
            )
            
            $
            (5,252
            )
            
            $
            (15,093
            )
            
            $
            (16,570
            )Net
      loss per share- basic and diluted
            
            $
            (0.23
            )
            
            $
            (0.29
            )
            
            $
            (0.72
            )
            
            $
            (1.21
            )Weighted
      average shares outstanding-basic and diluted
            
            
            21,076,134
            
            
            
            18,297,232
            
            
            
            20,859,801
            
            
            
            13,735,009






See
accompanying notes to consolidated financial statements.


-4-




ALSIUS
CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


(Unaudited,
in thousands, except share data)






Common
      StockShares
            
            
            Amount
            
            
            Additional
              Paid
      In
              Capital
            
            
            Accumulated
      Deficit
            
            
            TotalBalances
      as of December 31, 2007
            
            
            18,253,500
            
            
            $
            2
            
            
            $
            122,237
            
            
            $
            (98,227
            )
            
            $
            24,012Common
      stock warrant retirement program, net of costs of $437
            
            
            2,822,634
            
            
            
            
            
            
            
            447
            
            
            
            
            
            
            
            447Stock-based
      compensation (SFAS 123R)
            
            
            
            
            
            
            
            
            
            
            2,883
            
            
            
            
            
            
            
            2,883Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,093
            )
            
            
            (15,093
            )Balances
      as of September 30, 2008
            
            
            21,076,134
            
            
            $
            2
            
            
            $
            125,567
            
            
            $
            (113,320
            )
            
            $
            12,249






See
accompanying notes to consolidated financial statements.


-5-





ALSIUS CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited,
in thousands)






Nine
      Months Ended September 30,2008
            
            
            2007Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (15,093
            )
            
            $
            (16,570
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            461
            
            
            
            308Stock-based
      compensation
            
            
            2,883
            
            
            
            2,125Loss
      on disposal of assets
            
            
            2
            
            
            
            2Increase
      in fair value of warrant liabilities and embedded
    derivatives
            
            
            —
            
            
            
            (38
            )Amortization
      of discounts on long-term debt
            
            
            90
            
            
            
            2,647Amortization
      of debt issuance costs
            
            
            30
            
            
            
            50Provision
      for estimated warranty costs
            
            
            45
            
            
            
            29Bad
      debt expense
            
            
            42
            
            
            
            4Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            199
            
            
            
            (499
            )Inventories
            
            
            1,290
            
            
            
            (3,194
            )Prepaid
      expenses
            
            
            (1
            )
            
            
            (122
            )Other
      assets
            
            
            62
            
            
            
            153Accounts
      payable
            
            
            (1,699
            )
            
            
            (2,058
            )Accrued
      liabilities
            
            
            62
            
            
            
            324Net
      cash used in operating activities
            
            
            (11,627
            )
            
            
            (16,839
            )Cash
      Flows From Investing Activities:Net
      cash received in the Ithaka merger
            
            
            —
            
            
            
            41,478Cash
      paid for property and equipment
            
            
            (298
            )
            
            
            (459
            )Cash
      paid for evaluation equipment
            
            
            (667
            )
            
            
            (231
            )Net
      cash (used in) provided by investing activities
            
            
            (965
            )
            
            
            40,788Cash
      Flows From Financing Activities:Proceeds
      from warrant retirement program, net
            
            
            447
            
            
            
            —Common
      stock warrant repurchases
            
            
            —
            
            
            
            (894
            )Payment
      of debt issuance costs
            
            
            —
            
            
            
            (347
            )Proceeds
      from issuance of long-term debt
            
            
            51
            
            
            
            13,030Principal
      payments under long-term debt
            
            
            (2,406
            )
            
            
            (6,875
            )Principal
      payments under capital lease obligations
            
            
            (18
            )
            
            
            (15
            )Net
      cash (used in) provided by  financing activities
            
            
            (1,926
            )
            
            
            4,899Net
      (decrease) increase in cash and cash equivalents
            
            
            (14,518
            )
            
            
            28,848Cash
      and cash equivalents—beginning of period
            
            
            24,427
            
            
            
            647Cash
      and cash equivalents—end of period
            
            $
            9,909
            
            
            $
            29,495Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for income taxes
            
            $
            4
            
            
            $
            85Cash
      paid for interest
            
            $
            444
            
            
            $
            641Property
      and equipment acquired included in accounts payable and accrued
      liabilities
            
            $
            25
            
            
            $
            6Bridge
      notes and accrued interest converted to common stock
            
            $
            —
            
            
            $
            17,036Equipment
      acquired under capital leases
            
            $
            —
            
            
            $
            14






See
accompanying notes to consolidated financial statements.




-6-





ALSIUS
CORPORATION


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In
thousands, except share and per share data)




1. THE COMPANY
AND BASIS OF PRESENTATION
  On June
21, 2007, Ithaka Acquisition Corp., a Delaware corporation (“Ithaka”), completed
its acquisition of Alsius Corporation, a California corporation (“Alsius
Medical”). Ithaka was a publicly traded blank check company formed in 2005 to
acquire a healthcare company.  In the acquisition, Alsius Medical
became a wholly-owned subsidiary of Ithaka, and Ithaka concurrently changed its
name to Alsius Corporation.  Alsius Corporation is now a publicly
traded 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”.  Our common stock trades on NASDAQ under the symbol
“ALUS”.  See Note 3 for further details on the Ithaka
acquisition.  For accounting purposes, the acquisition 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 began its current business,
intravascular temperature management, in mid-1998. In June 2001, a branch
office, Alsius Service Center, in Wateringen, The Netherlands, was established
to provide field support for products in Europe. Alsius Medical develops,
manufactures and sells, proprietary catheter-based products to precisely control
patient temperature in hospital critical care settings. Alsius Medical has
received United States Food and Drug Administration (“FDA”) clearance to market
its CoolGard® 3000
Thermal Regulation System (the “CoolGard system”) and its Thermogard XP
System (the “Thermogard system”), together, “the Systems,” and the Cool
Line® catheter
for use in fever control. In addition, Alsius Medical has received FDA clearance
to market its IcyTM,,
FortiusTM,
QuattroTM and
SolexTM
catheters in combination with the Systems 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 in
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 the Ithaka
acquisition (Note 3), the sale of stock and the issuance of long-term debt (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 if the Company does not raise
additional funds. 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. The Company intends to raise
working capital through debt or additional equity financing in 2008 or early
2009, and is pursuing efforts to do so. However, there can be no assurance,
especially in light of current market conditions, that such financing can be
successfully completed in the time frame required or on terms acceptable to the
Company.
  Interim
Reporting
  The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission
(“SEC”).  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments,
which include only normal recurring adjustments, necessary to fairly state the
Company’s financial position, results of operations, and cash flows. The results
of operations for interim periods are not necessarily indicative of future
results that may be expected for a full year.   These statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Annual Report on Form 10-K for the year ended
December 31, 2007.




-7-




2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES


Principles
of Consolidation




The
condensed 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 condensed consolidated financial statements since the
date of the merger (June 21, 2007).




Management
Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles 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, the allowance for doubtful
accounts, inventory valuation, warranty reserve and stock based compensation 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.





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 long-term debt 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 in Euros are translated 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 translated using the average exchange
rate for the period, except items related to nonmonetary assets and liabilities,
which are translated using historical exchange rates. All remeasurement gains
and losses are included in determining net loss and have not been significant
for all periods presented.





Comprehensive
Loss





Comprehensive
loss encompasses the change in equity from transactions and other events and
circumstances from non-owner sources and the Company’s net loss.





Cash
Equivalents





The
Company considers all highly liquid investments that mature within 90 days
from the date of purchase to be cash equivalents. At September 30, 2008, cash
equivalents consisted of money market funds of $9,148.  At December
31, 2007, cash equivalents consisted of money market funds of
$23,903.  The Company utilizes a money market fund which invests in
U.S. Treasury securities.





Concentration
of Risk





The
Company maintains its cash accounts in a commercial bank. At September 30, 2008
and December 31, 2007, cash on deposit totaling $9,659 and $24,225,
respectively, was in excess of the federally insured
limits.  Management does not believe this concentration subjects it to
any unusual financial risk beyond the normal risk associated with commercial
banking relationships.





During
the three months ended September 30, 2008 and 2007, one customer accounted for
25% and 15%, respectively, of the Company’s net sales.  During the nine
months ended September 30, 2008 and 2007, one customer accounted for 23% and
17%, respectively, of the Company’s net sales.  At September 30, 2008
and December 31, 2007, one customer accounted for 23% and 20%, respectively, of
the Company’s total accounts receivable.




-8-




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 probable the
receivable will not be recovered.




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





For
      the Nine
              Months
      Ended
              September
      30,
            
            
            For
      the Year Ended
              December
      31,2008
            
            
            2007Beginning
      balance
            
            $
            44
            
            
            $
            13Provision
      for bad debt
            
            
            42
            
            
            
            31Write-offs,
      net of recoveries
            
            
            (28
            )
            
            
            —Ending
      balance
            
            $
            58
            
            
            $
            44





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. As of September 30, 2008, 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 life of the
asset, 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.





-9-




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
September 30, 2008 and December 31, 2007, the cost of evaluation equipment
was $1,719 and $1,109 and accumulated depreciation was $607 and $436,
respectively. For the three and nine months ended September 30, 2008 and 2007,
$82, $55, $228 and $165, respectively, was recorded as a component of cost of
revenue for the amortization of the equipment.




Stock-Based
Compensation




The
Company accounts for stock-based compensation according to Statement of
Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment.
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 was determined by analyzing historical data on
employees’ stock option exercises. 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”). 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 based on historical experience of its
stock-based awards that are granted, exercised and cancelled. 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.




Stock-based
compensation is included in the accompanying condensed consolidated financial
statements as follows:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Cost
      of revenue
            
            $
            86
            
            
            $
            129
            
            
            $
            241
            
            
            $
            139Research
      and development
            
            
            149
            
            
            
            333
            
            
            
            477
            
            
            
            357Sales
      and marketing
            
            
            334
            
            
            
            544
            
            
            
            960
            
            
            
            628General
      and administrative
            
            
            400
            
            
            
            890
            
            
            
            1,205
            
            
            
            1,001Total
            
            $
            969
            
            
            $
            1,896
            
            
            $
            2,883
            
            
            $
            2,125




The
weighted-average fair value per share of the options granted was $0.98 and
$1.38, respectively, for the three and nine months ended September 30,
2008.   The weighted-average fair value per share of the options
granted was $3.35 for the three and nine months ended September 30, 2007. 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.




-10-




Three
      Months
              Ended
              September
      30, 2008
            
            
            Nine
      Months
              Ended
              September
      30, 2008Dividend
      Yield
            
            
            0.00
            %
            
            
            0.00
            %Volatility
            
            
            66
            %
            
            
            66
            %Weighted-average
      risk-free interest rate
            
            
            3.02
            %
            
            
            3.44
            %Expected
      life
            
            6.25
      years
            
            
            6.25
      years





Three
      Months
              Ended
              September
      30, 2007
            
            
            Nine
      Months
              Ended
              September
      30, 2007Dividend
      Yield
            
            
            0.00
            %
            
            
            0.00
            %Volatility
            
            
            67
            %
            
            
            67
            %Weighted-average
      risk-free interest rate
            
            
            4.92
            %
            
            
            4.92
            %Expected
      life
            
            6.0-6.25
      years
            
            
            6.0-6.25
      years





The
Company accounts for equity instruments issued to non-employees 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 non-employees 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 non-employee 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 non-employee
awards, deferred stock-based compensation is not reflected in shareholders’
deficit until a commitment date is reached.





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 September 30, 2008 and December 31, 2007, there were minimal amounts
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, the Company may accept
returns in limited circumstances. The Company does not offer return rights for
expired products to its customers and assesses levels of inventory in the
distribution channel through regular communications with distributors by
international sales and service personnel.  The amount of returns
through September 30, 2008 have been minimal. A sales return allowance has not
been established as management believes returns will be
insignificant.




The
Company enters into equipment loan agreements with stated terms of primarily six
months with certain customers whereby a 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.  The Company currently does 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.




The
Company offers 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.




-11-




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:




For
      the Nine
              Months
      Ended
              September
      30,
            
            
            For
      the Year Ended
              December
      31,2008
            
            
            2007Beginning
      balance
            
            $
            107
            
            
            $
            156Provision
      for estimated warranty costs
            
            
            45
            
            
            
            79Warranty
      expenditures
            
            
            (53
            )
            
            
            (128
            )Ending
      balance
            
            $
            99
            
            
            $
            107




Cost
of Revenue





Cost of revenue consists 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.




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
three and nine months ended September 30, 2008 and 2007 was $50, $88, $347, and
$452, respectively.





Income
Taxes




The
Company accounts 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.





The
Company records net deferred tax assets to the extent it believes these assets
will more likely than not be realized. In making such determination, it
considers 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 the Company is unable to determine that it would be able to realize
its deferred income tax assets in the future in excess of their net recorded
amount, an adjustment would be made to the valuation allowance which would
reduce the provision for income taxes.




-12-




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
Ithaka merger, 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 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.





New
Accounting Pronouncements




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. SFAS 157 does not require any new
fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information.  In February 2008, the FASB deferred the effective date
of SFAS 157 by one year for certain nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  On January 1, 2008, the
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and liabilities for which the effective date has been
delayed by one year.




The fair
value hierarchy described by the standard is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value and include the following:




Level 1 –
Quoted prices in active markets for identical assets or
liabilities.




Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.




Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.





In
accordance with SFAS 157, the following table represents the Company’s fair
value hierarchy for its financial assets (cash equivalents and investments)
measured at fair value on a recurring basis as of September 30,
2008:




Fair
      Value Measurements UsingLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalCash
      and cash equivalents
            
            $
            9,909
            
            
            
            —
            
            
            
            —
            
            
            $
            9,909




-13-





The
adoption of SFAS 157 did not have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.  The book values of cash and cash equivalents, accounts
receivable and accounts payable approximate their respective fair values due to
the short-term nature of these instruments.




Effective
September 30, 2008, the Company adopted Financial Staff Position No. SFAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active” (FSP SFAS 157-3), which was issued on October 10, 2008. FSP SFAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for the financial asset is not
active. The adoption of FSP SFAS 157-3 did not have an impact on the Company’s
consolidated financial statements.




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
the Company’s 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.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. Entities are
required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This standard is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is currently evaluating the impact, if
any, SFAS No. 161 will have on its consolidated financial position, results
of operations or cash flows.




In March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”).
Beginning January 1, 2008, the Company adopted EITF Issue 06-11. In
accordance with the EITF Issue, the Company records a credit to additional
paid-in capital for tax deductions resulting from a dividend payment on
non-vested share awards the Company expects to vest. The adoption of EITF Issue
06-11 did not have any impact on the Company’s consolidated financial
statements.




-14-




In June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (“FSP EITF 03-6-1”). The FSP provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method in accordance with SFAS 128, Earnings per Share. The FSP is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. Upon adoption, the
Company is required to retrospectively adjust its earnings per share data to
conform with the provisions in this FSP. Early application of this FSP is
prohibited. The Company is currently evaluating the impact this FSP will have on
its consolidated financial statements.




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 Merger Shares issued,
4,902,527 shares were issued to Alsius Medical preferred shareholders and
3,097,473 shares were issued to holders of Alsius Medical bridge notes. In
addition, Alsius Medical’s shareholders also were given the right to receive up
to 6,000,000 additional shares (the “Milestone Shares”) if the combined company
meets certain revenue targets in fiscal years 2007 through 2009 (with 750,000
Milestone Shares allocated to 2007 revenues, 1,750,000 to 2008 revenues and
3,500,000 to 2009 revenues).  In 2007, the revenue targets were not
met and no Milestone Shares were issued, and the Company expects the 2008
revenue targets will not be met and that no Milestone Shares will be issued for
2008. 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 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
bridge notes and Series F preferred stock receiving their pro rata share, while
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, and all existing Alsius Medical equity instruments were
cancelled.




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.  The conversion rights
required the holder of the stock to deliver its stock certificate to the
Company’s transfer agent by August 15, 2007 in order to receive the applicable
cash payment. If not delivered by August 15, 2007, the stockholder forfeited its
right to receive cash payment for the shares.  The Company 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 revenue targets in
fiscal years 2007 through 2009 (which are the same revenue targets associated
with the issuance of additional Milestone Shares to former Alsius Medical
shareholders).  The revenue targets for 2007 were not achieved and no
portion of the bonus was paid for 2007.  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, were
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 condensed consolidated financial statements commencing June 22,
2007.




-15-




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, the fair value of the
consideration will be recorded as an additional capital adjustment.




Pro
Forma Results of Operations




The
accompanying unaudited condensed consolidated results of operations only reflect
the operating results of the Company following the date of the
merger.  Following are the pro forma unaudited results of operations
of the Company for the nine months ended September 30, 2007 assuming the merger
occurred at the beginning of the period.  Results for the three months
ended September 30, 2007 and the three and nine months ended September 30, 2008
reflect actual operating results.





Nine
      Months
              Ended
              September
      30, 2007Revenue
            
            $
            6,405Loss
      from operations
            
            
            (13,820
            )Net
      loss
            
            
            (16,489
            )Net
      loss per share- basic and diluted
            
            
            (0.88
            )








4. SUPPLEMENTAL
CONDENSED CONSOLIDATED FINANCIAL STATEMENT INFORMATION
  Inventories
consist of the following:




September
      30,
                2008
              
              
              December 31,
                2007Raw
      materials
              
              $
              3,011
              
              
              $
              3,775Work-in-process
              
              
              1,097
              
              
              
              1,747Finished
      goods
              
              
              1,282
              
              
              
              1,158$
              5,390
              
              
              $
              6,680





-16-


Accrued
liabilities consist of the following:




September
      30,
              2008
            
            
            December 31,
              2007Bonus
            
            $
            371
            
            
            $
            480Inventory
            
            
            378
            
            
            
            23Vacation
            
            
            341
            
            
            
            320Warranty
            
            
            99
            
            
            
            107Interest
            
            
            34
            
            
            
            69Professional
      services
            
            
            161
            
            
            
            453Payroll
      and related
            
            
            109
            
            
            
            42Travel
            
            
            169
            
            
            
            8Commission
            
            
            117
            
            
            
            232Royalties
            
            
            57
            
            
            
            38Deferred
      revenue
            
            
            121
            
            
            
            60Other
            
            
            83
            
            
            
            84$
            2,040
            
            
            $
            1,916




5. LONG-TERM
DEBT




The
components of long-term debt were as follows:





September
      30,
              2008
            
            
            December 31,
              2007Senior
      Secured Credit Facility, net of discount of $74 and $164,
      respectively
            
            $
            4,459
            
            
            $
            6,769Equipment
      financing
            
            
            45
            
            
            
            —4,504
            
            
            
            6,769Less:
      current portion
            
            
            (3,216
            )
            
            
            (3,200
            )Long-term
      portion
            
            $
            1,288
            
            
            $
            3,569




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 (subsequently acquired
by GE Capital) consisting of a $10,000 term loan (the “Term Loan”) with an
interest rate of one month LIBOR plus 6.50%. The Term Loan is secured by
substantially all of the assets of the Company other than intellectual
property.  Approximately $3,000 of the total amount borrowed was used
to repay in full a prior secured loan the Company received in May
2005.  At September 30, 2008, $4,533 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.




-17-




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.
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.




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 of $215 was
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.





Equipment
Financing




In April
2008, the Company entered into an equipment financing agreement with a finance
company for $51.  The agreement requires monthly payments over 36
months.




As of
September 30, 2008, principal payments for long-term debt are as
follows:





Year
      ending December 31,2008 (remainder)
            
            $
            8052009
            
            
            3,2162010
            
            
            5512011
            
            
            6$
            4,578


6. AUTHORIZED
CAPITAL STOCK




The
Company’s authorized capital 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 Company that have been reserved for
issuance as of September 30, 2008:





StocStock
      options and restricted stock units (Note 7)
            
            
            3,904,890Common
      stock warrants (Notes 5, 7 and 8)
            
            
            3,133,7147,038,604




7. STOCK OPTIONS
AND RESTRICTED STOCK UNITS




2006 Plan





In
connection with the Ithaka merger, the Company adopted the 2006 Equity Incentive
Plan (the “2006 Plan”).  The 2006 Plan currently provides for the
grant of options and restricted stock units up to a maximum of 3,479,890 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 8).





-18-




Common
Stock Options





The 2006
Plan includes Incentive Stock Options (“ISOs”) and Nonqualified Stock Options
(“NSOs”). For ISOs and NSOs, the exercise price per share shall be no less than
100% of the fair market value per share on the date of grant. 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
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 stock 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, 2007
            
            
            2,727,850
            
            
            
            15,000
            
            
            
            2,742,850
            
            
            $
            5.08
            
            
            
            9.51
            
            
            $
            3,786Granted
            
            
            441,700
            
            
            
            —
            
            
            
            441,700
            
            
            
            2.19Forfeited
            
            
            (532,448
            )
            
            
            —
            
            
            
            (532,448
            )
            
            
            5.06Exchanged
      for RSUs
            
            
            (2,037,417
            )
            
            
            (12,000
            )
            
            
            (2,049,417
            )
            
            
            5.00Outstanding
      at September 30, 2008
            
            
            599,685
            
            
            
            3,000
            
            
            
            602,685
            
            
            
            3.25
            
            
            
            9.22
            
            
            $
            1,444Exercisable
      at September 30, 2008
            
            
            97,945
            
            
            
            875
            
            
            
            98,820
            
            
            
            5.09
            
            
            
            8.76
            
            
            $
            419Vested
      and expected to vest as of September 30, 2008
            
            
            545,713
            
            
            
            3,000
            
            
            
            548,713
            
            
            
            3.25
            
            
            
            9.22
            
            
            $
            1,315




The
following table summarizes stock options outstanding at September 30,
2008:





Outstanding
            
            
            ExercisableRange
      of
              Exercise
      Prices
            
            
            Number
              of
      Shares
            
            Average
              Remaining
              Contractual
              Life
      (Years)
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              of
      Shares
            
            
            Weighted-
              Average
              Exercise
              Price$
            0.92
            
            
            
            6,500
            
            9.67
            
            $
            0.92
            
            
            
            —
            
            
            $
            —1.10
            
            
            
            39,900
            
            9.59
            
            
            1.10
            
            
            
            —
            
            
            
            —1.19
            
            
            
            59,300
            
            9.76
            
            
            1.19
            
            
            
            —
            
            
            
            —1.79
            
            
            
            12,000
            
            9.93
            
            
            1.79
            
            
            
            —
            
            
            
            —1.84
            
            
            
            171,200
            
            9.51
            
            
            1.84
            
            
            
            —
            
            
            
            —2.18
            
            
            
            30,000
            
            9.84
            
            
            2.18
            
            
            
            —
            
            
            
            —3.73
            
            
            
            9,900
            
            9.26
            
            
            3.73
            
            
            
            1,000
            
            
            
            3.735.10
            
            
            
            273,885
            
            8.76
            
            
            5.10
            
            
            
            97,820
            
            
            
            5.10602,685
            
            
            
            
            
            
            
            
            98,820





As of
September 30, 2008 there was $2.9 million of unrecognized compensation expense
related to nonvested stock options granted under the 2006 Plan using the fair
value method of SFAS 123(R). As of September 30, 2008, the cost was expected to
be recognized over a weighted-average period of 2.6 years, using the graded
vested attribution method.




-19-





Restricted Stock
Units





In June
and July 2008, the Company completed a tender offer whereby holders of the then
outstanding 2,904,450 options under the 2006 Plan were offered the opportunity
to exchange options for a number of restricted stock units (“RSUs”) equal to
one-half of the number of options.  The RSUs are also part of the 2006
Plan.  An RSU provides a right to receive common shares if the holder
remains in service to the Company as the RSU vests.  The purpose of
the Offer was (i) to counteract the loss of share value, which caused all
outstanding options to have exercise prices in excess of the fair market value
of Company common shares and (ii) to incentivize management to continue to
strive to increase Company value for the benefit of
stockholders.  Participation in the offer was voluntary and open to
eligible employees and consultants of the Company at the time of the offer and
remain employed through the expiration date of the
offer.  Non-employee members of the Company’s board of directors were
not eligible to participate.  The offer expired on July 25,
2008.  As a result of the offer, 2,049,417 options were exchanged for
1,024,709 RSUs.  The RSUs are subject to vesting in three annual
installments with continued service to the Company, but are subject to certain
accelerated vesting if the holder leaves in the middle of a vesting year other
than for cause, and in certain circumstances upon an acquisition or similar
change in control of the Company. The grant date fair value of $1.15 per
share of the new RSUs was determined by using the closing price of the Company’s
common stock on the day immediately preceding the grant date.




The
excess of the aggregate grant date fair value of the RSUs of $1,178 over the
fair value of the stock options canceled of $393 has been added to the
unamortized value of the canceled options of $2,410 and will be amortized over
the vesting period of the RSUs.  As of September 30, 2008, there was
$566 of unamortized compensation expense related to the RSUs granted under the
2006 Plan, which is expected to be recognized over 2.8 years, using the graded
attribution method.




A summary
of the activity related to the RSUs under the 2006 Plan for the nine months
ended September 30, 2008 is as follows.  Of the RSUs issued and
outstanding, 6,000 are to non-employees.





Number
      of RSUs
            
            Weighted
      Average
              Grant
      Date
              Fair
      ValueNonvested
      RSUs at January 1, 2008
            —
            
            
            —RSUs
      issued upon cancelation of options tendered- July 28, 2008
            1,024,709
            
            $
            1.15RSUs
      vested
            —RSUs
      forfeited
            —Nonvested
      RSUs at September 30, 2008
            1,024,709
            
            $
            1.15




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 September 30, 2008, 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.




-20-


8. COMMON STOCK
WARRANTS


For
accounting purposes, the Company was treated as having assumed Ithaka’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 at a price of $5.00 per share, subject to adjustment as
discussed below. The warrants expire on April 17, 2009. The Company 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.





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 Company 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.  The Company 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
Ithaka’s initial public offering in August 2005, 8,500,000 units were
sold.  In addition, in September 2005 Ithaka 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 September 30, 2008, 2,239,998 IPO Warrants were outstanding.




The IPO
Warrants are redeemable, at the Company’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 Company 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. The Company repurchased
1,157,200 warrants for cash of $0.9 million.  The Company terminated
this program in November 2007.




-21-


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.




The
warrant retirement program was completed on January 18, 2008.  A total
of 14,301,002 warrants were retired, which consisted of 14,029,081 warrants
tendered for 2,550,713 shares of common stock, and 271,921 warrants exercised
for cash proceeds of $884. After the program, there is a remaining
balance of 2,239,998 redeemable common stock purchase warrants outstanding. The
Company incurred $437 in direct and incremental costs related to the warrant
retirement program, and these costs have been recorded as a reduction of
additional paid-in capital.





9. 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 state or foreign 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
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 September 30, 2008. 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 $52,023 and $39,626, 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 $131 and $138,
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 has completed an analysis of whether an ownership change had occurred
with the consummation of the Ithaka merger in June 2007 and whether there have
been other relevant ownership changes since the Company's
formation.  There may be additional such ownership changes in the
future. If the Company has experienced certain ownership changes at any time
since its 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 its 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.  The Company has
determined that it has incurred three relevant ownership changes since its
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.




10.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.




-22-




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.




At
September 30, 2008, potentially dilutive securities that have been excluded from
net loss per share computations due to the net loss position are:




StocStock
      options
            
            
            1,027,685Res
      Restricted stock units
            
            
            1,024,709Common
      stock warrants
            
            
            3,133,7145,186,108




11.COMMITMENTS AND
CONTINGENCIES


Operating
Leases




The
Company leases its facility under a noncancelable operating lease which, as
amended, expires in December 2011 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 also leases an automobile under an operating lease
which expires in 2011.




As of
September 30, 2008, future minimum lease payments on the operating leases are as
follows:




Year
      Ending December 31,2008
      (remainder)
            
            $
            902009
            
            
            3792010
            
            
            3752011
            
            
            374$
            1,218




Rent
expense for the three and nine months ended September 30, 2008 and 2007 was
$122, $103, $339 and $306, respectively.




Capital
Leases




As of
September 30, 2008, capital lease payments are due in monthly installments
through October 2011 for a total of $89.  Future minimum payments are
$7, $27, $30 and $25 for the years ended December 31, 2008 (remainder), 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
for the year ended December 31, 2007.




Indemnifications




The
Company and Alsius Medical indemnify their directors, and may indemnify officers
and other agents, to the maximum extent permitted under the Delaware General
Corporation Law and the California Corporations Code. 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.




-23-




Litigation





From time
to time, the Company may be involved in litigation relating to claims arising
out of its operations in the normal course of business. The Company believes
that it currently is not a party to any legal proceedings which, individually or
in the aggregate, would have a material adverse effect on its consolidated
financial position, results of operations, or cash flows.




12.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:




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007United
      States
            
            $
            1,465
            
            
            $
            1,076
            
            
            $
            4,233
            
            
            $
            2,914Austria*
            
            
            —
            
            
            
            55
            
            
            
            —
            
            
            
            308Germany*
            
            
            786
            
            
            
            276
            
            
            
            2,040
            
            
            
            1,098France
            
            
            68
            
            
            
            1
            
            
            
            276
            
            
            
            407Rest
      of Europe
            
            
            613
            
            
            
            351
            
            
            
            1,642
            
            
            
            1,355Other
            
            
            164
            
            
            
            121
            
            
            
            430
            
            
            
            323$
            3,096
            
            
            $
            1,880
            
            
            $
            8,621
            
            
            $
            6,405




No other
country represented more than 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:




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Disposables
            
            $
            1,759
            
            
            $
            832
            
            
            $
            4,644
            
            
            $
            3,099CoolGard
      and Thermogard systems
            
            
            1,135
            
            
            
            912
            
            
            
            3,396
            
            
            
            2,956Services
            
            
            202
            
            
            
            136
            
            
            
            581
            
            
            
            350$
            3,096
            
            
            $
            1,880
            
            
            $
            8,621
            
            
            $
            6,405




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




As
      of
              September
      30, 2008
            
            
            As
      of
              December
      31, 2007United
      States
            
            $
            1,996
            
            
            $
            1,564International
            
            
            244
            
            
            
            143$
            2,240
            
            
            $
            1,707




-24-




13.RELATED
PARTIES




The
Company paid approximately $575 and $732 in legal fees for the nine months ended
September 30, 2008 and 2007, respectively, to a law firm whose partner is the
corporate secretary of the Company. Included in accounts payable and accrued
expenses at September 30, 2008 and at December 31, 2007 is approximately $35 and
$235, respectively, due to this law firm.




The
Company paid approximately $16 and $83 in professional fees for the nine months
ended September 30, 2008 and 2007, respectively, 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.  There are no amounts
outstanding to this firm as of September 30, 2008.




In connection with the services rendered in the nine months ended
September 30, 2008 and 2007 for the procurement of the Company’s directors’ and
officers’ insurance policies, the Company paid Woodruff-Sawyer & Co. a
commission of $17 and $22, respectively.   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 September 30, 2008 and December 31, 2007 due to
Woodruff-Sawyer & Co.




The
Company paid approximately $75 and $95 in legal fees for the nine months ended
September 30, 2008 and 2007, respectively, to a law firm whose partner is a
holder of stock options of the Company. Included in accounts payable and accrued
expenses at September 30, 2008 and at December 31, 2007 is approximately $5 and
$6, respectively, due to this law firm.  In addition, the Company had
a balance of $8 in accrued expenses at December 31, 2007 due to the partner of
this law firm.




In
January 2008, the Company completed a warrant retirement program whereby the
holders of certain warrants could, for the period from December 19, 2007 to
January 18, 2008, exercise their warrants on amended terms.  For each
5.5 warrants surrendered, the holder would 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.  Two
members of the Company’s board of directors participated in the warrant
retirement program.  One member tendered 522,500 warrants in exchange
for 95,000 shares of common stock and exercised 31,250 warrants by paying a
reduced aggregate exercise price of $102.  The other member tendered
553,750 warrants in exchange for 100,682 shares of common stock.






-25-




ITEM 2.
                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the federal securities laws, including the Private Securities
Litigation Reform Act of 1995, which provides certain "safe harbor" provisions
for forward-looking statements. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially
from those expressed or implied by such forward-looking statements. For a
detailed discussion of these risks and uncertainties, see the “Risk Factors”
section in Item 1A of Part II of this Form 10-Q and in our other SEC
filings. We caution the reader not to place undue reliance on these
forward-looking statements, which reflect management’s analysis only as of the
date of this Form 10-Q. We undertake no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this
Form 10-Q.
  Overview
  We are a
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 units, as well as five families of single-use catheters used exclusively
with the systems—Cool Line, Icy, Fortius, Quattro and Solex. 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.  In the first quarter of 2008,
we introduced the Thermogard XP system, which is similar to the Thermogard, but
with additional power and features.
  We began
selling our products in the United States in April 2004 and, as of September 30,
2008, had established a U.S. installed base of over 293 systems in 148
hospitals, of which 254 had been sold and 39 were under evaluation. Our U.S.
installed base includes 10 systems that we sold in the second quarter of 2008 to
a third party who intends to rent them to hospitals.  We began
building a current network of independent distributors in Europe in February
2004, and as of September 30, 2008, had established a European installed base of
over 388 systems in over 217 hospitals, of which 359 had been sold and 29 were
under evaluation. In other parts of the world as of September 30, 2008, we had
an installed base of 46 systems, of which 42 had been sold and 4 were under
evaluation.  We generated revenues of $8.6 million in the nine months
ended September 30, 2008, which represents revenue growth of 35% from the nine
months ended September 30, 2007. We had a net loss of $15.1 million in the
nine months ended September 30, 2008. International sales accounted for 51% of
our revenue in the nine months ended September 30, 2008. 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.
  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, China and Australia, including clearance for cardiac
arrest, and are in the process of obtaining clearances to sell our products in
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 September 30,
2008, we employed 16 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, an international
accounts manager, six clinical application specialists and a director of
clinical education in the United States and over 32 independent international
distributors covering over 40 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.
  We
continue to face challenges in the U.S., Europe and the rest of the world,
particularly due to competition, a long sales cycle, and the fact that we are
not FDA-approved to market in the United States for cardiac arrest and certain
other indications for which our products may be used.  We believe
awareness of the importance of patient temperature regulation is growing and
that more critical care givers are implementing aggressive temperature
management protocols, and looking for products to use in this
effort.  This increased awareness, however, has also increased our
competition with companies that market more traditional and newer surface
heating and cooling devices, which are less invasive and often less expensive
that our catheter-based approach.  We continue to believe that our
products offer the most effective approach to temperature regulation, and offer
superior benefits to patients and caregivers over competing surface products,
and that our sales will grow as this awareness increases.  However,
the increase in competition has lengthened our sales cycle and made sales in the
near term difficult to predict.
 
 In order
to meet our obligations and to continue as a going concern, we must raise
working capital through additional debt or equity financing in 2008 or early
2009, and we are pursuing efforts to do so.  However, there can be no
assurance, especially in light of current market conditions, that we can
successfully complete such a financing in the timeframe required or on terms
acceptable to us.
 
 -26-
  Critical
Accounting Policies and Estimates
  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.
  There are
no material changes from the critical accounting policies and estimates
previously disclosed in Item 7 of Part II of our Annual Report on Form 10-K for
the year ended December 31, 2007, which sets forth the most recent Critical
Accounting Policies and Estimates presentation in our filings under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
 
 Results
of Operations
 
 Nine
Months Ended September 30, 2008 and 2007
 
 Revenue. Revenue was $8.6
million for the nine months ended September 30, 2008, an increase of
$2.2 million or 34%, from $6.4 million for the nine months ended
September 30, 2007. During 2008, we introduced a new product, Thermogard XP,
resulting in an approximate 19% increase in average selling prices for
systems.  Our revenue also reflects an approximate 14% increase for
disposable units. During the nine months ended September 30, 2008, we sold 7,419
catheters and 7,039 start-up kits, an increase of 31% and 44%, respectively,
from the 5,646 catheters and 4,872 start-up kits sold during the nine months
ended September 30, 2007.  Sales of our CoolGard and Thermogard
systems decreased from 153 during the nine months ended September 30, 2007 to
148 during the nine months ended September 30, 2008.  Our 2007 results
include the sale of 23 systems to one European country, which has not recurred
in 2008.  Sales of our CoolGard and Thermogard systems accounted for
39% and 46% of revenue and sales of catheters and start-up kits accounted for
54% and 48% of our revenue for the nine months ended September 30, 2008 and
2007, respectively.  Sales in the United States accounted for 49% of
our revenue for the nine months ended September 30, 2008, compared to 45% for
the nine months ended September 30, 2007. 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 $6.6 million for the nine months ended September 30, 2008, an
increase of $1.2 million or 22%, from $5.4 million for the nine months ended
September 30, 2007. These costs include approximately $0.4 million related to a
write-down of and a reserve on our physical inventory in the quarter ended
September 30, 2008.  As a percentage of revenue, cost of revenue
decreased from 84% of sales for the nine months ended September 30,
2007, to 76% of sales for the nine months ended September 30,
2008. The percentage decrease was primarily due to the
realization of cost reduction programs and 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. Stock based compensation increased in the nine
months ended September 30, 2008 by $0.1 million as compared to the nine months
ended September 30, 2007  due to the grant of stock options and
restricted stock units under our 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 $3.4 million for the nine months ended
September 30, 2008, an increase of $0.8 million, or 31%, from
$2.6 million for the nine months ended September 30, 2007. This increase is
primarily attributable to increased stock based compensation of $0.1 million
associated with our 2006 Equity Incentive Plan, other compensation related costs
of $0.4 million associated with increased headcount, and $0.3 million associated
with material cost to test a new catheter. 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 $9.4 million for the nine
months ended September 30, 2008, an increase of $1.6 million, or 21%, from $7.8
million for the nine months ended September 30, 2007. 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 and commission costs of $0.7 million, increased travel, trade show
and meeting expenses of $0.1 million, and increased advertising, public
relations and outside services expenses of $0.3 million. Stock based
compensation increased by $0.3 million associated with our 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.
  -27-
 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 $4.1 million for the nine months ended September
30, 2008, an increase of $0.3 million or 8%, from $3.8 million for the nine
months ended September 30, 2007. The increase was primarily attributable to
increased stock based compensation of $0.2 million associated with our 2006
Equity Incentive Plan, and increased public company expenses of $0.1 million. 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,
including costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act.
  Interest income. Interest
income was $0.2 million for the nine months ended September 30, 2008, a
decrease of $0.2 million, or 50%, from $0.4 million for the nine
months ended September 30, 2007. This decrease was due to the lower levels of
cash on hand.
  Interest expense. Interest
expense was $0.5 million for the nine months ended September 30, 2008, a
decrease of $3.3 million, or 87%, from $3.8 million for the nine months
ended September 30, 2007. Interest expense in the nine months ended September
30, 2008 primarily resulted from our borrowings from Merrill Lynch Capital (now
GE Capital).  In the nine months ended September 30, 2007, we incurred
$0.9 million of interest on these borrowings, $0.2 million related to borrowings
from other finance companies, and $2.6 million related to the bridge notes, all
of which were repaid in the Ithaka merger in June 2007.
  Other income (expense). Other
income (expense) was zero for the nine months ended September 30, 2008 as
compared to $0.1 million of other expense for the nine months ended September
30, 2007. This was primarily due to the decrease in the fair value adjustments
of the warrant liabilities and embedded derivatives associated with the May 2005
secured promissory note and the 2006 bridge notes as these items were either
repaid or converted in the Ithaka merger in June 2007.
 
 Three
Months Ended September 30, 2008 and 2007
  Revenue. Revenue was $3.1
million for the quarter ended September 30, 2008, an increase of $1.2 million or
63%, from $1.9 million for the quarter ended September 30, 2007. During
2008, we introduced a new product, Thermogard XP, resulting in an approximate
19% increase in average selling prices for systems.  Our revenue also
reflects an approximate 8% increase for disposable units. During the quarter
ended September 30, 2008, we sold 2,780 catheters, an increase of 95% from the
1,422 catheters sold during the quarter ended September 30,
2007.  During the quarter ended September 30, 2008, we sold 2,542
start-up kits, an increase of 106% from the 1,235 start-up kits sold during the
quarter ended September 30, 2007.  Sales of our CoolGard and
Thermogard systems increased from 44 during the quarter ended September 30, 2007
to 46 during the quarter ended September 30, 2008.   Sales of our
CoolGard and Thermogard systems accounted for 37% and 49% of revenue and sales
of catheters and start-up kits accounted for 57% and 44% of our revenue for the
quarters ended September 30, 2008 and 2007, respectively.  Sales in
the United States accounted for 47% of our revenue for the quarter ended
September 30, 2008, compared to 57% for the quarter ended September 30, 2007. 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 $2.6 million for the quarter ended September 30, 2008, an increase
of $1.3 million or 100%, from $1.3 million for the quarter ended September 30,
2007. In absolute dollars, the increase is directly attributable to the increase
in revenues for the quarter.  As a percentage of revenue, cost of
revenue increased from 68% of sales for the quarter ended September
30, 2007, to 83% of sales for the quarter ended September 30,
2008. The percentage increase was primarily due to our sales
mix in the quarter, and a charge of $0.4 million resulting from a physical
inventory conducted as of September 30, 2008.  International sales,
which we make through distributors at a lower margin, increased to 53% of
revenues in the quarter ended September 30, 2008 versus 43% in the quarter ended
September 30, 2007. Stock based compensation decreased in the quarter ended
September 30, 2008 by $0.04 million as compared to the quarter ended September
30, 2007 due to the grant of stock options and restricted stock units under
our 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 we are
actively engaged in human clinical trials to support new regulatory clearances.
Research and development expense was $1.2 million for the quarter ended
September 30, 2008, an increase of $0.2 million, or 20%, from
$1.0 million for the quarter ended September 30, 2007. This increase is
primarily attributable to compensation related costs of $0.2 million associated
with increased headcount and $0.2 million in materials expenses related to
clinical studies, partially offset by decreased stock based compensation of $0.2
million associated with our 2006 Equity Incentive Plan. We expect research and
development expenses to decline as a percentage of revenue due to a larger
revenue base.
  -28-
  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 $2.9 million for the quarter
ended September 30, 2008, an increase of $0.2 million, or 7%, from $2.7 million
for the quarter ended September 30, 2007. 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 and commission
costs of $0.2 million, increased outside service costs related to installation
and training of $0.1 million, and other increased costs of $0.1 million related
to evaluation units and larger volume, partially offset by decreased stock based
compensation of $0.2 million associated with our 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.
  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 $1.2 million for the quarter ended September 30,
2008, a decrease of $0.9 million or 43%, from $2.1 million for the quarter
ended September 30, 2007. The decrease was primarily attributable to decreased
stock based compensation of $0.5 million associated with our 2006 Equity
Incentive Plan, decreased outside services and legal costs of $0.3 million
related to the withdrawn IPO and Ithaka merger in 2007, and decreased general
legal and public reporting expenses of $0.2 million which were at a higher level
of activity in the summer of 2007 with the Ithaka merger, partially offset by
increased costs of $0.1 million associated with our tender offer to exchange
common stock options for restricted stock units.  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,
including costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act.
  Interest income. Interest
income was $0.04 million for the quarter ended September 30, 2008, a
decrease of $0.36 million, or 90%, from $0.4 million for the quarter
ended September 30, 2007. This decrease was due to lower average cash balances
in the quarter ended September 30, 2008 as compared to the prior
year.
  Interest expense. Interest
expense was $0.2 million for the quarter ended September 30, 2008, a decrease of
$0.2 million, or 50%, from $0.4 million for the quarter ended September 30,
2007. Interest expense in the three months ended September 30, 2008 primarily
resulted from our borrowings from Merrill Lynch Capital (now GE
Capital).  In the three months ended September 30, 2007, we incurred
$0.3 million of interest on these borrowings and $0.1 million on borrowings from
other finance companies.
  Other income (expense). Other
income (expense) was zero for the quarter ended September 30, 2008 as compared
to $0.002 million of other income for the quarter ended September 30, 2007. The
other income in 2007 was due to the decrease in the fair value adjustments of
the warrant liabilities and embedded derivatives associated with debt
instruments we held before the Ithaka merger in June 2007.
  Liquidity
and Capital Resources
 
 From our
inception, and prior to the Ithaka merger 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
(subsequently 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 $0.2 million, 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 the Ithaka
merger in June 2007, and in that transaction we acquired approximately $40.0
million of net assets (see Note 3 of the accompanying Notes to Condensed
Consolidated Financial Statements).
  We have
incurred significant net losses since inception and have relied on our ability
to obtain financing.  As of September 30, 2008, we had $9.9 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, and to secure other sources of financing to
fund operations. Before we can achieve cash flow positive operations through
increased sales, it will be necessary to raise working capital through debt or
additional equity financing in 2008 or early 2009. However, there can be no
assurance, especially in light of current market conditions, that such financing
can be successfully completed in the time frame required or on terms acceptable
to the Company.
  -29-
 
 Nine
Months Ended September 30, 2008 and 2007
  As of
September 30, 2008, we had cash and cash equivalents of $9.9 million, working
capital of $11.2 million and an accumulated deficit of $113.3
million.
  Cash flows used in operating
activities. Net cash used in operations was $11.6 million for the nine
months ended September 30, 2008 and $16.8 million for the nine months ended
September 30, 2007. 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 debt issuance costs and the change in fair
value of warrant liabilities and embedded derivatives totaled $3.5 million and
$5.1 million for the nine months ended September 30, 2008 and 2007,
respectively, representing a $1.6 million decrease. This decrease was primarily
comprised of a $0.8 million increase in stock-based compensation offset by a
decrease of $2.6 million of amortization of discounts on promissory notes since
we converted or repaid our debt instruments in June 2007.
  For the
nine months ended September 30, 2008, operating assets and liabilities
aggregated to a net decrease of cash of $0.1 million, primarily related to
decreased accounts payable and accrued liabilities of $1.6 million as cash
levels increased following the Ithaka merger in June 2007, and offset by a $1.3
million increase in cash related to the reduction of inventories.
 
 Cash flows used in investing
activities. Net cash used by investing activities was $1.0 million for
the nine months ended September 30, 2008 and consisted of capital
expenditures.  Net cash used by investing activities was $40.8 million
for the nine months ended September 30, 2007 and consisted $41.5 million of net
cash received in the Ithaka merger and $0.7 million of capital expenditures. The
increase in capital expenditures is primarily attributable to the January 2008
release of our Thermogard XP system and the subsequent placement of these
systems into our evaluation equipment pool.  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. Net cash flows used by financing activities were $1.9 million
for the nine months ended September 30, 2008 compared to $4.9 million provided
by financing activities for the nine months ended September 30, 2007. Cash flows
from financing activities in 2008 reflects $0.5 million in net proceeds from our
warrant exchange program offset by $2.4 million in repayment of the borrowings
from Merrill Lynch.
  Cash
flows from financing activities in the nine months ended September 30, 2007 were
$4.9 million and primarily represent $13.0 million in proceeds from the 2006
bridge notes and other borrowings, offset by $6.9 million in principal payments,
$0.9 million in payments to convert common stock in connection with the Ithaka
acquisition, and $0.3 million of debt issuance costs.
 
 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
Ithaka merger in June 2007, we have and will continue to 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 continue to meet with the
FDA in 2008 to discuss other options and will plan accordingly after that
meeting.  As of September 30, 2008, no amounts have been paid by
us.
  The
following table summarizes information about our material contractual
obligations as of September 30, 2008:
  Contractual
      Obligations
                      
                      Total
                      
                      
                      Less Than
                        1
      Year
                      
                      
                      1-3
                        Years
                      
                      
                      3-5
                        Years
                      
                      
                      More Than
                        5
      Years(in
      thousands)Operating
      leases
                      
                      $
                      1,218
                      
                      
                      $
                      374
                      
                      
                      $
                      752
                      
                      
                      $
                      92
                      
                      
                      $
                      —Long-term
      debt
                      
                      $
                      4,578
                      
                      
                      $
                      3,216
                      
                      
                      $
                      1,362
                      
                      
                      $
                      —
                      
                      
                      $
                      —Capital
      leases
                      
                      $
                      89
                      
                      
                      $
                      27
                      
                      
                      $
                      62
                      
                      
                      $
                      —
                      
                      
                      $
                      —
  -30-
  Operating leases. We lease
our facility under a noncancelable operating lease which, as amended in August
2008, expires in December 2011 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.
  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 September 30, 2008 is
$4.5 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 September 30, 2008, we estimate that our interest payments for the remainder
of 2008 will be $0.1 million and over the subsequent years until maturity will
be $0.2 million.  In April 2008, we entered into a new equipment
financing agreement for $51 which requires monthly payments through April
2011.
 
 Capital leases. In June 2006,
we entered into a lease commitment for computer equipment over a period of 63
months for a total value of $106. In November 2006, we entered into a lease
commitment for office equipment over a period of 60 months for a total value of
$14. In April 2007, we entered into a lease commitment for machinery and
equipment over a period of 48 months for a total value of $14.
  Uncertain tax liabilities. At
September 30, 2008, 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 September 30, 2008.
 
 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.
 
 Recent
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, which
defines fair value, establishes a framework for consistently measuring fair
value under generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the
information.  In February 2008, the FASB deferred the effective date
of SFAS 157 by one year for certain nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  On January 1, 2008, the
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and liabilities for which the effective date has been
delayed by one year.
  The fair
value hierarchy described by the standard is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value and include the following:
 
 Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
  Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
  Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
 
 In
accordance with SFAS 157, the following table represents the Company’s fair
value hierarchy for its financial assets (cash equivalents and investments)
measured at fair value on a recurring basis as of September 30,
2008:
  Fair
      Value Measurements UsingLevel
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    TotalCash
      and cash equivalents
                    
                    $
                    9,909
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    9,909
 
 The
adoption of SFAS 157 did not have a material effect on the Company’s
consolidated financial position, results of operations or cash
flows.  The book values of cash and cash equivalents, accounts
receivable and accounts payable approximate their respective fair values due to
the short-term nature of these instruments.
  -31-
 
 Effective
September 30, 2008, the Company adopted Financial Staff Position No. SFAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active” (FSP SFAS 157-3), which was issued on October 10, 2008. FSP SFAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for the financial asset is not
active. The adoption of FSP SFAS 157-3 did not have an impact on the Company’s
consolidated financial statements.
  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
the Company’s 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.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity’s financial position, financial performance, and cash flows. Entities are
required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. This standard is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is currently evaluating the impact, if
any, SFAS No. 161 will have on its consolidated financial position, results
of operations or cash flows.
  In March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards, (“EITF Issue 06-11”).
Beginning January 1, 2008, the Company adopted EITF Issue 06-11. In
accordance with the EITF Issue, the Company records a credit to additional
paid-in capital for tax deductions resulting from a dividend payment on
non-vested share awards the Company expects to vest. The adoption of EITF Issue
06-11 did not have any impact on the Company’s consolidated financial
statements.
  In June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (“FSP EITF 03-6-1”). The FSP provides
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method in accordance with SFAS 128, Earnings per
Share. The FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. Upon
adoption, the Company is required to retrospectively adjust its earnings per
share data to conform with the provisions in this FSP. Early application of this
FSP is prohibited. The Company is currently evaluating the impact this FSP will
have on its consolidated financial statements.
  
 ITEM 3.
                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.
  -32-
  We invest
our excess cash primarily in a money market fund which invests in U.S. Treasury
securities. 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 September 30, 2008.
   ITEM 4T.
                CONTROLS
      AND PROCEDURES
  Evaluation of Disclosure Controls and
Procedures. Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange
Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
to ensure that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to management as appropriate to
allow for timely decisions regarding required disclosure.
  Changes in Internal Control Over
Financial Reporting. There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 As
previously reported in the Current Report on Form 8-K filed on July 15, 2008,
Brett Scott, our Chief Financial Officer, resigned from the Company, effective
August 8, 2008, to pursue other interests. We do not believe that his departure
has had or will have a material impact on our internal control over financial
reporting. On July 24, 2008, we engaged Gregory J. Tibbitts, an experienced
publicly-traded medical device company CFO, on a consulting basis to function as
our Chief Financial Officer after the departure of Mr. Scott. Mr. Tibbitts'
consulting agreement with the Company runs through March 31, 2009, unless
extended.
 
 PART
II – OTHER INFORMATION
  ITEM 1.
                LEGAL
      PROCEEDINGS
  We are
not a party to any material pending or threatened litigation.
  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.  You must not construe the following statements as
an exhaustive list of risks we face.  The risk factors below are
intended to update and supersede those previously disclosed in Part I, Item 1A
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
  *
The Company has marked with an asterisk those risk factors that reflect changes
from the risk factors included in the Company's Annual Report on Form 10-K filed
with the SEC on March 13, 2008.
 
 Risks
Related to Our Business
  *            
We have not yet been able to finance our operations with the cash generated from
our business. We will need additional financing to repay our bank debt and
fund operations, which may not be available or may be available only on
unfavorable terms.
  We have
not yet generated sufficient cash from operations to finance our business. Our
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 cash we acquired in the Ithaka merger. We have not reported an operating
profit for any year since our inception.  From our inception through
September 30, 2008, we had an accumulated deficit of $113.3 million, and at
September 30, 2008 had cash and cash equivalents of $9.9 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.
  -33-
  Our cash
and cash equivalents on hand, and our projected cash flows, are not
sufficient to take us to cash flow positive based on our current business
plan.  We will need additional debt or equity financing no later than
the second quarter of 2009, and are pursuing efforts to secure such funding. The
current market for debt and equity financing is challenging and the additional
financing that we require may not be available at all or, if available, may be
on terms unfavorable to us and our stockholders, and may substantially dilute
current ownership interests.
 
 Our loan
with GE Capital had an outstanding balance of $4.5 million as of September 30,
2008, and requires that we make monthly principal payments of $266,667, until
the loan is repaid in full in February 2010.  Our agreements with GE
Capital provide GE Capital with a lien on all of our principal assets other than
intellectual property.  If we default on a payment due to GE Capital,
and the default is not waived, GE Capital can foreclose on our assets, including
seizing our cash and investments accounts.  If GE Capital were to
seize our cash and investments accounts or otherwise foreclose on our assets,
that would materially harm our business, and could force us to cease operations,
declare bankruptcy, or both.  We are currently in compliance with the
covenants of our debt facility.  However, if we are unsuccessful in
raising additional funds and we default on a payment to GE Capital, GE Capital
could seize our remaining cash and investments.  We cannot guarantee
that we will be successful in raising additional funds.
  *            
Recent turmoil in the credit markets and the financial services industry may
negatively impact our business, results of operations, financial condition or
liquidity.
  Recently, the credit markets and the
financial services industry have been experiencing a period of unprecedented
turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale
of various financial institutions and an unprecedented level of intervention
from the United States federal government. These conditions make it extremely
difficult for our customers, our vendors and us to accurately forecast and plan
future business activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which would delay and
lengthen sales cycles.  Furthermore, during challenging economic times
our customers may face issues gaining timely access to sufficient credit, which
could result in an impairment of their ability to make timely payments to
us.  In addition, the recent economic crisis could also adversely
impact our suppliers’ ability to provide us with materials and components,
either of which may negatively impact our business, financial condition and
results of operations.
 
 Although
we maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments and such losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same loss rates that we
have in the past, especially given the current turmoil of the worldwide economy.
We cannot predict the timing, strength or duration of any economic slowdown or
subsequent economic recovery.   If the economy or markets in
which we operate do not continue at their present levels, our business,
financial condition and results of operations will likely be materially and
adversely affected. Additionally, the combination of our lengthy sales cycle
coupled with challenging macroeconomic conditions could have a synergistic
negative impact on the results of our operations.
  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.  From time to time, we have 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.
 
 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 accounted for 3% and 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.
  -34-
  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.
  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.
  -35-
 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.
  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.
  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.
 
 -36-
 *            
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. Since the
study began, we have submitted several quarterly and annual reports to the FDA
on the progress of the PMS study. Currently, we have reported information
regarding 203 patients enrolled in the study, which we believed showed good
safety results. 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.
  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.
  -37-
 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 may appeal to certain critical care providers.  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 substantially 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.
  *
Our
failure to maintain Nasdaq listing requirements could cause our common stock to
be delisted.
  If our
common stock closes below $1.00 for thirty consecutive trading days, as nearly
occurred a few times in 2008, we could be subject to Nasdaq delisting procedures
if such noncompliance is not rectified within 180 calendar days, which would
require our stock price to be $1.00 or more for at least 10 consecutive trading
days.  In the event we do not re-establish compliance within such 180
day period, we may be granted an additional 180 calendar days to re-establish
compliance provided we at least satisfy the initial listing criteria of the
Nasdaq Capital Market other than the minimum bid price requirement as of the
expiration of the initial 180-day period.
  The loss
of our Nasdaq listing would likely reduce trading activity in our common stock
and make it more difficult for stockholders to sell their shares, and the threat
of such a result could have a negative or dampening effect on our trading
activity until such matter is resolved. Any decreased trading activity and added
difficulty in trading our stock could have a negative impact on our stock
price.
 
 However,
given the current extraordinary market conditions, NASDAQ has decided to suspend
the bid price and market value of publicly held shares requirements through
Friday, January 16, 2009. On October 16, 2008, NASDAQ filed an immediately
effective rule change with the SEC, such that companies will not be cited for
any new concerns related to bid price or market value of publicly held shares
deficiencies. These rules will be reinstated on Monday, January 19,
2009.
 
 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.
  -38-
  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;
  •
              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.
  -39-
 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.
  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.
  -40-
 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 the fiscal year ending on December 31, 2009.
  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.
 
 -41-
 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 September 30, 2008, 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 September 30, 2008, 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.
  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 2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  None.
  ITEM 3.
                DEFAULTS
      UPON SENIOR SECURITIES
  None.
  -42-
 ITEM 4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  At
our Annual Meeting of Stockholders on July 16, 2008, our stockholders elected
two Class A directors to continue to serve as board members until 2011 and
until their respective successors are elected. The stockholders of the Company
also ratified the selection of Deloitte & Touche as the Company's
independent registered public accounting firm. Our Class B directors, Wende
S. Hutton and Kurt C. Wheeler, will serve until their terms expire at the Annual
Meeting to be held in 2009. Our Class C directors, Eric M. Hecht, Gregory
D. Waller and William J. Worthen, will serve until their terms expire at the
Annual Meeting to be held in 2010.
  Number of
      SharesProposal
                    
                    Voted
For
                    
                    
                    Voted
      Against
                    
                    
                    Withheld1. To
      elect two Class A directors to hold office until 2011 and until their
      respective successors are elected and qualified (1)Paul
      A. Brooke
                    
                    
                    15,917,625
                    
                    
                    
                    4,500
                    
                    
                    
                    5,154,009Jack
      W. Lasersohn
                    
                    
                    15,917,625
                    
                    
                    
                    4,500
                    
                    
                    
                    5,154,0092. To
      ratify selection of Deloitte & Touche as independent registered public
      accounting firm(2)
                    
                    
                    15,917,625
                    
                    
                    
                    4,500
                    
                    
                    
                    5,154,009
  (1)Directors are elected by a
plurality vote, which means that the nominee or nominees receiving the most
affirmative votes was elected.
 (2)The affirmative vote of the
majority of the votes cast was required for the approval of the selection of the
independent registered public accounting firm.
  
 ITEM 5.
                OTHER
      INFORMATION
 
 None .
 
 ITEM 6.
                EXHIBITS
  Exhibit No.
                      
                      Description10.1
                      
                      Gregory
      Tibbitts CFO Consulting Agreement, dated July 24, 2008.31.1
                      
                      Certification
      of Chief Executive Officer under Securities Exchange Act Rule
      13a-14(a).31.2
                      
                      Certification
      of Chief Financial Officer under Securities Exchange Act Rule
      13a-14(a).32.1
                      
                      Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. 1350 and Securities Exchange Act Rule
    13a-14(b).
  -43-
 
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, who have signed this report on behalf of
the Company as the principal executive officer, principal financial officer and
principal accounting officer.
  Alsius
      CorporationDate:  November
      6, 2008
                  /s/
      William J. WorthenWilliam
      J. WorthenPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      November 6, 2008
                  /s/
      Gregory J. TibbittsGregory
      J. TibbittsChief
      Financial Officer(Principal
      Financial and Accounting Officer)
  -44-
  Exhibit No.
                    
                    Description10.1
                    
                    Gregory
      Tibbitts CFO Consulting Agreement, dated July 24, 2008.31.1
                    
                    Certification
      of Chief Executive Officer under Securities Exchange Act Rule
      13a-14(a).31.2
                    
                    Certification
      of Chief Financial Officer under Securities Exchange Act Rule
      13a-14(a).32.1
                    
                    Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. 1350 and Securities Exchange Act Rule
    13a-14(b).








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