##### Table of Contents



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 333-144472
 TOPSPIN MEDICAL, INC.
  Delaware
    
    510394637(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 Global Park
2 Yodfat Street, Third Floor
North Industrial Area
Lod 71291
Israel
 972-8-9200033
 þ o
 o þ
  o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements.Unaudited Condensed Interim Consolidated Financial StatementsCondensed Consolidated Balance Sheet as of September 30, 2007 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2007 and 2006 and the period from inception to September 30, 2007 (unaudited)
    
    
    2Statements of Shareholders Equity for each of the years in the period ended December 31, 2006 and for the nine month period ended September 30, 2007 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2007 and 2006 and the period from inception to September 30, 2007 (unaudited)
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis or Plan of Operation.
    
    
    25Item 3A(T). Controls and Procedures.
    
    
    29PART II  OTHER INFORMATION
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    31Item 5. Other Information.
    
    
    31Item 6. Exhibits.
    
    
    32SIGNATURESAmended & Restated BylawsCertification of CEO pursuant to Rule 13a-14(a)/15d-14(a)Certification by CFO pursuant to Rule 13a-14(a)/15d-14(a)Certification Furnished pursuant to 18 USC Section 1350




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 TopSpin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED BALANCE SHEET
 (Unaudited)
 September 30,2007NIS in thousandsASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    57,200Other receivables and prepaid expenses
    
    
    2,17359,373LONG-TERM ASSETS:Restricted deposit
    
    
    520Severance pay fund
    
    
    35Prepaid lease payments
    
    
    114669PROPERTY AND EQUIPMENT, NET
    
    
    2,000DEFERRED ISSUANCE EXPENSES
    
    
    4,69366,735LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Trade payables
    
    
    1,312Other accounts payables and accrued expenses
    
    
    11,37212,684LONG TERM LIABILITIESAccrued severance pay
    
    
    567Liabilities in respect of options to employees and consultants
    
    
    5,771Liability in respect of warrants (series 2)
    
    
    3,925Embedded conversion feature in convertible debentures
    
    
    7,197Embedded derivative related to issuance expenses
    
    
    871Convertible debentures
    
    
    38,42656,190SHAREHOLDERS EQUITY:Ordinary shares of $0.001 par value:Authorized 500,000,000 shares; Issued and outstanding 186,141,173 shares;
    
    
    837Additional paid in capital
    
    
    163,760Accumulated deficit during the development stage
    
    
    (167,303
    )(2,706
    )66,735
  1




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Period frominception(September 20,Nine months ended
    
    Three months ended
    
    1999) throughSeptember 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006
    
    2007UnauditedResearch and development expenses
    
    
    21,707
    
    
    
    15,793
    
    
    
    6,703
    
    
    
    6,187
    
    
    
    113,987Less  participation by the office of the chief scientist
    
    
    (4,320
    )
    
    
    (2,743
    )
    
    
    (1,108
    )
    
    
    (914
    )
    
    
    (15,351
    )Research and development expenses, net
    
    
    17,387
    
    
    
    13,050
    
    
    
    5,595
    
    
    
    5,273
    
    
    
    98,636Selling and marketing expenses
    
    
    750
    
    
    
    169
    
    
    
    160
    
    
    
    109
    
    
    
    2,347General and administrative expenses
    
    
    6,882
    
    
    
    5,492
    
    
    
    2,218
    
    
    
    1,580
    
    
    
    46,299Operating loss
    
    
    (25,019
    )
    
    
    (18,711
    )
    
    
    (7,973
    )
    
    
    (6,962
    )
    
    
    (147,282
    )Financing income (expenses), net
    
    
    (782
    )
    
    
    (134
    )
    
    
    (2,642
    )
    
    
    (205
    )
    
    
    (6,463
    )Loss before cumulative effect of a change in accounting principle
    
    
    (25,801
    )
    
    
    (18,845
    )
    
    
    (10,615
    )
    
    
    (7,167
    )
    
    
    (153,745
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (238
    )
    
    
    
    
    
    
    
    
    
    
    (238
    )Net loss
    
    
    (25,801
    )
    
    
    (19,083
    )
    
    
    (10,615
    )
    
    
    (7,167
    )
    
    
    (153,983
    )Loss before cumulative effect of a change in accounting
principle per ordinary share
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (0.06
    )
    
    
    (0.05
    )Cumulative effect of a change in accounting principle per
Ordinary share
    
    
    
    
    
    
    (0.002
    )
    
    
    
    
    
    
    Basic and diluted loss per Ordinary share
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (0.04
    )
    
    
    (0.05
    )Weighted average number of Ordinary shares outstanding used in
basic and diluted net loss per share calculation
    
    
    170,886,274
    
    
    
    158,567,860
    
    
    
    185,114,256
    
    
    
    158,701,315
  2




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
 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 Ordinary shares 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
  3




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)  (Continued)
 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
  4




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)  (Continued)
 Non-
    
    Deficitrecourse
    
    accumulatedNumber of outstanding shares
    
    Share capital
    
    Additional
    
    receivables
    
    during the
    
    TotalPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    development
    
    shareholdersOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    capital
    
    issued
    
    stage
    
    equityBalance 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 Ordinary shares
    
    
    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
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,325
    )
    
    
    (14,325
    )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 of 634,374 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.  5




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)  (Continued)
 Non-
    
    Deficitrecourse
    
    accumulatedNumber of outstanding shares
    
    Share capital
    
    Additional
    
    receivables
    
    during the
    
    TotalPreferred
    
    
    
    
    
    Preferred
    
    paid-in
    
    for shares
    
    development
    
    shareholdersOrdinary
    
    A
    
    B
    
    C
    
    Ordinary
    
    A
    
    B
    
    C
    
    Capital
    
    issued
    
    stage
    
    equityBalance as of December 31, 2006
    
    
    159,537,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,603
    
    
    
    (237
    )
    
    
    (141,502
    )
    
    
    (6,408
    )Exercise of options
    
    
    2,205,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    65Classification of liability
into equity in respect of
exercise of 1,005,310 options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,645
    
    
    
    
    
    
    
    
    
    
    
    1,645Repayment of loan to the Chief
Executive Officer and
Classification of liability
into equity (note 6b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    237
    
    
    
    
    
    
    
    9,457Issuance of ordinary shares
and 
warrants (series 3), net

of issuance expenses of NIS 1,013
    
    
    24,398,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,236
    
    
    
    
    
    
    
    
    
    
    
    18,336Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,801
    )
    
    
    (25,801
    )Balance as of September 30,
2007 (Unaudited)
    
    
    186,141,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,760
    
    
    
    
    
    
    
    (167,303
    )
    
    
    2,706
  6




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Period frominception(September 20,Nine months ended
    
    1999) throughSeptember 30,
    
    September 30,2007
    
    2006
    
    2007Cash flows from operating activities:Net loss
    
    
    (25,801
    )
    
    
    (19,083
    )
    
    
    (153,983
    )Adjustments to reconcile net loss to net cash used in
operating activities (a)
    
    
    4,506
    
    
    
    3,023
    
    
    
    37,275Net cash used in operating activities:
    
    
    (21,295
    )
    
    
    (16,060
    )
    
    
    (116,708
    )Cash flows from investing activities:Change in restricted deposit, net
    
    
    (122
    )
    
    
    
    
    
    
    (479
    )Restricted cash in respect of issuance convertible
debentures
    
    
    52,242
    
    
    
    
    
    
    
    Purchase of fixed assets
    
    
    (487
    )
    
    
    (280
    )
    
    
    (7,969
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    40Loan to the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    (231
    )Net cash provided by (used in) investing activities:
    
    
    51,633
    
    
    
    (280
    )
    
    
    (8,639
    )Cash flows from financing activities:Exercise of stock options
    
    
    65
    
    
    
    8
    
    
    
    186Proceeds from issuance of shares and warrants series 3 ,
net of issuance expenses
    
    
    18,710
    
    
    
    
    
    
    
    138,279Proceeds from issuance convertible debentures and warrants
series 2, net of issuance expenses
    
    
    (2,292
    )
    
    
    
    
    
    
    44,082Net cash provided by financing activities:
    
    
    16,483
    
    
    
    8
    
    
    
    182,547Increase (decrease) in cash and cash equivalents
    
    
    46,821
    
    
    
    (16,332
    )
    
    
    57,200Cash and cash equivalents at beginning of period
    
    
    10,379
    
    
    
    37,160
    
    
    
    Cash and cash equivalents at end of period
    
    
    57,200
    
    
    
    20,828
    
    
    
    57,200
  7




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(Unaudited)
 Period frominception(September 20,Nine months ended
    
    1999) throughSeptember 30,
    
    September 30,2007
    
    2006
    
    2007(a
    )
    
    Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    572
    
    
    
    702
    
    
    
    6,053Capital loss from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    25Interest and exchange rate differences on loan to the Chief
Executive Officer
    
    
    
    
    
    
    2
    
    
    
    (35
    )Non-cash bonus to the Chief Executive Officer
    
    
    241
    
    
    
    326
    
    
    
    789Interest on restricted deposit
    
    
    (1,110
    )
    
    
    (5
    )
    
    
    (1,339
    )Change in fair value of liability in respect of warrants
    
    
    (4,814
    )
    
    
    
    
    
    
    (3,907
    )Change in fair value of conversion feature
    
    
    (371
    )
    
    
    
    
    
    
    3,669Change in fair value of embedded derivative
    
    
    16
    
    
    
    
    
    
    
    25Amortization of deferred issuance expenses and debentures
discount
    
    
    3,835
    
    
    
    
    
    
    
    4,303Amortization of deferred stock based compensation related
to employees
    
    
    

    
    
    
    
    
    
    
    6,487Cumulative effect of change in accounting principle
    
    
    
    
    
    
    238
    
    
    
    238Change in fair value and amortization of stock options
classified as a liability
    
    
    679
    
    
    
    2,399
    
    
    
    10,077Amortization of deferred stock based compensation related
to consultants
    
    
    
    
    
    
    
    
    
    
    1,632Accrued severance pay, net
    
    
    327
    
    
    
    (104
    )
    
    
    532Increase (decrease) in accounts receivable (including
long-term receivables)
    
    
    7
    
    
    
    (1,142
    )
    
    
    (2,287
    )Increase (decrease) in trade payables
    
    
    (130
    )
    
    
    306
    
    
    
    1,163Increase in other accounts payable
    
    
    5,254
    
    
    
    301
    
    
    
    9,850Total adjustments
    
    
    5,406
    
    
    
    3,023
    
    
    
    37,275(b
    )
    
    Supplemental disclosure of cash flow activities:Cash paid during the period for:Taxes paid due to non-deductible expenses
    
    
    81
    
    
    
    83
    
    
    
    632Interest paid
    
    
    32
    
    
    
    
    
    
    
    324(c
    )
    
    Supplemental disclosure of non cash flows activities:Purchase of fixed assets
    
    
    
    
    
    
    
    
    
    
    149Non-recourse receivables in respect of shares issued
    
    
    
    
    
    
    
    
    
    
    469Accrued issuance expenses
    
    
    2,820
    
    
    
    
    
    
    
    2,820Classification of liabilities into equity
    
    
    10,865
    
    
    
    6,317
    
    
    
    11,316Beneficial conversion feature related to Preferred A
and Preferred B shares
    
    
    
    
    
    
    
    
    
    
    13,320
  8




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NIS in thousands,
 except share and per share data
 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 a medical MRI technology, the main application of which is
interventional cardiology.The Company was incorporated and commenced operation in September 1999 as a private
company registered in Delaware, U.S. On September 1, 2005, the Company issued
securities to the public in Israel and became publicly traded in the Tel Aviv Stock
Exchange (TASE).Since its inception the Company is devoting substantial efforts towards activities
such as research and development of its products, marketing, financial planning and
capital raising. 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).In the course of such activities, the Company and its subsidiary have sustained
operating losses, have not generated revenues and have not achieved profitable
operations or positive cash flows from operations. The Companys deficit accumulated
during the development stage aggregated to NIS 167,303 through September 30, 2007.
There is no assurance that profitable operations, if ever achieved, could be
sustained on a continuing basis. The Company plans to continue to finance its
operations with a combination of stock issuance and private placements. The Company
has also alternative plans which include, among other, minimizing its expenses to the
required level based on the financial situation. 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.
 B.
    1.
    
    On July 10, 2007, the Company obtained the written consent of all the
holders of securities to an additional amendment to the terms of the private
placement of bonds (series A) and warrants (series 2), replacing the bonds (series
A) trustee, replacing the deed of trust of the bonds (series A) of November 21,
2006, as amended on April 30, 2007 (the original deed of trust) with an indenture
(the Indenture) and an additional amendment to the warrant (series 2) of November
21, 2006, as amended on April 30, 2007.The following description is a summary of the material modifications in the
terms of the bonds (Series A) as contained in the Indenture and the certificate
evidencing the bonds (Series A):
 (a)
    
    Security on bonds (series A):Immediately after bonds (series A) are listed for trade on the Tel Aviv
Stock Exchange (the TASE) the trustee will transfer to the Company all
the amounts deposited in the trust account.(b)
    
    Listing for trade on the TASE:The Company will make its best efforts and intends to take all necessary
actions and to receive all required decisions, under the law, to list the
bonds (Series A) on TASE and this within a period of ten (10) months from
the date of issuance of the bonds (Series A), meaning until September 23,
2007 (See Note 1(B)(2)).(c)
    
    Early redemption of bonds (series A):If the bonds (series A) are not listed for trade in the TASE within ten
months from the date of the private placement, as stated in (b) above, the
bonds (series A) will not be convertible into the Companys shares and will
be placed for immediate redemption.
 9




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 (d)
    
    The interest on the debentures:According to the terms of the Indenture, the unsettled balance of the
principal of bonds (series A) will bear annual interest at a rate of 6%
(the interest rate) similarly to the rate established in the original deed
of trust.In addition, according to the terms of the Indenture, the Company will pay
the holders of bonds (series A) additional annual interest at a rate of
1.75% in respect of the period commencing on November 23, 2006 and ending on
November 30, 2007 such that the interest paid to the holders of bonds
(series A) in respect of this period will be at an annual rate of 7.75%.
Accordingly, upon the initial payment of interest, which similarly to the
provisions of the original deed of trust will be on November 30, 2007 for
the period commencing on the date of the private placement and ending on
November 30, 2007, interest at a rate of 7.8986% will be paid (and not at a
rate of 6.1151% according to the terms of the original deed of trust).The Indenture also determines that the bonds (series A) are governed by the
laws of the State of Delaware and exclusive venue with respect to any matter
related to the bonds (series A), will be in the state or federal courts of
the State of Delaware (and not Israel, as determined in the original deed of
trust), excluding any rights, duties, obligations, actions and omissions of
the Co-Trustee, which are subject to the Israeli Securities Law and will be
governed and construed in accordance with the Israeli Securities Law.In conjunction with the replacement of the original deed of trust with the
Indenture as specified above, and following the consent of all the holders
of warrants (series 2) and the approval of the Company board of directors
and the shareholders of the Company, on July 10, 2007, an amendment to the
warrant (series 2) was adopted. The material modifications are detailed
below:
 (a)
    
    Listing for trade on the TASE:The Company will make its best efforts and intends to take all necessary
actions and to receive all required decisions, under the law, to list
the warrants (series 2) on the TASE and this within a period of ten (10)
months from the private placement, meaning until September 23, 2007 (See
Note 1(B)(2)).(b)
    
    Jurisdiction; applicable laws:The sole jurisdiction in all matters pertaining to the warrant (series
2) will be with the authorized courts in the State of Delaware, pursuant
to the laws of the State of Delaware (and not in Israel as determined in
the original warrant (series 2).
 2.
    
    According to EITF 96-19, Debtors Accounting for a Modification
or Exchange of Debt Instruments and EITF 06-6 Debtors Accounting for a
Modification (or Exchange) of Convertible Debt Instruments, the Company
determined that the terms of the convertible debentures do not constitute a
substantial change compared to the original terms. Consequently, a new effective
interest rate was determined based on the carrying amount of the original debt
instrument, adjusted for an increase in the fair value of an embedded conversion
option (calculated as the difference between the fair value of the embedded
conversion option immediately before and after the modification or exchange)
resulting from the modification, and the revised cash flows.In addition to the above changes, during the third quarter of 2007 additional
deferred issuance costs in the amount of approximately NIS 1,870 were recorded in
relation to the issuance of the bonds (series A) and warrants (series 2).
 10




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 During 2007, the Company filed a registration statement pursuant to the United
States Securities Act of 1933 (the registration statement) with the U.S.
Securities and Exchange Commission (SEC) for the registration of the bonds
(series A), warrants (series 2) and the shares underlying the conversion of the
bonds (series A) and the exercise of the warrants (series 2). On September 11,
2007, the registration statement became effective. On September 17, 2007, the
bonds (series A) and the warrants (series 2) and the shares underlying the
conversion of the bonds (series A) and the exercise of the warrants (series 2)
were listed for trade on the TASE. As a result the trustee transferred to the Company all the amounts
deposited in the trust account (less tax and expenses relating to the management
of the account).The functional currency of the Company is nominal NIS and the exercise price of
the warrants (series 2) is linked to the Israeli Consumer Price Index (CPI)
accordingly, the Company continues to classify the warrants as a liability and
remeasured at each reporting date until the date of settlement.
 C.
    
    On July 29, 2007 , TopSpin Medical (Israel) Ltd. (the Subsidiary),
entered into a distribution agreement (the agreement), with Johnson & Johnson
Medical Israel, a division of J-C Healthcare L.T.D. (the distributor) wherein the
distributor was appointed as the exclusive distributor in Israel of an intravascular
MRI catheter system developed by the Subsidiary used for imaging and characterizing
the tissue composition of coronary plaque during a conventional cardiac
catheterization procedure (the product). The distributor will purchase the product
from the Subsidiary and will market and sell the Product to customers located in
Israel. The appointment of the distributor as the exclusive distributor of the
product in Israel is subject to distributor meeting certain periodic sales targets.Under the terms of the agreement, the distributor has agreed to take certain
marketing actions in connection with the product and has agreed to mutually work with
the Subsidiary in promoting clinical trials to collect long term information in the
frame work of Post Marketing Surveillance concerning the use of the product in
patients in Israel.Unless the agreement is earlier terminated by one of the parties pursuant to the
conditions set forth in the agreement, the agreement will automatically expire and
terminate on July 29, 2010. The parties may mutually agree in writing to extend the
term of the agreement any time before July 29, 2010.The distributor is a company that is controlled by Johnson & Johnson Inc., who owns
Johnson & Johnson Development Corporation, who in turn beneficially owns 5% or more
of the outstanding shares of the Companys common stock.D.
    
    On August 2, 2007, the Subsidiary received the CE Mark for its advanced
generation intravascular MRI catheter. The advanced generation intravascular MRI
catheter represents a further technological advancement in the miniaturization of
the imaging probe and also integrates a number of probes in the catheter, enabling
the imaging of longer vessel segments simultaneously.
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
   11




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 a.
    
    Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainties in Income Taxes (FIN 48).The Company and its subsidiary file U.S. federal income tax returns as well as income
tax returns in various states and foreign jurisdictions and as such may be subject to
examination by the Internal Revenue Service (IRS) for calendar years since
inception through 2006. Additionally, any net operating losses that were generated in
prior years may also be subject to examination and reduction by the IRS.The adoption of FIN 48 resulted in a write-off of the deferred tax asset and the
respective valuation allowance with respect to the net operating losses for tax
purposes of the Company, with no impact on the balance sheet of the Company.b.
    
    Impact of recently issued accounting standards:
 1.
    
    SFAS No. 157:In September 2006, the FASB issued SFAS 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 statement does not apply to accounting standard that require or permit
measurement similar to fair value but are not intended to represent fair value.
This pronouncement is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact of adopting SFAS 157.2.
    
    SFAS No. 159: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 Standard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 is currently evaluating the impact of adopting
SFAS 159.3.
    
    EITF 07-3On June 27, 2007 EITF 07-3 Accounting for Nonrefundable Advance Payments for
Good or Services Received for Use in Future Research and Development Activities
(EITF 07-3) was issued. EITF 07-3 provides that nonrefundable advance payments
made for goods or services to be used in future research and development
activities should be deferred and capitalized until such time as the related
goods or services are delivered or are performed, at which point the amounts
would be recognized as an expense. This standard is effective for new contracts
entered into after January 1, 2008. The Company is currently evaluating the
impact of adopting EITF 07-3.
 NOTE 3  CONTINGENT LIABILITIES
 a.
    
    Commitments to pay royalties to the Chief Scientist:
 12




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 The subsidiary had obtained from 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 September 30, 2007, total grants obtained aggregate NIS 15,025.b.
    
    The subsidiary pledged a bank deposit which is used as a bank guarantee
amounting to NIS 464 to secure its payments under lease agreements.
 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 non-cumulative 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 stocks are registered and publicly traded on the Tel-Aviv
Stock Exchange.b.
    
    Share capital:
 1.
    
    In September 1999, the Company issued 625,000 Ordinary shares
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 of the 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 Ordinary shares 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
Ordinary shares.Preferred A, B and C shares were convertible into Ordinary shares according to
conversion rates of 15.5885, 53.4998 and 1 per Ordinary share, respectively.
 13




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 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 Ordinary shares, 208,329 Preferred B shares were
converted into 11,145,557 Ordinary shares and 87,386,858 Preferred C shares
were converted into 87,386,858 Ordinary shares.2.
    
    According to an agreement signed in December 2002, the Company
issued to the Chief Executive Officer (CEO) 11,927,727 Ordinary shares in
consideration for $100 thousand, subject to repurchase right according to
certain vesting terms. The subsidiary, TopSpin, 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%. 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 lack of ability 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 TopSpin. 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 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 in TopSpin or is a consultant in TopSpin
or in any of its related companies at such time. Accordingly, for the nine
months ended September 30, 2006 and 2007 and the period from inception through
September 30, 2007 amounts of NIS 108, 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 four years 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 has been
achieved in September 2003.
 Till December 31, 2005, the Company accounted for these shares as a variable
plan and re-measured compensation at 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 till the loan is fully paid.On March 4, 2007 the General Meeting of the Company approved to cancel the
pledge on the above mentioned shares and to repay the outstanding loan with
the grant. Consequently, the liability related to this loan in the amount of
NIS 9,220 was classified as equity.
 14




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 Total compensation expenses (income) related to the CEO of NIS 927, NIS (70),
NIS 73, NIS (70) and NIS 8,866 were recognized during the nine months ended
September 30, 2006, 2007 and three months ended September 30, 2006, 2007 and
for the period from inception through September 30, 2007, respectively.3.
    
    In December 2002, the Company granted fully vested options to
holders of Ordinary shares, for their services, which are exercisable into
1,805,138 Ordinary shares 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 cash-less exercised into 170,247 Ordinary shares.5.
    
    On August 23, 2005, the Company increased its authorized share
capital to 500 million Ordinary shares 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 Ordinary shares 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 Ordinary shares 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, no options (series 1) have
been exercised.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 Ordinary shares and warrants
(series 3) and the shares resulting from the exercise of the warrants (series
3). On September 4, 2007, the registration statement became effective, and on
September 17, the shares and warrants (series 3) were traded in the TASE.In the context of the registration statement, the Company is entitled to
offer up to 53,000,000 Ordinary shares and 26,500,000 warrants (series 3),
offered in 26,500,000 Units (each consisting of 2 Ordinary shares and 1 warrant
(series 3)), for a period of one year from the date the registration statement
became effective.On June 6, 2007, the Company issued 24,398,402 Ordinary shares which are
listed for trade on the TASE together with 12,199,201 warrants (series 3) that
are not listed for trade on the TASE (the warrants or the warrants (series
3)). 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 thousands (net of issuance expenses of NIS 1,013 thousands) received in
September 2007.The shares issued represents 15.20% of the Companys issued and outstanding
share capital and voting rights prior to issuing the Ordinary shares.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.
 15




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 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 issuing the Ordinary shares.During the third quarter of 2007, additional deferred issuance costs in the
amount of approximately NIS 374 were recorded in relation to the issuance of the
Companys Ordinary shares and warrants (series 3).
 NOTE 5  STOCK BASED COMPENSATION
 a.
    
    On September 25, 2007, the Board of Directors (BOD) approved to
increase the total number of shares of common stock authorized for issuance pursuant
to the Companys 2003 Israeli Stock Option Plan by 15,000,000 shares of common stock
to a total of 37,000,000 shares of common stock.
  b.
    
    On January 7, 2007 the General Meeting of the Shareholders of the Company
approved the BODs resolutions for the issuance of 2,400,000 non-marketable options
to the CEO, exercisable into 2,400,000 Ordinary shares of the Company (the
options), for an exercise price of $ 0.1503 per share. The options are subject to
the vesting terms pursuant to the following targets and goals:
 1.
    
    600,000 options vested as the Company obtained CE Mark approval
for the intravascular MRI catheter for the coronary arteries developed by the
Company (the product), during December 2006.
 2.
    
    960,000 options will vest once the Company obtains FDA approval
for the product, if and when such approval is granted by November 15, 2007. The
Company assumes that this approval will be achieved on time.3.
    
    840,000 options will vest upon the occurrence of one of the
following events: (1) Receiving a memorandum of investment in Topspin Urology
Ltd., or in any other company holding the intellectual property rights in
requests and/or applications regarding intellectual property and the Companys
urology activities (urology activities), including through capital raising by
the Company for the development of the urology activities, in an amount
exceeding $1,000 by November 30, 2007, which would not include grants from the
Office of the Chief Scientist; (2) The sale, transfer, grant of a license or
any other transfer of all or substantially all of the urology activities or
signing a memorandum or any other agreement in connection with said transfer by
November 30, 2007; or (3) the Companys BOD decision to independently finance
the urology activities instead of locating available external financing, under
the terms detailed above by November 30, 2007. The Company assumes that at
least one of these events will occur.
 Any options that do not vest by said dates will expire. The options will be subject
to the additional conditions regarding the Companys 2003 stock option plan (the
option plan) provided that should there be a discrepancy between the option grant
conditions stipulated above and the conditions of the option plan, the provisions
detailed above will prevail. Despite the provisions stipulated in the option plan,
options that will become vested will become exercisable for a year from the end of
all engagements or commitments between the Company (or its subsidiaries) and the CEO
as employee, consultant, director or in any other way.The fair value of the options at grant date is estimated to be approximately NIS
1,473. The fair value is calculated according to the Binomial model with expected
annual volatility of 60%-80% calculated on the date of grant and based on the share
price on the grant date (NIS 0.87 per share), annual risk-free interest rates of
4.5%-5% calculated on the grant date and forfeiture rates of 0%. Compensation
expenses related to options granted to the CEO were recorded to general and
administrative expenses.
 16




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
  1.
    
    Options to purchase 600,000 shares of Common Stock of the
Company, par value US$ 0.001 each, have already vested.2.
    
    As of the conclusion of Mr. Golan employment by the subsidiary
which will occur on December 25, 2007, (the Conclusion Date), an aggregate of
900,000 Options shall vest.3.
    
    An additional 240,000 Options shall vest on a quarterly basis
over a two years period after the Conclusion Date, with 30,000 Options vesting
at the end of each quarter; Notwithstanding the above, any unvested portion of
such Options will become immediately vested upon the termination by TopSpin of
the consulting agreement with the Optionee for any reason, other than
Optionees unwillingness to comply with Topspins Board of Directors or CEOs
reasonable requests pursuant to the Optionees obligations under the such
consulting agreement.4.
    
    Upon the Conclusion Date, the remaining 660,000 Options shall
terminate and expire.
 All other terms and conditions, including terms and conditions of expiration and
termination of the Options, voting rights and adjustments, which are set forth in
the Plan, shall apply to the Options.c.
    
    On September 25, 2007, the BOD of the Company approved the appointment of
Yaron Tal to serve as President and CEO of the Company and of the Subsidiary
effective October 1, 2007 (for further details refer to Note 6d). On September 25,
2007, the BOD approved the grant of an option to Mr. Tal for the purchase of up to
10,000,000 shares of the Companys common stock at a weighted-average exercise price
per share of $0.13545 pursuant to the Companys 2003 Israeli Stock Option Plan. The
Options shall vest in accordance with the following schedule: (i) 2,500,000
underlying shares with an exercise price per share of $0.1819 shall vest on
September 25, 2008; (ii) 625,000 underlying shares with an exercise price per share
of $0.1509 shall vest on the last day of each of the four quarters following
September 25, 2008; (iii) 625,000 underlying shares with an exercise price per share
of $0.12 shall vest on the last day of each of the four quarters following
September 25, 2009; and (iv) 625,000 underlying shares with an exercise price per
share of $0.089 shall vest on the last day of each of the four quarters following
September 25, 2010. Notwithstanding the foregoing vesting schedule, all unvested
options shall become vested immediately following a change in control of the Company
or the sale of all or substantially all of the assets of the Company.The fair value of the options at grant date is estimated to be approximately NIS
5,014. The fair value is calculated according to the Binomial model with expected
annual volatility of 64% calculated on the date of grant and based on the known
share price on the grant date (NIS 0.734 per share), annual risk-free interest rates
of 4.3% calculated on the grant date and forfeiture rates of 0%. Compensation
expenses related to options granted to the CEO were recorded to general and
administrative expenses.On September 25, 2007, the Board approved also the grant of 3,200,000 options for
the purchase of up to 3,200,000 shares of the Companys common stock to employees
and consultants of the subsidiary at an exercise price per share of $0.1819 pursuant
to the Companys 2003 Israeli Stock Option Plan.
 d.
    1.
    A summary of the Companys share option activities for options granted
to employees under the plans excluding performance base options is as follows:
 
 17




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 
 Nine months ended September 30, 2006WeightedaverageWeighted
    
    
    remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    intrinsicexercise
    
    
    terms
    
    
    valueNumber
    
    
    Price
    
    
    (in years)
    
    
    priceOptions outstanding at
January 1, 2006
    
    
    9,293,800
    
    
    $
    0.054Options granted
    
    
    1,965,000
    
    
    $
    0.132Options exercised
    
    
    (223,749
    )
    
    $
    0.006Options forfeited
    
    
    (546,251
    )
    
    $
    0.035Options outstanding at
September 30, 2006
    
    
    10,488,800
    
    
    $
    0.071
    
    
    
    8.2
    
    
    
    3,670Options vested and
expected to vest at
September 30, 2006
    
    
    10,488,800
    
    
    $
    0.071
    
    
    
    8.2
    
    
    
    3,670Options exercisable
at September 30, 2006
    
    
    4,725,738
    
    
    $
    0.088
    
    
    
    7.3
    
    
    
    2,066
 Nine months ended September 30, 2007WeightedAverageWeighted
    
    
    Remaining
    
    
    Aggregateaverage
    
    
    Contractual
    
    
    intrinsicexercise
    
    
    terms
    
    
    ValueNumber
    
    
    Price
    
    
    (in years)
    
    
    PriceOptions outstanding
at January 1, 2007
    
    
    9,982,860
    
    
    $
    0.073Options granted
    
    
    12,550,000
    
    
    $
    0.145Options exercised
    
    
    (2,205,310
    )
    
    $
    0.007Options forfeited
    
    
    (707,000
    )
    
    $
    0.061Options outstanding at
September 30, 2007
    
    
    19,620,550
    
    
    $
    0.127
    
    
    
    9.1
    
    
    
    5,371Options vested and
expected to vest at
September 30, 2007
    
    
    18,997,723
    
    
    $
    0.126
    
    
    
    9.1
    
    
    
    5,288Options exercisable
at September 30, 2007
    
    
    4,052,989
    
    
    $
    0.114
    
    
    
    7.1
    
    
    
    2,279
 18




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 2.
    
    A summary of the activity under the performance share based
options granted to employees as follows:
 Nine months ended September 30, 2006WeightedaverageWeighted
    
    
    remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    Intrinsicexercise
    
    
    terms
    
    
    ValueNumber
    
    
    Price
    
    
    (in years)
    
    
    PriceOptions outstanding at
January 1, 2006
    
    
    
    
    
    
    Options granted
    
    
    1,000,000
    
    
    $
    0.149Options outstanding
at September 30, 2006
    
    
    1,000,000
    
    
    $
    0.149
    
    
    
    9.7
    
    
    
    Options vested and
expected to vest at
September 30, 2006
    
    
    1,000,000
    
    
    $
    0.149
    
    
    
    9.7
    
    
    
    Options exercisable
at September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Nine months ended September 30, 2007WeightedaverageWeighted
    
    
    remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    Intrinsicexercise
    
    
    terms
    
    
    ValueNumber
    
    
    Price
    
    
    (in years)
    
    
    PriceOptions outstanding at
January 1, 2007
    
    
    1,000,000
    
    
    $
    0.149Options granted
    
    
    2,400,000
    
    
    $
    0.150Options outstanding
at September 30, 2007
    
    
    3,400,000
    
    
    $
    0.150
    
    
    
    9.1
    
    
    
    387Options vested and
expected to vest at
September 30, 2007
    
    
    2,740,000
    
    
    $
    0.150
    
    
    
    9.1
    
    
    
    313Options exercisable
at September 30, 2007
    
    
    1,025,000
    
    
    $
    0.150
    
    
    
    9.1
    
    
    
    117
 3.
    
    The weighted-average grant-date fair value of options granted
to employees during the nine months ended September 30, 2007 was NIS 0.489 per
option. The aggregate intrinsic value represents the total intrinsic value (the
difference between the Companys closing stock price on the last trading day of
September 2007 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 September 30, 2007. This amount change
based on the fair market value of the Companys stock. Total intrinsic value of
options exercised by employees for the nine months ended September 30, 2007 was
NIS 1,645 As of September 30, 2007, there was NIS 6,552 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 2.2 years.
 4.
    
    The Companys outstanding options to employees as of September
30, 2007, have been separated into ranges of exercise prices as follows:
 WeighedaverageOptions for
    
    Exercise
    
    
    
    
    
    remainingIssuance
    
    Ordinary
    
    price
    
    Options
    
    contractualDate
    
    shares
    
    per share
    
    exercisable
    
    termsMarch 2000
- August 2001
    
    
    155,300
    
    
    $
    2
    
    
    
    155,300
    
    
    
    2.7September 2002
    
    
    2,000
    
    
    $
    12
    
    
    
    2,000
    
    
    
    5.0July  October 2003
    
    
    710,000
    
    
    $
    0.001
    
    
    
    710,000
    
    
    
    5.8April  August 2004
    
    
    1,343,250
    
    
    $
    0.02
    
    
    
    1,006,626
    
    
    
    6.7July  August 2005
    
    
    2,985,000
    
    
    $
    0.02
    
    
    
    1,619,375
    
    
    
    7.8April 2006
    
    
    750,000
    
    
    $
    0.125
    
    
    
    234,375
    
    
    
    8.5
 19




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 WeighedaverageOptions for
    
    Exercise
    
    
    
    
    
    remainingIssuance
    
    Ordinary
    
    price
    
    Options
    
    contractualDate
    
    shares
    
    per share
    
    exercisable
    
    termsJune 2006
    
    
    1,705,000
    
    
    $
    0.149
    
    
    
    645,313
    
    
    
    8.7September 2006
    
    
    420,000
    
    
    $
    0.111
    
    
    
    105,000
    
    
    
    9.0January 2007
    
    
    2,400,000
    
    
    $
    0.150
    
    
    
    600,000
    
    
    
    9.3September 2007
    
    
    2,500,000
    
    
    $
    0.089
    
    
    
    
    
    
    
    10.0September 2007
    
    
    2,500,000
    
    
    $
    0.120
    
    
    
    
    
    
    
    10.0September 2007
    
    
    2,500,000
    
    
    $
    0.151
    
    
    
    
    
    
    
    10.0September 2007
    
    
    5,050,000
    
    
    $
    0.182
    
    
    
    
    
    
    
    10.0
 5.
    
    Compensation income (expenses) related to options granted to
employees were recorded to research and development expenses and general and
administrative expenses, as follows:
 Period frominception(September 20,Nine months ended
    
    Three months ended
    
    1999) throughSeptember 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006
    
    2007Research and
development
expenses
    
    
    (467
    )
    
    
    938
    
    
    
    (648
    )
    
    
    220
    
    
    
    3,094General and
administrative
expenses
    
    
    (536
    )
    
    
    1,296
    
    
    
    (1,658
    )
    
    
    135
    
    
    
    9,943(1,003
    )
    
    
    2,234
    
    
    
    (2,306
    )
    
    
    355
    
    
    
    13,037
 e.
    
    1. A summary of the Companys share option activities for options granted
to non-employees under the plans excluding performance base options is as follows:
 Nine months ended September 30, 2006WeightedAverageWeighted
    
    
    Remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    intrinsicexercise
    
    
    Terms
    
    
    valueNumber
    
    
    Price
    
    
    (in years)
    
    
    priceOptions outstanding at
January 1, 2006
    
    
    1,419,135
    
    
    $
    0.216Options granted
    
    
    450,000
    
    
    $
    0.114Options forfeited
    
    
    (37,500
    )
    
    $
    2Options outstanding
at September
30, 2006
    
    
    1,831,635
    
    
    $
    0.154
    
    
    
    8.0
    
    
    
    415Options exercisable at
September 30, 2006
    
    
    1,002,533
    
    
    $
    0.215
    
    
    
    7.0
    
    
    
    292
 20




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 Nine months ended September 30, 2007WeightedAverageWeighted
    
    
    Remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    intrinsicexercise
    
    
    Terms
    
    
    ValueNumber
    
    
    Price
    
    
    (in years)
    
    
    PriceOptions outstanding at
January 1, 2007
    
    
    1,831,635
    
    
    $
    0.154Options granted
    
    
    650,000
    
    
    $
    0.182Options forfeited
    
    
    (375,000
    )
    
    $
    0.111Options outstanding
at
September 30, 2007
    
    
    2,106,635
    
    
    $
    0.170
    
    
    
    7.5
    
    
    
    741Options exercisable at
September 30, 2007
    
    
    1,288,003
    
    
    $
    0.179
    
    
    
    6.2
    
    
    
    661
 2.
    
    A summary of the activity under the performance share-based
options granted to non-employees is as follows:
 Nine months ended September 30, 2006WeightedAverageWeighted
    
    
    Remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    intrinsicexercise
    
    
    Terms
    
    
    valueNumber
    
    
    Price
    
    
    (in years)
    
    
    priceOptions outstanding at
January 1, 2006
    
    
    
    
    
    
    Options granted
    
    
    1,430,000
    
    
    $
    0.114Options outstanding
at
September 30, 2006
    
    
    1,430,000
    
    
    $
    0.114
    
    
    
    9.9Options exercisable at
September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Nine months ended September 30, 2007WeightedAverageWeighted
    
    
    Remaining
    
    
    Aggregateaverage
    
    
    contractual
    
    
    intrinsicexercise
    
    
    Terms
    
    
    valueNumber
    
    
    Price
    
    
    (in years)
    
    
    priceOptions outstanding at
January 1, 2007 and
September 30, 2007
    
    
    1,200,000
    
    
    $
    0.111
    
    
    
    9.0
    
    
    
    323Options exercisable at
September 30, 2007
    
    
    300,000
    
    
    $
    0.111
    
    
    
    9.0
    
    
    
    81
 3.
    
    The weighted-average grant-date fair value of options granted
to employees during the nine months ended September 30, 2007 was NIS 0.498 per
option. The aggregate intrinsic value represents the total intrinsic value (the
difference between the Companys closing stock price on the last trading day of
September 2007 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by
 21




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 the option holders had all option
holders exercised their options on September 30, 2007. This amount change
based on the fair market value of the Companys stock. Total intrinsic value of
options exercised by employees for the nine months ended September 30, 2007 was
NIS 1,645. As of September 30, 2007, there was NIS 6,552 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 2.2 years.
 4.
    
    The Companys outstanding options to non-employees under the Companys
stock option plans as of September 30, 2007 are as follows:
 WeighedaverageOptions for
    
    
    
    
    
    
    
    
    
    remainingOrdinary
    
    Exercise price
    
    Options
    
    contractualIssuance date
    
    shares
    
    per share
    
    exercisable
    
    termsJanuary  June 2002
    
    
    14,010
    
    
    $
    12
    
    
    
    14,010
    
    
    
    5.0May 2003 - July 2004
    
    
    1,202,000
    
    
    $
    0.05
    
    
    
    1,150,750
    
    
    
    6.0July  August 2005
    
    
    165,625
    
    
    $
    0.02
    
    
    
    99,805
    
    
    
    7.8April 2006
    
    
    75,000
    
    
    $
    0.125
    
    
    
    23,438
    
    
    
    8.5September 2006
    
    
    1,200,000
    
    
    $
    0.111
    
    
    
    300,000
    
    
    
    9.0September 2007
    
    
    650,000
    
    
    $
    0.182
    
    
    
    
    
    
    
    10
 5.
    
    Compensation income (expenses) 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,Nine months ended
    
    Three months ended
    
    1999) throughSeptember 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006
    
    2006Research and
development
expenses
    
    
    153
    
    
    
    142
    
    
    
    (72
    )
    
    
    12
    
    
    
    942General and
administrative
expenses
    
    
    (116
    )
    
    
    23
    
    
    
    (127
    )
    
    
    8
    
    
    
    1,70037
    
    
    
    165
    
    
    
    (199
    )
    
    
    20
    
    
    
    2,692
 NOTE 6  RELATED PARTIES TRANSACTIONS
 a.
    
    On January 7, 2007, the general meeting of the shareholders of the
Company approved the BODS resolutions as follows:
 1.
    
    Monetary grant:The CEO will be entitled to receive a monetary grant from the Company,
calculated on the basis of the Companys revenues from product sales for 2007
(the Companys revenues). Such grant will equal 10% of the Companys revenues,
from $ 250 up to $ 500 and 5% of the Companys revenues exceeding $ 500. The
Companys revenues will be examined every calendar quarter in 2007. The amount
of the grant will be
 22




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 examined and paid pro rata to the accrued revenues as of
January 1, 2007 until the end of each quarter (less any amount paid on account
of the grant for the previous quarters). The grant will be paid to the CEO
within 14 days from the date of approval of the interim financial statements by
the board.2.
    
    Amendment to employment terms:The CEO will be entitled to an updated monthly salary, to be paid for the period
starting November 17, 2006, in a total of NIS 55, linked to the Israeli CPI
published on November 16, 2006 until the known CPI on the date of actual
payment.On September 25, 2007, Erez Golan signed a notice stating that Mr. Golan will
cease to act as President and CEO of the Company effective October 1, 2007, and
his employment with the Subsidiary will be terminated on December 25, 2007 (the
Termination). In connection with the Termination, on September 25, 2007, the
Subsidiary agreed to pay Mr. Golan the amount of $10,000 pursuant to the terms
of Mr. Golans employment agreement dated December 9, 2002, as amended, and to
pay Mr. Golan a bonus in the amount of $20,000 pursuant to the conditions set
forth in Mr. Golans termination notice letter dated September 25, 2007.Also, in connection with the Termination, on September 25, 2007, the Subsidiary
and Mr. Golan entered into a consulting agreement pursuant to which Mr. Golan
will serve as a consultant to the Subsidiary and perform consulting services
reasonably requested by the Subsidiary commencing on December 26, 2007 until
December 26, 2009. The Consulting Agreement shall automatically renew for
additional terms of one year. Either party may terminate the Consulting
Agreement, at any time, and for any reason or for no reason whatsoever, upon the
provision of 90 days advance written notice, and the Subsidiary may terminate
the Consulting Agreement effective immediately provided the Subsidiary has cause
to do so.Mr. Golan will provide the Subsidiary an average of 5 business days of
consulting per month (which average will be computed on a quarterly basis), in
consideration for which the Subsidiary will pay Mr. Golan a fee of $7,750 per
month. In the event Mr. Golan provides at least 15 business days of consulting
in a quarterly period, the Subsidiary will pay Mr. Golan an additional fee of
$1,500 for each additional business day of consulting supplied by Mr. Golan
during such quarterly period.The Subsidiary shall own all rights, title and interest in patents, intellectual
property rights and other inventions arising from Mr. Golans provision of
Services pursuant to the Consulting Agreement. Mr. Golan has entered into
confidentiality, non-compete and non-solicitation covenants under the Consulting
Agreement as more fully described therein.Mr. Golan is a director of the Company and beneficially owns five percent or
more of the outstanding shares of the Companys common stock.
 b.
    
    On March 4, 2007, the General Meeting of the Shareholders of the Company
approved to amend the terms of the loan to the CEO detailed in Note 4b2, such that
the conversion of the entire outstanding loan into a grant is accelerated to March
4, 2007, and the pledge is cancelled. As such, on March 4, 2007, TopSpin paid a cash
bonus to the CEO in the amount outstanding under the loan and the CEO repaid the
loan with the bonus amount.
 c.
    
    During April 2007, the Company entered into an agreement with Israel Seed
IV, L.P., the Pitango group and the Giza group, the controlling shareholders in the
Company (the controlling shareholders) according to which the controlling
shareholders will extend a dollar loan totaling U.S. $ 500,000 (the loan) to the
Company by April 30, 2007. The loan shall bear annual interest at a rate of 5.03%
and shall be repaid upon receiving the proceeds from the listing for trade of the
Companys securities at an estimated U.S. $ 4 million at the least, but in any event
no later than July 31, 2007. The loan has been fully repaid in June 2007, and is no
longer outstanding.
 23




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##### Table of Contents



TopSpin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
NIS in thousands,
except share and per share data
 
 d.
    
    On September 25, 2007, the Board of Directors of the Company approved the
appointment of Yaron Tal to serve as President and CEO of the Company and of the
Subsidiary effective October 1, 2007.In connection with the Election, on September 25, 2007, the Subsidiary and Mr. Tal
entered into an employment agreement (the Employment Agreement). Under the
Employment Agreement, Mr. Tal will receive a monthly gross salary of NIS 65 (the
Salary), and the Salary will be linked to, and adjusted on a quarterly basis in
accordance with, the Israeli Consumer Price Index to account for the cost of living
in Israel. Mr. Tal also will receive benefits such as a company car, a cellular
phone, managers insurance and an education fund, and he will be entitled to
reimbursement of reasonable expenses incurred by him in the performance of his
duties. The Employment Agreement provides that Mr. Tal may earn bonuses upon
satisfaction of certain performance objectives as determined by the Board of up to
7.5 times the monthly Salary for the period commencing on October 1, 2007 and ending
on December 31, 2008 (the Initial Target Period) and of up to 6 times the monthly
Salary for calendar years thereafter. Notwithstanding the foregoing, Mr. Tal shall
automatically receive a bonus of 4.5 times the monthly Salary with respect to the
Initial Target Period. The Subsidiary shall own all rights, title and interest in
patents, intellectual property rights and other inventions arising from Mr. Tals
provision of services pursuant to the Employment Agreement. Mr. Tal has entered into
confidentiality, non-compete and non-solicitation covenants under the Employment
Agreement as more fully described therein. On or before October 1, 2008, either
party may terminate the Employment Agreement, at any time, and for any reason or for
no reason whatsoever, upon the provision of written notice which notice of
termination shall become effective four months from the date of such notice, and
after October 1, 2008, such notice of termination shall become effective six months
from the date of such notice (such four or six month period, as the case may be,
being referred to as the Notice Period). Unless waived by the Subsidiary, Mr. Tal
shall continue his course of employment with Subsidiary during the first half of the
Notice Period. Mr. Tal may, but shall not be required to, continue his course of
employment with Subsidiary during the second half of the Notice Period. The
Subsidiary may terminate the Employment Agreement effective immediately provided the
Subsidiary has cause to do so.Furthermore, in connection with the Election, on September 25, 2007, the Board
approved the grant of an option to Mr. Tal for the purchase of up to 10,000,000
shares of the Companys common stock as described in Note 5c.
 NOTE 7  SUBSEQUENT EVENTS
  24




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##### Table of Contents



Item 2. Managements Discussion and Analysis or Plan of Operation.
  Overview
      Plan of Operation
   25




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##### Table of Contents



Critical Accounting Policies
    26




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##### Table of Contents



Off-Balance Sheet Arrangements
 Commitments to Pay Royalties to the Chief Scientist
  Offices Lease Commitments
   27




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##### Table of Contents



Bank Guarantee for Offices Lease
  Motor Vehicles Lease Commitment
  28




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##### Table of Contents



Item 3A(T). Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
     29




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PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Recent Sales of Unregistered Securities
  
    
    1,200,000 options for shares of Common Stock were exercised by 4 employees and
ex-employees of TopSpin Medical (Israel) Ltd. with gross proceeds of 29,853 NIS
(approximately $7,439).
 Use of Proceeds from Best-Efforts, Direct Public Offering
     Underwriting discounts and commissions
    
    
    Finders fees
    
    
    Expenses paid to or for our underwriters
    
    
    Other expenses
    
    1,012 NISTotal expenses
    
    1,012 NIS
    Construction of plant, building and facilities
    
    
    Purchase and installation of machinery and equipment
    
    
    Purchase of real estate
    
    
    Acquisition of other business
    
    
    Repayment of indebtedness
    
    3,128 NISWorking capital
    
    
    Temporary investments
    
    
    Other purposes (total) (for which at least 401,300 NIS
has been used based upon exchange rate of 4.013 NIS
for 1 U.S. Dollar on September 30, 2007)(1) Funds transferred to TopSpin Medical (Israel) Ltd.
as advance payment on TopSpin Medical (Israel) Ltd.
shares of common stock
    
    12,551 NISTotal
    
    15,679 NIS
 30




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
  VotesFor
    
    96,537,891 sharesAgainst
    
    
    Withheld
    
    
    Abstentions
    
    
    Broker Non-Votes
    
    
    
 
 Item 5. Other Information.
     31




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Item 6. Exhibits.
  ExhibitNumber
    
    Description of Document3.2
    
    Amended and Restated By-Laws31.1
    
    Certification by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)31.2
    
    Certification by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)32.1
    
    Certification Furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 32




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SIGNATURES
  TOPSPIN MEDICAL, INC.November 8, 2007
    
    By:
    
    /s/ Yaron Tal

Name: Yaron TalTitle: Chief Executive OfficerNovember 8, 2007
    
    By:
    
    /s/ Eyal Kolka

Name: Eyal KolkaTitle: Chief Financial Officer




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EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document3.2
    
    Amended and Restated By-Laws31.1
    
    Certification by Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)31.2
    
    Certification by Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)32.1
    
    Certification Furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002