##### 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 June 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 June 30, 2008
 TABLE OF CONTENTS
 PagePART 1.FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 4T. Controls and Procedures
    
    
    29PART II.OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31Exhibit 3.1Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
   -i-




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##### Table of Contents



FORWARD-LOOKING STATEMENTS




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##### Table of Contents



TOPSPIN MEDICAL, INC.
(A Development Stage Company)
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JUNE 30, 2008
 (Unaudited)
 INDEX
 PageConsolidated Balance Sheet
    
    
    2-3Consolidated Statements of Operations
    
    
    4Statements of Changes in Shareholders Equity (Deficiency)
    
    
    5-8Consolidated Statements of Cash Flows
    
    
    9-10Notes to Consolidated Financial Statements
    
    
    11 - 24




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 NIS in thousands
 December 31,
    
    
    June 30,2007
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    40,978
    
    
    
    24,791Other receivables and prepaid expenses
    
    
    2,275
    
    
    
    1,342Inventory
    
    
    512
    
    
    
    43,765
    
    
    
    26,133LONG-TERM ASSETS:Restricted deposit
    
    
    555
    
    
    
    564Severance pay fund
    
    
    36
    
    
    
    35Prepaid lease payments
    
    
    20
    
    
    
    139611
    
    
    
    738PROPERTY AND EQUIPMENT, NET
    
    
    2,692
    
    
    
    1,482DEFERRED ISSUANCE EXPENSES
    
    
    4,206
    
    
    
    51,274
    
    
    
    28,353
  - 2 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NIS in thousands
 December 31,
    
    
    June 30,2007
    
    
    2008LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)CURRENT LIABILITIES:Trade payables
    
    
    2,091
    
    
    
    747Other accounts payables and accrued expenses
    
    
    5,341
    
    
    
    6,219Convertible debentures
    
    
    39,453
    
    
    
    12,139Embedded derivative related to issuance expenses
    
    
    175
    
    
    
    50047,060
    
    
    
    19,605LONG  TERM LIABILITIESAccrued severance pay
    
    
    633
    
    
    
    601Liabilities in respect of options to employees and consultants
    
    
    2,368
    
    
    
    115Embedded conversion feature in convertible debentures
    
    
    1,281
    
    
    
    Liability in respect of warrants (series 2)
    
    
    975
    
    
    
    3004,624
    
    
    
    415SHAREHOLDERS EQUITY (DEFICIENCY):Ordinary 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
    
    
    
    163,955Accumulated deficit during the development stage
    
    
    (165,670
    )
    
    
    (157,062
    )(1,043
    )
    
    
    7,73251,274
    
    
    
    28,353
  - 3 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Period frominceptionSix months ended
    
    
    Three months ended
    
    
    (September 20, 1999)June 30,
    
    
    June 30,
    
    
    through June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008UnauditedResearch and development expenses*
    
    
    10,895
    
    
    
    15,004
    
    
    
    5,801
    
    
    
    7,830
    
    
    
    130,022Less  participation by the office of the chief scientist
    
    
    
    
    
    
    (3,212
    )
    
    
    
    
    
    
    (2,912
    )
    
    
    (17,471
    )Research and development expenses, net
    
    
    10,895
    
    
    
    11,792
    
    
    
    5,801
    
    
    
    4,918
    
    
    
    112,551Sales and marketing expenses
    
    
    557
    
    
    
    590
    
    
    
    183
    
    
    
    268
    
    
    
    3,649General and administrative expenses (income)
    
    
    3,485
    
    
    
    4,664
    
    
    
    1,992
    
    
    
    1,915
    
    
    
    51,953Operating loss
    
    
    (14,937
    )
    
    
    (17,046
    )
    
    
    (7,976
    )
    
    
    (7,101
    )
    
    
    (168,153
    )Financing income , net
    
    
    18,166
    
    
    
    1,860
    
    
    
    10,938
    
    
    
    955
    
    
    
    19,270Income (loss) before cumulative effect of a change in
accounting principle
    
    
    3,229
    
    
    
    (15,186
    )
    
    
    2,962
    
    
    
    (6,146
    )
    
    
    (148,883
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238Net income (loss)
    
    
    3,229
    
    
    
    (15,186
    )
    
    
    2,962
    
    
    
    (6,146
    )
    
    
    (149,121
    )Basic and diluted net income (loss) per Ordinary share
    
    
    0.017
    
    
    
    (0.09
    )
    
    
    0.016
    
    
    
    (0.04
    )Weighted average number of Ordinary shares outstanding
used in basic and diluted net income (loss) per share
calculation
    
    
    189,090,511
    
    
    
    163,487,681
    
    
    
    189,090,511
    
    
    
    167,039,012
 *
    
    Including deduction of experimental sales for the periods of six and three months ended June 30,
2008 in the amount of approximately NIS 212 and NIS 122, respectively.  - 4 -




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)
NIS in thousands
 Non-
    
    
    Deficitrecourse
    
    
    accumulated
    
    
    TotalNumber of outstanding shares
    
    
    Share capital
    
    
    Additional
    
    
    receivables
    
    
    during the
    
    
    shareholdersPreferred
    
    
    
    
    
    
    Preferred
    
    
    paid-in
    
    
    for shares
    
    
    development
    
    
    equityOrdinary
    
    
    A
    
    
    B
    
    
    C
    
    
    Ordinary
    
    
    A
    
    
    B
    
    
    C
    
    
    capital
    
    
    issued
    
    
    stage
    
    
    (deficiency)Balance as of December 31, 2006
    
    
    159,537,461
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,603
    
    
    
    (237
    )
    
    
    (141,502
    )
    
    
    (6,408
    )Exercise of options
    
    
    2,270,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    75Classification of liability
into equity in respect of
exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,665
    
    
    
    
    
    
    
    
    
    
    
    1,665Repayment of non-recourse loan
and classification of
liability into equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,220
    
    
    
    237
    
    
    
    
    
    
    
    9,457Issuance of Ordinary 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
    
    
    
    
    
    
    
    
    
    
    
    125Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,229
    
    
    
    3,229Balance as of June 30, 2008
    
    
    186,870,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,955
    
    
    
    
    
    
    
    (157,062
    )
    
    
    7,732
 *)
    
    Less than NIS 1 thousand.(1)
    
    See Note 2a.  - 8 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 NIS in thousands
 Period frominception(September 20,Six months ended
    
    
    1999) throughJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    
    3,229
    
    
    
    (15,186
    )
    
    
    (149,121
    )Adjustments to reconcile net loss to net cash used
in operating activities (a)
    
    
    (19,215
    )
    
    
    841
    
    
    
    2,692Net cash used in operating activities:
    
    
    (15,986
    )
    
    
    (14,345
    )
    
    
    (146,429
    )Cash flows from investing activities:Change in restricted deposit, net
    
    
    
    
    
    
    (122
    )
    
    
    (509
    )Restricted cash in respect of issuance of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    Purchase of fixed assets
    
    
    (243
    )
    
    
    (347
    )
    
    
    (9,157
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    40Loan to the Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    (231
    )Net cash used in investing activities:
    
    
    (243
    )
    
    
    (469
    )
    
    
    (8,559
    )Cash flows from financing activities:Exercise of stock options and warrants
    
    
    42
    
    
    
    35
    
    
    
    238Proceeds from issuance of shares and warrants series
3 , net of issuance expenses
    
    
    
    
    
    
    18,710
    
    
    
    137,905Proceeds from issuance of convertible debentures and
warrants series 2, net of issuance expenses
    
    
    
    
    
    
    (220
    )
    
    
    41,636Net cash provided by financing activities:
    
    
    42
    
    
    
    18,525
    
    
    
    179,779Increase (decrease) in cash and cash equivalents
    
    
    (16,187
    )
    
    
    3,711
    
    
    
    24,791Cash and cash equivalents at the beginning of the period
    
    
    40,978
    
    
    
    10,379
    
    
    
    Cash and cash equivalents at the end of the period
    
    
    24,791
    
    
    
    14,090
    
    
    
    24,791
  - 9 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
NIS in thousands
 Period frominception(September 20,Six months ended
    
    
    1999) throughJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008(a) Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    1,334
    
    
    
    380
    
    
    
    7,586Capital loss
    
    
    16
    
    
    
    
    
    
    
    50Interest and exchange rate differences on loan to the Chief
Executive Officer
    
    
    
    
    
    
    
    
    
    
    (35
    )Non-cash bonus to the Chief Executive Officer
    
    
    
    
    
    
    241
    
    
    
    789Interest on restricted deposit
    
    
    (9
    )
    
    
    (888
    )
    
    
    (1,353
    )Change in fair value of liability in respect of warrants
    
    
    (675
    )
    
    
    (2,869
    )
    
    
    (7,444
    )Change in fair value of conversion feature
    
    
    
    
    
    
    (1,857
    )
    
    
    (2,746
    )Change in fair value of convertible debentures
    
    
    (19,010
    )
    
    
    
    
    
    
    (19,010
    )Change in fair value of embedded derivative
    
    
    325
    
    
    
    (83
    )
    
    
    (346
    )Amortization of deferred issuance expenses and debentures
discount
    
    
    
    
    
    
    2,297
    
    
    
    6,228Amortization of deferred stock based compensation related
to employees
    
    
    
    
    
    
    
    
    
    
    6,487Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    238Change in fair value and amortization of stock options
classified as a liability
    
    
    (2,128
    )
    
    
    1,548
    
    
    
    4,566Amortization of deferred stock based compensation related
to consultants
    
    
    
    
    
    
    
    
    
    
    1,632Accrued severance pay, net
    
    
    (31
    )
    
    
    42
    
    
    
    566Increase (decrease) in accounts receivable (including
long-term receivables)
    
    
    1,326
    
    
    
    (1,368
    )
    
    
    (1,481
    )Increase (decrease) in trade payables
    
    
    (1,241
    )
    
    
    1,123
    
    
    
    746Increase in other accounts payable
    
    
    878
    
    
    
    2,275
    
    
    
    6,219Total adjustments
    
    
    (19,215
    )
    
    
    841
    
    
    
    2,692(b) Supplemental disclosure of cash flow activities:Cash paid during the period for:Taxes paid due to non-deductible expenses
    
    
    39
    
    
    
    67
    
    
    
    755Interest paid
    
    
    20
    
    
    
    
    
    
    
    3,951(c) Supplemental disclosure of non cash flows activities:Accrued issuance expenses
    
    
    
    
    
    
    526
    
    
    
    2,868Classification of liabilities into equity
    
    
    125
    
    
    
    10,041
    
    
    
    11,461
 
  - 10 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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 a 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 in 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 stocks
are traded only in Israel in NIS.b.
    
    Since its inception, the Company has devoted substantially most of its efforts to
business planning, research and development, marketing, recruiting management and
technical staff, acquiring assets and raising capital. Accordingly, the Company
is considered to be in the development stage, as defined in Statement of
Financial Accounting Standards No. 7, Accounting and reporting by development
Stage Enterprises (SFAS No. 7).The Company have financed its operations principally through private and public
sales of equity securities, convertible notes and through grants from the Office
of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor.As of June 30, 2008 the Company finished the development of the first generation
and the advanced generation intravascular MRI catheter for the coronary arteries
(IVMRI), received the CE Mark and filed a marketing application with the United
States Food and Drug Administration (the FDA) in order to obtain the FDAs
approval to market the first generation IVMRI catheter in the United State, but
didnt received it yet.
On July 31, 2008 the Board of Directors decided to dismiss the abovementioned FDA
application.The Company develops an endorectal probe for the diagnosis of prostate cancer
based on its MRI technology (the Urology Product). The Companys board of
directors has decided in its meeting dated April 27, 2008, that the Company shall
put more focus and resources on the development of its Urology Product and shall
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. Also, the Companys board of directors
decided to decrease the total research and development expenses starting the
second half of 2008 by 40% with respect to its level in the second half of 2007.
   - 11 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 1  GENERAL (CONT.)
    c.
    
    On June 3, 2008, the Ziv Haft Trust Company, the Co-Trustee of
holders of the Series A Convertible Bonds (the Co-Truestee, the Bondholders and
the Bonds respectively) gave a notice that an Event of Default, as defined in the
indenture, has occurred and that a meeting of the Bondholders will be held to
discuss, among others, early redemption of the Series A Convertible Bonds.On June 11, 2008, the Court of Chancery of the State of Delaware (the Court) granted
a temporary restraining order (a TRO) in favor of the Company. The TRO enjoined
the Co-Trustee from taking any action in furtherance of an early redemption of
the Bonds before the completion of a trial on the matter, commenced by a petition
for declaratory relief (the Petition) filed by the Company on June 3, 2008 with
the Court. The TRO also enjoined the Co-Trustee from allowing the holders of the
Bonds to vote on a special decision for an early redemption of the Bonds until
June 17, 2008.According to an unanimous resolution by a continued meeting of the Bondholders that
was held on June 17, 2008, the Co-Trustee was empowered to achieve a settlement agreement
with the Company on behalf of the Bondholders with respect to specified and complete
conditions of an arrangement between the Bondholders and the Company, according to the
arrangement layout, and the matters brought into discussion in the aforementioned continued
meeting of the Bondholders, and to execute the settlement agreement in the name of the
Bondholders.On July 8, 2008, the Company dismissed the Petition, including the TRO and the Board
of Directors approved the arrangement with the Bondholders.
  - 12 -




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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 1  GENERAL (CONT.)
    d.
    
    On May 19, 2008 the Companys Board of Directors approved an
Amendment to Erez Golans (director) Consulting Agreement. Pursuant to this amendment, effective as of
August 15, 2008, the Company agrees to pay the Consultant a fee of NIS 6.2 per each
day of services actually provided, plus value added tax.
 e.
    
    The financial statements for the period ended June 30, 2008
included provision for fixed assets impairment of NIS 332. The provision recorded as
part of the research and development expenses for the three-months and six-months
ended June 30, 2008.
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES (CONT.)
  a.
    
    In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities(SFAS 159). This Statement provides companies with an
option to report selected financial assets and liabilities at fair value. Generally
accepted accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in earnings.
The Statements objective is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets and
liabilities differently. This Statement is effective as of the beginning of an
entitys first fiscal year beginning after November 15, 2007.The Company has decided to adopt the provisions of SFAS No. 159 as of January 1,
2008 and consequently measures the convertible debentures at its 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
debenture as of December 31, 2007, net of issuance expenses, which amounts to NIS
37,018 and the fair market value of the convertible debenture, 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 debentures is NIS 12,139. See Note 1c for events
subsequent to balance sheet date.b.
    
    Impact of recently issued accounting standards:
 1.
    
    SFAS No. 160:SFAS 160  In December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the
consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the
amounts of
consolidated net income attributable to the parent and to the noncontrolling
interest.SFAS 160 requires that a parent recognize a gain or loss in net income when
a subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish
between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary.SFAS 160 is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Early adoption is not
permitted.The Company is currently evaluating the potential impact that the adoption of
SFAS 160 could have on its consolidated financial statements.2.
    
    Statement of Financial Accounting Standards No. 161In March 2008, the FASB issued
SFAS No. 161 Disclosures 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. This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption.
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES (CONT.)
 b.
    
    Impact of recently issued accounting standards:
 The Company is currently evaluating the future impacts and
disclosures resulting from SFAS 161.3.
    
    Emerging Issues Task Force document No. 07-1In November 2007, the EITF issued EITF Issue No. 07-1, Accounting for
Collaborative Arrangements Related to the Development and Commercialization
of Intellectual Property. Companies may enter into arrangements with other
companies to jointly develop, manufacture, distribute, and market a product.
Often the activities associated with these arrangements are conducted by the
collaborators without the creation of a separate legal entity (that is, the
arrangement is operated as a virtual joint venture). The arrangements
generally provide that the collaborators will share, based on contractually
defined calculations, the profits or losses from the associated activities.
Periodically, the collaborators share financial information related to
product revenues generated (if any) and costs incurred that may trigger a
sharing payment for the combined profits or losses. The consensus requires
collaborators in such an arrangement to present the result of activities for
which they act as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable
GAAP or, in the absence of other applicable GAAP, based on analogy to
authoritative accounting literature or a reasonable, rational, and
consistently applied accounting policy election. EITF Issue No. 07-1 is
effective
for collaborative arrangements in place at the beginning of the annual
period beginning after December 15, 2008. The Company is currently
evaluating the impact that this pronouncement may have on its consolidated
financial statements.
 NOTE 3  CONTINGENT LIABILITIES
    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.
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Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital:
 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.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.
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Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 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, 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 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
June 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:
 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.
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 On March 4, 2007 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.Compensation expenses (income) related to the CEO of NIS (70) and NIS 8,866
were recognized during the six months ended June 30, 2007 and for the
period from inception through June 30, 2008, 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, 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.
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 4  SHAREHOLDERS EQUITY (CONT.)
 b.
    
    Share capital (cont.):
 7.
    
    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 June 4, 2007, the registration statement became effective.In the context of the registration statement, the Company is entitled to
offer up to 53,000,000 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 listed for trade on the TASE since September 17, 2007. The issued
securities were issued in consideration for NIS 1.586 in cash per Unit. The
total net proceeds from the issuance amounted to approximately NIS 18,336
(net of issuance expenses of NIS 1,013).The shares issued 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.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 Common Stock.
 NOTE 5  STOCK BASED COMPENSATION
 a.
    
    On March 4, 2008 the Board of Directors approved the grant of
2,880,000 options for the purchase of up to 2,880,000 shares of the Companys
common stock to employees of the subsidiary at an exercise price per share of
$0.0782 pursuant to the Companys 2003 Israeli Stock Option Plan.
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    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:
 Six months ended June 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
    
    
    (1,829,827
    )
    
    $
    0.114Options outstanding at
June 30, 2008
    
    
    19,676,499
    
    
    $
    0.125
    
    
    
    8.6
    
    
    
    7Options vested and
expected to vest at
June 30, 2008
    
    
    16,350,391
    
    
    $
    0.128
    
    
    
    8.5
    
    
    
    7Options exercisable
at June 30, 2008
    
    
    4,029,938
    
    
    $
    0.119
    
    
    
    6.5
    
    
    
    7
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Option granted to employees (cont.):
 2.
    
    A summary of the activity under the performance share
based options granted to employees as follows:
 Six months ended June 30, 2008,2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008
and June 30, 2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.4
    
    
    
    Options vested and
expected to vest at
June 30, 2008
    
    
    2,390,000
    
    
    $
    0.150
    
    
    
    8.4
    
    
    
    Options exercisable
at June 30, 2008
    
    
    2,210,000
    
    
    $
    0.150
    
    
    
    8.3
    
    
    
    
 3.
    
    The Companys outstanding options to employees (including options under performance) as of
June 30, 2008, have been separated into ranges of exercise prices as follows:
 Weighed averageExercise
    
    Options for
    
    
    
    
    
    
    remainingprice
    
    Ordinary
    
    
    Options
    
    
    contractual termper share
    
    shares
    
    
    exercisable
    
    
    (in years)$0.001
    
    
    340,000
    
    
    
    340,000
    
    
    
    5.1$  0.02
    
    
    3,306,062
    
    
    
    2,796,688
    
    
    
    6.6$0.078
    
    
    2,745,000
    
    
    
    
    
    
    
    9.7$0.089
    
    
    2,500,00
    
    
    
    
    
    
    
    9.2$0.111
    
    
    407,500
    
    
    
    183,750
    
    
    
    8.2$0.120
    
    
    2,500,00
    
    
    
    
    
    
    
    9.2$0.125
    
    
    575,000
    
    
    
    337,500
    
    
    
    7.8$0.149
    
    
    883,437
    
    
    
    867,500
    
    
    
    7.9$0.150
    
    
    1,740,00
    
    
    
    1,560,000
    
    
    
    8.5$0.151
    
    
    2,500,00
    
    
    
    
    
    
    
    9.2$0.182
    
    
    4,415,000
    
    
    
    
    
    
    
    9.2$       2
    
    
    152,500
    
    
    
    152,500
    
    
    
    2.0$     12
    
    
    2,000
    
    
    
    2,000
    
    
    
    4.222,066,499
    
    
    
    6,239,938
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 b.
    
    Option granted to employees (cont.):
 4.
    
    Compensation expenses (income) related to options granted
to employees were recorded to research and development expenses and general
and administrative expenses, as follows:
 Period frominception(September 20,Six months ended
    
    
    Three months ended
    
    
    1999) throughJune 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Research and
development
expenses
    
    
    (1,009
    )
    
    
    181
    
    
    
    (570
    )
    
    
    142
    
    
    
    689General and
administrative
expenses
    
    
    (576
    )
    
    
    1,122
    
    
    
    (429
    )
    
    
    277
    
    
    
    9,894(1,585
    )
    
    
    1,303
    
    
    
    (999
    )
    
    
    419
    
    
    
    10,583
  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:
 Six months ended June 30, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding
at January 1, 2008
and June 30, 2008
    
    
    2,106,635
    
    
    $
    0.170
    
    
    
    6.7
    
    
    
    Options exercisable at
June 30, 2008
    
    
    1,374,995
    
    
    $
    0.171
    
    
    
    5.5
    
    
    
    
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    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:
 Six months ended June 30, 2008WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractual
    
    
    Aggregateexercise
    
    
    term
    
    
    intrinsicNumber
    
    
    price
    
    
    (in years)
    
    
    valueOptions outstanding at
January 1, 2008 and
June 30, 2008
    
    
    1,200,000
    
    
    
    0.111
    
    
    
    8.2
    
    
    
    Options exercisable at
June 30, 2008
    
    
    300,000
    
    
    
    0.111
    
    
    
    8.2
    
    
    
    
 3.
    
    The Companys outstanding options to non-employees (including options under
performance) as of June 30, 2008, have been separated into ranges of
exercise prices as follows:
 WeighedaverageremainingOptions for
    
    
    
    
    
    
    contractualExercise price
    
    Ordinary
    
    
    Options
    
    
    termper share
    
    shares
    
    
    exercisable
    
    
    (in years)$  0.02
    
    
    165,625
    
    
    
    130,860
    
    
    
    7.1$  0.05
    
    
    1,202,000
    
    
    
    1,192,625
    
    
    
    5.3$0.111
    
    
    1,200,000
    
    
    
    300,000
    
    
    
    8.2$0.125
    
    
    75,000
    
    
    
    37,500
    
    
    
    7.8$0.182
    
    
    650,000
    
    
    
    
    
    
    
    9.2$     12
    
    
    14,010
    
    
    
    14,010
    
    
    
    4.23,306,635
    
    
    
    1,674,995
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##### Table of Contents



Topspin Medical, Inc.
(A Development Stage Company)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except for share and per share data
 NOTE 5  STOCK BASED COMPENSATION (CONT.)
 c.
    
    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,Six months ended
    
    
    Three months ended
    
    
    1999) throughJune 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008Research and
development
expenses
    
    
    (344
    )
    
    
    225
    
    
    
    (221
    )
    
    
    11
    
    
    
    188General and
administrative
expenses
    
    
    (196
    )
    
    
    12
    
    
    
    (85
    )
    
    
    (40
    )
    
    
    1,315(540
    )
    
    
    237
    
    
    
    (306
    )
    
    
    (29
    )
    
    
    1,503
  d.
    
    Options granted to Tmura  The Israeli Public Service Venture
Fund and to American Friends of Tmura Inc. (Tmura).As of June 30, 2008, the fair value of the liability in respect for the options
issued was NIS 3. Compensation income of NIS 51, NIS 4 and of NIS 3 related to
options granted to Tmura were recorded to general and administrative expenses
during the six-month periods ended June 30, 2008 and 2007 and the period from
inception through June 30, 2008, respectively.
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##### Table of Contents



ITEM 2.

    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
    Liquidity and Capital Resources
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Operating Activities
  Financing Activities
  (
 Investing Activities
  Results of Operations
  Research and Development Expense
  Selling and Marketing Expense
  General and Administrative Expense
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Critical Accounting Policies
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Off-Balance Sheet Arrangements
 Commitments to Pay Royalties to the Chief Scientist
  Office Lease Commitments
   Bank Guarantee for Office Lease
  Motor Vehicles Lease Commitment
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ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
        
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description3.1*
    
    Amended and Restated Certificate of Incorporation, filed with the Secretary
of State of Delaware on August 13, 2008.10.1*
    
    Settlement Agreement between the Company and Ziv Haft Trust Company Ltd., dated
as of July 13, 200831.1*
    
    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
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##### Table of Contents



SIGNATURES
  Date: August 14, 2008
    
    TOPSPIN MEDICAL, INC.By:
    
    /s/ Yaron Tal

Chief Executive OfficerDate: August 14, 2008
    
    By:
    
    /s/ Tami Sharbit-BacharDirector of Finance
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    

Amended
and Restated Certificate of Incorporation, filed with the Secretary
of State of Delaware on August 13, 2008.10.1
    
    
    Settlement Agreement between the Company and Ziv Haft Trust Company Ltd., dated as of July
13, 200831.1
    
    
    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
  - 32 -