UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
 or
 o
    
    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: 1-33428
 Topspin Medical, Inc.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    98-0406340(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)Global Park2 Yofdat Street, Third FloorNorth Industrial AreaLod, Israel
    
    71291(Address of registrants principal executive offices)
    
    (Zip Code)
 (972)-8-920-0033
 (Telephone number, including area code)
 N/A
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
  o o o þ
  o þ




---



##### 



TOPSPIN MEDICAL, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED MARCH 31, 2008
 TABLE OF CONTENTS
 PagePART 1. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    

    23Item 4T. Controls and Procedures
    

    27PART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    

    28Item 4. Submission of Matters to a Vote of Security Holders
    

    28Item 6. Exhibits
    

    28SIGNATURES
    
    29




---



##### 



FORWARD-LOOKING STATEMENTS




---



##### 



PART 1. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TOPSPIN MEDICAL, INC.
(A Development Stage Company)
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF MARCH 31, 2008
 (Unaudited)
 INDEX
 PageConsolidated
Balance Sheet
    
    2-3Consolidated
Statements of Operations
    
    4Statements
of Changes in Shareholders Equity (Deficiency)
    
    5-8Consolidated
Statements of Cash Flows
    
    9-10Notes
to Consolidated Financial Statements
    
    11 - 22




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED BALANCE
SHEET (UNAUDITED) 
NIS in thousands
 December 31,

    March 31,2007

    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    

40,978


    
    32,959Other receivables and prepaid expenses
    

2,275


    
    2,423Inventory
    

512


    
    43,765


    
    35,382LONG-TERM ASSETS:Restricted deposit
    

555


    
    559Severance pay fund
    

36


    
    34Prepaid lease payments
    

20


    
    79611


    
    672PROPERTY AND EQUIPMENT, NET
    

2,692


    
    2,405DEFERRED ISSUANCE EXPENSES
    

4,206


    
    51,274


    
    38,459
  - 2 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED BALANCE
SHEET (UNAUDITED) 
NIS in thousands
 December 31,


    March 31,2007

    2008LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)CURRENT LIABILITIES:Trade payables
    

2,091


    
    1,370Other accounts payables and accrued expenses
    

5,341


    
    5,5937,432


    
    6,963LONG TERM LIABILITIESAccrued severance pay
    

633


    
    593Liabilities
in respect of options granted to employees and consultants
    

2,368


    
    1,447Embedded conversion feature in convertible debentures
    

1,281


    
    Liability in respect of warrants (series 2)
    

975


    
    525Embedded derivative related to issuance expenses
    

175


    
    172Convertible debentures
    

39,453


    
    23,98944,252


    
    26,133SHAREHOLDERS
EQUITY (DEFICIENCY):Common Stock of $0.001 par value:Authorized 500,000,000 shares;
Issued and outstanding 186,870,882 shares
    

837


    
    839Additional paid in capital
    

163,790


    
    163,955Accumulated deficit during the development stage
    

(165,670)


    
    (160,024
    )(1,043
)

    
    4,77051,274


    
    38,459
  - 3 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NIS in thousands
 Period frominception(September 20,Three months ended
    
    
    1999) throughMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008Research and development expenses*
    
    
    5,094
    
    
    
    7,174
    
    
    
    124,221Less participation by the Office of the Chief Scientist
    
    
    
    
    
    
    (300
    )
    
    
    (17,471
    )Research and development expenses, net
    
    
    5,094
    
    
    
    6,874
    
    
    
    106,750Selling and marketing expenses
    
    
    374
    
    
    
    322
    
    
    
    3,466General and administrative expenses
    
    
    1,493
    
    
    
    2,749
    
    
    
    49,961Operating loss
    
    
    (6,961
    )
    
    
    (9,945
    )
    
    
    (160,177
    )Financing income, net
    
    
    7,228
    
    
    
    905
    
    
    
    8,332Income (loss) before cumulative effect of a change in
accounting principle
    
    
    267
    
    
    
    (9,040
    )
    
    
    (151,845
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    238Net income (loss)
    
    
    267
    
    
    
    (9,040
    )
    
    
    (152,083
    )Basic and diluted net income (loss) per Ordinary share
    
    
    0.001
    
    
    
    (0.06
    )Weighted average number of Common Stock outstanding
used in basic and diluted net loss per share
calculation
    
    
    189,088,092
    
    
    
    160,064,863
 
 *
    
    Including deduction of experimental sales in the amount of approximately 90,000 NIS.  - 4 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)
NIS in thousands
 Non-
    
    Deficitrecourse
    
    accumulatedNumber of outstanding shares
    
    Share capital
    
    Additional
    
    Receivables
    
    receivables
    
    during the
    
    TotalPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    for shares
    
    development
    
    shareholdersOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    capital
    
    issued
    
    issued
    
    stage
    
    equityBalance as of September 20, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common shares
    
    
    625,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Issuance of Preferred A shares net of issuance expenses of NIS 20
    
    
    
    
    
    
    375,001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,136Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (380
    )
    
    
    (380
    )Balance as of December 31, 1999
    
    
    625,000
    
    
    
    375,001
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,134
    
    
    
    
    
    
    
    
    
    
    
    (380
    )
    
    
    2,759Issuance of Preferred B shares
net of issuance expenses of NIS 61
    
    
    
    
    
    
    
    
    
    
    208,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    10,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,184Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,880
    )
    
    
    (3,880
    )Balance as of December 31, 2000
    
    
    625,000
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    13,317
    
    
    
    
    
    
    
    
    
    
    
    (4,260
    )
    
    
    9,063Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,254
    )
    
    
    (7,254
    )Balance as of December 31, 2001
    
    
    625,000
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    13,317
    
    
    
    
    
    
    
    
    
    
    
    (11,514
    )
    
    
    1,809Issuance of Preferred C shares
net of issuance expenses of NIS 2,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,386,858
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410
    
    
    
    47,578
    
    
    
    (630
    )
    
    
    
    
    
    
    
    
    
    
    47,358Beneficial conversion feature
related to Preferred A and
Preferred B shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    
    
    
    
    (13,320
    )
    
    Issuance of Common Stock to
the Chief Executive Officer
    
    
    6,957,841
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    (469
    )
    
    
    
    
    
    Deferred stock based
compensation related to
issuance of shares to the Chief
Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,822
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,822Stock based compensation
related to options granted to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,286Accrued interest and exchange
rate differences on a loan to
the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,414
    )
    
    
    (15,414
    )Balance as of December 31, 2002
    
    
    7,582,841
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    59
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    78,740
    
    
    
    (630
    )
    
    
    (473
    )
    
    
    (40,248
    )
    
    
    37,861
  - 5 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)
NIS in thousands
 Non-
    
    Deficitrecourse
    
    accumulatedNumber of outstanding shares
    
    Share capital
    
    Additional
    
    Receivables
    
    receivables
    
    during the
    
    TotalPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    for shares
    
    development
    
    shareholdersOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    capital
    
    issued
    
    issued
    
    stage
    
    equityBalance as of December 31, 2002
    
    
    7,582,841
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    59
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    78,740
    
    
    
    (630
    )
    
    
    (473
    )
    
    
    (40,248
    )
    
    
    37,861Receivables in respect of
Preferred C shares issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,828
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    26,458Amortization of deferred stock
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    736Deferred stock based
compensation related to
issuance of shares to the
Chief Executive Officer
    
    
    3,077,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,778Stock based compensation
related to options granted to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Accrued interest and exchange
rate differences on a loan to
the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,693
    )
    
    
    (27,693
    )Balance as of December 31, 2003
    
    
    10,660,347
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    59
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    107,087
    
    
    
    
    
    
    
    (459
    )
    
    
    (67,941
    )
    
    
    39,159Exercise of options
    
    
    418,746
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Amortization of deferred stock
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677Deferred stock based
compensation related to
issuance of shares to the
Chief Executive Officer
    
    
    630,793
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615Stock based compensation
related to options granted to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    261Accrued interest and exchange
rate differences on a loan to
the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,433
    )
    
    
    (20,433
    )Balance as of December 31, 2004
    
    
    11,709,886
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    61
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    108,718
    
    
    
    
    
    
    
    (475
    )
    
    
    (88,374
    )
    
    
    20,343
  - 6 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)
NIS in thousands
 Non-
    
    Deficitrecourse
    
    accumulated
    
    TotalNumber of outstanding shares
    
    Share capital
    
    Additional
    
    Receivables
    
    during the
    
    shareholdersPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    development
    
    equityOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    capital
    
    issued
    
    stage
    
    (deficiency)Balance as of December 31, 2004
    
    
    11,709,886
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    61
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    108,718
    
    
    
    (475
    )
    
    
    (88,374
    )
    
    
    20,343Conversion of Preferred A, B
and C into Common Stock
    
    
    104,378,107
    
    
    
    (375,001
    )
    
    
    (208,329
    )
    
    
    (87,386,858
    )
    
    
    477
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (410
    )
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    3,553,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *)
    
    
    
    
    
    
    
    
    
    
    
    16Issuance of ordinary shares
net of issuance expenses of
NIS 3,292
    
    
    38,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,920
    
    
    
    
    
    
    
    
    
    
    
    29,091Issuance of options net of
issuance expenses of NIS 378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,339
    
    
    
    
    
    
    
    
    
    
    
    3,339Deferred stock based
compensation related to
issuance of shares to the
Chief Executive Officer
    
    
    630,793
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (627
    )
    
    
    
    
    
    
    
    
    
    
    (627
    )Grant to the Chief Executive
Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    74Amortization of deferred stock
based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    
    
    
    
    
    486Stock based compensation
related to options granted to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Accrued interest and exchange
rate differences on a loan to
the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    (58
    )
    
    
    
    
    
    
    Balance as of December 31, 2005
    
    
    158,272,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,896
    
    
    
    (459
    )
    
    
    (102,699
    )
    
    
    38,463Change of deferred stock
compensation into liability as
a result from accounting
change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,768
    )
    
    
    
    
    
    
    
    
    
    
    (6,768
    )Exercise of options
    
    
    634,374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    41Classification of liability
into equity in respect of
exercise options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    451Grant to the Chief Executive
Officer
    
    
    630,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    208Accrued interest and exchange
rate differences on a loan to
the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    14
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,803
    )
    
    
    (38,803
    )Balance as of December 31, 2006
    
    
    159,537,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,603
    
    
    
    (237
    )
    
    
    (141,502
    )
    
    
    (6,408
    )
 
 *)
    
    Less than NIS 1 thousand.  - 7 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)
NIS in thousands
 Non-
    
    Deficitrecourse
    
    accumulated
    
    TotalNumber of outstanding shares
    
    Share capital
    
    Additional
    
    receivables
    
    during the
    
    shareholdersPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    development
    
    equityOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    capital
    
    issued
    
    stage
    
    (deficiency)Balance as of December 31, 2006
    
    
    159,537,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,603
    
    
    
    (237
    )
    
    
    (141,502
    )
    
    
    (6,408
    )Exercise of options
    
    
    2,270,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    75Classification of liability
into equity in respect of
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,665
    
    
    
    
    
    
    
    
    
    
    
    1,665Repayment of non-recourse loan
and classification of
liability into equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    237
    
    
    
    
    
    
    
    9,457Issuance of Common Stock
and warrants (series 3), net
of issuance expenses of NIS 1,013
    
    
    24,398,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,236
    
    
    
    
    
    
    
    
    
    
    
    18,336Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,168
    )
    
    
    (24,168
    )Balance as of December 31, 2007
    
    
    186,206,798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,790
    
    
    
    
    
    
    
    (165,670
    )
    
    
    (1,043
    )Cumulative effect of a change
in accounting principle (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,379
    
    
    
    5,379Exercise of options
    
    
    641,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    22Exercise of warrants (series 1)
    
    
    22,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *) -
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Classification of liability
into equity in respect of
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267
    
    
    
    267Balance as of March 31, 2008
    
    
    186,870,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,955
    
    
    
    
    
    
    
    (160,024
    )
    
    
    4,770
 
 *) Less than NIS 1 thousand.(1)
    
    See Note 2b.  - 8 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands
 Period frominception(September 20,Three months ended
    
    
    1999) throughMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    
    267
    
    
    
    (9,040
    )
    
    
    (152,083
    )Adjustments to reconcile net loss to net cash used
in operating activities (a)
    
    
    (8,117
    )
    
    
    1,775
    
    
    
    13,790Net cash used in operating activities:
    
    
    (7,850
    )
    
    
    (7,265
    )
    
    
    (138,293
    )Cash flows from investing activities:Change in restricted deposit, net
    
    
    
    
    
    
    (122
    )
    
    
    (509
    )Restricted cash in respect of issuance of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    1,298Purchase of fixed assets
    
    
    (211
    )
    
    
    (198
    )
    
    
    (9,125
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    40Loan to the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    (231
    )Net cash used in investing activities:
    
    
    (211
    )
    
    
    (320
    )
    
    
    (8,527
    )Cash flows from financing activities:Exercise of stock options and warrants (series 1)
    
    
    42
    
    
    
    34
    
    
    
    238Proceeds from issuance of shares and warrants series
3 , net of issuance expenses
    
    
    
    
    
    
    
    
    
    
    137,905Proceeds from issuance of convertible debentures and
warrants series 2, net of issuance expenses
    
    
    
    
    
    
    (220
    )
    
    
    41,636Net cash provided by (used in) financing activities:
    
    
    42
    
    
    
    (186
    )
    
    
    179,779Increase (decrease) in cash and cash equivalents
    
    
    (8,019
    )
    
    
    (7,771
    )
    
    
    32,959Cash and cash equivalents at the beginning of the period
    
    
    40,978
    
    
    
    10,379
    
    
    
    Cash and cash equivalents at the end of the period
    
    
    32,959
    
    
    
    2,608
    
    
    
    32,959
 - 9 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands
 Period frominception(September 20,Three months ended
    
    
    1999) throughMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008(a) Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    399
    
    
    
    189
    
    
    
    6,651Capital loss from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    34Interest and exchange rate differences on loan to the Chief
Executive Officer
    
    
    
    
    
    
    
    
    
    
    (35
    )Non-cash bonus to the Chief Executive Officer
    
    
    
    
    
    
    241
    
    
    
    789Interest on restricted deposit
    
    
    (4
    )
    
    
    (541
    )
    
    
    (1,348
    )Change in fair value of liability in respect of warrants
    
    
    (450
    )
    
    
    (2,256
    )
    
    
    (7,219
    )Change in fair value of conversion feature
    
    
    
    
    
    
    124
    
    
    
    (2,746
    )Change in fair value of convertible debentures
    
    
    (7,160
    )
    
    
    
    
    
    
    (7,160
    )Change in fair value of embedded derivative
    
    
    (3
    )
    
    
    (77
    )
    
    
    (674
    )Amortization of deferred issuance expenses and debentures
discount
    
    
    
    
    
    
    1,129
    
    
    
    6,228Amortization of deferred stock based compensation related
to employees
    
    
    
    
    
    
    
    
    
    
    6,487Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    238Change in fair value and amortization of stock options
classified as a liability
    
    
    (796
    )
    
    
    1,139
    
    
    
    5,898Amortization of deferred stock based compensation related
to consultants
    
    
    
    
    
    
    
    
    
    
    1,632Accrued severance pay, net
    
    
    (38
    )
    
    
    14
    
    
    
    559Increase (decrease) in accounts receivable (including
long-term receivables)
    
    
    305
    
    
    
    134
    
    
    
    (2,502
    )Increase (decrease) in trade payables
    
    
    (622
    )
    
    
    (15
    )
    
    
    1,365Increase in other accounts payable
    
    
    252
    
    
    
    1,694
    
    
    
    5,593Total adjustments
    
    
    (8,117
    )
    
    
    1,775
    
    
    
    13,790(b) Supplemental disclosure of cash flow activities:Cash paid during the period for:Taxes paid due to non-deductible expenses
    
    
    14
    
    
    
    54
    
    
    
    730Interest paid
    
    
    
    
    
    
    
    
    
    
    3,951(c) Supplemental disclosure of non cash flows activities:Classification of liabilities into equity
    
    
    125
    
    
    
    10,029
    
    
    
    11,461
 - 10 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands
 NOTE 1  GENERAL
 a.
    
    TopSpin Medical, Inc (the Company) and its subsidiary, TopSpin
Medical (Israel) Ltd. (the Subsidiary or TopSpin) are engaged in research and
development of medical MRI technology.The Company was incorporated and commenced operation in September 1999 as a
private company registered in Delaware. On September 1, 2005, the Company
issued securities to the public in Israel and became publicly traded
on the Tel
Aviv Stock Exchange (TASE). In 2007, the Company listed some of its securities
with the U.S. Securities and Exchange Commission (SEC). The Companys stocks are
traded only in Israel in NIS.b.
    
    Since its inception, the Company has devoted substantially most of its
efforts to business planning, research and development, marketing, recruiting
management and technical staff, acquiring assets and raising capital. Accordingly,
the Company is considered to be in the development stage, as defined in Statement
of Financial Accounting Standards No. 7, Accounting and Reporting by Development
Stage Enterprises (SFAS No. 7).The Company plans to continue to finance its operations with a combination of
stock issuance and private placements. In addition, the Company is exploring
different alternatives for the repayment of the Series A
Debentures of the
company or its conversion into the Companys shares of Common Stock, including
through making a tender offer to the holders of the Series A Debentures against
receipt of cash consideration and issuance of shares of
Common Stock of the
Company.There are no assurances, however, that the Company will be successful in obtaining
an adequate level of financing needed for the long-term development and
commercialization of its planned products.c.
    
    The Company develops an endorectal probe for the diagnosis of
prostate cancer based on its MRI technology (the Urology Product). The Companys
board of directors decided in its meeting on April 27, 2008, that the
Company will direct more focus and resources on the development of its Urology
Product while decreasing its expenses related to the IVMRI catheter activity due
to the market feedback received following the initial sales in cardiology and an
analysis of the cardiology and urology markets. Also, the Companys board of
directors decided to decrease the total research and development
expenses starting in
the second half of 2008 by 40% as compared to expenses incurred in the second half of
2007.
 d.
    
    Subsequent to the balance sheet date and following meetings held between
the Company and the Israeli trustee of the Series A Debentures (the Trustee),
it was agreed to convene a meeting of the holders of the Series A Debentures on
June 1, 2008 (the Meeting). The agenda of the Meeting is:
 a.
    
    Update by the Company of its business status and its future
plans followed by a discussion on these issues.b.
    
    Presentation of the Companys proposal for an arrangement
with the holders of the Series A Debentures followed by a discussion.c.
    
    Discussion of the holders of the Series A Debentures and
a resolution regarding their view on whether an Event of Default, as defined
in section 7.07 of the indenture of the Series A Debentures (the
Indenture) has occurred.
 The Company believes, based on the advice of its legal advisors, that no Event of
Default, as defined in section 7.07 of the Indenture, has occurred, and therefore
it is remote that the Company will be required to immediately repay the Series A Debentures.
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
 The accompanying unaudited interim consolidated financial statements have been prepared
as of March 31, 2008, in accordance with United States generally accepted accounting
principles relating to the preparation of financial statements for interim periods.
Accordingly, they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2008 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2008.The significant accounting policies followed in the preparation of these financial
statements are identical to those applied in the preparation of the latest annual
financial statements except as detailed below:
 - 11 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 a.
    
    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS 159). This Statement
provides companies with an option to report selected financial assets and
liabilities at fair value. Generally accepted accounting principles have required
different measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. The Statements objective is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently. This
Statement is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007.The Company has decided to adopt the provisions of SFAS No. 159 as of January 1,
2008 and consequently measures the convertible debentures in their entirety at fair
value with changes in fair value recorded in earnings. As a result, the Company
recorded an increase in retained earnings in the amount of NIS 5,379. This amount
represents the difference between the aggregate amount of the fair value of the
embedded conversion feature and the amortized book value of the convertible
debentures as of December 31, 2007, net of issuance expenses, which amounts to NIS
37,018 and the fair market value of the convertible debentures, based on quoted
market price as of the same date in the amount of NIS 31,639. The convertible
debentures are linked to the CPI and will be redeemable in one installment (unless
conversion occurs) on November 30, 2009. As of March 31, 2008, the fair value of the
convertible debentures was NIS 51,662.b.
    
    Impact of recently issued accounting standards:
 1.
    
    SFAS No. 160:SFAS 160  In December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also clarifies that
a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest.SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish
between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary.SFAS 160 is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Early adoption is not
permitted.The Company is currently evaluating the potential impact that the adoption of
SFAS 160 could have on its consolidated financial statements.
 - 12 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 b.
    
    Impact of recently issued accounting standards (cont.):
 2.
    
    FAS No. 157In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (SFAS 157). This statement provides a
single definition of fair value, a framework for measuring fair value, and
expanded disclosures concerning fair value. Previously, different definitions
of fair value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. SFAS 157 applies under those
previously issued pronouncements that prescribe fair value as the relevant
measure of value, except SFAS 123(R) and related interpretations. The
statements does not apply to accounting standards that require or permit
measurement similar to fair value but are not intended to measure fair value.
This pronouncement is effective for fiscal years beginning after November 15,
2007.
On February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2,
Effective Date of FASB Statement No. 157 (the FSP). The FSP amends FASB
Statement No. 157, Fair Value Measurements (Statement 157), to delay the
effective date of Statement 157 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis (that is, at least annually).
For items within its scope, the FSP defers the effective date of Statement
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years.The Company is currently evaluating the impact that this pronouncement may
have on its consolidated financial statements.
 NOTE 3  CONTINGENT LIABILITIES
 Commitments to pay royalties to the Office of the Chief Scientist:The Subsidiary has obtained from the Office of the Chief Scientist of the State of
Israel grants for participation in research and development and, in return, the
Subsidiary is obligated to pay royalties amounting to 3% of the sales in the first three
years from the beginning of the repayment and 3.5% of the sales from the fourth year
until all of its obligation is repaid, whichever period ends earlier. The grant is
linked to the exchange rate of the dollar and bears interest of LIBOR per annum.Through March 31, 2008, total grants obtained had an
aggregate value of NIS 16,747.
 - 13 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY
 a.
    
    Composition of share capital:The Companys authorized Common Stock consists of 500,000,000 shares with a par
value of $ 0.001 per share. All shares have equal voting rights and are entitled
to one noncumulative vote per share in all matters to be voted upon by
shareholders. The shares have no preemptive, subscription, conversion or
redemption rights and may be issued only as fully paid and non-assessable shares.
Holders of the Common Stock are entitled to equal ratable rights to dividends and
distributions with respect to the Common Stock, as may be declared by the Board of
Directors out of funds legally available. The Common Stock is registered and
publicly traded on the Tel-Aviv Stock Exchange.b.
    
    Share capital:
 1.
    
    In September 1999, the Company issued 625,000 Common Stock at a price of $0.001 per share.In October 1999, the Company issued 375,001 Preferred A shares in
consideration for NIS 3,136 (net of issuance expenses of NIS 20) at a price
of $2 per share.In May 2000, the Company issued 208,329 Preferred B shares in consideration
for NIS 10,184 (net of issuance expenses of NIS 61) at a price of $12 per
share.In December 2002, the Company issued 87,386,858 Preferred C shares in
consideration for a total amount of NIS 73,816 (net of issuance expenses of
NIS 2,200) at a price of $0.1886 per share.The consideration for the issued stock was paid at the closing day (NIS
47,358) and the remaining consideration was paid when the Company
achieved the development milestone, as detailed in the agreement
(commencement of clinical trials of its products on humans) in 2003.Preferred C shares conferred, among others, preference rights in respect of
distribution of the Companys earnings and distribution of the Companys
assets upon liquidation. Preferred A and B shares conferred, among others,
preference rights in respect of distribution of the Companys assets upon
liquidation, after such distribution is made to holders of Preferred C shares
and Common Stock conferred voting rights and rights in distribution of the
Companys assets upon liquidation, after such distribution is made to holders
of Preferred shares.All classes of shares, as above, conferred equal voting rights in the
Companys general meetings on the basis of conversion into the underlying
Common Stock.Preferred A, B and C shares were convertible into Common Stock according
to conversion rates of 15.5885, 53.4998 and 1 per Ordinary share,
respectively.On August 22, 2005, the Company effected a consolidation and distribution of
its share capital in such a manner that 375,001 Preferred A shares of $ 0.001
were converted into 5,845,692 Common Stock, 208,329 Preferred B shares
were converted into 11,145,557 Common Stock and 87,386,858 Preferred C
shares were converted into 87,386,858 Common Stock.
 - 14 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 2.
    
    According to an agreement signed in December 2002, the
Company issued to the Chief Executive Officer (CEO) 11,927,727 Common Stock in consideration for $100,000, subject to repurchase right
according to certain vesting terms. The Subsidiary gave the CEO a
loan to finance the purchase of the Companys shares. The loan is denominated
in U.S dollars and bears interest at the rate of 5% per annum. As a security to ensure
the repayment of the loan, the CEO pledged these shares for the benefit of
the Company. The pledged shares and the related balance of the loan were
deducted from the shareholders equity.The agreement determines that in case of inability to repay the loan,
the loan may be repaid only out of the return on the pledged shares. The CEO
has also undertaken that if the first of the events detailed in the agreement
occurs (such as the Company becomes an issuer, as defined by the
Sarbanes-Oxley Act of 2002), he will repay the outstanding loan amount, if he
is required to do so by the Subsidiary. In August 2005, the Company and the CEO
signed an agreement that modifies the employment conditions of the CEO and
revises the terms of the loan and the pledge. The first half of the $ 100,000
loan that the CEO received in order to purchase the Companys shares, including
the accrued interest thereon, will become a grant at the end of the second
anniversary of the IPO, and the other half at the end of the third
anniversary of the IPO, provided that the CEO continues to be
employed by the Subsidiary or is a consultant to the Subsidiary or in any of its related companies at
such time. Accordingly, for the three months ended March 31, 2007 and the
period from inception through March 31, 2008 amounts of NIS 241 and NIS 523,
respectively became a grant and were recorded as expenses.The Company has a repurchase option to buy the unvested shares from the CEO
at price equal to its original purchase price.Upon closing of the agreement 7/12 (seven twelfths) of the shares were
immediately vested. The other portions of the shares are subject to the
Companys right of repurchase according to the following terms:
 A.
    
    The Companys right of repurchase shall lapse on
a monthly basis over a four year period commencing on the date of
execution of the original agreement.B.
    
    The Companys right of repurchase shall lapse,
with respect to 1/6 (one sixth) of the shares in the event that the
Company achieves a milestone as defined in the agreement. This milestone
was achieved in September 2003.
 Until December 31, 2005, the Company accounted for these shares as a variable
plan and remeasured compensation in the period such shares were vested. As
of January 1, 2006, the fair value of the vested shares was classified as a
liability.In August 2005, according to the modifications in the employment agreement
and the loan agreement the security for the loan was replaced such that the
CEOs shares in a private company which holds 475,000 of the Companys shares
were pledged until the loan is fully paid.
 - 15 -




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##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 On March 4, 2007, at the General Meeting of the Company,
the Company approved cancellation of the
pledge on the above mentioned shares and repayment of the outstanding loan with
proceeds from the grant. Consequently, the liability related to this loan in the amount of
NIS 9,220 was classified as equity.Compensation expenses (income) related to the CEO of NIS (70) and NIS 8,866
were recognized during the three months ended March 31, 2007 and for the
period from inception through March 31, 2008, respectively.3.
    
    In December 2002, the Company granted fully vested options
to holders of Common Stock, for their services, which are exercisable into
1,805,138 Common Stock of the Company at $ 0.001 per share. The options
were exercised in September 2005 in consideration for NIS 7.4.
    
    In December 2002, the Company granted fully vested options
to Hemisphere Capital Corp., for their services, which are exercisable into
1,590,668 Preferred C shares of the Company at $ 0.1886 per share. In
September 2005, all the options were exercised into 170,247
Common Stock.5.
    
    On August 23, 2005, the Company increased its authorized
share capital to 500 million Common Stock of $ 0.001 par value each.6.
    
    On August 25, 2005, the Company published a prospectus for
the issuance of securities to the public in Israel. The securities were
issued in 38 thousand units (the units) and the price per unit, as
determined in a tender, was NIS 0.95 per unit. Each unit consisted of 1,000
Common Stock at NIS 0.95 per share and 600 options at no consideration.As such, the Company has 22,800,000 registered options (series 1) which are
exercisable into 22,800,000 Common Stock of $ 0.001 par value with an
exercise price of NIS 1.1 per share, linked to the changes in the dollar/NIS
exchange rate from August 25, 2005. The options are exercisable up to
February 28, 2008. As of the balance sheet date, 22,522 options (series 1)
have been exercised and the rest have been forfeited.Net proceeds total approximately NIS 32,430 (net of issuance expenses of
NIS 3,670). The net proceeds were allocated to the shares and options based
on their relative market value.7.
    
    On April 19, 2007, the Company filed a registration
statement pursuant to the United States Securities Act of 1933 (the
Registration Statement and Securities Act respectively) with the U.S.
Securities and Exchange Commission (SEC) regarding the sale of Common Stock and warrants (series 3) and the shares resulting from the exercise of
the warrants (series 3). On June 4, 2007, the Registration Statement became
effective.In the context of the Registration Statement, the Company is entitled to
offer up to 53,000,000 Common Stock and 26,500,000 warrants (series 3),
offered in 26,500,000 Units (each Unit consisting of 2 Common Stock
and 1 warrant (series 3)), for a period of one year from the
date the registration statement became effective.
 - 16 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 7.
    
    (Cont.)On June 6, 2007, the Company issued 24,398,402 Common Stock which are
listed for trade on the TASE together with 12,199,201 warrants (series 3)
that are listed for trade on the TASE since September 17, 2007. The issued
securities were issued in consideration for NIS 1.586 in cash per Unit. The
total net proceeds from the issuance amounted to approximately NIS 18,336
(net of issuance expenses of NIS 1,013).The shares issued represent 15.20% of the Companys issued and outstanding
share capital and voting rights prior to issuing the Common Stock.Each warrant (series 3) is exercisable into one Ordinary share of the Company
until June 30, 2009, in consideration for a cash payment of NIS 0.84.
Warrants (series 3) which are not exercised by June 30, 2009 (inclusive) will
expire, become null and void and not confer their holders any rights
whatsoever.The shares that will result from the exercise of all the warrants (series 3)
represented approximately 7.60% of the Companys issued and outstanding share
capital and voting rights prior to issuing the Common Stock.
 NOTE 5  STOCK BASED COMPENSATION
 a.
    
    On March 4, 2008 the Board of Directors approved the grant of
2,880,000 options for the purchase of up to 2,880,000 shares of the Companys
Common Stock to employees of the Subsidiary at an exercise price per share of
$0.0782 pursuant to the Companys 2003 Israeli Stock Option Plan.
 - 17 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Options granted to employees:
 1.
    
    A summary of the Companys share option activities for options
granted to employees under the plans excluding performance-based options is as
follows:
 Three months ended March 31, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
    
    
    19,267,888
    
    
    $
    0.127Options granted
    
    
    2,880,000
    
    
    $
    0.078Options exercised
    
    
    (641,562
    )
    
    $
    0.011Options forfeited
    
    
    (501,089
    )
    
    $
    0.097Options outstanding at
March 31, 2008
    
    
    21,005,237
    
    
    $
    0.125
    
    
    
    8.9
    
    
    
    670Options vested and
expected to vest at
March 31, 2008
    
    
    16,952,676
    
    
    $
    0.127
    
    
    
    8.7
    
    
    
    656Options exercisable
at March 31, 2008
    
    
    4,043,863
    
    
    $
    0.119
    
    
    
    6.7
    
    
    
    542
 The weighted-average grant-date fair value of options granted to
employees during the three months ended March 31, 2008 was NIS 0.09 per
option. The aggregate intrinsic value in the tables above represents the total
intrinsic value (the difference between the Companys closing stock price on
the last trading day of March 2008 and the exercise price, multiplied by the
number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on March 31, 2008. This
amount changes based on the fair market value of the Companys stock. Total
intrinsic value of options exercised by employees for the three months ended
March 31, 2008 was NIS 125.The fair value for these options was estimated using the
Binomial option-pricing model.
 - 18 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Options granted to employees (cont.):
 2.
    
    A summary of the activity under the performance share based
options granted to employees as follows:
 Three months ended March 31,2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
and March 31, 2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.6
    
    
    
    Options vested and
expected to vest at
March 31, 2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.6
    
    
    
    Options
exercisable at
March 31, 2008
    
    
    1,955,000
    
    
    $
    0.150
    
    
    
    8.6
    
    
    
    
 3.
    
    The Companys outstanding options to employees (including
options under performance) as of March 31, 2008, have been separated into
ranges of exercise prices as follows:
 Weighed averageExercise
    
    Options for
    
    
    
    
    
    remainingprice
    
    Ordinary
    
    Options
    
    contractual term (inper share
    
    shares
    
    exercisable
    
    years)$      2
    
    
    155,300
    
    
    
    155,300
    
    
    
    2.2$    12
    
    
    2,000
    
    
    
    2,000
    
    
    
    4.5$0.001
    
    
    340,000
    
    
    
    340,000
    
    
    
    5.3$  0.02
    
    
    3,657,625
    
    
    
    2,863,125
    
    
    
    7.0$0.125
    
    
    707,812
    
    
    
    328,125
    
    
    
    8.0$0.149
    
    
    1,092,500
    
    
    
    622,813
    
    
    
    8.2$0.111
    
    
    420,000
    
    
    
    157,500
    
    
    
    8.5$0.150
    
    
    1,740,000
    
    
    
    1,530,000
    
    
    
    8.8$0.089
    
    
    2,500,000
    
    
    
    
    
    
    
    9.5$0.120
    
    
    2,500,000
    
    
    
    
    
    
    
    9.5$0.151
    
    
    2,500,000
    
    
    
    
    
    
    
    9.5$0.182
    
    
    4,900,000
    
    
    
    
    
    
    
    9.5$0.078
    
    
    2,880,000
    
    
    
    
    
    
    
    9.923,395,237
    
    
    
    5,998,863
 - 19 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Option granted to employees (cont.):
 4.
    
    Compensation expenses (income) related to options granted
to employees were recorded to research and development expenses and general
and administrative expenses, as follows:
 Period frominception(September 20,Three months ended
    
    
    1999) throughMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008Research and development
expenses
    
    
    (439
    )
    
    
    39
    
    
    
    1,259General and administrative
expenses
    
    
    (146
    )
    
    
    845
    
    
    
    10,324(585
    )
    
    
    884
    
    
    
    11,583
 As of March 31, 2008, there was NIS 834 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted to employees under the Companys stock option plans. That cost is
expected to be recognized over a weighted-average period of 1.9 years.
 c.
    1.
    A summary of the Companys share option activities for options
granted to non-employees under the plans excluding performance-based options is as
follows:
 Three months ended March 31, 2008WeightedaverageWeighted
    
    remainingaverage
    
    contractual
    
    Aggregateexercise
    
    term
    
    intrinsicNumber
    
    price
    
    (in years)
    
    valueOptions outstanding
at January 1, 2008
and March 31, 2008
    
    
    2,106,635
    
    
    $
    0.170
    
    
    
    7.0
    
    
    
    93Options exercisable at
March 31, 2008
    
    
    1,350,581
    
    
    $
    0.173
    
    
    
    5.8
    
    
    
    85
 The Company accounted for its options to non-employees under the fair value
method in accordance with SFAS 123(R) and EITF 96-18. The fair value for options
granted to non-employees was estimated according to the principles determined
in SFAS 123(R) based on a Binomial option-pricing model and amounts to
approximately NIS 336.
 - 20 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    Options granted to non-employees (cont.):
 2.
    
    A summary of the activity under the performance share-based
options granted to non-employees is as follows:
 Three months ended March 31, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008 and
March 31, 2008
    
    
    1,200,000
    
    
    $
    0.111
    
    
    
    8.5
    
    
    
    Options exercisable at
March 31, 2008
    
    
    300,000
    
    
    $
    0.111
    
    
    
    8.5
    
    
    
    
 3.
    
    The Companys outstanding options to non-employees
(including options under performance) as of March 31, 2008, have been
separated into ranges of exercise prices as follows:
 WeighedaverageremainingOptions for
    

    
    
    
    contractualExercise price
    
    Ordinary
    

    Options
    

    term (inper share
    
    shares
    

    exercisable
    

    years)$      12
    
    14,010
    
    
    14,010
    
    
    4.5$   0.05
    
    1,202,000
    
    
    1,183,250
    
    
    5.5$   0.02
    
    165,625
    
    
    120,508
    
    
    7.3$0.125
    
    75,000
    
    
    32,813
    
    
    8.0$0.111
    
    1,200,000
    
    
    300,000
    
    
    8.5$0.182
    
    650,000
    
    
    
    
    
    9.53,306,635
    
    
    1,650,581
 - 21 -




---



##### 



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    Options granted to non-employees (cont.):
 4.
    
    Compensation expenses (income) related to options granted
to non-employees were recorded to research and development expenses and
general and administrative expenses, as follows:
 Period frominception(September 20,Three months ended
    
    
    1999) throughMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008Research and development expenses
    
    
    (122
    )
    
    
    214
    
    
    
    410General and administrative expenses
    
    
    (61
    )
    
    
    42
    
    
    
    1,450(183
    )
    
    
    256
    
    
    
    1,860
 As of March 31, 2008, there was NIS 104 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted to
non-employees under the Companys stock option plans. That cost is expected to be
recognized over a weighted-average period of 1.7 years.d.
    
    Options granted to Tmura  The Israeli Public Service Venture Fund and
to American Friends of Tmura Inc. (Tmura):As of March 31, 2008, the fair value of the liability in respect for the options
issued was NIS 30. Compensation income of NIS 24, expense of NIS 12 and income of
NIS 30 related to options granted to Tmura were recorded to general and
administrative expenses during the three month periods ended March 31, 2008 and
2007 and the period from inception through March 31, 2008, respectively.
 - 22 -




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      Liquidity and Capital Resources
   - 23 -




---



##### 



Operating Activities
  Financing Activities
   Investing Activities
  Results of Operations
  Research and Development Expense
  Selling and Marketing Expense
  General and Administrative Expense
  - 24 -




---



##### 



Critical Accounting Policies
       - 25 -




---



##### 



Off-Balance Sheet Arrangements
 Commitments to Pay Royalties to the Chief Scientist
  Offices Lease Commitments
   Bank Guarantee for Offices Lease
  Motor Vehicles Lease Commitment
  - 26 -




---



##### 



ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
     - 27 -




---



##### 



PART II. OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Recent Sales of Unregistered Securities
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  VotesDirector
    
    For
    
    AgainstYaron Tal
    
    
    96,232,474
    
    
    
    0Michael Berman
    
    
    96,232,474
    
    
    
    0Erez Golan
    
    
    96,232,474
    
    
    
    0Zvi Schechter
    
    
    96,232,474
    
    
    
    0Nissim Darvish
    
    
    96,232,474
    
    
    
    0Neil Cohen
    
    
    96,232,474
    
    
    
    0Ora Setter
    
    
    96,232,474
    
    
    
    0Ran Ben-Or
    
    
    96,232,474
    
    
    
    0
 
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description31.1*
    
    Rule 13a-14(a)/15d-14(a) Certification31.2*
    
    Rule 13a-14(a)/15d-14(a) Certification32*
    
    Section 1350 Certifications
 
 *
    
    - Filed herewith. - 28 -




---



##### 



SIGNATURES
  TOPSPIN MEDICAL, INC.Date: May 15, 2008
    By:

/s/ Yaron TalYaron TalChief Executive OfficerDate: May 15, 2008
    By:

/s/ Eyal KolkaEyal KolkaChief Financial Officer - 29 -




---



##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a)/15d-14(a) Certification31.2
    
    Rule 13a-14(a)/15d-14(a) Certification32.1
    
    Section 1350 Certifications
 - 30 -