##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission
File Number: 333-144472
 
 Topspin Medical, Inc.
 (Exact name of registrant as specified in its charter)
 
 DELAWARE
    
    98-0406340(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)Global Park2 Yofdat Street, Third FloorNorth Industrial AreaLod, Israel
    
    71291(Address of registrants principal executive offices)
    
    (Zip Code)
 (972)-8-920-0033
(Telephone number, including area code)
 N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




---



##### 



TOPSPIN MEDICAL, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 2008
 TABLE OF CONTENTS
 PagePART 1. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 4T. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31Exhibit 31.1Exhibit 31.2Exhibit 32
   - i -




---



##### Table of Contents



FORWARD-LOOKING STATEMENTS




---



##### Table of Contents



TOPSPIN MEDICAL, INC.
(A Development Stage Company)
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF SEPTEMBER 30, 2008
 (Unaudited)
 INDEX
 PageConsolidated Balance Sheets
    
    
    2-3Consolidated Statements of Operations
    
    
    4Statements of Changes in Shareholders Equity (Deficiency)
    
    
    5-8Consolidated Statements of Cash Flows
    
    
    9-10Notes to Consolidated Financial Statements
    
    
    11-22




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED BALANCE SHEETS
NIS in thousands
 December 31,
    
    
    September 30,2007
    
    
    2008UnauditedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    40,978
    
    
    
    5,300Other receivables and prepaid expenses
    
    
    2,275
    
    
    
    1,198Restricted deposit in respect of convertible bonds settlement
    
    
    
    
    
    
    12,500Inventory
    
    
    512
    
    
    
    Restricted deposits
    
    
    
    
    
    
    565Severance pay fund
    
    
    
    
    
    
    5Prepaid lease payments
    
    
    
    
    
    
    161Property and equipment, net
    
    
    
    
    
    
    37143,765
    
    
    
    20,100LONG-TERM ASSETS:Restricted deposit
    
    
    555
    
    
    
    Severance pay fund
    
    
    36
    
    
    
    Prepaid lease payments
    
    
    20
    
    
    
    611
    
    
    
    PROPERTY AND EQUIPMENT, NET
    
    
    2,692
    
    
    
    DEFERRED ISSUANCE EXPENSES
    
    
    4,206
    
    
    
    51,274
    
    
    
    20,100
  - 2 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED BALANCE SHEETS
NIS in thousands
 December 31,
    
    
    September 30,2007
    
    
    2008UnauditedLIABILITIES AND SHAREHOLDERS EQUITY
(DEFICIENCY)CURRENT LIABILITIES:Trade payables
    
    
    2,091
    
    
    
    431Other accounts payables and accrued expenses
    
    
    5,341
    
    
    
    8,062Liability in respect of convertible bonds settlement
    
    
    
    
    
    
    12,500Convertible bonds
    
    
    39,453
    
    
    
    Liability in respect of warrants (series 2)
    
    
    
    
    
    
    250Embedded derivative related to issuance expenses
    
    
    175
    
    
    
    500Liabilities in respect of options to employees and
consultants  short term
    
    
    
    
    
    
    54Accrued severance pay
    
    
    
    
    
    
    54847,060
    
    
    
    22,345LONG  TERM LIABILITIESAccrued severance pay
    
    
    633
    
    
    
    Liabilities in respect of options to employees and
consultants  long term
    
    
    2,368
    
    
    
    143Embedded conversion feature in convertible bonds
    
    
    1,281
    
    
    
    Liability in respect of warrants (series 2)
    
    
    9754,624
    
    
    
    143SHAREHOLDERS EQUITY (DEFICIENCY):Common shares of $0.001 par value:Authorized 500,000,000 shares; Issued and
outstanding 186,870,882 shares;
    
    
    837
    
    
    
    839Additional paid in capital
    
    
    163,790
    
    
    
    178,805Accumulated deficit during the development stage
    
    
    (165,670
    )
    
    
    (180,032
    )(1,043
    )
    
    
    (2,388
    )51,274
    
    
    
    20,100
  - 3 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
NIS in thousands
 Period frominception(September 20,Nine months ended
    
    
    Three months ended
    
    

1999) throughSeptember 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008UnauditedResearch and development expenses*
    
    
    14,213
    
    
    
    21,707
    
    
    
    3,318
    
    
    
    6,703
    
    
    
    133,340Less  participation by the office of the chief scientist
    
    
    
    
    
    
    (4,320
    )
    
    
    
    
    
    
    (1,108
    )
    
    
    (17,471
    )Research and development expenses, net
    
    
    14,213
    
    
    
    17,387
    
    
    
    3,318
    
    
    
    5,595
    
    
    
    115,869Sales and marketing expenses
    
    
    562
    
    
    
    750
    
    
    
    5
    
    
    
    160
    
    
    
    3,654General and administrative expenses
    
    
    6,398
    
    
    
    6,882
    
    
    
    2,913
    
    
    
    2,218
    
    
    
    54,866Operating loss
    
    
    (21,173
    )
    
    
    (25,019
    )
    
    
    (6,236
    )
    
    
    (7,973
    )
    
    
    (174,389
    )Financing income (loss) , net
    
    
    4,807
    
    
    
    (782
    )
    
    
    (13,359
    )
    
    
    (2,642
    )
    
    
    5,911Loss before income taxes
    
    
    (16,366
    )
    
    
    (25,801
    )
    
    
    (19,595
    )
    
    
    (10,615
    )
    
    
    (168,478
    )Income taxes
    
    
    5,375
    
    
    
    
    
    
    
    5,375
    
    
    
    
    
    
    
    5,375Loss after income taxes and before cumulative effect of a change in
accounting principle
    
    
    (21,741
    )
    
    
    (25,801
    )
    
    
    (24,970
    )
    
    
    (10,615
    )
    
    
    (173,853
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,141Net loss
    
    
    (21,741
    )
    
    
    (25,801
    )
    
    
    (24,970
    )
    
    
    (10,615
    )
    
    
    (168,712
    )Basic net loss per Common share
    
    
    (0.11
    )
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (0.06
    )Diluted net loss per Common share
    
    
    (0.11
    )
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (0.06
    )Weighted average number of Common shares outstanding used in basic
and diluted net loss per share calculation
    
    
    207,759,583
    
    
    
    170,886,274
    
    
    
    207,759,583
    
    
    
    185,114,256
 *
    
    Including deduction of experimental sales for the periods of three months and nine months ended
September 30, 2008 in the amount of approximately NIS 0 and NIS 212, respectively.  - 4 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
NIS in thousands
 Non-
    
    
    Deficitrecourse
    
    
    accumulatedNumber of outstanding shares
    
    
    Share capital
    
    
    Additional
    
    
    Receivables
    
    
    receivables
    
    
    during the
    
    
    TotalPreferred
    
    
    
    
    
    
    Preferred
    
    
    paid-in
    
    
    for shares
    
    
    for shares
    
    
    development
    
    
    shareholdersCommon
    
    
    A
    
    
    B
    
    
    C
    
    
    Common
    
    
    A
    
    
    B
    
    
    C
    
    
    capital
    
    
    issued
    
    
    issued
    
    
    stage
    
    
    equityBalance as of September 20, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common shares
    
    
    625,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Issuance of Preferred A shares
net of issuance expenses of NIS
20
    
    
    
    
    
    
    375,001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,136Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (380
    )
    
    
    (380
    )Balance as of December 31, 1999
    
    
    625,000
    
    
    
    375,001
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,134
    
    
    
    
    
    
    
    
    
    
    
    (380
    )
    
    
    2,759Issuance of Preferred B shares
net of issuance expenses of NIS
61
    
    
    
    
    
    
    
    
    
    
    208,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    10,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,184Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,880
    )
    
    
    (3,880
    )Balance as of December 31, 2000
    
    
    625,000
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    13,317
    
    
    
    
    
    
    
    
    
    
    
    (4,260
    )
    
    
    9,063Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,254
    )
    
    
    (7,254
    )Balance as of December 31, 2001
    
    
    625,000
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    13,317
    
    
    
    
    
    
    
    
    
    
    
    (11,514
    )
    
    
    1,809Issuance of Preferred C shares
net of issuance expenses of NIS 2,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,386,858
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    410
    
    
    
    47,578
    
    
    
    (630
    )
    
    
    
    
    
    
    
    
    
    
    47,358Beneficial conversion feature
related to Preferred A and
Preferred B shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,320
    
    
    
    
    
    
    
    
    
    
    
    (13,320
    )
    
    
    Issuance of Common 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
  - 5 -




---



##### Table of Contents



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




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
NIS in thousands
 Non-
    
    
    Deficitrecourse
    
    
    accumulated
    
    
    TotalNumber of outstanding shares
    
    
    Share capital
    
    
    Additional
    
    
    Receivables
    
    
    during the
    
    
    shareholdersPreferred
    
    
    
    
    
    
    Preferred
    
    
    paid-in
    
    
    for shares
    
    
    development
    
    
    equityCommon
    
    
    A
    
    
    B
    
    
    C
    
    
    Common
    
    
    A
    
    
    B
    
    
    C
    
    
    capital
    
    
    issued
    
    
    stage
    
    
    (deficiency)Balance as of December 31, 2004
    
    
    11,709,886
    
    
    
    375,001
    
    
    
    208,329
    
    
    
    87,386,858
    
    
    
    61
    
    
    
    2
    
    
    
    1
    
    
    
    410
    
    
    
    108,718
    
    
    
    (475
    )
    
    
    (88,374
    )
    
    
    20,343Conversion of Preferred A, B
and C into Common 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 Common 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 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.  - 7 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 STATEMENT
OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
NIS in thousands
 Non-
    
    
    Deficitrecourse
    
    
    accumulated
    
    
    TotalNumber of outstanding shares
    
    
    Share capital
    
    
    Additional
    
    
    receivables
    
    
    during the
    
    
    shareholdersPreferred
    
    
    
    
    
    
    Preferred
    
    
    paid-in
    
    
    for shares
    
    
    development
    
    
    equityCommon
    
    
    A
    
    
    B
    
    
    C
    
    
    Common
    
    
    A
    
    
    B
    
    
    C
    
    
    capital
    
    
    issued
    
    
    stage
    
    
    (deficiency)Balance as of December 31, 2006
    
    
    159,537,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,603
    
    
    
    (237
    )
    
    
    (141,502
    )
    
    
    (6,408
    )Exercise of options
    
    
    2,270,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    75Classification of liability
into equity in respect of
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,665
    
    
    
    
    
    
    
    
    
    
    
    1,665Repayment of non-recourse loan
and classification of liability
into equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    237
    
    
    
    
    
    
    
    9,457Issuance of Common shares and
warrants (series 3), net of
issuance expenses of NIS 1,013
    
    
    24,398,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,236
    
    
    
    
    
    
    
    
    
    
    
    18,336Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,168
    )
    
    
    (24,168
    )Balance as of December 31, 2007
    
    
    186,206,798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,790
    
    
    
    
    
    
    
    (165,670
    )
    
    
    (1,043
    )Cumulative effect of a change
in accounting principle (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,379
    
    
    
    5,379Exercise of options
    
    
    641,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    22Exercise of warrants (series 1)
    
    
    22,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (*
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Classification of liability
into equity in respect of
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Settlement with convertible
bonds holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,850
    
    
    
    
    
    
    
    
    
    
    
    14,850Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,741
    )
    
    
    (21,741
    )Balance as of September 30, 2008
(Unaudited)
    
    
    186,870,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,805
    
    
    
    
    
    
    
    (182,032
    )
    
    
    (2,388
    )
 *)
    
    Less than NIS 1.(1)
    
    See Note 2a.  - 8 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS in thousands, except for share and per share data
 Period frominception(September 20,Nine months ended
    
    
    1999) throughSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008UnauditedCash flows from operating activities:Net loss
    
    
    (21,741
    )
    
    
    (25,801
    )
    
    
    (163,337
    )Adjustments to reconcile net loss to net cash used
in operating activities (a)
    
    
    (1,216
    )
    
    
    4,506
    
    
    
    9,937Net cash used in operating activities:
    
    
    (22,957
    )
    
    
    (21,295
    )
    
    
    (153,400
    )Cash flows from investing activities:Change in restricted deposit, net
    
    
    
    
    
    
    (122
    )
    
    
    (509
    )Restricted deposit in respect of settlement agreement
    
    
    (12,500
    )
    
    
    
    
    
    
    (12,500
    )Restricted cash in respect of issuance of convertible
bonds
    
    
    
    
    
    
    52,242
    
    
    
    1,298Purchase of fixed assets
    
    
    (263
    )
    
    
    (487
    )
    
    
    (9,177
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    40Loan to the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    (231
    )Net cash provided by (used in) investing activities:
    
    
    (12,763
    )
    
    
    51,633
    
    
    
    (21,079
    )Cash flows from financing activities:Exercise of stock options and warrants
    
    
    42
    
    
    
    65
    
    
    
    238Proceeds from issuance of shares and warrants series
3, net of issuance expenses
    
    
    
    
    
    
    18,710
    
    
    
    137,905Proceeds from issuance of convertible bonds and
warrants series 2, net of issuance expenses
    
    
    
    
    
    
    (2,292
    )
    
    
    41,636Net cash provided by financing activities:
    
    
    42
    
    
    
    16,483
    
    
    
    179,779Increase (decrease) in cash and cash equivalents
    
    
    (35,678
    )
    
    
    46,821
    
    
    
    5,300Cash and cash equivalents at the beginning of the period
    
    
    40,978
    
    
    
    10,379
    
    
    
    Cash and cash equivalents at the end of the period
    
    
    5,300
    
    
    
    57,200
    
    
    
    5,300
  - 9 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS in thousands, except for share and per share data
 Period frominception(September 20,Nine months ended
    
    
    1999) throughSeptember 30,
    
    
    September 30,2008
    
    
    2007

    
    
    2008Unaudited(a) Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    1,213
    
    
    
    572
    
    
    
    7,465Impairment of property and equipment
    
    
    1,269
    
    
    
    
    
    
    
    1,269Capital gain (loss)
    
    
    (1
    )
    
    
    
    
    
    
    33Interest and exchange rate differences on loan to the Chief
Executive Officer
    
    
    
    
    
    
    
    
    
    
    (35
    )Non-cash bonus to the Chief Executive Officer
    
    
    
    
    
    
    241
    
    
    
    789Interest on restricted deposits
    
    
    (10
    )
    
    
    (1,110
    )
    
    
    (1,354
    )Change in fair value of liability in respect of warrants
    
    
    (725
    )
    
    
    (4,814
    )
    
    
    (7,494
    )Change in fair value of conversion feature
    
    
    
    
    
    
    (371
    )
    
    
    (2,746
    )Change in fair value of convertible bonds
    
    
    (3,799
    )
    
    
    
    
    
    
    (3,799
    )Change in fair value of embedded derivative
    
    
    325
    
    
    
    16
    
    
    
    (346
    )Amortization of deferred issuance expenses and bonds
discount
    
    
    
    
    
    
    3,835
    
    
    
    6,228Amortization of deferred stock based compensation related
to employees
    
    
    
    
    
    
    
    
    
    
    6,487Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (5,141
    )Change in fair value and amortization of stock options
classified as a liability
    
    
    (2,046
    )
    
    
    679
    
    
    
    4,648Amortization of deferred stock based compensation related
to consultants
    
    
    
    
    
    
    
    
    
    
    1,632Accrued severance pay, net
    
    
    (54
    )
    
    
    327
    
    
    
    543Decrease (Increase) in accounts receivable (including
long-term receivables)
    
    
    1,448
    
    
    
    7
    
    
    
    (1,359
    )Increase (decrease) in trade payables
    
    
    (1,557
    )
    
    
    (130
    )
    
    
    430Increase in other accounts payable
    
    
    2,721
    
    
    
    5,254
    
    
    
    2,687Total adjustments
    
    
    (1,216
    )
    
    
    4,506
    
    
    
    9,937(b) Supplemental disclosure of cash flow activities:Cash paid during the period for:Taxes paid due to non-deductible expenses
    
    
    46
    
    
    
    81
    
    
    
    762Interest paid
    
    
    
    
    
    
    32
    
    
    
    3,951(c) Supplemental disclosure of non cash flows activities:Accrued issuance expenses
    
    
    
    
    
    
    2,820
    
    
    
    2,868Beneficial conversion feature related to Preferred A
and Preferred B shares
    
    
    
    
    
    
    
    
    
    
    (13,320
    )Classification of liabilities into equity
    
    
    125
    
    
    
    10,865
    
    
    
    11,461
  - 10 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for 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 medical MRI technology.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 on the Tel
Aviv Stock Exchange (TASE). In 2007 the Company registered some of its
securities with the U.S. Securities and Exchange Commission (SEC). The Companys
securities are traded only in Israel in NIS.The Companys operations were in the areas of (i) interventional cardiology,
developing products based on medical MRI technology and (ii) urology, developing
an endorectal probe for the diagnosis of prostate cancer based on MRI technology
(the Urology Product). The Companys Board of Directors decided in its meeting
on April 27, 2008 that the Company should place more focus and resources on the
development of its Urology Product and decrease its expenses related to the IVMRI
catheter activity due to the market feedback received following the initial sales
in cardiology and an analysis of the cardiology and urology markets.b.
    
    Since its inception, the Company has devoted substantially most of its
efforts to business planning, research and development, marketing, recruiting
management and technical staff, acquiring assets and raising capital. Accordingly,
the Company is considered to be in the development stage, as defined in Statement
of Financial Accounting Standards No. 7, Accounting and reporting by development
Stage Enterprises (SFAS No. 7).Due to the financial situation of the Company, in its meeting on October 27, 2008,
the Companys Board of Directors approved termination of the employment of all of
the Subsidiarys employees, excluding 3 employees in the financing department.
These actions caused the Company to currently suspend its activities. In addition,
the Companys Board of Directors decided to continue searching for financing for
the Companys activities and to examine the possibility of expanding the
operations of the Company.The Company and its Subsidiary have not generated any revenues and have not
achieved profitable operations or positive cash flows from operations. The Company
has an accumulated deficit of NIS 182,032 as of September 30, 2008, and it
incurred a net loss of NIS 21,741 and negative cash flow from operating activities
in the amount of NIS 22,957 for the nine months ended September 30, 2008. There is
no assurance that profitable operations, if ever achieved, could be sustained on a
continuing basis.These conditions raise substantial doubt about the Companys ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
  - 11 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
NIS in thousands, except for share and per share data
 NOTE 1  GENERAL (CONT.)
 c.
    
    On July 13, 2008, the Company and Ziv Haft Trust Company, the
Co-Trustee acting on behalf of the holders of the Series A Convertible Bonds (the
Co-Trustee, the Bondholders and the Series A Bonds, respectively), executed a
settlement agreement (the Settlement Agreement). Pursuant to the Settlement
Agreement, and subject to its terms and
the approval of an Israeli court (the Israeli Court), the Indenture will be
amended such that in consideration of each NIS 1 par value of the Series A Bonds,
each Bondholder will be entitled to receive 9 shares of Common Stock of the
Company and the sum of NIS 0.25 in cash. Pursuant to this arrangement, the
Bondholders will be paid an aggregate amount of NIS 12,500 in cash, and will be
issued common stock such that following the execution of the arrangement, the
Bondholders will hold 71% of the issued and outstanding capital stock of the
Company (approximately 64% on a fully diluted basis). Pursuant to the Settlement
Agreement, the Company deposited within 3 days following the execution of the
Settlement Agreement NIS 12,500 in an account on behalf of the Co-Trustee. As of
September 30, 2008 the above mentioned amounts were deposited.As of September 25, 2008, all of the conditions for amending the Indenture were
satisfied.In accordance with the Settlement Agreement, on October 12, 2008, all of the
outstanding NIS 50,000,000 principal amount of Series A Bonds were converted into
450,000,000 shares of the Companys common stock. On October 26, 2008, the
Company paid in cash NIS 0.250263 (such amount including accrued interest) per
each NIS 1 par value of the principal amount of Series A Bonds. Upon the
completion of this cash payment, all of the Companys outstanding Series A Bonds
were retired.Due to implementation of the
Settlement Agreement, the Company recorded NIS 5,375 as
tax provision in its financial statements.d.
    
    On May 19, 2008 the Companys Board of Directors approved an
amendment to Erez Golans (director) Consulting Agreement. Effective as of
August 15, 2008 the Company agreed to pay the Consultant a fee of NIS 6.2 per each
day of services actually provided, plus value added tax. Both parties decided to
terminate the Consulting Agreement on October 22, 2008.e.
    
    The financial statements for the period ended September 30, 2008
include provision for fixed assets impairment of NIS 1,269. The provision is recorded
as part of the research and development expenses and general and administrative
expenses for the nine months ended September 30, 2008, which were equal to NIS 741
and NIS 528, respectively.f.
    
    On October 19, 2008, the Companys Board of Directors accepted the
resignation of Mr. Yaron Tal, the Companys Chief Executive Officer, effective
January 19, 2009.
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
 The accompanying unaudited interim consolidated financial statements have been prepared
as of September 30, 2008 and for the three-month and nine-month periods then ended, in
accordance with United States generally accepted accounting principles relating to the
preparation of financial statements for interim periods. Accordingly, they do not
include all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 2008 are not
necessarily indicative of the results that may be expected for the year ended December
31, 2008.The significant accounting policies followed in the preparation of these financial
statements are identical to those applied in the preparation of the latest annual
financial statements except as detailed below:
 a.
    
    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities (SFAS 159). This Statement
provides companies with an option to report selected financial assets and
liabilities at fair value. Generally accepted
  - 12 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
NIS in thousands, except for share and per share data
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 accounting principles have required different measurement attributes for different
assets and liabilities that can create artificial volatility in earnings. The
Statements objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. This Statement is effective as of the beginning of
an entitys first fiscal year beginning after November 15, 2007. The Company
has decided to adopt the provisions of SFAS No. 159 as of January 1, 2008 and
consequently measures the convertible bonds in their entirety at fair value
with changes in fair value recorded in earnings. As a result, the Company
recorded an increase in retained earnings in the amount of NIS 5,379. This
amount represents the difference between the aggregate amount of the fair value
of the embedded conversion feature and the amortized book value of the
convertible bonds as of December 31, 2007, net of issuance expenses, which
amounts to NIS 37,018 and the fair market value of the convertible bonds, based
on quoted market price as of the same date in the amount of NIS 31,639. As of
June 30, 2008 the fair value of the convertible bonds is NIS 12,139. See Note
1c for events subsequent to balance sheet date.b.
    
    Impact of recently issued accounting standards:For the period ended September 30, 2008, there were no changes to our critical
accounting policies as identified in our annual report of Form 10-K for the year
ended December 31, 2007 except as follows:
 Statement of Financial Accounting Standards No. 161In March 2008, the FASB issued SFAS No. 161 Disclosure about Derivative
Instruments and Hedging Activities (SFAS 161). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. The
guidance will become effective for the fiscal year beginning after November 15,
2008. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. This
statement encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. The Company is currently evaluating the future
impacts and disclosures resulting from SFAS 161.
 NOTE 3  CONTINGENT LIABILITIES
 1.
    
    Commitments to pay royalties to the Office of the Chief Scientist:The Subsidiary had obtained from the Office of the Chief Scientist of the State of
Israel grants for participation in research and development and, in return, the
Subsidiary is obligated to pay royalties amounting to 3% of the sales in the first three years from the beginning
of the repayment and 3.5% of the sales from the fourth year until all of its
obligation is repaid,
whichever period ends earlier. The grant is linked to the exchange rate of the
dollar and bears interest of LIBOR per annum.Through September 30, 2008, total grants obtained aggregate NIS 14,066.
  - 13 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
NIS in thousands, except for share and per share data
 NOTE 3  CONTINGENT LIABILITIES (CONT.)
 2.
    
    On October 15, 2008, the Companys Board of Directors decided not to
exercise the Subsidiarys option to renew its office lease agreement. According to
the leases agreement, the lease period will end on November 30, 2008.3.
    
    TopSpin leases motor vehicles under operating lease arrangements for 36
months. The monthly lease payments are approximately NIS 43. As of September 30,
2008, the Company has deposited NIS 161 covering rental payments for the last three
months in respect of these contracts, out of which an amount of NIS 90 is expected
to be paid in the following year as an early termination penalty.
 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 stock is
registered and publicly traded on the Tel-Aviv Stock Exchange.b.
    
    Share capital:
 1.
    
    In September 1999, the Company issued 625,000 shares of
common stock at a price of $0.001 per share.In October 1999, the Company issued 375,001 Preferred A shares in
consideration for NIS 3,136 (net of issuance expenses of NIS 20) at a price
of $2 per share.In May 2000, the Company issued 208,329 Preferred B shares in consideration
for NIS 10,184 (net of issuance expenses of NIS 61) at a price of $12 per
share.In December 2002, the Company issued 87,386,858 Preferred C shares in
consideration for a total amount of NIS 73,816 (net of issuance expenses of
NIS 2,200) at a price of $0.1886 per share. Part of the consideration for
the issued stock was paid at closing (NIS 47,358) and the remainder 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 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 shares of common
stock conferred voting rights and rights in
  - 14 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
NIS in thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 distribution of the Companys assets upon liquidation, after such
distribution is made to holders of preferred shares.All classes of shares, as stated above, conferred equal voting rights in the
Companys general meetings on the basis of conversion into the underlying
common stock.Preferred A, B and C shares were convertible into common stock shares
according to conversion rates of 15.5885, 53.4998 and 1 per share of common
stock, respectively.On August 22, 2005, the Company effected a consolidation and distribution of
its share capital in such a manner that 375,001 preferred A shares of $ 0.001
were converted into 5,845,692 shares of common stock, 208,329 Preferred B
 shares were converted into 11,145,557 shares of common stock and 87,386,858
Preferred C shares were converted into 87,386,858 shares of common stock.According to an agreement signed in December 2002, the Company issued to the
Chief Executive Officer (CEO) 11,927,727 shares of common stock in
consideration for $100, subject to a repurchase right and certain vesting
terms. 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 security to ensure the repayment of the loan, the CEO pledged these
 shares for the benefit of the Company. The pledged shares and the related
balance of the loan were deducted from the shareholders equity.The agreement determines that in case of inability to repay the loan, the
loan may be repaid only by return on the pledged shares. The CEO has also
undertaken that if the first of the events detailed in the agreement occurs
(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 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
six months ended June 30, 2007 and the period from inception through
September 30, 2008 amounts of NIS 241 and NIS 523, respectively became a
grant and were recorded as expenses.The Company has a repurchase option to buy the unvested shares from the CEO
at price equal to its original purchase price.Upon closing of the agreement 7/12 (seven twelfths) of the shares were
immediately vested. The other portions of the shares are subject to the
Companys right of repurchase according to the following terms:
  - 15 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
NIS in thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 A.
    
    The Companys right of repurchase shall lapse on
a monthly basis over a four year period commencing on the date of
execution of the original agreement.B.
    
    The Companys right of repurchase shall lapse,
with respect to 1/6 (one sixth) of the shares in the event that the
Company achieves a milestone as defined in the agreement. This milestone
was achieved in September 2003.
 Until December 31, 2005, the Company accounted for these shares as a variable
plan and 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 the cancellation
of the pledge on the above mentioned shares and the repayment of the
outstanding loan with the grant. Consequently, the liability related to this
loan in the amount of NIS 9,220 was classified as equity.Compensation expenses (income) related to the CEO of NIS (70) and NIS 8,866
were recognized during the nine months ended September 30, 2007 and for the
period from inception through September 30, 2008, respectively.2.
    
    In December 2002, the Company granted fully vested options
to holders of common stock, for their services, which are exercisable into
1,805,138 shares of common stock of the Company at $ 0.001 per share. The
options were exercised in September 2005 in consideration for NIS 7.3.
    
    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 shares
of common stock.4.
    
    On August 23, 2005, the Company increased its authorized
share capital to 500 million shares of common stock, $ 0.001 par value each.5.
    
    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
shares of common stock at NIS 0.95 per share and 600 options at no
consideration.
  - 16 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 As such, the Company has 22,800,000 registered
options (series 1) which are exercisable into 22,800,000 shares of
common stock of $ 0.001 par value with an exercise price of NIS 1.1 per share, linked to the changes in the dollar/NIS exchange rate
from August 25, 2005. The options are exercisable up to February 28, 2008. As
of the balance sheet date, 22,522 options (series 1) have been exercised and
the rest have been forfeited.Net proceeds total approximately NIS 32,430 (net of
issuance expenses of NIS 3,670). The net proceeds were allocated to the
 shares and options based on their relative market value.6.
    
    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 shares of
common stock and warrants (series 3) and the shares resulting from the
exercise of the warrants (series 3). On June 4, 2007, the registration
statement became effective.Pursuant to the registration statement, the Company is entitled to offer up
to 53,000,000 shares of common stock and 26,500,000 warrants (series 3),
offered in 26,500,000 Units (each consisting of 2 common 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 shares of common stock which
are listed for trade on the TASE together with 12,199,201 warrants (series 3)
that are listed for trade on the TASE since September 17, 2007. The issued
securities were issued in consideration for NIS 1.586 in cash per Unit. The
total net proceeds from the issuance amounted to approximately NIS 18,336
(net of issuance expenses of NIS 1,013).Each warrant (series 3) is exercisable into one share of common stock 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.
 NOTE 5  STOCK BASED COMPENSATION
 a.
    
    On March 4, 2008 the Board of Directors approved the grant of
2,880,000 options for the purchase of up to 2,880,000 shares of the Companys
common stock to employees of the Subsidiary at an exercise price per share of
$0.0782 pursuant to the Companys 2003 Israeli Stock Option Plan.
  - 17 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    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:
 Nine months ended September 30, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
    
    
    19,267,888
    
    
    $
    0.127Options granted
    
    
    2,880,000
    
    
    $
    0.078Options exercised
    
    
    (641,562
    )
    
    $
    0.011Options forfeited
    
    
    (4,021,826
    )
    
    $
    0.102Options outstanding at
September 30, 2008
    
    
    17,484,500
    
    
    $
    0.129
    
    
    
    8.4
    
    
    
    4.9Options vested and
expected to vest at
September 30, 2008
    
    
    13,107,387
    
    
    $
    0.138
    
    
    
    8.2
    
    
    
    4.9Options exercisable
at September 30, 2008
    
    
    6,311,438
    
    
    $
    0.148
    
    
    
    7.5
    
    
    
    4.9
 The weighted-average grant-date fair value of options granted to
employees during the nine months ended September 30, 2008 was NIS 0.09 per
option. The aggregate intrinsic value in the tables above represents the total
intrinsic value (the difference between the Companys closing stock price on
the last trading day of September 2008 and the exercise price, multiplied by
the number of in-the-money options) that would have been received by the
option holders had all option holders exercised their options on September 30,
2008. This amount changes based on the fair market value of the Companys
stock. Total intrinsic value of options exercised by employees for the nine
months ended September 30, 2008 was NIS 125.The fair value for these options was estimated using the Binomial model
option-pricing model.
  - 18 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Option granted to employees (cont.):
 2.
    
    A summary of the activity under the performance share based
options granted to employees as follows:
 Nine months ended September 30, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
and September 30,
2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.1
    
    
    
    Options vested and
expected to vest at
September 30, 2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.1
    
    
    
    Options exercisable
at September 30,
2008
    
    
    2,240,000
    
    
    $
    0.150
    
    
    
    7.5
    
    
    
    
 3.
    
    The Companys outstanding options to employees (including
options under performance) as of September 30, 2008, have been separated into
ranges of exercise prices as follows:
 Weighed averageOptions for
    
    
    
    
    
    
    remainingExercise price
    
    
    
    Common
    
    
    Options
    
    
    contractual termper share
    
    
    
    
    shares
    
    
    exercisable
    
    

(in years)$
    0.001
    
    
    
    
    
    165,000
    
    
    
    165,000
    
    
    
    4.8$
    0.02
    
    
    
    
    
    2,879,500
    
    
    
    2,665,750
    
    
    
    6.5$
    0.078
    
    
    
    
    
    1,745,000
    
    
    
    
    
    
    
    9.4$
    0.089
    
    
    
    
    
    2,500,000
    
    
    
    
    
    
    
    9.0$
    0.111
    
    
    
    
    
    400,000
    
    
    
    200,000
    
    
    
    8.0$
    0.120
    
    
    
    
    
    2,500,000
    
    
    
    
    
    
    
    9.0$
    0.125
    
    
    
    
    
    387,500
    
    
    
    267,188
    
    
    
    7.5$
    0.149
    
    
    
    
    
    690,000
    
    
    
    681,250
    
    
    
    7.7$
    0.150
    
    
    
    
    
    1,740,000
    
    
    
    1,590,000
    
    
    
    8.3$
    0.151
    
    
    
    
    
    2,500,000
    
    
    
    
    
    
    
    9.0$
    0.182
    
    
    
    
    
    4,215,000
    
    
    
    2,829,750
    
    
    
    9.0$
    2
    
    
    
    
    
    152,500
    
    
    
    152,500
    
    
    
    1.719,874,500
    
    
    
    8,551,438
    
    
    
    8.4
  - 19 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Option granted to employees (cont.):
 4.
    
    Compensation expenses (income) related to options granted
to employees were recorded to research and development expenses and general
and administrative expenses, as follows:
 Period frominception(September 20,Nine months ended
    
    
    Three months ended
    
    
    1999) throughSeptember 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Research and development expenses
    
    
    (1,127
    )
    
    
    (467
    )
    
    
    8
    
    
    
    (648
    )
    
    
    571General and administrative expenses
    
    
    (531
    )
    
    
    (536
    )
    
    
    45
    
    
    
    (1,658
    )
    
    
    9,939(1,658
    )
    
    
    (1,003
    )
    
    
    53
    
    
    
    (2,306
    )
    
    
    10,510
 As of September 30, 2008, there was NIS 56 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted to employees under the Companys stock option plans. That cost is
expected to be recognized over a weighted-average period of 1.8 years.
 c.
    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, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
    
    
    2,106,635
    
    
    $
    0.170Options forfeited
    
    
    (61,914
    )
    
    $
    0.070Options outstanding
at September 30, 2008
    
    
    2,044,721
    
    
    $
    0.173
    
    
    
    6.5
    
    
    
    Options exercisable at
September 30, 2008
    
    
    1,557,221
    
    
    $
    0.171
    
    
    
    5.7
    
    
    
    
 The Company accounted for its options to non-employees under the fair value
method in accordance of SFAS 123(R) and EITF 96-18. The fair value for options
granted to non-employees was estimated according to the principles determined
in SFAS 123(R) based on binomial option pricing model and amounts to
approximately NIS 30.
  - 20 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    Option granted to non-employees (cont.):
 2.
    
    A summary of the activity under the performance share-based
options granted to non-employees is as follows:
 Nine months ended September 30, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008 and
September 30, 2008
    
    
    1,200,000
    
    
    $
    0.111
    
    
    
    8.0
    
    
    
    Options vested and
expected to vest at
September 30, 2008
    
    
    300,000
    
    
    $
    0.111
    
    
    
    8.0
    
    
    
    Options exercisable at
September 30, 2008
    
    
    300,000
    
    
    $
    0.111
    
    
    
    8.0
    
    
    
    
 3.
    
    The Companys outstanding options to non-employees
(including options under performance) as of September 30, 2008, have been
separated into ranges of exercise prices as follows:
 WeighedaverageremainingOptions for
    
    
    
    
    
    
    contractualExercise price
    
    
    
    
    Common
    
    
    Options
    
    
    termper share
    
    
    
    
    shares
    
    
    exercisable
    
    
    (in years)$
    0.02
    
    
    
    
    
    136,523
    
    
    
    136,523
    
    
    
    6.8$
    0.05
    
    
    
    
    
    1,202,000
    
    
    
    1,202,000
    
    
    
    5.1$
    0.111
    
    
    
    
    
    1,200,000
    
    
    
    300,000
    
    
    
    8.0$
    0.125
    
    
    
    
    
    42,188
    
    
    
    42,188
    
    
    
    7.5$
    0.182
    
    
    
    
    
    650,000
    
    
    
    162,500
    
    
    
    9.0$
    12
    
    
    
    
    
    14,010
    
    
    
    14,010
    
    
    
    4.03,244,721
    
    
    
    1,857,221
    
    
    
    7.0
  - 21 -




---



##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NIS in thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    Option granted to non-employees (cont.):
 4.
    
    Compensation expenses (income) related to options granted
to non-employees were recorded to research and development expenses and
general and administrative expenses, as follows:
 Period frominception(September 20,Nine months ended
    
    
    Three months ended
    
    
    1999) throughSeptember 30,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Research and
development
expenses
    
    
    (326
    )
    
    
    153
    
    
    
    16
    
    
    
    (72
    )
    
    
    206General and
administrative
expenses
    
    
    (187
    )
    
    
    (116
    )
    
    
    9
    
    
    
    (127
    )
    
    
    1,324(513
    )
    
    
    37
    
    
    
    25
    
    
    
    (199
    )
    
    
    1,530
 As of September 30, 2008, there was NIS 5 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted to
non-employees under the Companys stock option plans. That cost is expected to be
recognized over a weighted-average period of 1.4 years.d.
    
    Options granted to Tmura  The Israeli Public Service Venture Fund
and to American Friends of Tmura Inc. (Tmura).As of September 30, 2008, the fair value of the liability in respect for the
options issued was NIS 6. Compensation income of NIS 47, NIS 45 and of NIS 7
related to options granted to Tmura were recorded to general and administrative
expenses during the nine-month periods ended September 30, 2008 and 2007 and the
period from inception through September 30, 2008, respectively.
  - 22 -




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Form 8-K Form 8-K
 Overview
    Co-Trustee
  Liquidity and Capital Resources
   - 23 -




---



##### Table of Contents



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




---



##### Table of Contents



General and Administrative Expense
   Income Taxes
  Critical Accounting Policies
     - 25 -




---



##### Table of Contents



- 26 -




---



##### Table of Contents



Off-Balance Sheet Arrangements
 Commitments to Pay Royalties to the Chief Scientist
  Office Lease Commitments
  Bank Guarantee for Office Lease
  Motor Vehicles Lease Commitment
   - 27 -




---



##### Table of Contents



ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
     - 28 -




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  The cash payment in satisfaction of our obligations under the Settlement Agreement has
adversely affected our business and our liquidity and has raised substantial doubt about our
ability to continue as a going concern.
  Our reduced cash status has caused us to currently suspend our activities.
  Recent disruptions in the financial markets could affect our ability to obtain financing on
reasonable terms.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   - 29 -




---



##### Table of Contents



Proposal
    
    For
    
    
    AgainstApproval of Settlement Agreement
    
    
    80,118,871
    
    
    
    249,712Approval of Amendment to Certificate of
Incorporation
    
    
    98,085,952
    
    
    
    0
 
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description4.1
    
    
    First Supplemental Indenture, by and between Topspin Medical Inc., Wilmington
Trust Company (as the Indenture Trustee) and Ziv Haft Trust Company Ltd., dated
as of September 18, 2008.99.1
    
    
    Termination Agreement by and between TopSpin Medical (Israel) Ltd. and Top
Medical B.V., dated August 28, 2008.31.1
    *
    
    Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)31.2
    *
    
    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)32
    *
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350 Certifications as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
  *
    -
    filed herewith.  - 30 -




---



##### Table of Contents



SIGNATURES
  TOPSPIN MEDICAL, INC.Date: November 14, 2008
    By:
    /s/     Yaron TalChief Executive OfficerDate: November 14, 2008
    By:
    /s/   Tami Sharbit-BacharDirector of Finance  - 31 -




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description4.1
    
    
    First Supplemental Indenture, by and between Topspin Medical Inc., Wilmington Trust Company
(as the Indenture Trustee) and Ziv Haft Trust Company Ltd., dated as of September 18, 2008.99.1
    
    
    Termination Agreement by and between TopSpin Medical (Israel) Ltd. and Top Medical B.V.,
dated August 28, 2008.31.1*
    
    
    Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)31.2*
    
    
    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)32*
    
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 Certifications as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
  *
    -
    filed herewith.  - 32 -