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 March 31, 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 of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      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   x
    No    ̈




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 May
6, 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 March 31, 2008 and December
      31, 2007
            3Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2008 and March 31, 2007
            4Condensed
      Consolidated Statement of Shareholders’ Deficit for the three months ended
      March 31, 2008
            5Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2008 and March 31, 2007
            6Notes
      to Unaudited Condensed Consolidated Financial Statements
            7ITEM 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            25ITEM 3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            30ITEM 4T.
            CONTROLS
      AND PROCEDURES
            31PART II
            OTHER
      INFORMATIONITEM 1.
            LEGAL
      PROCEEDINGS
            32ITEM 1A.
            RISK
      FACTORS
            32ITEM 2
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            32ITEM 3
            DEFAULTS
      UPON SENIOR SECURITIES
            32ITEM 4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            32ITEM 5
            OTHER
      INFORMATION
            32ITEM 6.
            EXHIBITS
            33SIGNATURES
            34





-2-





ITEM I.   FINANCIAL
INFORMATON


ALSIUS
CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited,
in thousands, except share data)






March
      31,2008
            
            
            December
      31,
              2007ASSETSCurrent
      Assets:Cash and cash
      equivalents
            
            $
            18,527
            
            
            $
            24,427Accounts
      receivable, net of allowances of $18 and $44
            
            
            1,906
            
            
            
            2,162Inventories
            
            
            6,419
            
            
            
            6,680Prepaid
      expenses
            
            
            538
            
            
            
            284Total
      current assets
            
            
            27,390
            
            
            
            33,553Property
      and equipment, net
            
            
            1,165
            
            
            
            1,034Evaluation
      equipment, net
            
            
            987
            
            
            
            673Other
      assets
            
            
            294
            
            
            
            342TOTAL
            
            $
            29,836
            
            
            $
            35,602LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            1,630
            
            
            $
            2,732Accrued
      liabilities
            
            
            2,038
            
            
            
            1,916Current
      portion of long-term debt
            
            
            3,200
            
            
            
            3,200Current
      portion of capital lease obligation
            
            
            26
            
            
            
            25Total
      current liabilities
            
            
            6,894
            
            
            
            7,873Long-term
      debt –less current portion
            
            
            2,803
            
            
            
            3,569Capital
      lease obligation
            
            
            75
            
            
            
            82Other
      liabilities
            
            
            64
            
            
            
            66Total
      liabilities
            
            
            9,836
            
            
            
            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 March 31, 2008 and
      December 31, 2007, respectively
            
            
            2
            
            
            
            2Additional
      paid-in capital
            
            
            123,722
            
            
            
            122,237Accumulated
      deficit
            
            
            (103,724
            )
            
            
            (98,227
            )Total
      shareholders’ equity
            
            
            20,000
            
            
            
            24,012TOTAL
            
            $
            29,836
            
            
            $
            35,602






See
accompanying notes.





-3-







ALSIUS
CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


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






Three
      Months Ended
              March
      31,2008
            
            
            2007Revenue
            
            $
            2,503
            
            
            $
            2,025Cost
      of revenue
            
            
            1,911
            
            
            
            1,945Gross
      margin
            
            
            592
            
            
            
            80Operating
      expenses :Research
      and development
            
            
            1,196
            
            
            
            869Sales
      and marketing
            
            
            3,242
            
            
            
            2,399General
      and administrative
            
            
            1,573
            
            
            
            1,085Total
      operating expenses
            
            
            6,011
            
            
            
            4,353Loss
      from operations
            
            
            (5,419
            )
            
            
            (4,273
            )Interest  income
            
            
            135
            
            
            
            12Interest
      expense
            
            
            (213
            )
            
            
            (1,867
            )Other
      income (expense)
            
            
            —
            
            
            
            (231
            )Net
      loss
            
            $
            (5,497
            )
            
            $
            (6,359
            )Net
      loss per share- basic and diluted
            
            $
            (0.27
            )
            
            $
            (0.58
            )Weighted
      average shares outstanding-basic and diluted
            
            
            20,424,757
            
            
            
            10,974,100






See
accompanying notes.


-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 $432
            
            
            2,822,634
            
            
            
            
            
            
            
            452
            
            
            
            
            
            
            
            452Stock-based
      compensation (SFAS 123R)
            
            
            
            
            
            
            
            
            
            
            1,033
            
            
            
            
            
            
            
            1,033Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,497
            )
            
            
            (5,497
            )Balances
      as of March 31, 2008
            
            
            21,076,134
            
            
            $
            2
            
            
            $
            123,722
            
            
            $
            (103,724
            )
            
            $
            20,000






See
accompanying notes.


-5-





ALSIUS
CORPRATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited,
in thousands)






Three
      Months Ended March 31,2008
            
            
            2007Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (5,497
            )
            
            $
            (6,359
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            130
            
            
            
            100Stock-based
      compensation
            
            
            1,033
            
            
            
            124Loss
      on disposal of assets
            
            
            —
            
            
            
            2Increase
      in fair value of warrant liabilities and embedded
    derivatives
            
            
            —
            
            
            
            113Amortization
      of discounts on long-term debt
            
            
            34
            
            
            
            1,478Amortization
      of debt issuance costs
            
            
            11
            
            
            
            34Provision
      for estimated warranty costs
            
            
            20
            
            
            
            50Bad
      debt expense
            
            
            2
            
            
            
            2Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            254
            
            
            
            (198
            )Inventories
            
            
            261
            
            
            
            (519
            )Prepaid
      expenses
            
            
            (254
            )
            
            
            (97
            )Other
      assets
            
            
            35
            
            
            
            (134
            )Accounts
      payable
            
            
            (1,286
            )
            
            
            471Accrued
      liabilities
            
            
            (224
            )
            
            
            525Net
      cash used in operating activities
            
            
            (5,481
            )
            
            
            (4,408
            )Cash
      Flows From Investing Activities:Cash
      paid for property and equipment
            
            
            (114
            )
            
            
            (77
            )Cash
      paid for evaluation equipment
            
            
            (383
            )
            
            
            (21
            )Net
      cash used in investing activities
            
            
            (497
            )
            
            
            (98
            )Cash
      Flows From Financing Activities:Proceeds
      from warrant retirement program
            
            
            884
            
            
            
            —Proceeds
      from issuance of long-term debt, net
            
            
            —
            
            
            
            9,450Principal
      payments under long-term debt
            
            
            (800
            )
            
            
            (3,108
            )Principal
      payments under capital lease obligations
            
            
            (6
            )
            
            
            (5
            )Net
      cash provided by  financing activities
            
            
            78
            
            
            
            6,337Net
      increase (decrease) in cash and cash equivalents
            
            
            (5,900
            )
            
            
            1,831Cash
      and cash equivalents—beginning of period
            
            
            24,427
            
            
            
            647Cash
      and cash equivalents—end of period
            
            $
            18,527
            
            
            $
            2,478Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for income taxes
            
            $
            3
            
            
            $
            1Cash
      paid for interest
            
            $
            177
            
            
            $
            81Property
      and equipment acquired included in accounts payable and accrued
      liabilities
            
            $
            76
            
            
            $
            —Warrant
      retirement program costs included in accounts payable and accrued
      liabilities
            
            $
            432
            
            
            $
            —





See
accompanying notes.


-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 Corporation, 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 the Ithaka, and Ithaka concurrently changed its name
to Alsius Corporation.  Alsius Corporation is now a publically 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 plan,
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 its products in Europe. Alsius Medical develops,
manufactures and sells, proprietary catheter-based products to precisely control
patient temperature in hospital critical care settings. In August 2003, Alsius
Medical received United States Food and Drug Administration (“FDA”) clearance to
market its CoolGard ® 3000
Thermal Regulation System (the “CoolGard system”) and Cool Line ® catheter
for use in fever control. In addition, in October 2003, Alsius Medical received
FDA clearance to market its Icy TM and
Fortius TM
catheters in combination with the CoolGard ® 3000
Thermal Regulation System for use in normothermia in cardiac surgery and
hypothermia in neuro surgery.  Alsius Medical began to market and sell
its products in the United States during the year ended
December 31, 2004.




The
Company has incurred significant net losses since inception, and has relied on
its ability to obtain financing, which to date has been through the Ithaka
acquisition as discussed in Note3, the sale
of redeemable convertible preferred 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. Management intends to increase
sales, and raise working capital through debt or additional equity financing in
2008. However, there can be no assurance the Company will be able to increase
sales or that such financing can be successfully completed on terms acceptable
to the Company.





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 accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions. These affect the reported amounts of assets
and liabilities and disclosure of contingent assets or liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management has identified revenue, 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. There was no
difference between comprehensive loss and net loss for all periods
presented.





Cash
Equivalents





The
Company considers all highly liquid investments that mature within 90 days
from the date of purchase to be cash equivalents. At March 31, 2008, cash
equivalents consisted of money market funds of $17,522.  At December
31, 2007, cash equivalents consisted of money market funds of
$23,903.





Concentration
of Risk





The
Company maintains its cash accounts in a commercial bank. At March 31, 2008 and
December 31, 2007, cash on deposit totaling $18,327 and $24,225,
respectively, was in excess of the federally insured limit of
$100.  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 March 31, 2008 and 2007, one customer accounted for 28%
and 27%, respectively, of the Company’s net sales.  At March 31, 2008
and December 31, 2007, one customer accounted for 26% 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 Three Months Ended
              March
      31,
            
            
            For
      the Year Ended
              December
      31,2008
            
            
            2007Beginning
      balance
            
            $
            44
            
            
            $
            13Provision
      for bad debt
            
            
            2
            
            
            
            31Write-offs,
      net of recoveries
            
            
            (28
            )
            
            
            —Ending
      balance
            
            $
            18
            
            
            $
            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 March 31, 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 asset lives, are
charged to operations as incurred. Upon sale or disposition, the cost and
related accumulated depreciation and amortization are removed from the accounts
and any gain or loss is included in operations.


-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
March 31, 2008 and December 31, 2007, the cost of evaluation equipment was
$1,480 and $1,109 and accumulated depreciation was $493 and $436, respectively.
For the three months ended March 31, 2008 and 2007, $23 and $54, 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 Payments.
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
              March
      31, 2008
            
            
            Three
      Months Ended
              March
      31, 2007Cost
      of revenue
            
            $
            86
            
            
            $
            6Research
      and development
            
            
            178
            
            
            
            12Sales
      and marketing
            
            
            320
            
            
            
            44General
      and administrative
            
            
            449
            
            
            
            62Total
            
            $
            1,033
            
            
            $
            124





The
weighted-average fair value per share of the options granted was $2.29 for the
three months ended March 31, 2008.   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.  There were no
stock option grants in the three months ended March 31, 2007.




Three
      Months Ended
              March
      31, 2008Dividend
      Yield
            
            
            0.00%Volatility
            
            
            66%Weighted-average
      risk-free interest rate
            
            
            3.08%Expected
      life
            
            6.25
      years








-10-





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





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 March 31, 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. We
do not offer return rights for expired products to our customers. We assess
levels of inventory in the distribution channel through regular communications
with distributors by international sales and service personnel.  The
amount of returns through March 31, 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.  We currently do not charge a rental fee during the
evaluation period.  The amount of revenue attributable to the lease
element of these arrangements was less than 10% of the Company’s total revenue
for all periods presented. The CoolGard or Thermogard system is classified as
evaluation equipment and is depreciated over its estimated economic life of five
years with depreciation included as a component of cost of revenue.





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




Product
Warranty




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


-11-


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




For
      the Three Months Ended March 31,
              
              
              For
      the Year Ended December 31,2008
              
              
              2007Beginning
      balance
              
              $
              107
              
              
              $
              156Provision
      for estimated warranty costs
              
              
              20
              
              
              
              79Warranty
      expenditures
              
              
              (23
              )
              
              
              (128
              )Ending
      balance
              
              $
              104
              
              
              $
              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 months ended March 31, 2008 and 2007 was $219 and $175,
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
merger with Ithaka, as discussed in Note 3, for financial reporting purposes was
treated as a reverse acquisition.  Because the number of shares
outstanding following a reverse acquisition is significantly different from the
number of shares outstanding prior to the combination, the weighted average
shares outstanding for purposes of presenting net loss per share on a
comparative basis has been retroactively restated to the earliest period
presented in order to reflect the effect of the 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 lease annually).  On January 1, 2008, the
Company adopted the provisions of SFAS 157, except at 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 March 31, 2008:




Fair
      Value Measurements UsingLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalCash
      and cash equivalents
            
            $
            18,527
            
            
            
            —
            
            
            
            —
            
            
            $
            18,527







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.





-13-







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.





3.
            MERGER
      WITH ITHAKA




On June
21, 2007, Ithaka’s stockholders approved the merger of Alsius Medical with and
into Ithaka’s wholly owned merger subsidiary.  The merger
consideration consisted of 8,000,000 shares of Ithaka’s common stock (the
“Merger Shares”) in exchange for all of the issued and outstanding equity
securities of Alsius Medical. Of the 8,000,000 shares issued in
consideration, 4,902,527 shares were issued to preferred stock holders and
3,097,473 shares were issued to holders of the bridge notes. In addition, Alsius
Medical’s shareholders also have 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.  In 2007, the revenue
targets were not met and no Milestone Shares were granted. Additionally, Ithaka
agreed to fund bonuses totaling $3,000 to management, employees, two
non-employee directors and certain consultants of Alsius Medical.  The
$3,000 bonus paid by Ithaka was included as part of the merger consideration.
The Company accounted for the amount as a reduction of the net proceeds received
from Ithaka in return for the issuance of the stock. This treatment was based on
the fact that the amount was specifically negotiated by the parties as merger
consideration 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 executed 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.




-14-










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





The
merger was accounted for under the purchase method of accounting as a reverse
acquisition, with Alsius Medical as the accounting acquirer.  As part
of the merger, Ithaka’s common stock of 10,974,100 shares, which consisted of
9,866,392 common shares and 1,107,708 units convertible into common shares, 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.





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 three months ended March 31, 2007, assuming the merger
occurred at the beginning of the period.  Results for the three months
ended March 31, 2008 reflect actual operating results.





Three
      Months Ended March 31, 2007Revenue
            
            $
            2,025Loss
      from operations
            
            
            (4,481
            )Net
      loss
            
            
            (6,260
            )Net
      loss per share- basic and diluted
            
            
            (0.33
            )




-15-







4.
            SUPPLEMENTAL
      CONDENSED CONSOLIDATED FINANCIAL STATEMENT
  INFORMATION




Inventories
consist of the following:




March
      31,
              2008
            
            
            December 31,
              2007Raw
      materials
            
            $
            3,237
            
            
            $
            3,775Work-in-process
            
            
            1,942
            
            
            
            1,747Finished
      goods
            
            
            1,240
            
            
            
            1,158$
            6,419
            
            
            $
            6,680




Accrued
liabilities consist of the following:




March
      31, 2008
            
            
            December 31,
              2007Bonus
            
            $
            159
            
            
            $
            480Inventory
            
            
            51
            
            
            
            23Vacation
            
            
            357
            
            
            
            320Warranty
            
            
            104
            
            
            
            107Interest
            
            
            49
            
            
            
            69Professional
      services
            
            
            676
            
            
            
            453Payroll
      and related
            
            
            115
            
            
            
            42Travel
            
            
            220
            
            
            
            8Commission
            
            
            64
            
            
            
            232Royalties
            
            
            28
            
            
            
            38Deferred
      revenue
            
            
            96
            
            
            
            60Other
            
            
            119
            
            
            
            84$
            2,038
            
            
            $
            1,916




Other
income (expense) consists of the following:




Three
      Months Ended
              March
      31,2008
            
            
            2007Foreign
      currency remeasurement
            
            $
            —
            
            
            $
            (5
            )Increase
      in fair value of loan premium liabilities
            
            
            —
            
            
            
            (110
            )Decrease
      in fair value of warrant liabilities
            
            
            —
            
            
            
            (3
            )Prepayment
      penalty on secured promissory note
            
            
            —
            
            
            
            (113
            )$
            —
            
            
            $
            (231
            )


-16-







5.
            LONG-TERM
      DEBT




The
components of long-term debt were as follows:





March
      31, 2008
            
            
            December 31,
              2007Senior
      Secured Credit Facility, net of discount of $130 and $164,
      respectively
            
            $
            6,003
            
            
            $
            6,7696,003
            
            
            
            6,769Less:
      current portion
            
            
            (3,200
            )
            
            
            (3,200
            )Long-term
      portion
            
            $
            2,803
            
            
            $
            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 (recently acquired by
GE Capital) consisting of an $10,000 term loan (the “Term Loan”) with an
interest rate of one month LIBOR plus 6.50%. 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 the Company’s secured promissory note issued in May
2005.  At March 31, 2008, $6,133 of the Term Loan was outstanding. The
Term Loan requires interest only payments for the first six months and interest
and principal payments for each month thereafter through February
2010.




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




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.





As of
March 31, 2008, principal payments for long-term debt are as
follows:





Year
      ending December 31,2008 (remainder)
            
            $
            2,4002009
            
            
            3,2002010
            
            
            533$
            6,133





-17-







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 March 31, 2008:





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




7.
            STOCK
      OPTIONS




2006 Plan




In
connection with the merger, the Company adopted the 2006 Equity Incentive Plan
(the “2006 Plan”).  The 2006 Plan provides for the grant of options to
purchase 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).  The 2006 Plan includes ISOs and 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 immediate to three years for
non-employees. Options expire within a period of not more than 10 years from the
date of grant. ISOs granted to an employee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
classes of stock of the Company, expire within a period of not more than five
years from the date of grant. Options expire between thirty days and six months
after termination of employment depending on the
circumstances.





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




Shares
      Under OptionEmployee
            
            
            Non-employee
            
            
            Total
            
            
            Weighted
              Average
              Exercise Price
              Per
      Share
            
            
            Weighted
              Average
              Contractual
              Life
      (Years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at December 31, 2007
            
            
            2,727,850
            
            
            
            15,000
            
            
            
            2,742,850
            
            
            $
            5.08
            
            
            
            9.51
            
            
            $ 3,786Granted
            
            
            122,800
            
            
            
            —
            
            
            
            122,800
            
            
            
            3.62Exercised
      or forfeited
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
      at March 31, 2008
            
            
            2,850,650
            
            
            
            15,000
            
            
            
            2,865,650
            
            
            
            5.02
            
            
            
            9.28
            
            
            $
            9,104Exercisable
      at March 31, 2008
            
            
            83,289
            
            
            
            —
            
            
            
            83,289
            
            
            
            5.10
            
            
            
            9.26
            
            
            $
            271Vested
      and expected to vest as of March 31, 2008
            
            
            2,594,092
            
            
            
            15,000
            
            
            
            2,609,092
            
            
            
            5.02
            
            
            
            9.28
            
            
            $
            8,289





-18-







The
following table summarizes stock options outstanding at March 31,
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$
            3.01
            
            
            
            3,300
            
            9.93
            
            $
            3.01
            
            
            
            —
            
            
            $
            —3.60
            
            
            
            102,600
            
            9.85
            
            
            3.60
            
            
            
            —
            
            
            
            —3.73
            
            
            
            16,900
            
            9.76
            
            
            3.73
            
            
            
            150
            
            
            
            3.734.03
            
            
            
            62,300
            
            9.34
            
            
            4.03
            
            
            
            —
            
            
            
            —5.00
            
            
            
            3,300
            
            9.34
            
            
            5.00
            
            
            
            —
            
            
            
            —5.10
            
            
            
            2,664,450
            
            9.26
            
            
            5.10
            
            
            
            83,139
            
            
            
            5.106.08
            
            
            
            12,800
            
            9.32
            
            
            6.08
            
            
            
            —
            
            
            
            —2,865,650
            
            
            
            
            
            
            
            
            83,289





As of
March 31, 2008 there was $4,385 of unrecognized compensation expense related to
nonvested share-based compensation arrangements granted under share-based
compensation plans using the fair value method of SFAS 123(R). As of March 31,
2008, the cost was expected to be recognized over a weighted-average period of
3.0 years, using the graded vested attribution
method.




IPO
Option




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




8.
            COMMON
      STOCK WARRANTS




For
accounting purposes, the Company is 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.




-19-




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





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




IPO
Warrants




In
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 March 31, 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.





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 exercised, 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. During the three months ended March 31, 2008, the Company incurred
$432 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.


-20-







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




The
Company recently completed an analysis on whether an ownership change had
occurred with the consummation of the merger in June 2007 or whether there have
been multiple ownership changes since its formation.  There may be
additional such ownership changes in the future. If it has experienced an
ownership change 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
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.





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.





-21-




At March
31, 2008, potentially dilutive securities that have been excluded from net loss
per share computations due to the net loss position are:




StocStock
      options
            
            
            3,290,650Common
      stock warrants
            
            
            3,133,7146,424,364




11.
            COMMITMENTS
      AND CONTINGENCIES




Operating
Leases




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




The
Company leases its facility under a noncancelable operating lease for the Alsius
Service Center in Wateringen, The Netherlands which expires in
2010.  The Company also leases an automobile under an operating lease
which expires in 2011.




As of
March 31, 2008, future minimum lease payments on the operating leases are as
follows:




Year
      Ending December 31,2008
      (remainder)
            
            $
            2702009
            
            
            452010
            
            
            282011
            
            
            13$
            356




Rent
expense for the three months ended March 31, 2008 and 2007 was $111 and $100,
respectively.




Capital
Leases




As of
March 31, 2008, capital lease payments are due in monthly installments through
October 2011 for a total of $101.  Future minimum payments are $19,
$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.





-22-







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 March 31,2008
            
            
            2007United
      States
            
            $
            1,215
            
            
            $
            866Austria*
            
            
            —
            
            
            
            145Germany*
            
            
            695
            
            
            
            410France
            
            
            112
            
            
            
            163Rest
      of Europe
            
            
            431
            
            
            
            360Other
            
            
            50
            
            
            
            81$
            2,503
            
            
            $
            2,025




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





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




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




Three
      Months Ended
              March
      31,2008
            
            
            2007Disposables
            
            $
            1,424
            
            
            $
            1,009CoolGard
      and Thermogard systems
            
            
            900
            
            
            
            926Services
            
            
            179
            
            
            
            90$
            2,503
            
            
            $
            2,025








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




As
      of March 31, 2008
            
            
            As
      of December 31, 2007United
      States
            
            $
            1,903
            
            
            $
            1,564International
            
            
            249
            
            
            
            143$
            2,152
            
            
            $
            1,707







13.
            RELATED
      PARTIES




The
Company paid approximately $126 and $191 in legal fees for the three months
ended March 31, 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 March 31, 2008 and at December 31, 2007 is approximately $251 and
$235, respectively, due to this law firm.




-23-




The
Company paid approximately $1 and $10 in professional fees for the three months
ended March 31, 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 March 31, 2008 and December 31,
2007 is approximately $0 and $1, respectively, due to this executive recruiting
firm.




In
connection with the services rendered in the three months ended March 31, 2008
and 2007 for the procurement of the Company’s directors’ and officers’ insurance
policies, the Company paid Woodruff-Sawyer & Co. a commission of $7 and
$0, 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 March 31, 2008 and December 31, 2007 due to Woodruff-Sawyer &
Co.





The
Company paid approximately $9 in legal fees for the three months ended March 31,
2008 to a law firm whose partner is a holder of stock options of the Company.
Included in accounts payable and accrued expenses at March 31, 2008 and at
December 31, 2007 is approximately $20 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 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.  Two
members of our 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 $101,562.50.  The other member tendered
553,750 warrants in exchange for 100,682 shares of common
stock.





-24-





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




We began
selling our products in the United States in April 2004 and, as of March 31,
2008, had established a U.S. installed base of over 241 systems in 123
hospitals, of which 205 had been sold and 36 were under evaluation. We began
building a current network of independent distributors in Europe in February
2004, and as of March 31, 2008, had established a European installed base of
over 342 systems in over 178 hospitals, of which 315 had been sold and 27 were
under evaluation. In other parts of the world as of March 31, 2008, we had an
installed base of 34 systems, of which 31 had been sold and 3 were under
evaluation.  We generated revenues of $2.5 million in the three months
ended March 31, 2008, which represents revenue growth of 25% from the three
months ended March 31, 2007. We had a net loss of $5.5 million in the three
months ended March 31, 2008. International sales accounted for 51% of our
revenue in the three months ended March 31, 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 March 31, 2008, we
employed 13 direct sales people, a director of sales, a vice president of
worldwide sales and marketing, three regional sales managers, a corporate
accounts manager, a government-military accounts manager, five clinical
application specialists and a director of clinical education in the United
States and over 31 independent international distributors covering over 39
countries. We intend to continue to expand the size of our direct
U.S. sales force and clinical application specialists, as well as increase
our network of distributors in Europe and other countries.




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.





-25-


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




Three
Months Ended March 31, 2008 and 2007




Revenue. Revenue was $2.5
million for the quarter ended March 31, 2008, an increase of $0.5 million
or 25%, from $2.0 million for the quarter ended March 31, 2007. The
increase was attributable to an approximate 8% increase in average selling
prices for systems and an increase in the number of disposable units sold.
During the quarter ended March 31, 2008, we sold 2,449 catheters and 2,130
start-up kits, an increase of 41% and 22%, respectively, from the 1,735
catheters and 1,740 start-up kits sold during the quarter ended March 31,
2007.  Sales of our CoolGard and Thermogard systems decreased from 49
during the quarter ended March 31, 2007 to 44 during the quarter ended March 31,
2008.  Sales of our CoolGard and Thermogard systems accounted for 36% and
46% of revenue and sales of catheters and start-up kits accounted for 57% and
50% of our revenue for the quarters ended March 31, 2008 and 2007,
respectively.  Sales in the United States accounted for 49% of our
revenue for the quarter ended March 31, 2008, compared to 43% for the quarter
ended March 31, 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 $1.9 million for the quarter ended March 31, 2008, a decrease of
$0.03 million or 2%, from $1.9 million for the quarter ended March 31, 2007. As
a percentage of revenue, cost of revenue decreased from 96% of
sales for the quarter ended March 31, 2007, to 76% of sales for
the quarter ended March 31, 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
quarter ended March 31, 2008 by $0.08 million as compared to the quarter ended
March 31, 2007  due to the grant of stock options 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 $1.2 million for the quarter ended March
31, 2008, an increase of $0.3 million, or 38%, from $0.9 million for
the quarter ended March 31, 2007. This increase is primarily attributable to
increased stock based compensation of $0.2 million associated with our 2006
Equity Incentive Plan and other compensation related costs of $0.1 million
associated with increased headcount. 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 $3.2 million for the quarter
ended March 31, 2008, an increase of $0.8 million, or 35%, from $2.4 million for
the quarter ended March 31, 2007. This increase was primarily attributable to
the growth of our direct sales force


-26-


and
marketing activities to support our worldwide market expansion, resulting in
increased compensation and commission costs of $0.2 million, increased travel,
trade show and meeting expenses of $0.2 million and increased advertising
and promotion expenses of $0.1 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.




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 $1.6 million for the quarter ended March 31,
2008, an increase of $0.5 million or 45%, from $1.1 million for the quarter
ended March 31, 2007. The increase was primarily attributable to increased stock
based compensation of $0.4 million associated with our 2006 Equity Incentive
Plan and increased compensation related expenses of $0.1 million associated with
increased headcount. 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 our efforts to
be in compliance with Section 404 of the Sarbanes Oxley compliance
efforts.




Interest income. Interest
income was $0.1 million for the quarter ended March 31, 2008, an increase
of $0.1 million, or 1,025%, from $0.01 million for the quarter ended
March 31, 2007. This increase was due to the investing the cash and cash
equivalents we obtained in the merger.




Interest expense. Interest
expense was $0.2 million for the quarter ended March 31, 2008, a decrease of
$1.7 million, or 89%, from $1.9 million for the quarter ended March 31,
2007. Interest expense in the three months ended March 31, 2008 resulted from
our borrowings from Merrill Lynch Capital.  In the three months ended
March 31, 2007, we incurred $0.2 million of interest on these borrowings, and
$1.6 million related to the bridge notes, all of which were repaid in the merger
with Ithaka in June 2007.   We expect interest expense to decline
in future periods due to the lower level of borrowings as compared to prior
periods.




Other income (expense). Other
income (expense) was flat for the quarter ended March 31, 2008 as compared to
$0.2 million of other expense for the quarter ended March 31, 2007. This
increase 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 merger transaction in June 2007.





Liquidity
and Capital Resources





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





In May
2007, we and Merrill Lynch Capital amended our promissory note to provide for an
additional $2.0 million of borrowing for an aggregate total of $10.0 million.
The second tranche of $2.0 million was funded on May 11, 2007 with interest
at the same rate as the original note and it was repaid upon the close of the
Ithaka merger in June 2007. In connection with the second tranche, we did not
issue any additional warrants but we did incur a fee of $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 our merger
with Ithaka in June 2007, and in that transaction we acquired approximately
$40.0 million of net cash and cash equivalents (see Note 3 of the accompanying
Notes to Condensed Consolidated Financial Statements).




We have
incurred significant net losses since inception and have relied on our ability
to obtain financing.  As of March 31, 2008, we had $18.5 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


-27-


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 that such financing can be successfully completed on terms acceptable
to us.





Three
Months Ended March 31, 2008 and 2007




As of
March 31, 2008, we had cash and cash equivalents of $18.5 million, working
capital of $20.5 million and an accumulated deficit of $103.7
million.




Cash flows used in operating
activities. Net cash used in operations was $5.5 million for the three
months ended March 31, 2008 and $4.4 million for the three months ended March
31, 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
the change in fair value of warrant liabilities and embedded derivatives totaled
$1.2 million and $1.9 million for the three months ended March 31, 2008 and
2007, respectively, representing a $0.7 million decrease. This increase was
primarily comprised of a $0.9 million increase in stock-based compensation
offset by a decrease of $1.5 million of amortization of discounts on promissory
notes since we converted or repaid our debt instruments in June
2007.





For the
three months ended March 31, 2008, operating assets and liabilities aggregated
to a net decrease of cash of $1.2 million, representing an increased level of
all operating assets and liabilities, primarily related to decreased accounts
payable of $1.3 million as cash levels increased following our merger in June
2007.




Cash flows used in investing
activities. Net cash used by investing activities was $0.5 million for
the three months ended March 31, 2008 and $0.1 million for the three months
ended March 31, 2007 and consisted of capital expenditures. The increase 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. Cash flows from financing activities were $0.1 million for
the three months ended March 31, 2008 and $6.3 million for the three months
ended March 31, 2007. Cash flows from financing activities in 2008 reflects $0.9
million in proceeds from our warrant exchange program offset by $0.8 million in
repayment of the borrowings from Merrill Lynch.





Cash
flows from financing activities in the three months ended March 31, 2007 were
$6.3 million and represents $9.5 million in proceeds from the 2006 bridge notes,
offset by $3.1 million in principal payments.





Uses
of Capital Resources




We expect
to use our capital to fund sales and marketing, manufacturing, research and
development, and for general corporate purposes. We expect to increase the
number of employees including the size of our U.S. sales force and clinical
application specialists and increase our sales and marketing efforts
internationally. From time-to-time we may acquire businesses, technology or
products that complement our business, which may require substantial outlays of
capital resources. No acquisitions are currently pending. As a result of the
June 2007 merger with Ithaka, we 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.




-28-





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 March 31, 2008, no amounts have been paid by
us.





The
following table summarizes information about our material contractual
obligations as of March 31, 2008:




Contractual
      Obligations
            
            Total
            
            
            Less Than
              1
      Year
            
            
            1-3
              Years
            
            
            3-5
              Years
            
            
            More Than
              5
      Years(in
      thousands)Operating
      leases
            
            $
            356
            
            
            $
            282
            
            
            $
            74
            
            
            $
            —
            
            
            $
            —Long-term
      debt
            
            $
            6,133
            
            
            $
            3,200
            
            
            $
            2,933
            
            
            $
            —
            
            
            $
            —Capital
      leases
            
            $
            101
            
            
            $
            26
            
            
            $
            75
            
            
            $
            —
            
            
            $
            —







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





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 March 31, 2008 is
$6.1 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 March 31, 2008, we estimate that our interest payments for the remainder of
2008 will be $433 and over the subsequent three years will be $136.





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





Uncertain Tax Liabilities. At
March 31, 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 March 31, 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 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 lease annually).  On January 1, 2008, the
Company adopted the provisions of SFAS 157, except at 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.





-29-




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 March 31, 2008:




Fair
      Value Measurements UsingLevel
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalCash
      and cash equivalents
            
            $
            18,527
            
            
            
            —
            
            
            
            —
            
            
            $
            18,527


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.





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.




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.




-30-




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 March 31, 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.




-31-


PART
II – OTHER INFORMATION




ITEM 1.
            LEGAL
      PROCEEDINGS




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




ITEM 1A.
            RISK
      FACTORS





Other
than as set forth below, there are no material changes from the risk factors
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 Risk Factors
presented in our filings under the Securities Exchange Act of
1934.  The risk factors contained in this report reflect only changes
from or additions to the risk factors stated in the 10-K for the year ended
December 31, 2007.  The updated information set forth below must be
read in conjunction with those in the Form 10-K for the year ended December 31,
2007.  You must not construe the following statements as an exhaustive
list of risks.





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 continue our growth, 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 merger with Ithaka. We have not reported an
operating profit for any year since our inception.  From our inception
through March 31, 2008, we had an accumulated deficit of $103.7 million, and at
March 31, 2008 had cash and cash equivalents of $18.5 million to
finance operations. We expect to incur net losses for the foreseeable future.
These losses may be substantial and we may never achieve or maintain
profitability. These factors raise substantial doubt about our ability to
continue as a going concern.
  Our cash
and cash equivalents on hand, and our projected cash flows, are not
sufficient to take us to cash flow positive based on our business
plan.  We will need to finance our growth through additional debt or
equity financing no later than the second quarter of 2009. 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 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, 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.


ITEM 2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.







ITEM 3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM 4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




None.




ITEM 5.
            OTHER
      INFORMATION





None.





-32-










ITEM 6.
            EXHIBITS




Exhibit No.
            
            Description31.1
            
            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).








-33-









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:  May
      15, 2008
            /s/
      William J. WorthenWilliam
      J. WorthenPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      May 15, 2008
            /s/
      Brett L. ScottBrett
      L. ScottChief
      Financial Officer(Principal
      Financial and Accounting Officer)




-34-








INDEX
TO EXHIBITS






Exhibit No.
            
            Description31.1
            
            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).