My Size, Inc. - Annual Report: 2008 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                     

TOPSPIN MEDICAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		510394637
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 972-3-9470921

Securities registered pursuant to Section 12(b) of the Act: Not applicable

Securities registered pursuant to Section 12(g) of the Act: Not applicable

Indicate by check mark if the registrant is a well-known seasoned, issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes þ No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of March 1, 2009, 756,870,882 shares of the registrant’s Common Stock, $0.001 par value per share, were outstanding. As of such date, the aggregate market value of the common equity held by non-affiliates of the registrant was approximately NIS 5,311,924 ($1,276,291 (based upon the New Israeli Shekel (“NIS”)/U.S. Dollar exchange rate of NIS 4.162 for every U.S. Dollar as of March 1, 2009). Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Tel Aviv Stock Exchange on March 1, 2009. For purposes of determining this amount only, the registrant has defined affiliates as including the executive officers and directors of the registrant on March 1, 2009.

 

 

TABLE OF CONTENTS

		Page
PART I			3
Item 1. Business			3
Item 1A. Risk Factors			9
Item 1B. Unresolved Staff Comments			9
Item 2. Properties			9
Item 3. Legal Proceedings			10
Item 4. Submission of Matters to a Vote of Security Holders			10
PART II			11
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			11
Item 6. Selected Financial Data			14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			19
Item 8. Financial Statements and Supplementary Data			19
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			60
Item 9A(T). Controls and Procedures			60
Item 9B. Other Information			60
PART III			61
Item 10. Directors, Executive Officers and Corporate Governance			61
Item 11. Executive Compensation			63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			72
Item 13. Certain Relationships and Related Transactions, and Director Independence			73
Item 14. Principal Accountant Fees and Services			73
Item 15. Exhibits, financial Statement Schedules			74
SIGNATURES			79
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 99.1

PART I

This Annual Report on Form 10-K of TopSpin Medical, Inc. and its subsidiaries (“TopSpin” or the “Company”, or “us”, or “we” or “our”) for the fiscal year ending December 31, 2008 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Those statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements, which are usually accompanied by words such as “may,” “might,” “will,” “should,” “could,” “intends,” “estimates,” “predicts,” “potential,” “continue,” “believes,” “anticipates,” “plans,” “expects” and similar expressions, involve risks and uncertainties, and relate to, without limitation, statements about our market opportunities, our strategy, our competition, our projected revenue and expense levels and the adequacy of our available cash resources. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or forecasted in, or implied by, such forward-looking statements.

Although we believe that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K for the fiscal year ending December 31, 2008 may not occur and our actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We disclaim any obligation or undertaking to disseminate any updates or revision to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Unless specified otherwise, all U.S. Dollar amounts in this Annual Report on Form 10-K are calculated using the NIS/U.S. Dollar exchange rate of NIS 3.8020 for every U.S. Dollar as of December 31, 2008.

Item 1. Description of Business.

Overview

We were incorporated in Delaware on September 20, 1999. We have conducted all of our business operations through our wholly-owned Israeli subsidiary, TopSpin Medical (Israel) Ltd. (TopSpin Israel). TopSpin Israel was incorporated on October 5, 1999 to engage in research and development of MRI technology using miniaturized MRI sensors.

On September 1, 2005, we issued securities to the public in Israel and our shares of common stock began to trade on the Tel Aviv Stock Exchange (TASE). In 2007 we registered some of our securities with the U.S. Securities and Exchange Commission (SEC). Our securities are traded only on the TASE in NIS. (See PART II, Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”—“Market for Common Equity and Related Stockholder Matters”).

Until we suspended our activities due to financial considerations in October 2008, we were engaged through TopSpin Israel, in the design, research, development and manufacture of imaging devices that utilize MRI technology by means of miniature probes for various body organs. In 1999, we began researching and developing this technology for use in the diagnosis and therapy guidance of heart disease and more specifically of heart attacks (the “IVMRI Catheter”). During 2006, we expanded our miniaturized MRI activities and began development of a prostate imaging product that could potentially be used for diagnosis and therapy guidance to prostate cancer (the “Urology Product”).

Our technology enables healthcare professionals to perform local, MRI-based, tissue characterization and imaging of specific regions of a patient’s body using a portable probe without the need for an external MRI scanner. Because existing external MRI scanners need to apply a powerful, homogenous magnetic field over large parts of the human body, they are very large and cumbersome. With our IVMRI Catheter, the imaging probe is miniaturized to a size of less than 2 millimeters in diameter and is integrated into an intravascular catheter for imaging the coronary arteries. In the Urology Product, we used our MRI technology by combining an MRI probe and an endorectal ultrasound for imaging the prostate and diagnosing prostate cancer.

In April 2008, we adopted significant changes to our business plan following an analysis of our business and our financial resources. Pursuant to the plan, we shifted our focus and resources to the development of the endorectal probe for the diagnosis of prostate cancer which incorporates our Urology Product and decreased expenses related to development of the IVMRI Catheter. Our adoption of the revised business plan was primarily guided by market feedback received following the initial sales of the IVMRI Catheter, which suggested that the current generation of the IVMRI Catheter is not yet suitable for full-scale commercial distribution, but can be used for gathering clinical information. Further, we determined that considerable resources and time would be necessary to address the limitations relating to its use. In addition, discussions with experts in interventional cardiology suggested that the field of vulnerable plaque detection the originally intended application of the IVMRI Catheter has become more challenging due to the recent focus on supporting the safety and efficacy of existing medical products and prevention-based technologies, as opposed to the development of innovative longer term technologies such as the IVMRI Catheter.

In October 2008 we paid NIS 12,513,000 (approximately $3,291,163) as part of a settlement with holders of our Series A Debentures (see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation"). Because the grants due to us for the years 2007 and 2008 from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (OCS), an Israeli governmental agency, were not received in the expected timeframe, our Company encountered a challenging financial situation. As a result of the combination of the substantial outlay of cash in connection with the settlement and the lack of cash inflow from the OCS grants, on October 27, 2008, we decided to terminate the employment of all of TopSpin Israel’s employees (excluding the finance department and employees who were pregnant or on maternity leave) and suspend our operational activities (both with respect to the IVMRI Catheter and the Urology Product).

We are continuing our efforts to raise financing in order to continue our activities, including examination of the acquisition of new business lines in consideration for shares of our Common Stock and/or cash. Due to the sophistication of our product and our unique knowledge, we estimate that should we decide to continue our activities in the MRI field it will require significant financial resources, recruitment and training of qualified employees and engaging suitable suppliers and subcontractors. In February 2009, we raised an aggregate of NIS 900,000 (approximately $236,717) through the issuance of shares of our Common Stock to support these efforts . We can provide no assurances however, that we will be successful in identifying and operating such new business activities or obtaining an adequate level of financing needed for such activities.

We have not generated any revenues to date and have not achieved profitable operations or positive cash flows from operations. We have an accumulated deficit of NIS 180,441,000 (approximately $47,459,495) as of December 31, 2008, and have incurred a net loss of NIS 20,150,000 (approximately $5,299,842) and negative cash flow from operating activities in the amount of NIS 25,398,000 (approximately $6,680,168) for the year ended December 31, 2008.

Our Products

Cardiology Field

Until April 2008, we conducted the majority of our operations in the field of medical devices for interventional cardiology. We developed an intravascular MRI, or IVMRI, catheter device intended to image a patient’s coronary arteries that supply blood to the heart. The IVMRI Catheter aims to provide the physician with information to enhance the diagnosis and treatment of coronary artery disease, or CAD. CAD is caused by pathological changes in the function and composition of coronary artery walls leading to the formation of plaque. These plaques can grow until they significantly occlude arterial blood flow and cause ischemia. In stable plaques, comprising mainly fibrous tissue, the rate of development of arterial narrowing, or stenosis, is slow, leading mainly to stable angina that can be treated in most cases by percutaneous coronary intervention, namely using a balloon or stent to open the narrowing and restore normal blood flow. A more significant risk is potentially caused by unstable, or vulnerable, plaques. These vulnerable plaques are mainly characterized by lipid-rich cores that are separated from the lumen, the arterial blood flow duct, by a thin fibrous cap. Inflammatory processes may lead to the weakening and rupture of the fibrous cap, the release of lipid-rich material into the lumen and forming of thrombus, or blood clots, that can rapidly lead to significant vessel narrowing. This rapid narrowing of an originally partially open arterial segment due to vulnerable plaque rupture and thrombosis is believed to be the underlying cause of most acute coronary syndromes such as unstable angina and heart attacks.

In 2003, we completed the development of the initial IVMRI Catheter prototype intended for use in clinical trials. Twenty-nine European patients participated in the first in man clinical trial through the end of 2004. The patients whose coronary arteries were examined using the IVMRI Catheter during these trials sustained no major adverse cardiac events over a thirty day period after the catheterization. Thus, the trial confirmed the safety of the use of the IVMRI Catheter in patients. Since 2005, we extended the clinical trial using an amended protocol in Europe, Israel and the United States. This amended protocol consisted of additional data, such as blood tests, intravascular ultrasound measurements in some patients and an increased number of measurements per patient with our IVMRI Catheter. The trial was intended to further demonstrate the safety and performance of the IVMRI Catheter in a larger number of patients, as required by the United States Food and Drug Administration (FDA). We completed this trial in June 2007. In the aggregate, approximately 160 patients participated in the abovementioned clinical trials. In December 2006, we received the CE Mark for this product and in October 2007 we filed a marketing application with the FDA based on clinical trials in order to obtain the FDA’s approval to market and sell the first generation IVMRI Catheter in the United States. As of June 30, 2007, we finished the development of a more advanced version of our first generation IVMRI Catheter for which we received a CE Mark in August 2007. In July 2008, we decided to withdraw the abovementioned FDA application. Due to the fact that we decided to cancel our participation in annual testing of the CE Mark, our CE Mark was cancelled on December 5, 2008.

Urology Field

In early 2006, we began to develop our MRI technology for imaging prostate cancer. We developed a system for urology clinics, which consists of an external console and an integrated endorectal MRI and ultrasound probe. The system is designed for the detection of prostate cancer to potentially aid urologists in guiding prostate biopsies, staging of prostate cancer and guiding local treatment such as cryo- and brachy-therapy.

On September 13, 2006, we entered into an agreement with the Technion Institute for Research and Development Ltd. (Technion) for the development of a prototype of a prostate imaging probe for the diagnosis of prostate cancer. A patent application covering this invention was filed in September 2008. The agreement with the Technion was terminated in November 2008 and Technion was at that time granted joint ownership of any patent resulting from its research. As a part of the termination of the Technion agreement, Technion retained the prototype developed which it can use for research purposes, provided that we retain the right to use it to demonstrate the technology to potential investors.

By 2008, we developed our second prototype of the prostate imaging product, which incorporates both MRI and ultrasound sensors. In August 2008, we initiated clinical trials with this product on 11 patients immediately upon approval of the ethics committee in a Romanian hospital to determine its ability to differentiate between cancer and other non-cancerous prostate tissue using this prototype. We planned to complete these clinical trials by the end of March 2009 but suspended them in October 2008 due to financial considerations.

Competition in the Cardiology and Urology Markets

We believe that some of our competitors in the cardiology and urology markets have significantly greater financial and human resources and have established relationships with healthcare professionals. In addition, our competitors might have established distribution networks, have greater resources for product development, sales, marketing and additional lines of products. However, due to the fact that we changed our focus from the cardiology to the urology market in April 2008 and later suspended all our business activities in November 2008, we do not have updated and accurate information regarding competitive conditions in these markets.

Expenditures on Research and Development

From the time of our inception in 1999 through December 31, 2008, we invested a total of NIS 135,023,000 (approximately $35,513,677) in gross research and development expenses. We have funded our research and development expenses from our own resources and from the OCS.

Cardiology

From 2004 through December 31, 2007, the OCS issued approval letters to TopSpin Israel approving four programs for development of the IVMRI Catheter for imaging the coronary arteries, totaling NIS 43,300,000 (approximately $11,388,742), under the Israeli Promotion of Research and Development in Industry Law of 1984. According to these approval letters, TopSpin Israel was entitled to a grant of 40% of the approved expenses in these programs for research and development. The OCS has notified us that it approved a total of NIS 10,113,000 (approximately $2,659,916) of recognized expenses in 2004, NIS 9,371,000 (approximately $2,464,755) of recognized expenses in 2005, NIS 11,500,000 (approximately $3,024,723) of recognized expenses in 2006 and NIS 10,800,000 (approximately $2,840,610) of recognized expenses in 2007. As of December 31, 2008, we have actually received funds totaling approximately NIS 4,021,000 (approximately $1,057,601) for 2004, NIS 3,869,000 (approximately $1,017,622) for 2005, NIS 4,572,000 (approximately $1,202,525) for 2006 and NIS 4,294,000 (approximately $1,129,406) for 2007.

In April 2008, the OCS issued another approval letter to TopSpin Israel approving the program for development of the IVMRI Catheter for imaging the coronary arteries, totaling NIS 9,785,000 (approximately $2,573,645). According to this approval letter, TopSpin Israel was entitled to a grant of 30% of the approved expenses in this program for research and development. To the best of our knowledge, we have fulfilled all legal and technical requirements according to the approval, and therefore believe that we are eligible to receive another NIS 1,600,000 (approximately $420,831) from the OCS. However, we do not know if and when these funds will be transferred to us.

Urology

In 2006, the OCS issued an approval letter to us approving a program for the development of an endorectal MRI system for the imaging of prostate cancerous tumors under the Israeli Promotion of Research and Development in Industry Law of 1984. It awarded a total of NIS 3,200,000 (approximately $841,662). According to this approval letter, we were entitled to a grant of 40% of the approved expenses in this program for research and development. As of December 31, 2008, we received NIS 1,228,000 (approximately $322,988) from the OCS .

In April 2008, the OCS issued an approval letter to us approving a program for the development of an endorectal MRI system for the imaging of prostate cancerous tumors under the Israeli Promotion of Research and Development in Industry Law of 1984. It awarded a total of NIS 5,135,000 (approximately $1,350,605). According to this approval letter, we were entitled to a grant of 40% of the approved expenses in this program for research and development. To the best of our knowledge, we have fulfilled all legal and technical requirements according to the approval, and therefore believe that we are eligible to receive another NIS 1,600,000 (approximately $420,831) from the OCS. However, we do not know if and when these funds will be transferred to us.

According to the Israeli Regulations for the Promotion of Research and Development in Industry (Royalty Rates and Rules of their Application) 1996, we must pay the Chief Scientist royalties during the commercial stage of the project, that is once marketing of our product begins, at a rate of 3% of sales during the first three years from the start of repayment and 3.5% of sales from the fourth year onward until the full repayment of the grants, which are linked to the U.S. Dollar and bear interest.

Intellectual Property

As of December 31, 2008, TopSpin Israel owns five registered patents and twelve pending patent applications worldwide for its technology, one of which is jointly owned with the Technion (see Part I, Item 1. “Description of Business — Urology Field”). In the United States, TopSpin Israel holds the exclusive rights to three patents. U.S. Patent No. 6,377,048, entitled Magnetic Resonance Imaging Device for Operation in External Magnetic Fields, issued April 23, 2002 concerns the use of our MRI technology in conjunction with a conventional MRI device and expires on November 8, 2020. U.S. Patent No. 6,704,594 entitled Magnetic Resonance Imaging Device, issued March 9, 2004 and U.S. Patent No. 6,600,319, entitled Magnetic Resonance Imaging Device, issued July 29, 2003 concern the basic technology for local MRI imaging from a miniature imaging probe. They expire on November 6, 2020 and November 30, 2020, respectively. In addition, we hold the exclusive rights to Patent No. 149945 in Israel and Patent No. 3872431 in Japan, both which concern our basic technology for local MRI imaging from a miniature probe.

Potential Customers and Marketing Efforts

Cardiology

Potential customers for the IVMRI Catheter include hospitals, clinics and medical institutions that operate cardiac cath labs. Initially, we planned to sell our products to leading medical centers, who could also participate in a post-marketing clinical program intended to build indications for using IVMRI in clinical practice. We made experimental sales of the IVMRI Catheter to four European hospitals during 2008 through our distributor, Top Medical B.V.

On August 28, 2008, we agreed to terminate our existing agreement with Top Medical B.V., pursuant to which Top Medical B.V. served as the exclusive distributor and marketer of our IVMRI Catheter system in the Netherlands, Belgium and Luxembourg. We elected to terminate this distribution agreement in connection with the shift in our business focus away from IVMRI Catheters and towards applications of our technology in the field of urology. In connection with the termination, Top Medical B.V. returned all consoles and unused catheters previously rented and purchased and we in turn made a final payment of $14,500, which represents the value of the returned equipment less the amount owed to us by Top Medical B.V. There are no outstanding obligations or rights under this agreement.

On July 29, 2007, we entered into an agreement with Johnson & Johnson Medical Israel, a Division of J — C Healthcare L.T.D., a company organized under the laws of Israel, for the distribution of our IVMRI Catheter in Israel. The agreement provided for the appointment of Johnson & Johnson Medical Israel as our exclusive distributor and marketer of the IVMRI Catheter in Israel. Johnson & Johnson has not started distributing in Israel and therefore this agreement is inactive, although it has not been officially terminated. There are no outstanding obligations or rights under this agreement.

Urology

Potential customers for the Urology Product include hospitals, clinics and medical institutions that operate endorectal ultrasound equipment. We have to date made no sales of the Urology Product.

Suppliers and Subcontractors

We bought our IVMRI Catheter components from dozens of suppliers and do not possess written agreements with the majority of these suppliers. Instead, we place purchase orders from time to time according to our needs. These suppliers provided raw materials, components and various services, as well as processes related to the IVMRI Catheter.

We believe that alternative suppliers can be found for the majority of raw materials, components and services within one to two months. We might require several months to replace a small number of suppliers because of the time required to train new suppliers and have the new suppliers adjust their products to our needs.

In addition, we have entered into arrangements with subcontractors for providing various services related to the development of our imaging products and the performance of pre-clinical and clinical trials with our products.

However, since we suspended our activities in October 2008, we currently do not require any of these services.

Governmental Regulation: Medical Devices

Our products are subject to governmental regulation regarding medical devices in Europe, the United States, Japan and elsewhere. For this purpose, we employ experienced consultants on regulation and quality assurance in the European and United States markets, notably with regard to regulatory permits for interventional cardiology.

However, since we suspended our activities in October 2008, we suspended all of our efforts to obtain governmental regulatory approvals.

The FDA

The U.S. Food and Drug Administration (FDA) is an agency of the United States Department of Health and Human Services and is responsible for regulating and supervising the safety of foods, dietary supplements, drugs, vaccines, biological medical products, blood products, medical devices, radiation-emitting devices, veterinary products, and cosmetics. The FDA is responsible for the premarket approval of all medical devices, as well as overseeing the manufacturing, performance and safety of these devices, as well as the authorization of clinical trials.

In October 2007, we filed a marketing application with the FDA in order to obtain the FDA’s approval to market and sell the first generation IVMRI Catheter in the United States. Considering our financial status and additional efforts still required in order to proceed and follow up with the FDA application, in July 2008, we withdrew this application.

The CE Mark

The CE marking (also known as CE mark) is a mandatory conformity mark on many products placed on the single market in the European Economic Area (EEA). The CE marking does not certify that a product has met EU consumer safety, health or environmental requirements. By affixing the CE marking, the manufacturer or person placing the product on the market or putting it into service asserts that the item meets all the essential requirements of the relevant European Directive(s).

In December 2006, we received the CE Mark for our first generation IVMRI Catheter system and in August 2007 we receive a CE Mark for a more advanced version of our first generation IVMRI Catheter. Due to the fact that we decided to cancel our participation in annual testing of the CE Marks, our CE Marks were cancelled on December 5, 2008.

Employees

Due to financial difficulties, as of December 31, 2008, we had retained only six full-time employees of which three were on maternity leave and one was completing his employment with the Company following the issuance of a notice of termination stating that such employee’s termination would be effective February 19, 2009. All employees on maternity leave as of December 31, 2008 are due to be terminated by March 31, 2009. The remaining two employees of TopSpin Israel as of the date of this filing are our Director of Finance and the Controller. We do not have any other employees.

None of our employees represented by a collective bargaining agreement, nor have we experienced any work stoppages. We believe that our relations with our remaining employees are good. As of December 31, 2008, we have not adopted a code of ethics but intend to do so if and when we restart our suspended activities or enter into new business activities.

Item 1A. Risk Factors.

Not applicable.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

In 2003, TopSpin Israel entered into a five-year lease agreement with a third party for the lease of offices, laboratories and a “clean room” for the production of our MRI-based product. This lease costs approximately NIS 650,000 (approximately $170,963) annually. In December 2006, we entered into an additional five-year lease agreement with the third party for the lease of additional space at the same facility at a cost of approximately NIS 110,000 (approximately $28,932) annually. The term of the 2003 lease agreement ended on November 30, 2008, and we decided not to exercise the option to renew. The 2006 lease agreement was also terminated in accordance with its terms. We do not have any outstanding obligations with respect to these lease agreements, except for payments required for painting and minor repairs after our departure. We are currently disputing the exact sum to be paid in this regard with the landlord, but estimate that the sum will not exceed NIS 30,000 (approximately $7,890).

Since December 1, 2008, our office is situated at the offices of Top-Notch Capital Ltd. (Top-Notch), located at Derech Hashalom 53, Givataim, Israel, where we use one room free of charge using computers and other office supplies owned by us. One of our directors, Ehud-Moshe Gilboa, is a controlling shareholder of Top-Notch. We believe that this arrangement is sufficient to meet our current needs. However, in the near future, we are planning to rent a small office space, and in the long-term, we will reevaluate the need for additional facilities based on our growth and future needs with respect to management, administration, marketing and manufacturing requirements.

Before we vacated the premises in November 2008, we sold the engineering and technical equipment we owned for the manufacture and development of our products and additional computers and office equipment for an aggregate NIS 427,000 (approximately $112,309).

Item 3. Legal Proceedings.

As of December 31, 2008, we were not a party to any material legal proceeding.

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

At our annual general meeting of stockholders convened on December 3, 2008 and adjourned for lack of quorum to December 10, 2008, Mr. Ran Ben-Or and Dr. Eran Feldhay were elected to our Board of Directors as independent directors, and Messrs. Ehud Moshe Gilboa, Elhanan Moaz, Gideon Even-Struelesi, Avi Molcho and Ms. Shlomit Oren were elected as directors, all of such directors to hold office until the next annual general meeting of stockholders. All votes were cast for all directors and independent directors. There were no abstentions and no broker non-votes. The shareholders voted at the meeting as following:

Director		For		Against
Ran Ben-Or		129,398,878			0
Eran Feldhay		129,398,878			0
Ehud Moshe Gilboa		228,259,462			0
Elhanan Moaz		228,259,462			0
Gideon Even-Struelesi		228,259,462			0
Avi Molcho		228,259,462			0
Shlomit Oren		228,259,462			0

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Common Equity and Related Stockholder Matters

Our shares of Common Stock and our Series 2 Warrants and Series 3 Warrants are listed for trading on the TASE. On February 28, 2008, 22,522 of our outstanding Series 1 Warrants were converted into shares of our Common Stock and all warrants that remained unexercised as of the close of business of such date expired and were delisted from TASE. The information below refers to shares of our Common Stock and our Series 2 Warrants and Series 3 Warrants that are currently traded on TASE under the symbols “TOPMD”, “TOPMD.W2” and “TOPMD.W3”, respectively. Prior to delisting, our Series 1 Warrants traded on TASE under the symbol “TOPMD.W1”. Public trading of our shares of Common Stock and our Series 1 Warrants commenced on September 6, 2005. Public trading of our Series 2 Warrants and Series 3 Warrants commenced on September 17, 2007. We have never declared any dividends on any of these securities.

The following tables set forth, for the periods indicated, the range of high and low per share sale prices for our Common Stock and our Series 2 Warrants and Series 3 Warrants as reported on TASE.

Common Stock

		2007
		High				Low
First quarter		NIS	0.921			NIS	0.757
Second quarter		NIS	0.894			NIS	0.790
Third quarter		NIS	0.895			NIS	0.669
Fourth quarter		NIS	0.753			NIS	0.340

		2008
		High				Low
First quarter		NIS	0.377			NIS	0.218
Second quarter		NIS	0.233			NIS	0.022
Third quarter		NIS	0.110			NIS	0.020
Fourth quarter		NIS	0.028			NIS	0.010

Series 1 Warrants

		2007
		High				Low
First quarter		NIS	0.290			NIS	0.241
Second quarter		NIS	0.267			NIS	0.172
Third quarter		NIS	0.205			NIS	0.106
Fourth quarter		NIS	0.119			NIS	0.017

		2008
		High				Low
First quarter From January 1, 2008 through February 28, 2008		NIS	0.015			NIS	0.010

Series 2 Warrants

		2007
		High				Low
Third quarter — From September 17, 2007 through end of Third quarter (September 30, 2007)		NIS	0.259			NIS	0.120
Fourth quarter		NIS	0.168			NIS	0.039

		2008
		High				Low
First quarter		NIS	0.093			NIS	0.021
Second quarter		NIS	0.034			NIS	0.010
Third quarter		NIS	0.012			NIS	0.010
Fourth quarter		NIS	0.010			NIS	0.010

Series 3 Warrants

		2007
		High				Low
September 17, 2007 through end of Third quarter (September 30, 2007)		NIS	0.197			NIS	0.098
Fourth quarter		NIS	0.235			NIS	0.047

		2008
		High				Low
First quarter		NIS	0.139			NIS	0.049
Second quarter		NIS	0.080			NIS	0.010
Third quarter		NIS	0.018			NIS	0.010
Fourth quarter		NIS	0.010			NIS	0.010

Recent Sales of Unregistered Securities

Conversion of Warrants

On February 28, 2008, 22,522 of our outstanding Series 1 Warrants were converted into shares of our Common Stock for an aggregate exercise price of NIS 19,903 (NIS 0.88 per share).

Stock Options

During the fiscal year ended December 31, 2008, a total of 641,562 unregistered options under our 2003 Israeli Stock Option Plan were exercised by 3 of our former employees with gross proceeds of NIS 23,988 (approximately $6,309), for 641,562 shares of our Common Stock.

Holders of Securities

As of December 31, 2008, we had 39 stockholders of record and one holder of record for each of our Series 2 Warrants and Series 3 Warrants.

Dividends

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. We have never declared any dividends on any of our securities, and do not intend to do so in the foreseeable future.

Securities Authorized For Issuance Under the Equity Compensation Plans

The following table sets forth the aggregate number of securities to be issued upon the exercise of outstanding options, warrants and rights under our equity compensation plans, and the number of securities remaining available for future issuance under our equity compensation plans as of December 31, 2008:

Equity Compensation Plan Information

Number of securities

remaining available for

future issuance under

Number of securities to be

Weighted-average

equity compensation

issued upon exercise of

exercise price of

plans (excluding

outstanding options,

outstanding options,

securities reflected in

warrants and rights

warrants and rights

column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

0

0

0

Equity compensation plans not approved by security holders

11,881,761

0.092

19,741,010

Total

11,881,761

0.092

19,741,010

Use of Proceeds from Best-Efforts, Direct Public Offering

Our registration statement on Form SB-2 (Commission File No. 333-142242) covering our best-efforts, direct public offering of up to 26,500,000 Units (each Unit consisting of (i) two shares of our Common Stock and (ii) one Series 3 Warrant to purchase one share of our Common Stock) was declared effective by the SEC on June 4, 2007. The offering commenced on June 5, 2007. In June 2007, we sold 12,199,201 Units and have not sold any additional Units since then. As of June 4, 2008, the offering for the remaining 14,300,799 Units expired.

The Units were offered through certain of our executive officers and directors, to whom no commissions or other compensation will be paid on account of such activities. This offering was conducted without any involvement of underwriters or selling agents.

We registered 26,500,000 Units (which in the aggregate consists of (i) 53,000,000 shares of Common Stock and (ii) 26,500,000 Series 3 Warrants, of which Series 3 Warrants there are 26,500,000 underlying shares of Common Stock) at an offering price of NIS 1.586 per Unit, yielding an aggregate, registered offering price of approximately NIS 42,029,000. As of December 31, 2008, we had sold 12,199,201 Units, and the aggregate offering price of such sold amount is NIS 19,347,933.

From June 4, 2007 to December 31, 2008, we incurred the following expenses in connection with our best-efforts, direct public offering in the following amounts (as approximated, in thousands):

Underwriting discounts and commissions			—
Finders’ fees			—
Expenses paid to or for our underwriters			—
Other expenses		NIS	1,012
Total expenses		NIS	1,012

No payments for any of the foregoing expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

Net proceeds to us from the sale of 12,199,201 Units based on the offering price of NIS 1.586 per Unit, after deducting the aforementioned expenses of approximately NIS 1,012,000 payable by us, were approximately NIS 18,336,000 (approximately $4,822,725).

From January 1, 2008 to December 31, 2008, the following net proceeds have been used by us for the purposes and in the amounts set out below (as approximated):

Construction of plant, building and facilities		NIS	5,000
Purchase and installation of machinery and equipment		NIS	149,000
Purchase of real estate			—
Acquisition of other business			—
Repayment of indebtedness		NIS	12,513,000
Working capital			—
Temporary investments			—
Consulting fees in connection with the debenture settlement		NIS	1,113,000
Total		NIS	13,780,000

Other than the payment in July 2007 of NIS 2,102,000 in principal and interest for a bridge loan granted to us by the Pitango Group, the Giza Group and Israel Seed IV, L.P., each of whom was a holder of more than 10% of our Common Stock until October 2008 (except for Israel Seed IV, L.P. that held more than 5% of our Common Stock and who had a representative on our board of directors until October 2008), no payments for any of the foregoing amounts were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements and Notes and the other financial information included elsewhere in this Annual Report on Form 10-K for the fiscal year ending December 31, 2008. In addition to historical information, this discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements as a result of various factors.

Overview

Until suspension of our business activities due to financial considerations in October 2008, we, through our subsidiary, TopSpin Israel, were engaged in the design, research, development and manufacturing of imaging devices that utilize MRI technology by means of miniature probes that image various body organs. In 1999, we began researching and developing this technology for use in the diagnosis and therapy guidance of heart disease and more specifically of heart attacks. During 2006, we started to develop a product that combines our MRI technology with an endorectal ultrasound for imaging prostate cancer.

Until 2008, our main product was an intravascular MRI, or IVMRI, catheter system for imaging and characterizing the tissue composition of coronary plaque during a conventional cardiac catheterization procedure. We have completed the development of a first generation IVMRI catheter and an advanced generation IVMRI catheter, which represents a further technological advancement in the miniaturization of the imaging probe and also integrates a number of probes in the catheter, enabling the imaging of longer vessel segments simultaneously.

As previously disclosed in current reports on Form 8-K filed on September 25, 2008, September 29, 2008 and October 16, 2008, we executed a supplemental indenture with Wilmington Trust Company (in its capacity as Trustee for our Series A Debentures) and the Ziv Haft Trust Company Ltd. (in its capacity as Co-Trustee of our Series A Debentures) which supplemented the original indenture governing the Series A Debentures and provided for the conversion of each NIS 1.00 of principal amount of Series A Debentures held by eligible bondholders into nine (9) shares of our common stock and NIS 0.25 in cash.

As contemplated by the supplemental indenture and the settlement agreement, dated July 13, 2008, between the Company and the Co-Trustee, on October 12, 2008, all of the outstanding NIS 50,000,000of the Series A Debentures were converted into 450,000,000 shares of our Common Stock. Upon the completion of this conversion, all of our outstanding Series A Debentures were removed from trading on the TASE. We issued the cash payment contemplated by the settlement agreement on October 26, 2008 in the amount of NIS 12,513,000 (approximately $3,291,162).

This payment significantly reduced our cash resources, and, together with the delay in receipt of grants from the OCS, materially and adversely affected our business and the cash we have available to maintain research and development, marketing, and other activities conducted in the ordinary course of our business. Our reduced cash position caused us to suspend our activities as of October 27, 2008. We were forced to terminate all of our employees except three employees in our finance department and three employees who were on maternity leave at the time (each of whose employment will be terminated no later than March 31, 2009), and we have incurred termination fees in connection with the early termination of our property and motor vehicle lease.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Until December 31, 2005 we elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and the FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” in accounting for our employee stock based compensation. According to APB No. 25, compensation expense is measured under the intrinsic value method, whereby compensation expense is equal to the excess, if any, of the quoted market price of the share at the date of grant of the award over the exercise price.

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expenses based on the estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes APB No. 25 for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R). SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations. We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006. According to SFAS 123(R), an option indexed to a factor which is not a market, performance, or service condition, shall be classified as a liability.

Our shares are traded in Israel in NIS. Our options granted to employees, directors and consultants are exercisable in U.S. Dollars. Our functional currency and the currency in which our employees are paid is NIS. Accordingly, until December 31, 2005, we considered all option plans as variable plans and thus the intrinsic value of all vested options is remeasured at each reporting date until the date of settlement. As of January 1, 2006, the fair value of the vested portion of the options was classified as a liability and remeasured at each reporting date until the date of settlement. In addition, an expense of NIS 238 (approximately $63) was recorded on January 1, 2006 as a cumulative effect of a change in accounting principle. Compensation cost for each period until settlement shall be based on the change in the fair value of the options for each reporting period based on the binomial method. We recognize compensation expenses of the value of our options based on the accelerated method over the requisite service period of each of the options.

We apply SFAS No. 123 and Emerging Issues Task Force No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, with respect to options issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants. Until December 31, 2005, the fair value of these options was estimated using Black-Scholes option-pricing model. Since January 1, 2006, the fair value of these options was estimated according to the principles determined in SFAS 123(R) based on the binomial option pricing model.

In accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and potentially settled in a Company’s Own Stock” (EITF 00-19), we recorded the consideration paid for the Convertible Bonds and Series 2 Warrants as a liability. The Series 2 Warrants were recorded as a liability based on their fair value. According to EITF 05-2, “The meaning of conventional convertible Debt Instrument in Issue No. 00-19” the Convertible Bonds are considered as non conventional convertible debentures. As such, the bifurcation of the conversion feature was required. In addition, we considered the commission of 2% to be paid to the placement agent of the Convertible Bonds and Series 2 Warrants placement in November 2006 upon the conversion of the Convertible Bonds as an embedded derivative. The fair value of the embedded derivative was recorded as a liability. We estimated the fair value of the abovementioned liabilities using a binomial model, except that following the listing of our Series 2 Warrants on the TASE, we estimated this liability based upon its market value. The binomial model requires the use of several assumptions made by us, which affect the estimated fair value of the liabilities. An assumption that we used in determining the fair value of the abovementioned liabilities is the expected volatility, which is an estimation that is based on the historical volatility of the per share market price of the publicly traded capital stock of similar companies and on the historical volatility of the per share market price of our Common Stock on the TASE.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal periods beginning after November 15, 2007. SFAS 159 was effective for us beginning January 1, 2008, and as a result we recorded an increase in retained earnings in the amount of NIS 5,379 as the embedded conversion feature in convertible debentures, embedded derivative related to issuance expenses and convertible debentures, net of deferred issuance expenses, was remeasured at a total fair value in the amount of NIS 31,639.

Results of Operations

Years Ended December 31, 2008 and 2007

Revenues. We did not have any revenues in 2008 or 2007.

Research and Development. In 2008, our net research and development expenses (after receipt of research and development grants from the OCS) were NIS 15,387,000 (approximately $4,047,080) compared to NIS 20,407,000 (approximately $5,367,438) in 2007, while gross research and development expenses in 2008 were NIS 15,896,000 (approximately $4,180,957) compared to NIS 25,874,000 (approximately $6,805,366) during 2007, a decrease of approximately 25% and 39%, respectively.

Marketing and Sales. In 2008, our marketing and sales expenses were NIS 570,000 (approximately $149,921) compared to NIS 1,495,000 (approximately $393,214) in 2007, a reduction of approximately 62%.

General and Administrative. General and administrative expenses consist primarily of professional fees, rent, office maintenance, payroll related expenses and consulting fees’ and directors’ fees. General and administrative expenses decreased by approximately 15% to NIS 7,731,000 (approximately $2,033,403) in 2008 from NIS 9,051,000 (approximately $2,380,589) in 2007. This decrease was the result of the decisions of our Board of Directors on April 27, 2008 and October 27, 2008 regarding the change of our focus from cardiology to urology, reduction of resources on the cardiology project and termination of some of our employees, and later, nearly all of our employees.

Financial Income, Net. In 2008, our financial income decreased 28% to NIS 4,882,000 (approximately $1,284,061) as compared to financial income of NIS 6,785,000 (approximately $1,784,587) in 2007. This decrease is attributable to decrease in the market value of undertakings recorded in our financial statements.

Taxes on income. Since its formation, the Company has had no income from operations and has no deferred tax liabilities. As a result of the settlement with our bondholders, it is possible that we will have income for tax purposes and we have recorded a reserve in the amount of NIS 1,344,000 (approximately $353,498) for this purpose.

Net Loss. Our net loss for 2008 was NIS 20,150,000 (approximately $5,299,842) compared to a net loss of NIS 24,168,000 (approximately $6,356,654) in 2007, a decrease of approximately 17% which is attributable to a reduction in almost all our expenses due to cost saving efforts.

Liquidity and Capital Resources

We have not had any revenues from operations since our inception in September 1999. We have financed our operations principally through private and public sales of equity securities, convertible notes and through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, an Israeli governmental agency. In November 2006, we raised net proceeds of NIS 40,635,000 (approximately $10,687,796) through the sale of Series A Debenturesand Series 2 Warrants in a private placement. In June 2007, we raised net proceeds of NIS 18,336,000 (approximately $4,822,725) through the sale of Common Stock and Series 3 Warrants. In February 2009, we raised net proceeds of NIS 900,000 (approximately $236,717) through the sale of 120,000,000 shares of our Common Stock and options to purchase up to an additional 58,064,516 shares of our common stock of the Company with an exercise price of NIS 0.01 per share and will be exercisable from the date of issuance until four years following the date of issuance.

As of December 31, 2008, our assets were approximately NIS 4,391,000 (approximately $1,154,918), of which cash and cash equivalents were approximately NIS 3,385,000 (approximately $890,321). As of December 31, 2008, our liabilities were approximately NIS 5,188,000 (approximately $1,364,545).

We believe that our cash resources are sufficient for our operations at current levels at least for the next twelve months. Our assessment of our cash needs constitutes an estimate based on the pace of our cash expenses, and the expected receipt of grants still payable by the OCS for the period through December 31, 2008. We continue to examine the possibility of expanding our operations into other fields of activity, including through commercial arrangements with companies or acquisition of new businesses in consideration for shares of our Common Stock and/or cash, and we are continuing our efforts to raise financing in order to carry out these activities. There are no assurances however, that we will be successful in obtaining an adequate level of financing needed for the long term development and commercialization of our planned products.

We may not be able to raise additional funds required to resume our regular business operations or to engage in new fields of business that we may decide to pursue. The global stock and credit markets are experiencing significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases have resulted in the unavailability of certain types of financing. Continued uncertainty in the stock and credit markets may negatively affect our ability to raise necessary additional funds.

Off-Balance Sheet Arrangements

TopSpin Israel has obtained grants from the OCS for participation in research and development and, in return, is obligated to pay royalties amounting to 3% of sales during the first three years from the start date of the repayments and 3.5% of sales from the fourth year until the full repayment of the grants. The grants are linked to the exchange rate of the dollar and bear interest of LIBOR per annum. As of December 31, 2008, the total liability to the OCS equaled up to approximately NIS 16,082,000 (approximately $4,229,879).

Office Lease Commitments

In December 2006, TopSpin Israel entered into an additional five-year lease agreement with the third party for the lease of additional space at the same facility at a cost of approximately NIS 110,000 (approximately $28,932) annually starting February 2007. As part of this additional lease agreement, the lessor participated in investment in leasehold improvements. This lease agreement was terminated on November 30, 2008 in accordance with its terms. We do not have any outstanding obligations with respect to this lease agreement, except for payments required for restoring the premises to the original condition after our departure. We are currently disputing the exact sum to be paid in this regard with the landlord, but we estimate that the sum will not exceed approximately NIS 30,000 (approximately $7,890).

Credit Card Commitment

We have pledged a bank deposit of NIS 31,000 (approximately $8,154) as security for commitments on credit cards issued to us.

Bank Guarantee for Offices Lease

According to our office lease agreement which terminated in November 2008, we pledged a bank deposit, which is used as a bank guarantee, amounting to approximately NIS 436,000 (approximately $114,676) as of December 31, 2008 to secure its payments under the lease agreements. As of March 12, 2009 the guarantee was decreased to NIS 108,000 (approximately $28,406); the guarantee obligation will terminate upon our restoration of the premises pursuant to an agreement that we are currently negotiating with our landlord.

Motor Vehicles Lease Commitment

TopSpin Israel leases motor vehicles under operating lease agreements for 36 months. The monthly lease payments were approximately NIS 43,000 (approximately $11,310) as of December 31, 2008. Following our decision to terminate the employment of most of our employees, as of December 31, 2008, the Company has deposited NIS 49,000 (approximately $12,888) covering rental payments for the last three months in respect of these contracts, out of which an amount of NIS 29,000 (approximately $7,628) is expected to be paid in 2009 as an early termination penalty.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

TOPSPIN MEDICAL, INC.
(A Development Stage Company)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008

INDEX

		Page
Report of Independent Registered Public Accounting Firm			21
Consolidated Balance Sheets			22 – 23
Consolidated Statements of Operations			24
Statements of Changes in Shareholders’ Equity (Deficiency)			25 – 28
Consolidated Statements of Cash Flows			29 – 30
Notes to Consolidated Financial Statements			31 – 59

		•		Kost Forer Gabbay & Kasierer 2 Pal-Yam St. Haifa 33095, Israel		•		Phone: 972-4-8654000 Fax:     972-4-8654022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

TOPSPIN MEDICAL, INC.
(A Development Stage Company)

We have audited the accompanying consolidated balance sheets of Topspin Medical Inc. (A Development Stage Company) (“the Company”) and its subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity (deficiency) and cash flows for each of the two years in the period ended December 31, 2008 and for the period from September 20, 1999 (inception date) through December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included considerations of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements, referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 and for the period from September 20, 1999 (inception date) through December 31, 2008, in conformity with accounting principles generally accepted in the United States.

Haifa, Israel		KOST FORER GABBAY & KASIERER
March 17, 2009		A Member of Ernst & Young Global

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

						December 31,				December 31,
		Note				2007				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			3				40,978				3,385
Other receivables and prepaid expenses			4				2,275				385
Restricted deposits			8c1				—				562
Prepaid lease payments			8d				—				49
Inventory							512				—
							43,765				4,381
LONG-TERM ASSETS:
Restricted deposits							555				—
Severance pay fund							36				—
Prepaid lease payments							20				—
							611				—
PROPERTY AND EQUIPMENT, NET			5				2,692				10
DEFERRED ISSUANCE EXPENSES							4,206				—
							51,274				4,391

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

						December 31,				December 31,
		Note				2007				2008
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
CURRENT LIABILITIES:
Trade payables			6				2,091				455
Other accounts payables and accrued expenses			7				5,341				2,821
Liability in respect of warrants (series 2)			10				—				250
Liabilities in respect of options to employees and consultants- short term			11				—				10
Accrued severance pay							—				270
							7,432				3,806
LONG TERM LIABILITIES
Tax provision							—				1,344
Accrued severance pay							633				—
Liabilities in respect of options to employees and consultants			11				2,368				38
Liability in respect of warrants (series 2)			10				975				—
Embedded conversion feature in convertible debentures			10				1,281				—
Embedded derivative related to issuance expenses			10				175				—
Convertible debentures			10				39,453				—
							44,885				1,382
CONTINGENT LIABILITIES AND ASSETS, COMMITMENTS AND CHARGES			8
SHAREHOLDERS’ DEFICIENCY:			9
Common shares of $0.001 par value:
Authorized 1,000,000,000 shares; Issued and outstanding 636,870,882 shares and 186,206,798 as of December 31, 2008 and 2007, respectively;							837				2,457
Additional paid in capital							163,790				177,187
Accumulated deficit during the development stage							(165,670	)			(180,441	)
							(1,043	)			(797	)
							51,274				4,391

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

														Period from
														inception
														(September 20,
						Year ended								1999) through
						December 31,								December 31,
		Note				2007				2008				2008
Research and development expenses							25,874				15,896				135,023
Less — participation by the office of the Chief Scientist							(5,467	)			(509	)			(17,980	)
Research and development expenses, net							20,407				15,387				117,043
Seles and marketing expenses							1,495				570				3,662
General and administrative expenses							9,051				7,731				56,199
Operating loss							(30,953	)			(23,688	)			(176,904	)
Financing income, net			12				6,785				4,882				5,986
Loss before income taxes							(24,168	)			(18,806	)			(170,918	)
Income taxes							—				(1,344	)			(1,344	)
Net loss							(24,168	)			(20,150	)			(172,262	)
Basic and diluted loss per Common share							(0.13	)			(0.07	)
Weighted average number of Common shares outstanding used in basic and diluted net loss per share calculation							180,028,135				285,339,247

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)

																																										Non-				Deficit
																																										recourse				accumulated				Total
		Number of outstanding shares																Share capital																Additional				Receivables				receivables				during the				shareholders’
						Preferred																Preferred												paid-in				for shares				for shares				development				Equity
		Common				A				B				C				Common				A				B				C				capital				issued				issued				stage				(Deficiency)
Balance as of September 20, 1999			—				—				—				—				—				—				—				—				—				—				—				—				—
Issuance of common shares			625,000				—				—				—				3				—				—				—				—				—				—				—				3
Issuance of Preferred A shares net of issuance expenses of NIS 20			—				375,001				—				—				—				2				—				—				3,134				—				—				—				3,136
Net loss			—				—				—				—				—				—				—				—				—				—				—				(380	)			(380	)
Balance as of December 31, 1999			625,000				375,001				—				—				3				2				—				—				3,134				—				—				(380	)			2,759
Issuance of Preferred B shares net of issuance expenses of NIS 61			—				—				208,329				—				—				—				1				—				10,183				—				—				—				10,184
Net loss			—				—				—				—				—				—				—				—				—				—				—				(3,880	)			(3,880	)
Balance as of December 31, 2000			625,000				375,001				208,329				—				3				2				1				—				13,317				—				—				(4,260	)			9,063
Net loss			—				—				—				—				—				—				—				—				—				—				—				(7,254	)			(7,254	)
Balance as of December 31, 2001			625,000				375,001				208,329				—				3				2				1				—				13,317				—				—				(11,514	)			1,809
Issuance of Preferred C shares net of issuance expenses of NIS 2,200			—				—				—				87,386,858				—				—				—				410				47,578				(630	)			—				—				47,358
Beneficial 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				—				—				—				2,822
Stock based compensation related to options granted to consultants			—				—				—				—				—				—				—				—				1,286				—				—				—				1,286
Accrued 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

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
NIS in thousands

																																										Non-				Deficit
																																										recourse				accumulated				Total
		Number of outstanding shares																Share capital																Additional				Receivables				receivables				during the				shareholders’
						Preferred																Preferred												paid-in				for shares				for shares				development				equity
		Common				A				B				C				Common				A				B				C				capital				issued				issued				stage				(Deficiency)
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
Receivables in respect of Preferred C shares issued			—				—				—				—				—				—				—				—				25,828				630				—				—				26,458
Amortization of deferred stock based compensation			—				—				—				—				—				—				—				—				736				—				—				—				736
Deferred stock based compensation related to issuance of shares to the Chief Executive Officer			3,077,506				—				—				—				—				—				—				—				1,778				—				—				—				1,778
Stock based compensation related to options granted to consultants			—				—				—				—				—				—				—				—				19				—				—				—				19
Accrued 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	)			39,159
Exercise of options			418,746				—				—				—				2				—				—				—				62				—				—				—				64
Amortization of deferred stock based compensation			—				—				—				—				—				—				—				—				677				—				—				—				677
Deferred stock based compensation related to issuance of shares to the Chief Executive Officer			630,793				—				—				—				—				—				—				—				615				—				—				—				615
Stock based compensation related to options granted to consultants			—				—				—				—				—				—				—				—				261				—				—				—				261
Accrued 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

The accompanying notes are an integral part of the consolidated financial statements.

Topspin Medical, Inc.
(A Development Stage Company)

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIENCY)
NIS in thousands

																																						Non-				Deficit
																																						recourse				accumulated				Total
		Number of outstanding shares																Share capital																Additional				receivables				during the				shareholders’
						Preferred																Preferred												paid-in				for shares				development				Equity
		Common				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	)			20,343
Conversion 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				—				—				—				—	(*)			—				—				16
Issuance of Common shares net of issuance expenses of NIS 3,292			38,000,000				—				—				—				171				—				—				—				28,920				—				—				29,091
Issuance of options net of issuance expenses of NIS 378			—				—				—				—				—				—				—				—				3,339				—				—				3,339
Deferred stock based compensation related to issuance of shares to the Chief Executive Officer			630,793				—				—				—				—				—				—				—				(627	)			—				—				(627	)
Grant to the Chief Executive Officer			—				—				—				—				—				—				—				—				—				74				—				74
Amortization of deferred stock based compensation			—				—				—				—				—				—				—				—				486				—				—				486
Stock based compensation related to options granted to consultants			—				—				—				—				—				—				—				—				66				—				—				66
Accrued 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	)			38,463
Cumulative effect of the adoption of SFAS 123(R)																																											(238	)			(238	)
Change of deferred stock compensation into liability as a result from accounting change			—				—				—				—				—				—				—				—				(6,768	)			—				—				(6,768	)
Exercise of options			634,374				—				—				—				3				—				—				—				38				—				—				41
Conversion of liability into equity in respect of exercise of options			—				—				—				—				—				—				—				—				451												451
Grant to the Chief Executive Officer			630,794				—				—				—				—				—				—				—				—				208				—				208
Accrued interest and exchange rate differences on a loan to the Chief Executive Officer			—				—				—				—				—				—				—				—				(14	)			14				—				—
Net loss			—				—				—				—				—				—				—				—				—				—				(38,565	)			(38,565	)
Balance as of December 31, 2006			159,537,461				—				—				—				728				—				—				—				134,603				(237	)			(141,502	)			(6,408	)