INSPIREMD, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2012











INSPIREMD, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2012



TABLE
OF CONTENTS



|                                                                      | Page      
|--------------------------------------------------------------------- | ----------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM               | F-2       
|CONSOLIDATED FINANCIAL STATEMENTS:                                    |           
|Consolidated Balance Sheets                                           | F-3 - F-4 
|Consolidated Statements of Operations                                 | F-5       
|Consolidated Statements of Changes in Equity (Capital
    Deficiency) | F-6       
|Consolidated Statements of Cash Flows                                 | F-7       
|Notes to the Consolidated Financial Statements                        | F-8 - F-45



The amounts are stated in U.S. dollars
in thousands



_____________________

___________________________________

_____________________





















Report of Independent Registered Public
Accounting Firm



To the shareholders of

InspireMD, Inc.



In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, changes in equity (capital deficiency) and cash flows present fairly, in
all material respects, the financial position of InspireMD, Inc. (the “Company”) and its subsidiaries at June 30, 2012,
and the results of its operations and its cash flows for the twelve months ended June 30, 2012 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements
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.
An audit 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 audit provide a reasonable basis for our opinion.



The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has had recurring losses, negative cash flows from operating activities and has significant future commitments that
raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





|Tel Aviv, Israel |  | /s/ Kesselman & Kesselman                                                                           
|---------------- |  | ----------------------------------------------------------------------------------------------------
|January  3, 2013 |  | Certified Public Accountants (Isr.)
        A member of PricewaterhouseCoopers International Limited



F-2







INSPIREMD, INC.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)



|                                                   |  | June 30   |       
|-------------------------------------------------- |  | --------- | ------
|                                                   |  | 2012      |       
|                                                   |  | (Audited) |       
|                                                   |  |           |       
|ASSETS                                             |  |           |       
|                                                   |  |           |       
|CURRENT ASSETS:                                    |  |           |       
|Cash and cash equivalents                          |  | $         | 10,284
|Restricted cash                                    |  |           | 37    
|Accounts receivable:                               |  |           |       
|Trade                                              |  |           | 1,824 
|Other                                              |  |           | 264   
|Prepaid expenses                                   |  |           | 93    
|Inventory:                                         |  |           |       
|On hand                                            |  |           | 1,744 
|On consignment                                     |  |           | 63    
|Total current assets                               |  |           | 14,309
|                                                   |  |           |       
|PROPERTY, PLANT AND EQUIPMENT, net                 |  |           | 462   
|                                                   |  |           |       
|NON-CURRENT ASSETS:                                |  |           |       
|Deferred debt issuance costs                       |  |           | 961   
|Fund in respect of employee rights upon retirement |  |           | 282   
|Total non-current assets                           |  |           | 1,243 
|Total assets                                       |  | $         | 16,014



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



F-3







INSPIREMD, INC.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)



|                                                                                                                                                                              |  | June 30   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | -------
|                                                                                                                                                                              |  | 2012      |        
|                                                                                                                                                                              |  | (Audited) |        
|LIABILITIES AND EQUITY                                                                                                                                                        |  |           |        
|                                                                                                                                                                              |  |           |        
|CURRENT LIABILITIES:                                                                                                                                                          |  |           |        
|Current maturities of long-term loan                                                                                                                                          |  |           |        
|Accounts payable and accruals:                                                                                                                                                |  |           |        
|Trade                                                                                                                                                                         |  | $         | 441    
|Other                                                                                                                                                                         |  |           | 2,925  
|Advanced payment from customers                                                                                                                                               |  |           | 174    
|Deferred revenues                                                                                                                                                             |  |           | 10     
|Total current liabilities                                                                                                                                                     |  |           | 3,550  
|                                                                                                                                                                              |  |           |        
|LONG-TERM LIABILITIES:                                                                                                                                                        |  |           |        
|Liability for employees rights upon retirement                                                                                                                                |  |           | 354    
|Convertible loans                                                                                                                                                             |  |           | 5,018  
|Contingently redeemable warrants                                                                                                                                              |  |           | 1,706  
|Total long-term liabilities                                                                                                                                                   |  |           | 7,078  
|                                                                                                                                                                              |  |           |        
|COMMITMENTS AND CONTINGENT LIABILITIES (Note
    9)                                                                                                                           |  |           |        
|Total liabilities                                                                                                                                                             |  |           | 10,628 
|                                                                                                                                                                              |  |           |        
|EQUITY:                                                                                                                                                                       |  |           |        
|                                                                                                                                                                              |  |           |        
|Common stock, par value $0.0001 per share; 125,000,000 shares authorized;
    17,040,040 and 16,046,290 shares issued and outstanding at June 30, 2012 and 2011, respectively |  |           | 2      
|Additional paid-in capital                                                                                                                                                    |  |           | 49,106 
|Accumulated deficit                                                                                                                                                           |  |           | (43,722
|Total equity                                                                                                                                                                  |  |           | 5,386  
|Total liabilities and equity                                                                                                                                                  |  | $         | 16,014 



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



F-4







INSPIREMD, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except per
share data)



|                                                                                                                                                                  |  | Year ended June 30 |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                                                                                                                  |  | 2012               |           
|                                                                                                                                                                  |  | (Audited)          |           
|                                                                                                                                                                  |  |                    |           
|REVENUES                                                                                                                                                          |  | $                  | 5,349     
|COST OF REVENUES                                                                                                                                                  |  |                    | 2,849     
|GROSS PROFIT                                                                                                                                                      |  |                    | 2,500     
|OPERATING EXPENSES:                                                                                                                                               |  |                    |           
|Research and development                                                                                                                                          |  |                    | 3,988     
|Selling and marketing                                                                                                                                             |  |                    | 2,174     
|General and administrative (including
    $9,549 and $786 of share-based compensation for years ended June 30, 2012 (audited) and 2011 (unaudited), respectively) |  |                    | 13,883    
|Total operating expenses                                                                                                                                          |  |                    | 20,045    
|LOSS FROM OPERATIONS                                                                                                                                              |  |                    | (17,545   
|FINANCIAL EXPENSES (INCOME),
    net                                                                                                                              |  |                    | 38        
|LOSS BEFORE TAX EXPENSES                                                                                                                                          |  |                    | (17,583   
|TAX EXPENSES                                                                                                                                                      |  |                    | 14        
|NET LOSS                                                                                                                                                          |  | $                  | (17,597   
|NET LOSS PER SHARE
    - basic and diluted                                                                                                                        |  | $                  | (1.04     
|WEIGHTED
    AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTING NET LOSS PER SHARE - basic and diluted                                                           |  |                    | 16,707,599



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



F-5







INSPIREMD, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
EQUITY (CAPITAL DEFICIENCY)



|                                                                |  | Ordinary shares |            |   |                               |   |   |                          |  |   |                    |  
|--------------------------------------------------------------- |  | --------------- | ---------- | - | ----------------------------- | - | - | ------------------------ |  | - | ------------------ | -
|                                                                |  | Number ofshares |            |   | Parvalue                      |   |   | Additionalpaid-incapital |  |   | Accumulateddeficit |  
|                                                                |  |                 |            |   | U.S.
    dollars in thousands |  
|BALANCE
    AT JULY 1, 2010 (Unaudited)                         |  |                 | 12,372,615 |   |                               | $ | 1 |                          |  | $ | 19,300             |  
|CHANGES
    DURING 2011:                                        |  |                 |            |   |                               |   |   |                          |  |   |                    |  
|Net loss                                                        |  |                 |            |   |                               |   |   |                          |  |   |                    |  
|Employee
    and non-employee share-based compensation expenses |  |                 |            |   |                               |   |   |                          |  |   | 3,946              |  
|Conversion
    of convertible loan                              |  |                 | 131,556    |   |                               |   | * |                          |  |   | 768                |  
|Issuance
    of ordinary shares, net of $257 issuance cost      |  |                 | 3,542,119  |   |                               |   | 1 |                          |  |   | 9,269              |  
|BALANCE
    AT JUNE 30, 2011 (Unaudited)                        |  |                 | 16,046,290 |   |                               |   | 2 |                          |  |   | 33,283             |  
|CHANGES
    DURING 2012:                                        |  |                 |            |   |                               |   |   |                          |  |   |                    |  
|Net loss                                                        |  |                 |            |   |                               |   |   |                          |  |   |                    |  
|Employee
    and non-employee share-based compensation expenses |  |                 | 748,446    |   |                               |   | * |                          |  |   | 10,554             |  
|Acquisition
    and cancellation of shares                      |  |                 | (4,696     | ) |                               |   | * |                          |  |   | (21                | )
|Exercise
    of options by employee                             |  |                 | 250,000    |   |                               |   | * |                          |  |   | 1,500              |  
|Beneficial
    conversion feature of convertible loan           |  |                 |            |   |                               |   |   |                          |  |   | 3,790              |  
|BALANCE
    AT JUNE 30, 2012 (Audited)                          |  |                 | 17,040,040 |   |                               |   | 2 |                          |  | $ | 49,106             |  



*Represents an amount less than
$1



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



F-6







INSPIREMD, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)



|                                                                                                                             |  | Year ended June 30, |        
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -------
|                                                                                                                             |  | 2012                |        
|                                                                                                                             |  | (Audited)           |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                        |  |                     |        
|Net loss                                                                                                                     |  | $                   | (17,597
|Adjustments required to reconcile net loss to net
    cash  used in operating activities:                                    |  |                     |        
|Depreciation of property, plant and equipment                                                                                |  |                     | 120    
|Loss from sale of property, plant and equipment                                                                              |  |                     |        
|Change in liability for employees right upon retirement                                                                      |  |                     | 72     
|Financial expenses (income)                                                                                                  |  |                     | (65    
|Share-based compensation expenses                                                                                            |  |                     | 10,554 
|Gains on amounts funded in respect of employee rights
    upon retirement, net                                               |  |                     | (1     
|Changes in operating asset and liability items:                                                                              |  |                     |        
|Decrease (increase) in prepaid expenses                                                                                      |  |                     | (22    
|Increase in trade receivables                                                                                                |  |                     | (1,210 
|Increase in other receivables                                                                                                |  |                     | (93    
|Decrease in inventory on consignment                                                                                         |  |                     | 19     
|Increase in inventory on hand                                                                                                |  |                     | (273   
|Increase (decrease) in trade payables                                                                                        |  |                     | (322   
|Increase (decrease) in deferred revenues                                                                                     |  |                     | 10     
|Increase in other payable and
    advance payment from customers                                                             |  |                     | 228    
|Net cash used in operating activities                                                                                        |  |                     | (8,580 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                        |  |                     |        
|Decrease (increase) in restricted cash                                                                                       |  |                     | 306    
|Purchase of property, plant and equipment                                                                                    |  |                     | (290   
|Proceeds from sale of property, plant and equipment                                                                          |  |                     | 12     
|Amounts funded in respect of
    employee rights upon retirement, net                                                        |  |                     | (71    
|Net cash used in investing activities                                                                                        |  |                     | (43    
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                        |  |                     |        
|Proceeds from issuance of convertible loan and warrants,
    net of issuance costs of $1,132 in the year ended June 30, 2012 |  |                     | 9,868  
|Proceeds from issuance of shares and warrants, net
    of issuance costs of $1,067, in the year ended June 30, 2011          |  |                     |        
|Exercise of options                                                                                                          |  |                     | 1,500  
|Proceeds from convertible loan at fair value through
    profit or loss, net of $60 issuance costs                           |  |                     |        
|Repayment of long-term loan                                                                                                  |  |                     | (281   
|Acquisition and cancellation of shares                                                                                       |  |                     | (21    
|Repayment of loans from shareholders                                                                                         |  |                     |        
|Repayment of convertible loans                                                                                               |  |                     |        
|Net cash provided by financing
    activities                                                                                |  |                     | 11,066 
|EFFECT OF EXCHANGE
    RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                             |  |                     | (229   
|INCREASE IN CASH AND CASH EQUIVALENTS                                                                                        |  |                     | 2,214  
|BALANCE OF
    CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                              |  |                     | 8,070  
|BALANCE OF
    CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                    |  |                     | 10,284 
|                                                                                                                             |  |                     |        
|SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION:                                                                       |  |                     |        
|Taxes on income  paid                                                                                                        |  | $                   | 17     
|Interest paid                                                                                                                |  | $                   | 225    



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



F-7







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | NOTE 1 - | DESCRIPTION
                                                                                             OF BUSINESS
| | -------- | --------------------------------------------------------------------------------------------------------------------



InspireMD, Inc., formerly Saguaro Resources, Inc.,
(the “Company”), a public company, is a Delaware corporation formed on February 29, 2008. On March 28, 2011, the Company
changed its name to InspireMD, Inc.



On December 29, 2010, the Company entered into
a Share Exchange Agreement (the “Exchange Agreement”) by and among the Company and InspireMD Ltd., a limited company
incorporated under the laws of the State of Israel in April 2005. Subsequent to the date of execution of the Exchange Agreement,
shareholders of InspireMD Ltd., holding 91.7% of InspireMD Ltd.’s issued and outstanding ordinary shares, executed a joinder
to the Exchange Agreement and became parties thereto (the “InspireMD Shareholders”). Pursuant to the Exchange Agreement,
on March 31, 2011, the InspireMD Shareholders transferred all of their ordinary shares in InspireMD Ltd. to the Company in exchange
for 11,617,977 newly issued shares of common stock of the Company (the “Initial Share Exchange”). In addition, the
remaining holders of InspireMD Ltd.’s ordinary shares separately transferred all of their ordinary shares of InspireMD Ltd.
to the Company, in exchange for an aggregate of 1,048,689 newly issued shares of common stock of the Company (the “Follow
Up Share Exchange”) and, together with the Initial Share Exchange, the “Share Exchange”). As a result of the
Share Exchange, InspireMD Ltd. became a wholly owned subsidiary of the Company.



The Share Exchange was accounted for as a reverse
recapitalization, equivalent to the issuance of stock by InspireMD Ltd. for the net monetary assets of the Company. Accordingly,
the historical financial statements of the Company reflect the historical operations and financial statements of InspireMD Ltd.



The Company, together with its subsidiaries, is
a medical device company focusing on the development and commercialization of its proprietary stent platform technology, MGuardTM.
MGuardTM provides embolic protection in stenting procedures by placing a micron mesh sleeve over a stent. The Company’s
initial products are marketed for use in patients with acute coronary syndromes, notably acute myocardial infarction (heart attack)
and saphenous vein graft coronary interventions (bypass surgery). The Company markets its products through distributors in international
markets, mainly in Europe and Latin America.



In addition, the Company operates in Germany through
its wholly-owned subsidiary, InspireMD GmbH, a German limited liability company incorporated in November 2007, where the Company
subcontracts the manufacturing of its stents.



On December 19, 2012, the
Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment of the Company’s Amended
and Restated Certificate of Incorporation to effect a one-for-four reverse stock split of its common stock (the
“Reverse Stock Split”), which decreased the number of common shares issued and outstanding from approximately
72.1 million shares to approximately 18.0 million shares. The Company’s authorized common shares were not  affected by
the Reverse Stock Split. All related share and per share data have been retroactively applied to the financial statements and
their related notes for all periods presented.

The Company has had recurring
losses and negative cash flows from operating activities and has significant future commitments. For the year ended June 30, 2012,
the Company had losses of approximately $17.6 million and negative cash flows from operating activities of approximately $8.6
million. The Company’s management believes that its working capital as of June 30, 2012 of approximately $10.8 million should
enable it to continue funding the negative cash flows from operating activities until October 2013, when its 2012 Convertible
Debentures (defined and described in Note 6a) are subject to a noncontingent redemption option that could require the Company
to make a payment of $13.3 million, including accrued interest. Since the Company expects to continue incurring negative cash
flows from operations and in light of the cash requirement in connection with the 2012 Convertible Debentures, there is substantial
doubt about the Company’s ability to continue operating as a going concern. These financial statements include no adjustments
of the values of assets and liabilities and the classification thereof, if any, that will apply if the Company is unable to continue
operating as a going concern.



F-8







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The Company will need to raise
further capital at some future point in time, through the sale of additional equity securities or debt. The Company’s future
capital requirements and the adequacy of the Company’s available funds will depend on many factors, including the Company’s
ability to successfully commercialize the Company’s MGuardTM products, development of future products, competing
technological and market developments, and the need to enter into collaborations with other companies or acquire other companies
or technologies to enhance or complement the Company’s product offerings. However, the Company may be unable to raise sufficient
additional capital when the Company will need it or with favorable terms. The terms of any securities issued by the Company in
future financing may be more favorable to new investors, and may include preferences, superior voting rights and the issuance
of warrants or other derivative securities, which may have a further dilutive effect on the holders of any of the Company’s
securities then outstanding. If the Company is unable to obtain adequate funds on reasonable terms, the Company will need to curtail
operations significantly, including possibly postponing or halting the Company’s Unites States of America (“U.S.”)
Food and Drug Administration clinical trials or entering into financing agreements with unattractive terms.



| | NOTE 2 - | SIGNIFICANT
                                                                                             ACCOUNTING POLICIES
| | -------- | ----------------------------------------------------------------------------------------------------------------------------



| | a. | Accounting principles
| | -- | ---------------------



The consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).



| | b. | Use of estimates
| | -- | ----------------



The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates using assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates.



As applicable to these consolidated
financial statements, the most significant estimates and assumptions relate to inventory write-off, provisions for returns, legal
contingencies, estimation of the fair value of share-based compensation and estimation of the fair value of warrants.



| | c. | Functional
                                                                                           currency
| | -- | --------------------------------------------------------------------------------------------------------------



The currency of the primary economic
environment in which the operations of the Company and its subsidiaries are conducted is the U.S. dollar (“$” or “dollar”).
Accordingly, the functional currency of the Company and of the subsidiaries is the dollar.



The dollar figures are determined
as follows: transactions and balances originally denominated in dollars are presented in their original amounts. Balances in foreign
currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively.
The resulting translation gains or losses are recorded as financial income or expense, as appropriate. For transactions reflected
in the statements of operations in foreign currencies, the exchange rates at transaction dates are used. Depreciation and changes
in inventories and other changes deriving from non-monetary items are based on historical exchange rates.



F-9







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | d. | Principles
                                                                                           of consolidation
| | -- | ----------------------------------------------------------------------------------------------------------------------



The consolidated financial statements
include the accounts of the Company and of its subsidiaries. Intercompany transactions and balances have been eliminated upon
consolidation.



| | e. | Cash
                                                                                           and cash equivalents
| | -- | --------------------------------------------------------------------------------------------------------------------



The Company considers all highly
liquid investments, which include short-term bank deposits (up to three months from date of deposit), that are not restricted
as to withdrawal or use, to be cash equivalents.



| | f. | Restricted
                                                                                           cash
| | -- | ----------------------------------------------------------------------------------------------------------



The Company maintains certain cash
amounts restricted as to withdrawal or use, related to credit cards. Restricted cash is denominated in dollars and New Israel
Shekel (“NIS”). See also Note 9c(2).



| | g. | Concentration
                                                                                           of credit risk and allowance for doubtful
                                                                                           accounts
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial instruments that may potentially
subject the Company to a concentration of credit risk consist of cash, cash equivalents and restricted cash, which are deposited
in major financial institutions in the “U.S.”, Israel and Germany, and trade accounts receivable. The Company’s
trade accounts receivable are derived from revenues earned from customers from various countries. The Company performs ongoing
credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The
Company also has a credit insurance policy for some of its customers. The Company maintains an allowance for doubtful accounts
receivable based upon the expected ability to collect the accounts receivable. The Company reviews its allowance for doubtful
accounts quarterly by assessing individual accounts receivable and all other balances based on historical collection experience
and an economic risk assessment. If the Company determines that a specific customer isunable to meet its financial obligations
to the Company, the Company provides an allowance for credit losses to reduce the receivable to the amount management reasonably
believes will be collected. To mitigate risks, the Company deposits cash and cash equivalents with high credit quality financial
institutions.



Provisions for doubtful accounts
receivable are netted against “Accounts receivable-Trade.”



| | h. | Inventory
| | -- | ---------



Inventories include finished goods,
work in process and raw materials.  Inventories are stated at the lower of cost (cost is determined on a “first-in,
first-out” basis) or market value. The Company’s inventories generally have a limited shelf life and are subject to
impairment as they approach their expiration dates. The Company regularly evaluates the carrying value of the Company’s
inventories and when, in the Company’s opinion, factors indicate that impairment has occurred, the Company establishes a
reserve against the inventories’ carrying value. The Company’s determination that a valuation reserve might be required
and the quantification of such reserve require management to utilize significant judgment. With respect to inventory on consignment,
see Note 2k.



F-10







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | i. | Property, plant and
                                                                         equipment
| | -- | ------------------------------------------------------------------------------------------------------



Property, plant and equipment are
stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets: over three years for computers and other electronic equipment, five years for
vehicles and seven to fifteen years for office furniture and equipment and machinery and equipment (mainly seven years).
Leasehold improvements are amortized on a straight-line basis over the term of the lease, which is shorter than the estimated
life of the improvements.



| | j. | Impairment
                                                                                           of property, plant and equipment
| | -- | --------------------------------------------------------------------------------------------------------------------------------------



The Company reviews its property,
plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) of the property,
plant and equipment is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would
be written down to their estimated fair values.



To date, the Company has not recorded
any impairment charges relating to its property, plant and equipment.



| | k. | Revenue recognition
| | -- | -------------------



Revenue is
recognized when delivery has occurred, evidence of an arrangement exists, title and risks and rewards for the products are transferred
to the customer, collection is reasonably assured and product returns can be reliably estimated. When product returns can be reliably
estimated a provision is recorded, based on historical experience, and deducted from revenues. The provision for product returns
and related costs are included in “Accounts payable and accruals-other” under “Current liabilities” and
“Inventory-On consignment,” respectively.



When returns cannot be reliably
estimated, both related revenues and costs are deferred, and presented under “Deferred revenues” and “Inventory-On
consignment,” respectively.



As of June 30, 2012, there are no
deferred revenues related to sales for which the rate of return cannot be reliably estimated.



The Company’s revenue arrangements
may contain delivery of free products upon the achievement of sales targets. Each period, the Company estimates the amount of
free products to which these distributors will be entitled based upon the expected achievement of sales targets and defers a portion
of revenues accordingly.



The Company recognizes revenue net
of value added tax (VAT).



| | l. | Research
                                                                                           and development costs
| | -- | -------------------------------------------------------------------------------------------------------------------------



Research and development costs are
charged to the statement of operations as incurred.



| | m. | Share-based
                                                                                           compensation
| | -- | -------------------------------------------------------------------------------------------------------------------



Employee option awards are classified
as equity awards and accounted for using the grant-date fair value method. The fair value of share-based awards is estimated using
the Black-Scholes valuation model and expensed over the requisite service period, net of estimated forfeitures. The Company estimates
forfeitures based on historical experience and anticipated future conditions.



F-11







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The Company
elected to recognize compensation expenses for awards with only service conditions that have graded vesting schedules using the
accelerated multiple option approach.



The Company
accounts for equity instruments issued to third party service providers (non-employees), by recording the fair value of the options
granted using an option pricing model, at each reporting period, until awards are vested in full. The expense is recognized over
the vesting period using the accelerated multiple option approach.



However, when
the grant relates to options granted to third parties as consideration for introducing investors to the Company, the costs are
recorded as issuance costs, of the various financial instruments issued.



In addition, certain share-based
awards of the Company are performance based and dependent upon achieving certain goals. With respect to these awards, the company
estimates the expected pre-vesting award probability that the performance conditions will be achieved. The Company only recognizes
expense for the shares that are expected to vest.



| | n. | Uncertain tax positions
| | -- | -----------------------



The Company follows a two-step approach
to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining
if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit. If
under the first step a tax provision is assessed to be more likely than not of being sustained on audit, the second step is performed,
under which the tax benefit is measured as the largest amount that is more than 50% likely to be realized upon ultimate settlement.
Such liabilities are classified as long-term, unless the liability is expected to be resolved within twelve months from the balance
sheet date. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within “Financial
expenses (income)-net”.



| | o. | Deferred
                                                                                           income taxes
| | -- | ----------------------------------------------------------------------------------------------------------------



Deferred taxes are determined utilizing
the “asset and liability” method based on the estimated future tax effects of differences between the financial accounting
and tax bases of assets and liabilities under the applicable tax laws, and on tax rates anticipated to be in effect when the deferred
taxes are expected to be paid or realized. The Company assesses realization of deferred income tax assets and, based on all available
evidence, concludes whether it is more likely than not that the net deferred income tax assets will be realized. A valuation allowance
is provided for the amount of deferred income tax assets not considered to be realizable.



The Company may incur additional
tax liability in the event of intercompany dividend distributions by its subsidiary. Such additional tax liability in respect
of these foreign subsidiaries has not been provided for in these financial statements as it is the Company’s policy to permanently
reinvest the subsidiaries’ earnings and to consider distributing dividends only when this can be facilitated in connection
with a specific tax opportunity that may arise.



Taxes that would apply in the event
of disposal of investments in the foreign subsidiary have not been taken into account in computing the deferred taxes, as it is
the Company’s intention to hold, and not to realize, this investment.



F-12







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | p. | Advertising
| | -- | -----------



Costs related to advertising and
promotion of products are charged to sales and marketing expense as incurred. Advertising expenses were $590 thousand and $386
thousand for the years ended June 30, 2012 and 2011, respectively.



| | q. | Net
                                                                                           loss per share
| | -- | -------------------------------------------------------------------------------------------------------------



Basic and diluted net loss per share
is computed by dividing the net loss for the year by the weighted average number of ordinary shares outstanding during the year.
The calculation of diluted net loss per share excludes potential ordinary shares as the effect is anti-dilutive. Potential ordinary
shares are comprised of incremental ordinary shares issuable upon the exercise of share options, warrants and convertible loans.



For the years ended June 30, 2012
and 2011, all ordinary shares underlying outstanding options, warrants and convertible loans have been excluded from the calculation
of the diluted loss per share since their effect was anti-dilutive. The total number of ordinary shares related to outstanding
options, warrants and convertible loans excluded from the calculations of diluted loss per share were 8,117,577 and 4,056,060
for the years ended June 30, 2012 and 2011, respectively.



| | r. | Segment reporting
| | -- | -----------------



The Company has one operating and
reportable segment.



| | s. | Factoring
                                                                                           of receivables
| | -- | -------------------------------------------------------------------------------------------------------------------



The Company entered into factoring
agreements amounting to $1,200 thousand during the year ended June 30, 2011, with certain banking institutions on a non-recourse
basis. The factoring of trade receivables under these agreements were accounted for as sales. Under the terms of these factoring
agreements, the Company transferred ownership of eligible trade receivables without recourse to the respective banking institutions
in exchange for cash. Proceeds on the transfers reflect the face value of the account less a discount. The discounts, of $12 thousand
during the year ended June 30, 2011, were recorded to “Financial expenses (income)-net” within the Consolidated Statements
of Operations. There were no such factoring agreements for the year ended June 30, 2012.



The receivables sold pursuant to
these factoring agreements are excluded from “Accounts receivable-Trade” on the Consolidated Balance Sheets and are
reflected as cash provided by operating activities on the Consolidated Statements of Cash Flows. The banking institution had no
recourse to the Company’s assets for failure of debtors to pay when due.



The related commissions on the sales
of trade receivables sold under these factoring agreements amounting to $0 thousand and $23 thousand during the years ended June
30, 2012 and 2011, respectively, were recorded to “Financial expenses (income)-net” within the Consolidated Statements
of Operations.



| | t. | Fair value measurement:
| | -- | -----------------------



The Company measures fair value
and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.



The accounting standard establishes
a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels,
which are described below:



F-13







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



Level 1: Quoted prices (unadjusted)
in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.



Level 2: Observable prices that
are based on inputs not quoted on active markets, but corroborated by market data.



Level 3: Unobservable inputs are
used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.



In determining fair value, the Company
utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible and considers counterparty credit risk in its assessment of fair value.



| | u. | Put warrants
| | -- | ------------



| |  | Put warrants that embody an obligation
                                                                to repurchase the Company’s equity shares, or are indexed
                                                                to such an obligation, and that require or may require the Company
                                                                to settle the obligation by transferring assets are within the
                                                                scope of Accounting Standards Codification (“ASC”)
                                                                480-10-25-8, and are recognized as a liability and measured at
                                                                fair value at each reporting date, with changes in fair value
                                                                recorded in earnings. See Note 6a(4)(A).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | v. | Beneficial conversion
                                                                         feature (“BCF”)
| | -- | --------------------------------------------------------------------------------------------------------------

| |  | When the Company issues convertible
                                                                debt, if the stock price is greater than the effective conversion
                                                                price (after allocation of the total proceeds) on the measurement
                                                                date, the conversion feature is considered "beneficial"
                                                                to the holder.If there is no contingency, this difference is treated
                                                                as issued equity and reduces the carrying value of the host debt;
                                                                the discount is accreted as deemed interest on the debt. See Note
                                                                6a(4)(B).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | w. | Embedded derivatives
| | -- | --------------------



Embedded derivatives
in debt contracts that are not clearly and closely related to the host debt are bifurcated and accounted for separately. Those
embedded derivatives are measured at fair value each reporting date, with changes in fair value recorded in earnings. See
Note 6a(4)(B).



| | x. | Allocation of issuance
                                                                         proceeds
| | -- | --------------------------------------------------------------------------------------------------------



The Company
allocated proceeds from its issuance of debt that was sold with detachable warrants that are classified as liability as follows:
first to the warrants based on their full fair value; then to any embedded derivatives in the debt that require bifurcation at
their fair values; then the residual amount of the proceeds to the debt. See Note 6a(4)(B).



| | y. | Newly
                                                                                           adopted accounting guidance
| | -- | ----------------------------------------------------------------------------------------------------------------------------



Fair value measurement



In May 2011, the FASB issued Accounting
Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 changes certain fair value measurement principles
and clarifies the application of existing fair value measurement guidance. These amendments include, among others, (1) the application
of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting
entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within
the Level 3 hierarchy.



F-14







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



Effective January 1, 2012, the Company
adopted ASU 2011-04. The adoption of this accounting standards update did not have a material impact on the Company’s consolidated
financial statements.



| | NOTE 3 - | FAIR VALUE
                                                                                      MEASURMENT
| | -------- | -----------------------------------------------------------------------------------------------------------



Items
Measured at Fair Value on a Recurring Basis



| | a. | The following table summarizes the balances for those
                                                                      financial liabilities where fair value measurements are
                                                                      estimated utilizing Level 2 and Level 3 inputs:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                            |  | Level |   |  | June 30, 2012    |  
|--------------------------- |  | ----- | - |  | ---------------- | -
|                            |  |       |   |  | ($ in thousands) |  
|2012 Warrants at fair value |  |       | 2 |  |                  |  
|Embedded derivative         |  |       | 3 |  |                  |  
|                            |  |       |   |  |                  | $



| | b. | The following tables summarize the activity for those
                                                                      financial liabilities where fair value measurements are
                                                                      estimated utilizing Level 3 inputs:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                             |  | Embedded Derivative |    |  | Convertible Loan |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------- | -- |  | ---------------- | -
|                                                                                                             |  | ($ in thousands)    |    |  | ($ in thousands) |  
|                                                                                                             |  |                     |    |  |                  |  
|Balance as of July 1, 2010 (Unaudited)                                                                       |  | $                   | -  |  |                  | $
|Issuances                                                                                                    |  |                     |    |  |                  |  
|Total losses (gains) (realized and unrealized) - included
    in earnings - Financial expenses (income), net |  |                     |    |  |                  |  
|Conversion to Company’s shares of common stock                                                               |  |                     |    |  |                  |  
|Redemption                                                                                                   |  |                     |    |  |                  |  
|Balance as of June 30, 2011 (Unaudited)                                                                      |  |                     | -  |  |                  |  
|Issuances                                                                                                    |  |                     | 8  |  |                  |  
|Total losses (gains) (realized
    and unrealized) - included in earnings - Financial expenses (income), net |  |                     | 41 |  |                  |  
|Balance as of June 30, 2012 (Audited)                                                                        |  | $                   | 49 |  |                  | $



Level 3 liabilities include an embedded
derivative related to the Company’s senior secured convertible debenture due April 5, 2014, as described in Note 6a. The
Company values the Level 3 embedded derivative using an internally developed valuation model, whose inputs include recovery
rates, credit spreads, stock prices, and volatilities, as described below.



In calculating the fair value of embedded derivative,
the Company used the following 	assumptions: Company’s credit spread of 23.1% and 26.5% for the transaction date and
for June 30, 2012, respectively, Company’s recovery rate of 49.8% and 49.8% for the transaction date and forJune 30, 2012,
respectively, probability of non-financial event of default 5% and 5% for the transaction date and for June 30, 2012, respectively.



F-15







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The credit spread is the yield to maturity of risky
bonds over risk free bonds and was based on an average of sample comparable companies.



The recovery rate is the estimated amount to be
recovered through bankruptcy procedures in event of a default,
expressed as a percentage of face value.



A non-financial event of default is a contractual
event of default which does not result from a declining financial standing of the Company.



The fair value of the warrants included
in Level 2 is estimated using the Black & Scholes model.



In calculating the fair value of
warrants, the Company used the following assumptions: expected term of 5 and 4.76 years for the transaction date and for June
30, 2012, respectively; expected volatility of 66.1% and 69.6% for the transaction date and for June 30, 2012, respectively; risk-free
interest rate of 1.01% and 0.72% for the transaction date and for June 30, 2012, respectively; and dividend yield of 0%.



The carrying amounts of financial
instruments included in working capital approximate their fair value either because these amounts are presented at fair value
or due to the relatively short-term maturities of such instruments. The carrying amount of the Company’s other financial
long-term assets and other financial long-term liabilities (other than the debentures) approximate their fair value. The fair
value of the Company’s senior secured convertible debenture due April 5, 2014 approximates the carrying amount (after considering
the BCF, as described in Note 6a).



| | NOTE 4 - | PROPERTY,
                                                                                             PLANT AND EQUIPMENT
| | -------- | --------------------------------------------------------------------------------------------------------------------------



| | a. | Composition of assets, grouped by major classifications,
                                                                      is as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------



|                                                 |  | June 30          |     
|------------------------------------------------ |  | ---------------- | ----
|                                                 |  | 2012             |     
|                                                 |  | ($ in thousands) |     
|                                                 |  | (Audited)        |     
|Cost:                                            |  |                  |     
|Computer equipment                               |  |                  | 142 
|Office furniture and equipment                   |  |                  | 83  
|Machinery and equipment                          |  |                  | 598 
|Leasehold improvements                           |  |                  | 111 
|                                                 |  |                  | 934 
|Less - accumulated depreciation and amortization |  |                  | (472
|Net carrying amount                              |  | $                | 462 



| | b. | Depreciation and amortization expenses totaled approximately
                                                                      $120 thousand and $80 thousand for the years ended June
                                                                      30, 2012 and 2011, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | NOTE 5 - | LIABILITY
                                                                                             FOR EMPLOYEES RIGHT UPON RETIREMENT
| | -------- | ------------------------------------------------------------------------------------------------------------------------------------------



Israeli labor
law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other
circumstances.



F-16







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS





Pursuant to
section 14 of the Israeli Severance Compensation Act, 1963, some of the Company’s employees are entitled to have monthly
deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Payments in accordance with
section 14 relieve the Company from any future severance payments to these employees.



The severance
pay liability of the Company for the rest of its employees, which reflects the undiscounted amount of the liability, is based
upon the number of years of service and the latest monthly salary. The severance pay liability is partly covered by insurance
policies and by regular deposits with recognized severance payment funds. The Company may only make withdrawals from the amounts
funded for the purpose of paying severance pay. The severance pay expenses were approximately $177 thousand and $149 thousand
in the years ended June 30, 2012 and 2011, respectively.



Defined contribution
plan expenses were $206 and $72 in the years ended June 30, 2012 and 2011, respectively. Gain on amounts funded with respect
to employee rights upon retirement totaled to approximately $1 thousand and $9 thousand for the years ended June 30, 2012 and
2011, respectively.



The Company
expects contribution plan expenses in fiscal year 2013 to be approximately $198 thousand.



| | NOTE 6 - | convertible
                                                                                      LOANS
| | -------- | -------------------------------------------------------------------------------------------------------



| | a. | On April 5, 2012, the Company
                                                                     issued senior secured convertible debentures (the “2012
                                                                     Convertible Debentures”) due April 5, 2014 in the original
                                                                     aggregate principal amount of $11,702,128 and five-year warrants
                                                                     (the “2012 Warrants”) to purchase an aggregate
                                                                     of 835,866 shares of its common stock at an exercise price
                                                                     of $7.20 per share in a private placement transaction in
                                                                     exchange for aggregate gross proceeds of $11,000 thousand.
                                                                     The 2012 Convertible Debentures bear interest at an annual
                                                                     rate of 8% (payable quarterly beginning on July 1, 2012)
                                                                     and are convertible at any time into shares of common stock
                                                                     at an initial conversion price of $7.00 per share.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The relevant features of the 2012
Convertible Debentures and 2012 Warrants are summarized below:



| | 1) | 2012
                                                                    Convertible Debentures
| | -- | -----------------------------------------------------------------------------------------------



| | A. | Conversion and contingent
                                                                    conversion
| | -- | --------------------------------------------------------------------------------------------------------



The 2012 Convertible Debentures,
including accrued interest on such 2012 Convertible Debentures, are convertible at any time, in whole or part, at the option of
the holders into shares of common stock at an initial conversion price of $7.00 per share, subject to adjustment for stock splits,
fundamental transactions or similar events and an additional conversion adjustment described below.



The
number of conversion shares issuable upon a conversion shall be determined by the quotient obtained by dividing (x) the sum of
(a) the outstanding principal amount to be converted, (b) at the option of the holder, a portion or all of any accrued and unpaid
interest to be converted and (c) the conversion adjustment amount by (y) the conversion price. The “conversion adjustment
amount” is calculated by multiplying the principal amount being converted by a fraction, the numerator of which is (a) the
number of days elapsed from the original issue date multiplied by (b) .021917808; and the denominator of which is 100. The maximum
number of days elapsed to be used in calculating the conversion adjustment amount will not be greater than 548 days regardless
of the actual number of days elapsed from the original issue date.



F-17







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The Company may force conversion
of the 2012 Convertible Debentures if the closing bid price of the Company’s common stock equals or exceeds 165% of the
conversion price for twenty consecutive trading days, the minimum daily trading volume for such period is $1,100 thousand, all
of the underlying shares during such period are either registered for resale with the Securities and Exchange Commission or eligible
for resale pursuant to Rule 144 and there is no existing event of default or existing event which, with the passage of time or
the giving of notice, would constitute an event of default during such period.



The 2012 Convertible Debentures contain
certain limitations on conversion. No conversion may be made if, after giving effect to the conversion, any holder would beneifially
own in excess of 4.99% of the Company’s outstanding shares of common stock. This percentage may be increased to a percentage
not to exceed 9.99%, at the option of such holder, except any increase will not be effective until the holder has given 61 days’
prior notice to the Company.



The 2012 Convertible Debentures impose
penalties on the Company for any failure to timely deliver any shares of its common stock issuable upon conversion.



| | B. | Events of default and holder’s
                                                                    contingent redemption option
| | -- | -------------------------------------------------------------------------------------------------------------------------------



If there is an event of default as
stipulated in the agreement, then by election of the holders holding at least 60% of the 2012 Convertible Debentures, the Company
must redeem all of the 2012 Convertible Debentures in cash for 112% of the outstanding principal, together with all unpaid and
accrued interest, all interest that would have been payable through the maturity date and any other amounts due under the 2012
Convertible Debentures (such amount, the “Mandatory Default Amount”). The Mandatory Default Amount will accrue interest
at a rate of 24% per annum commencing on the fifth calendar date following the relevant event of default.



| | C. | Holder’s noncontingent
                                                                    redemption option
| | -- | ------------------------------------------------------------------------------------------------------------



Commencing 18 months following the
original issuance date of the 2012 Convertible Debentures, the holders may require the Company to redeem all or a portion of the
2012 Convertible Debentures, for a price equal to 112% of the amount of principal to be redeemed plus all accrued but unpaid interest
and other amounts due under the 2012 Convertible Debentures.



| | D. | Company’s noncontingent
                                                                    redemption option
| | -- | -------------------------------------------------------------------------------------------------------------



Commencing 6 months following the
original issuance date of the 2012 Convertible Debentures, the Company may redeem all or a portion of the 2012 Convertible Debentures
for a price equal to 112% of the amount of principal to be redeemed plus all accrued but unpaid interest and other amounts due
under the 2012 Convertible Debentures.



| | E. | Covenants
| | -- | ---------



The 2012 Convertible Debentures contain
certain covenants which prohibit or limit the Company’s and its subsidiaries ability to, among other things:



| | 1. | pay cash dividends to its stockholders;
| | -- | ---------------------------------------

| | 2. | redeem, repurchase or otherwise acquire
                                                               more than a de minimis number of shares of its Common Stock or
                                                               Common Stock equivalents;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | incur additional indebtedness;
| | -- | ------------------------------

| | 4. | permit liens on assets or conduct
                                                               sales of assets;
| | -- | -----------------------------------------------------------------------------------------------------------------



F-18







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | 5. | effectuate stock splits until April
                                                               5, 2013, except in connection with an initial listing on a national
                                                               securities exchange or to meet the continued listing requirements
                                                               of such exchange;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | cease making public filings under
                                                               the Securities Exchange Act of 1934, as amended;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | engage in transactions with affiliates;
                                                               and
| | -- | ----------------------------------------------------------------------------------------------------------

| | 8. | amend its charter documents in a way
                                                               that would materially and adversely affect any holder of the Debentures.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F. | Pro rata distributions
| | -- | ----------------------



If the Company, at any time while
the 2012 Convertible Debentures are outstanding, distributes to all holders of common stock evidences of its indebtedness or assets
(including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the common stock,
then, upon any conversion of the 2012 Convertible Debentures, the holder shall be entitled to receive such distribution to the
same extent that the holder would have if the holder had held the number of conversion shares issued upon such conversion of the
2012 Convertible Debentures immediately before the date on which a record was taken for such distribution, or, if no such record
was taken, the date as of which the record holders of shares of common stock were determined for the participation in such distribution.



| | 2) | 2012
                                                                    Warrants
| | -- | ---------------------------------------------------------------------------------



| | A. | Exercisability
| | -- | --------------

The 2012 Warrants are immediately
exercisable and, in the aggregate, entitle the holders to purchase up to 835,866 shares of common stock. The 2012 Warrants have
an initial exercise price of $7.20 per share payable in cash. ” The 2012 Warrants expire on April 5, 2017.



Similar to the 2012 Convertible Debentures,
the 2012 Warrants also contain limitations on exercise that would cause the holder to beneficially own in excess of 4.99% or 9.99%
of the Company’s outstanding common stock.



| | B. | Anti-dilution protection
| | -- | ------------------------



The exercise price of the 2012 Warrants
and the number of shares issuable upon exercise of the 2012 Warrants are subject to adjustments for stock splits, combinations
or similar events.



| | C. | “Most favored nation”
| | -- | ---------------------



The 2012 Warrants are also subject
to an adjustment pursuant to which, in the event that the Company issues or is deemed to have issued certain securities with terms
that are superior to those of the 2012 Warrants, except with respect to exercise price and warrant coverage, the superior terms
will automatically be incorporated into the 2012 Warrants.



| | D. | Contingent holder redemption
                                                                    option
| | -- | -------------------------------------------------------------------------------------------------------



Upon the occurrence of a transaction
involving a change of control that is (i) an all cash transaction, (ii) a “Rule 13e-3 transaction” as defined in Rule
13e-3 under the Securities Exchange Act of 1934, as amended, or (iii) involving a person or entity not traded on a national securities
exchange, the holders of the 2012 Warrants will have the right, among others, to have the 2012 Warrants repurchased for a purchase
price in cash equal to the Black-Scholes value of the then unexercised portion of the 2012 Warrants.



F-19







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | E. | Pro rata distributions
| | -- | ----------------------



Similar to the 2012 Convertible Debentures,
the 2012 Warrants allow exercising holders to participate in pro rata distributions.



| | F. | Public information failure
| | -- | --------------------------



If the Company fails for any reason
to satisfy the current public information requirement under Rule 144(c) then, in addition to any other remedies available to the
holders, the Company must pay to the holders, in cash, partial liquidated damages as set forth in the agreement.



| | 3) | Transaction
                                                                    costs
| | -- | -------------------------------------------------------------------------------------



In connection with the Transaction,
the Company paid issuance costs, including placement agent and legal fees, of approximately $1,200 thousand, and issued five-year
warrants (“2012 Placement Agents Warrants”) to purchase 78,078 shares of the Company’s common stock at an exercise
price of $7.20 per share to the placement agent.



| | 4) | Accounting
                                                                    treatment
| | -- | ----------------------------------------------------------------------------------------



| | A. | 2012 Warrants
| | -- | -------------



The Company determined, based on
the provisions of ASC 480-10-25-8, that equity classification is precluded because of the redeemable option of the holders in
the event of a change in control (in certain conditions), which is an event that is not within the Company’s control. Accordingly,
the 2012 Warrants are classified as a liability in the Consolidated Balance Sheets and measured at fair value at each reporting
period. The fair value of the 2012 Warrants is estimated using the Black-Scholes valuation model. See Note 2u.



In calculating the fair value of
the 2012 Warrants (including the 2012 Placement Agents Warrants), the Company used the following assumptions: expected term of
5 and 4.76 years for the transaction date and for June 30, 2012, respectively; expected volatility of 66.1% and 69.6% for the
transaction date and for June 30, 2012, respectively; risk-free interest rate of 1.01% and 0.72% for the transaction date and
for June 30, 2012, respectively; and dividend yield of 0%.



| | B. | 2012 Convertible Debentures
| | -- | ---------------------------



In accordance with ASC 470-20, “Debt
with Conversion and Other Options,” the Company determined that a BCF existed at the issuance date of the 2012 Convertible
Debentures. The BCF amounting to $3,790 thousand was recorded in equity.



In addition, the Company analyzed
the holders’ contingent redemption option based on the guidance stipulated in Topic 815, and concluded that the holders’
contingent redemption option is not clearly and closely related to the debt host contract. Thus, the Company bifurcated and accounted
for it separately as an embedded derivative and classified it, together with the 2012 Convertible Debentures, in its statement
of financial position. This embedded derivative will be measured at fair value at each reporting period. The fair value of the
embedded derivative is estimated using the binominal valuation model.



In addition, the Company analyzed
the holders’ noncontingent redemption option and determined that the prepayment options are clearly and closely related
to the debt host contract and should not be bifurcated from the 2012 Convertible Debentures.



F-20







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The gross proceeds amounting to $11,000
thousand from the 2012 Convertible Debentures transaction were allocated as follows:



| | · | 2012
                                                                                                                                 Warrants
                                                                                                                                 at
                                                                                                                                 fair
                                                                                                                                 value
                                                                                                                                 -
                                                                                                                                 $2,807
                                                                                                                                 thousand
                                                                                                                                 based
                                                                                                                                 on
                                                                                                                                 their
                                                                                                                                 fair
                                                                                                                                 value;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | embedded
                                                                                                                                 derivative
                                                                                                                                 -
                                                                                                                                 $8
                                                                                                                                 thousand
                                                                                                                                 based
                                                                                                                                 on
                                                                                                                                 its
                                                                                                                                 fair
                                                                                                                                 value;
                                                                                                                                 and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | 2012
                                                                                                               Convertible Debentures
                                                                                                               - $8,185 thousand
                                                                                                               based on the residual
                                                                                                               amount after the
                                                                                                               allocation of other
                                                                                                               components as described
                                                                                                               above. In addition,
                                                                                                               an amount of $3,790
                                                                                                               thousand was recognized
                                                                                                               as a BCF against
                                                                                                               the 2012 Convertible
                                                                                                               Debentures.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 2012 Convertible Debentures are
subsequently measured at amortized cost on the basis of the effective interest method over the loan period until the maturity
date.



| | C. | Transaction costs
| | -- | -----------------



Direct transaction costs of $1,394
thousand, which included the placement agents fees and the 2012 Placement Agents Warrants valued at $262 thousand as of the transaction
date , as well as other issuance costs, were allocated to the various instruments associated with the 2012 Convertible Debentures
pro-rata to the amount such instruments were recorded as of the transaction date. The amounts that were allocated to the 2012
Warrants at fair value and embedded derivative were recorded in “Financial expenses” and the remainder amounting to
$1,037 thousand was recorded as “Deferred debt issuance costs” in the Consolidated Balance Sheets and will be amortized
over the loan period using the effective interest method until the maturity date.



| | b. | In July 2010, InspireMD Ltd.
                                                                       entered into a securities purchase agreement, pursuant
                                                                       to which InspireMD Ltd. issued (i) 8% senior convertible
                                                                       debentures in the principal amount of $1.58 million (the
                                                                       “2010 Convertible Debentures”) and (ii) three
                                                                       year warrants (the “2010 Warrants”) to purchase
                                                                       up to 253,628 shares of common stock at an exercise price
                                                                       of $4.92 per share (as adjusted for the Share Exchange)
                                                                       in exchange for aggregate gross proceeds of $1.58 million.
                                                                       The 2010 Convertible Debentures accrued interest at the
                                                                       annual rate of 8% and were payable on the later of (i)
                                                                       two months following receipt by InspireMD Ltd. of a tax
                                                                       ruling from the Israeli Tax Authority that the issuance
                                                                       of shares of a U.S. “shell company” in exchange
                                                                       for securities held by shareholders and option holders
                                                                       of InspireMD Ltd. would constitute a deferred tax event
                                                                       for InspireMD Ltd. and/or its security holders or (ii)
                                                                       the six month anniversary of the issuance of the 2010 Convertible
                                                                       Debentures (the “Original Maturity Date); provided
                                                                       however, that so long as the Company was not in default
                                                                       under the 2010 Convertible Debentures, InspireMD Ltd. had
                                                                       the right to extend the maturity date of the 2010 Convertible
                                                                       Debentures to nine months following the Original Maturity
                                                                       Date (the “Second Maturity Date”).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If InspireMD
Ltd. completed a qualified financing in connection with a reverse merger prior to the Original Maturity Date, or the Second Maturity
Date, if applicable, the holders of the 2010 Convertible Debentures had the option to convert the 2010 Convertible Debentures
into shares of common stock of the surviving corporation at $6.00 per share or be repaid in cash.



In addition, provided that there
was not an event of default, if InspireMD Ltd. completed a financing for at least $3 million prior to the Second Maturity Date,
the 2010 Convertible Debentures would automatically convert into ordinary shares of InspireMD Ltd. at a 15% discount to the pricing
of the new financing.



Finally, if an event of default had
not occurred, and any 2010 Convertible Debentures were still outstanding, following the Second Maturity Date, such 2010 Convertible
Debentures would automatically convert into ordinary shares of InspireMD Ltd. (i) if InspireMD Ltd. completed a financing for
at least $3 million prior to the one year anniversary of the Second Maturity Date, at a 15% discount to the pricing of the new
financing, or (ii) or if InspireMD Ltd. did not complete a financing for at least $3 million prior to the one year anniversary
of the Second Maturity Date, at $10 per ordinary share.



F-21







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



Upon an event of default under the
2010 Convertible Debentures, the holders had the right to demand payment of all then unpaid principal and accrued but unpaid interest
under the 2010 Convertible Debentures.



The Company elected to apply the
fair value option regarding the 2010 Convertible Debentures in accordance with ASC 825 (i.e. the 2010 Convertible Debentures were
measured at each balance sheet date at fair value and the changes in their fair value were recorded in profit and loss). See Note
3.



The proceeds from the 2010 Convertible
Debenture Transaction were allocated to the 2010 Convertible Debentures at their fair value with the residual proceeds ascribed
to the 2010 Warrants as follows:



·2010
Debenture at fair value - $1,133 thousand; and

·  2010
Warrants - $447 thousand, net of $23 thousand direct transaction costs.



The issuance of the 2010 Warrants
was recorded in the “Additional paid-in capital”, net of $23 thousand direct transaction costs allocated to the 2010
Warrants.



On March 31, 2011, holders of the
2010 Convertible Debentures surrendered $667,596 of outstanding principal and interest due under such debentures in exchange for
shares of common stock and warrants as part of the Company’s private placement on such date (the “Debt Conversions”)
as described in Note 10b.



As a result of the Debt Conversions,
there was $1 million of unpaid principal outstanding remaining under the 2010 Convertible Debentures on March 31, 2011, which
was repaid by the Company in May 2011, plus all accrued interest thereon.



| | c. | On January 4, 2011, InspireMD
                                                                       Ltd. entered into a convertible loan agreement with its
                                                                       distributor in Israel (the “Lender”), in the
                                                                       amount of $100 thousand subject to the following conditions:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                              convertible loan
                                                                                                              did not bear annual
                                                                                                              interest;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | in
                                                                                                              the event of a share
                                                                                                              exchange or similar
                                                                                                              transaction, the
                                                                                                              Lender would have,
                                                                                                              at its sole discretion,
                                                                                                              the option to convert
                                                                                                              the loan into either
                                                                                                              (i) shares of the
                                                                                                              Company’s
                                                                                                              common stock at
                                                                                                              a price of $4.92
                                                                                                              per share ($10 per
                                                                                                              share prior to the
                                                                                                              Share Exchange),
                                                                                                              or (ii) the Company’s
                                                                                                              product at a price
                                                                                                              of 400 euro per
                                                                                                              unit (which represented
                                                                                                              the market price
                                                                                                              for the Lender);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | in
                                                                                                              the event that the
                                                                                                              Company did not
                                                                                                              close a share exchange
                                                                                                              or similar transaction
                                                                                                              by June 1, 2011,
                                                                                                              the Lender had the
                                                                                                              right to extend
                                                                                                              the loan and its
                                                                                                              terms for up to
                                                                                                              an additional 6
                                                                                                              months (as noted
                                                                                                              in Note 1, the Exchange
                                                                                                              Agreement was closed
                                                                                                              on March 31, 2011);
                                                                                                              and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | in
                                                                                                                                no
                                                                                                                                event
                                                                                                                                was
                                                                                                                                cash
                                                                                                                                required
                                                                                                                                to
                                                                                                                                be
                                                                                                                                repaid
                                                                                                                                by
                                                                                                                                the
                                                                                                                                Company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On June 1, 2011 the Lender surrendered
the $100 thousand convertible loan in exchange for 20,290 shares of common stock of the Company.



| | d. | In April 2008 InspireMD
                                                                       Ltd. entered into a convertible loan agreement with certain
                                                                       lenders. Under this agreement, the lenders were issued
                                                                       convertible notes in the aggregate principal amount of
                                                                       $720 thousand, bearing annual interest of 10%, in exchange
                                                                       for $720 thousand. While the notes did not have a maturity
                                                                       date, they were repayable on demand upon an event of default.
                                                                       The notes were convertible, at any time, into ordinary
                                                                       shares of InspireMD Ltd. at the option of the holders.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The notes were automatically convertible
into ordinary shares of InspireMD Ltd. if InspireMD Ltd. completed a financing that resulted in at least $1 million (“qualified
financing”), at the lower conversion price of: (i) $5.92; or (ii) a discount of 30% on the price per share in such qualified
financing.



F-22







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The notes were
also automatically convertible into ordinary shares of InspireMD Ltd. upon an initial public offering (“IPO”) or upon
a consolidation, merger or sale of all assets or shares of InspireMD Ltd. (“exit transaction”), at the lower conversion
price of: (i) $5.92; or (ii) a discount of 20% on the price per share in such exit transaction.



In accordance
with ASC 470-20 "Debt with Conversion and Other Options",, the Company determined that a BCF existed at the issuance
date of these notes, totaling $308 thousand. Because these notes did not have a stated redemption date (except on an event of
default), and could be converted by the holder at any time, the BCF was recognized immediately on the issuance date under “Financial
expenses (income)-net” in the Consolidated Statements of Operations.



In March 2009 these convertible
notes were fully repaid (principal and accrued interest) due to a breach of the covenants by InspireMD Ltd. InspireMD Ltd. allocated
the proceeds paid between the portion related to the redemption of the beneficial conversion feature and that related to the convertible
loan, based on the guidance in ASC 470-20. The Company measured the portion allocated to the beneficial conversion feature based
on the intrinsic value of the conversion feature at the extinguishment date, which amounted to $308 thousand (which equals the
original BCF since the price of InspireMD Ltd.’s shares on the issuance date and the redemption date was the same). Accordingly,
the difference between the amount allocated to the BCF plus the loan’s carrying amount, and the cash paid, was recognized
as financial income in the Consolidated Statements of Operations.



| | NOTE 7 - | LONG-TERM
                                                                                             LOAN
| | -------- | -----------------------------------------------------------------------------------------------------------



In January 2009, InspireMD Ltd. signed a loan agreement
with Mizrahi Tefahot Bank. According to the agreement, InspireMD Ltd. was entitled to receive the following:



| | 1. | A loan (the “First Loan”) amounting to $750 thousand,
                                                               bearing annual interest (paid quarterly) equal to the London Interbank
                                                               Offer Rate plus 4%. The loan was payable in eight quarterly installments
                                                               beginning in April 2010.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | An additional loan (the “Second
                                                               Loan”) amounting to $750 thousand, to be received no later
                                                               than August 3, 2009, subject to certain terms. InspireMD Ltd. did
                                                               not meet the specific terms and therefore was not able to receive
                                                               the Second Loan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | A credit line amounting to $500
                                                               thousand for the purpose of financing export shipments. The credit
                                                               line was not utilized by the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition,
InspireMD Ltd. was required to pay an additional $250 thousand in the following events:



| | 1. | A liquidity event of at least $100
                                                               million (as stipulated in the agreement); or
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | An IPO in which the Company’s
                                                               valuation was at least $100 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------



InspireMD Ltd. granted to the
bank a floating lien on all of its assets, as well as a fixed lien on all of its intellectual property and rights of future payments
from the Company’s clients. InspireMD Ltd. also committed to maintain in its bank account a minimum of $250 thousand in
order to support an estimated cash burn rate of three months of activity based on average monthly cash flow in the preceding three
months. This amount was recorded in the Consolidated Balance Sheets under “Restricted cash.”



F-23







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



On February 2009 InspireMD Ltd.
received the First Loan and, in accordance with the loan agreement, issued 58,704 ordinary shares to the bank. Subsequently,
InspireMD Ltd. estimated the fair value of the First Loan, the Second Loan, the credit line and the 58,704 ordinary shares issued
to the bank using the following assumptions:



| | 1. | Discount rate of 25.13% per year
                                                               calculated by using Altman-Z score model
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Probability of realizing the Second
                                                               Loan - 40%
| | -- | -------------------------------------------------------------------------------------------------------------

| | 3. | Probability of realizing the credit
                                                               line - 80%
| | -- | -------------------------------------------------------------------------------------------------------------



The relative
fair value of each component based on the valuation report was as follows:



| | 1. | The First Loan - $540 thousand
| | -- | ------------------------------

| | 2. | The Second Loan option - $20 thousand
| | -- | -------------------------------------

| | 3. | The credit line - $59 thousand
| | -- | ------------------------------

| | 4. | The 58,704 ordinary shares issued
                                                               to the bank - $290 thousand
| | -- | ----------------------------------------------------------------------------------------------------------------------------



The First Loan was subsequently
measured at amortized cost on the basis of the effective interest method over the loan period.



The Second Loan option and the
credit line have been recorded in the Consolidated Financial Statements in “Financial expenses” during 2009.



The 58,704 ordinary shares were
recorded as equity according to their fair market value at the time.



Direct transaction costs of $41
thousand were recorded as deferred debt issuance costs in the Consolidated Balance Sheet and were amortized over the First Loan
period.



In November 2010, InspireMD Ltd.
was asked by Mizrahi Tefahot Bank to grant it a fixed lien in the amount of $300 thousand that would replace the $250 thousand
of restricted cash since the actual cash burn rate was higher than the cash amount maintained in the Company’s bank account.
The transaction was effectuated in January 2011.



On July 20, 2011, Mizrahi Tefahot
Bank approved the release of a fixed lien in the amount of $300 thousand. Following the approval, $300 thousand of restricted
cash was classified to cash and cash equivalents.



In March 2012, following the
complete repayment of the loan, Mizrahi Tefahot Bank approved the release of the floating lien.



| | NOTE 8 - | RELATED
                                                                                             PARTIES TRANSACTIONS
| | -------- | -------------------------------------------------------------------------------------------------------------------------



| | a. | In January 2009, InspireMD Ltd. signed a sub-lease agreement
                                                                      with a company controlled by the Company’s shareholders,
                                                                      for a period of 12.5 months, for a monthly rent payment
                                                                      of $1 thousand. In 2010, the rent period was extended for
                                                                      an additional year, and the rent payments increased by 10%.
                                                                      In 2011, the rent period was extended for an additional
                                                                      year, through February 2012. The sub-lease agreement was
                                                                      not renewed.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | On May 6, 2008, InspireMD Ltd. entered into a consultancy
                                                                      agreement (the “2008 Consultancy Agreement”)
                                                                      for marketing services with a member of the immediate family
                                                                      of the CEO. Pursuant to the 2008 Consultancy Agreement,
                                                                      InspireMD Ltd. paid a fixed hourly fee of $45 (154 NIS)
                                                                      in Israel and a fixed daily fee of $400 when traveling abroad
                                                                      with respect to the consulting services. On September 1,
                                                                      2011, effective April 1, 2011, the 2008 Consultancy Agreement
                                                                      was terminated and InspireMD Ltd. entered into a new consultancy
                                                                      agreement (the “2011 Consultancy Agreement”)
                                                                      pursuant to which the consultant was retained to serve as
                                                                      the Company’s vice president of sales. Pursuant to
                                                                      the agreement, she was paid a monthly consultancy fee of
                                                                      $12,500 from April 1, 2011 through June 30, 2011 and a monthly
                                                                      consultancy fee of $15,500 thereafter. On July 2, 2012,
                                                                      effective August 1, 2012, the 2011 Consultancy Agreement
                                                                      was termainated and InspireMD Ltd. entered into a new consultancy
                                                                      agreement (the “2012 Consultancy Agreement”)
                                                                      pursuant to which the consultant would be retained for sale
                                                                      services. Pursuant to the agreement, she would be entitled
                                                                      to a fixed fee of $625 (2,500 NIS) for each full working
                                                                      day and a bonus fee up to $10,000 (40,000 NIS) upon 100%
                                                                      achievement of set objectives. The Consultancy Agreement
                                                                      has a termination date of September 30, 2012, but could
                                                                      be terminated without cause by InspireMD Ltd. upon 7 days’
                                                                      notice, and may be terminated with cause by InspireMD Ltd.
                                                                      immediately, upon the occurrence of certain events, such
                                                                      as a breach of fiduciary duties owed to the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-24







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | c. | During 2007, InspireMD Ltd received a loan of $40 thousand
                                                                      from its controlling shareholders. Half of the loan was
                                                                      paid during 2009, and the second half was paid during 2011.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | On April 1, 2005, InspireMD Ltd. entered into employment
                                                                      agreements with the Company’s president and the Company’s
                                                                      CEO (both are directors and shareholders). Such employment
                                                                      agreements were subsequently amended on October 1, 2008
                                                                      (in the case of the Company’s CEO) and March 28, 2011
                                                                      (in the case of both the president and the CEO). Pursuant
                                                                      to these employment agreements, as amended on March 28,
                                                                      2011, each officer was entitled to a monthly gross salary
                                                                      of $15,367. Each officer was also entitled to certain social
                                                                      and fringe benefits as set forth in the employment agreements,
                                                                      which totaled 25% of their gross salary, as well as a company
                                                                      car. Each officer was also entitled to a minimum bonus equivalent
                                                                      to three monthly gross salary payments based on achievement
                                                                      of objectives and board of directors’ approval. If
                                                                      such officer’s employment was terminated with or without
                                                                      cause, he was entitled to at least six months’ prior
                                                                      notice, and would have been paid his salary and all social
                                                                      and fringe benefits in full during such notice period.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On April 1, 2011, the employment
agreements with the Company’s president and CEO were terminated and the Company entered into consulting agreements with
the Company’s president and CEO for a monthly consultancy fee of $21,563 each.



| |  | At the request of the compensation committee, the Company’s
                                                                CEO and president agreed, effective as of December 1, 2011, to
                                                                be treated as employees for purposes of paying their salary and
                                                                benefits, rather than as consultants under their consulting agreements.
                                                                In addition, the Company’s CEO and president agreed to formally
                                                                terminate their consulting agreement upon the execution of an
                                                                employment agreement with the Company on substantially the same
                                                                terms as their consultancy agreements. A new employment agreement,
                                                                however, was never executed with either party.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On June 1, 2012, the president of the Company resigned. In
                                                                connection with his resignation, effective June 1, 2012, he remains
                                                                on the Company’s board of directors. In connection with
                                                                the resignation, the Company and the president entered into a
                                                                consulting agreement, pursuant to which, among other things, the
                                                                president agreed to provide the Company with consulting services
                                                                for a period of six months, terminating on November 30, 2012,
                                                                in exchange for payments by the Company of $20 thousand per month.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We anticipate that in the near term, Ofir Paz will resign
                                                                from his position as our chief executive officer. Mr. Paz intends
                                                                to remain in his position while we conduct a thorough search for
                                                                an appropriate replacement. We have retained a search firm to
                                                                assist in this process. Mr. Paz’s resignation reflects our
                                                                transition from a private medical device start-up company with
                                                                a promising new technology to a publicly traded company with a
                                                                successfully tested, commercialized, CE Mark approved product.
                                                                After his resignation, we anticipate that Mr. Paz will remain
                                                                one of our directors and maintain his involvement with us, as
                                                                necessary, on a consulting basis.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-25







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| | e. | During the second half of 2008, InspireMD Ltd. decreased
                                                                      the salaries for most of its employees due to the economic
                                                                      slowdown. InspireMD Ltd. also decreased the salaries of
                                                                      the former president and the CEO. Their salaries were decreased
                                                                      25%, and an additional 25% was accrued and recorded in “Accounts
                                                                      payable-trade.” The accrued amounts were fully paid
                                                                      as of June 30, 2011.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In September 2009, the 25% decrease in salaries described
                                                                above was cancelled.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| | f. | InspireMD Ltd. entered into
                                                                      a license agreement to use a unique stent design developed
                                                                      by an American company owned by a former director of InspireMD
                                                                      Ltd. (“MGuard Prime”). See Note 9b.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | Certain directors of the Company
                                                                      were granted options to purchase shares of the Company’s
                                                                      common stock. See Note 10.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | Balances
                                                                                        with related parties:
| | -- | ----------------------------------------------------------------------------------------------------------------------



|                       |  | June 30          |   
|---------------------- |  | ---------------- | --
|                       |  | 2012             |   
|                       |  | ($ in thousands) |   
|                       |  | (Audited)        |   
|Current liabilities:   |  |                  |   
|Other accounts payable |  | $                | 45



| | i. | Transactions
                                                                                        with related parties:
| | -- | --------------------------------------------------------------------------------------------------------------------------



|                              |  | Year ended June 30 |      
|----------------------------- |  | ------------------ | -----
|                              |  | 2012               |      
|                              |  | ($ in thousands)   |      
|                              |  | (Audited)          |      
|Expenses:                     |  |                    |      
|Share-based compensation      |  | $                  | 9,517
|Salaries and related expenses |  | $                  | 305  
|Consulting fees               |  | $                  | 393  
|Rent income                   |  | $                  | (21  



NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES



| | a. | Lease
                                                                                        commitments:
| | -- | ----------------------------------------------------------------------------------------------------------



| | 1) | The Company is a party to two lease agreements for its facilities,
                                                                 which expire in March 2014 and December 2014. The Company has
                                                                 the option, under both agreements, to extend the agreements for
                                                                 two additional two year periods, for a total of four years each.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rent expense included in the
Consolidated Statements of Operations totaled approximately $220 thousand and $133 thousand for the years ended June 30, 2012
and 2011.



F-26





INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



As of June 30, 2012, the aggregate
future minimum lease obligations for office rent under non-cancelable operating lease agreements were as follows:





|                    |  | ($ in thousands) |    
|------------------- |  | ---------------- | ---
|                    |  | (Audited)        |    
|Year Ended June 30: |  |                  |    
|2013                |  | $                | 345
|2014                |  |                  | 320
|2015                |  |                  | 122
|                    |  | $                | 787



| | 2) | The Company leases its motor vehicles under non-cancelable
                                                                 operating lease agreements.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------



As of June 30, 2012, the aggregate
future minimum lease obligations for motor vehicles under non-cancelable operating lease agreements were as follows:



|                    |  | ($ in thousands) |    
|------------------- |  | ---------------- | ---
|                    |  | (Audited)        |    
|Year Ended June 30: |  |                  |    
|2013                |  | $                | 58 
|2014                |  |                  | 46 
|2015                |  |                  | 22 
|                    |  | $                | 126



| | b. | License
                                                                                        Agreement:
| | -- | ----------------------------------------------------------------------------------------------------------



| |  | In March 2010, the Company entered into a new license agreement
                                                                to use MGuard Prime, a unique stent design developed by an American
                                                                company owned by a former director of InspireMD Ltd. According
                                                                to the agreement, the licensor is entitled to receive 7% royalties
                                                                for sales outside the U.S. and inside the U.S. as follows: 7%
                                                                royalties for the first $10 million of net sales and 10% royalties
                                                                for net sales exceeding the first $10 million. Royalties accrued
                                                                for these sales are included in “Accounts payable and accruals
                                                                -Other.” Royalties expenses for the years ended June 30,
                                                                2012 and 2011 amounted to $201 thousand and $22 thousand, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Liens
                                                                                        and pledges
| | -- | ---------------------------------------------------------------------------------------------------------



| | 1) | The Company’s obligations under the 2012 Convertible
                                                               Debentures (Note 6) are secured by a first priority perfected
                                                               security interest in all of the assets and properties of the Company
                                                               and InspireMD Ltd., including the stock of InspireMD Ltd. and InspireMD
                                                               GmbH.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | As of June 30, 2012, the Company had fixed liens amounting
                                                               to $37 thousand to Bank Mizrahi in connection with the Company’s
                                                               credit cards.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Litigation:
| | -- | -----------



The Company is a party to various
claims arising in the ordinary course of its operations in the aggregate amount of $10 thousand. The Company has not recorded
an expense provision related to damages in connection with these matters because management, after considering the views of its
legal counsel as well as other factors, is of the opinion that a loss to the Company is neither probable nor in an amount or range
of loss that is estimable.



In February 2011, representatives
of a third party indicated that they intended to seek damages from the Company in connection with certain finders’ fees
that they claim are owed to them. The claimants’ demand was for approximately $1 million. The claimants’ most recent
settlement demand, conveyed in April 2011, was for a total of $250 thousand in cash and 62,500 shares of the Company common stock.
To date, no lawsuit has been filed and the Company has not accrued a provision in connection with this matter because the Company’s
management, after considering the views of its legal counsel as well as other factors, is of the opinion that a loss to the Company
is neither probable nor in an amount or range of loss that is estimable.



F-27







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



In November 2010, a former senior
employee submitted a claim against the Company in the total amount of $430 thousand and options to purchase 507,256 shares of
the Company’s common stock at an exercise price of $0.004 per share in the Magistrate’s Court in Tel Aviv, claiming
unpaid back wages and commissions. The fair value of those options was valued using the Black-Scholes valuation model at $2.5
million as of the period he claimed to be entitled to the options. In June 2012, the parties reached a settlement agreement for
a payment of $88 thousand by the Company to the plaintiff and following the a mutual petition filed by the parties , on July 6,
2012 the Labor Court dismissed the claim. As of June 30, 2012, a provision of $88 thousand was included in the Company’s
Consolidated Financial Statements.



In November 2010, an alleged founder
and former legal advisor of the Company submitted a claim against the Company for options to purchase 124,014 shares of the Company’s
common stock at an exercise price of $0.004 per share in the Magistrate’s Court in Tel Aviv. The fair value of those options
was estimated using the Black-Scholes valuation model at $134 thousand as of the grant date. It was during 2005 and 2006 that
the Company first became aware of the events that gave rise to this litigation. Also, during this time, the Company had discussions
with the plaintiffs on an informal basis. The Company’s management, after considering the views of its legal counsel as
well as other factors, recorded a share-based compensation expense of $134 thousand in 2006, in respect of services allegedly
provided in 2005 and 2006.



In November 2010, a former legal
advisor of the Company submitted in the Magistrate’s Court in Tel Aviv a claim against the Company in the total amount of
$53 thousand due to an alleged breach of employment promise. It was during 2005 and 2006 that the Company first became aware of
the events that gave rise to this litigation. Also during this time, the Company had discussions with the plaintiff on an informal
basis. The Company’s management, after considering the views of its legal counsel as well as other factors, recorded a provision
of $53 thousand in 2006.



With respect to the two claims against
the Company submitted by an alleged founder and former legal advisor of the Company in November 2010, described above, following
a mediation held in January 2012, the parties reached the following settlement agreement: (i) the plaintiff shall be the owner
of options to purchase 48,697 shares of common stock of the Company and withdraw their claim for the remaining 75,318 options;
and (ii) the Company would withdraw its counterclaim against the plaintiff. In January 2012, the District Court in Tel Aviv approved
the settlement and a corresponding judgment was given by the court. Following the settlement agreement, as of December 31, 2011,
the provision in the amount of $53 thousand was reversed.



In February 2011, a service provider
submitted a claim against the Company in the amount of $327 thousand in the Magistrate’s Court in Tel Aviv, claiming a future
success fee and commission for assistance in finding the Company’s distributor in Brazil. The Company’s management,
after considering the views of its legal counsel as well as other factors, recorded a provision of $327 thousand in the financial
statements in the first quarter of the 2011 calender year. The related expense has been recorded to “General and administrative”
within the Consolidated Statements of Operations. On October 5, 2011, the Company filed a counter claim against the plaintiff
in the amount of $29 thousand.



F-28







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



In August 2011, a former senior
employee submitted to the Regional Labor Court in Tel Aviv a claim against the Company for (i) compensation of $118,000 and (ii)
a declaratory ruling that he is entitled to exercise 121,742 options to purchase shares of the Company’s common stock at
an exercise price of $0.004 per share. 20,290 of such options were not disputed by the Company. On October 21, 2012, the former
senior employee exercised 20,290 options. After considering the views of its legal counsel as well as other factors, the Company’s
management is of the opinion that a loss to the Company is neither probable nor in an amount or range of loss that is estimable.



In November 2011, a previous service
provider of InspireMD Ltd. submitted to the Magistrate Court in Tel Aviv a claim against the Company, InspireMD Ltd. and the Company’s
President and the Company’s CEO for a declaratory ruling that it is entitled to convert options to purchase 13,650 of InspireMD
Ltd.’s ordinary shares at an exercise price of $3.67 per share into options to purchase 27,696 shares of the Company’s
common stock at an exercise price of $1.80 per share, and to convert options to purchase 4,816 of InspireMD Ltd.’s ordinary
shares at an exercise price of $10 per share into options to purchase 9,772 shares of the Company’s common stock at an exercise
price of $4.92 per share. On July 30, 2012, the parties held a mediation which resulted in a settlement agreement according to
which the Company paid $7 thousand plus value added taxes to the plaintiff and the plaintiff waived all of his claims to any options
and agreed to the irrevocable dismissal of the above mentioned claim. On August 5, 2012, the court approved the settlement and
dismissed the claim.



In December
2011, a statement of claim against the Company was submitted by an alleged finder of the Company, regarding 146,089 options to
purchase the Company’s shares. The Company filed its defense in this case on March 11, 2012. The Company and the plaintiff
agreed to refer the case to mediation. A second hearing in this case was set for September 20, 2012. After consulting the views
of its legal counsel as well as other factors, the Company is unable to assess the probable outcome of this claim.



In July 2012, a purported
assignee of options in InspireMD Ltd. submitted a statement of claim against the Company, InspireMD Ltd., and the
Company’s CEO and former President for a declaratory and enforcement order that it is entitled to options to purchase
83,637 shares of the Company’s common stock at an exercise price of $0.76 per share. The Company filed its defense in
this case on November 8, 2012. A hearing in this case was set for February 21, 2013. After consulting the views of its
legal counsel as well as other factors, the Company is unable to assess the probable outcome of this claim.



In December 2012, a previous service
provider of InspireMD GmbH submitted to the Labor Court in Buenos Aires, Argentina a claim in the amount of $193,378 plus interest
(6% in dollars or 18.5% in pesos), legal expenses and fees (25% of the award) against InspireMD Ltd. and InspireMD GmbH. The Company
has not yet engaged with a local law firm for the representation of the Company in these proceedings, however, according to the
local lawyers with whom the Company has discussed the lawsuit, the Company has to file its defense by February 1, 2013. As the
Company has yet to engage a local law firm to represent it in this claim, the Company cannot evaluate its potential exposure under
this claim.





In December 2012, the State of Israel issued a criminal complaint
to InspireMD Ltd., the Company’s CEO, former President, and Vice President of Research and Development, alleging that the
Company failed to operate its production facilities under an appropriate business license. On January 3, 2013, the Company was
granted a 3 month temporary license for its production facility. The Company expects to receive a permanent license within the
next 30 days and is currently seeking a dismissal of the criminal complaint. The Company does not expect that this action by the
State of Israel will result in any material liability to either the Company or the named individuals.



F-29







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



NOTE 10 –
EQUITY (CAPITAL DEFICIENCY)



| | a. | Share capital
| | -- | -------------



As of June 30, 2012, the Company
has authorized 130,000,000 shares of capital stock, par value $0.0001 per share, of which 125,000,000 are shares of common stock
and 5,000,000 are shares of “blank check” preferred stock.



On October 31, 2011, the stockholders
approved the authorization of the board of directors, in its discretion, to amend the Amended and Restated Certificate of Incorporation
of the Company to effect a reverse stock split of the Company’s common stock at a ratio of one-for-two to one-for-four,
such ratio to be determined by the board of directors (the “Reverse Stock Split”), which approval will allow the board
of directors to effect the Reverse Stock Split any time prior to the Company’s annual meeting of stockholders in 2012.



As of June 30, 2012, the Company
had yet to effect the Reverse Stock Split.



| | b. | Share exchange and private placement agreements and
                                                                      share issuance
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------



As noted in Note 1 above, in
connection with the Share Exchange, the Company issued 12,516,666 shares of its common stock in exchange for 6,242,754 ordinary
shares of InspireMD Ltd., which represented all of InspireMD Ltd.’s outstanding shares, resulting in InspireMD Ltd. became
a wholly owned subsidiary of the Company.



In connection with the Share
Exchange, the Company also assumed all of InspireMD Ltd.’s obligations under InspireMD Ltd.’s outstanding stock options.
Immediately prior to the Share Exchange, InspireMD Ltd. had outstanding stock options to purchase an aggregate of 937,256 ordinary
shares, which outstanding options became options to purchase an aggregate of 1,901,693 shares of common stock of the Company after
giving effect to the Share Exchange. In addition, three-year warrants to purchase up to 125,000 ordinary shares of InspireMD Ltd.
at an exercise price of $10 per share were assumed by the Company and converted into warrants to purchase 253,625 shares of the
Company’s common stock at an exercise price of $4.92 per share.



In connection with the closing
of the Share Exchange, the Company sold 1,613,501 shares of its common stock at a purchase price of $6.00 per share and five-year
warrants to purchase up to 806,750 shares of common stock at an exercise price of $7.20 per share in a private placement to accredited
investors (the “Private Placement”).



As part of the Private Placement,
certain holders of the 2010 Convertible Debentures surrendered $667,596 of outstanding principal and interest due under the 2010
Convertible Debentures in exchange for 111,266 shares of common stock and warrants to purchase an aggregate of 56,383 shares of
common stock. The number of shares of common stock and warrants issued in connection with the Debt Conversions are included in
the aggregate figures for the Private Placement. As a result, the Company received aggregate cash proceeds of $9,013,404 in the
Private Placement.



In connection with the Share Exchange, the Company
also entered into a stock escrow agreement with certain stockholders, pursuant to which these stockholders deposited 253,906 shares
of common stock held by them and warrants to purchase 208,125 shares of common stock into escrow. These shares and warrants were
to be released to the Company for cancellation or surrender to an entity designated by the Company should the Company have $10
million in consolidated revenue, as certified by the Company’s independent auditors, during the first 12 months following
the closing of the Private Placement, yet fail, after a good faith effort, to have the Company’s common stock approved for
listing on a national securities exchange. If the Company failed to record at least $10 million in consolidated revenue during
the first 12 months following the closing of the Private Placement or have its common stock listed on a national securities exchange
within 12 months following the closing on the Private Placement, these escrowed shares were to be released back to the stockholders.



F-30







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



As it appeared unlikely that
the Company would satisfy the revenue threshold set forth above, on November 16, 2011, the Company’s board
of directors approved the release of the 253,906 shares of common stock and warrants to purchase 208,125 shares of common
stock then held in escrow in order to immediately increase the Company’s public float.



In connection with the Share
Exchange, the Company issued certain consultants five-year warrants to purchase up to an aggregate of 625,000 shares of common
stock at an exercise price of $6.00 per share in consideration for consulting services related to the Share Exchange, which warrants
have a fair value of $1.5 million. The expenses related to the issuance of the warrants are recorded as share-based compensation
and treated as issuance costs.



In connection with the Private
Placement, the Company paid placement agent fees of approximately $300 thousand and issued five-year warrants to purchase 93,435
shares of the Company’s common stock at an exercise price of $7.20 per share to the placement agent. The fair value of the
warrants is $212 thousand.



During the first quarter of 2011
and prior to the Share Exchange, InspireMD Ltd. raised approximately $990 thousand and issued approximately 200,873 ordinary shares
through private placements.



On April 18, 2011, the Company
issued 166,667 shares of its common stock and five-year warrants to purchase 83,333 shares of the Company’s common stock
at an exercise price of $7.20 per share, for an aggregate purchase price of $1,000 thousand, in a private placement.



On April 18, 2011, the Company
issued 70,834 shares of its common stock and five-year term warrants to purchase 35,417 shares of the Company’s common stock
at an exercise price of $7.20 per share, for an aggregate purchase price of $425 thousand, in a private placement.



In connection with the above-referenced
transactions from April 18, 2011, the Company paid placement agent fees of approximately $471 thousand, which were recorded as
issuance costs, and five-year term warrants to purchase 14,250 shares of the Company common stock at an exercise price of $7.20
per share to the placement agent. The fair value of those warrants, amounting to $67 thousand, is estimated using the Black-Scholes
valuation model.



On April 21, 2011, the Company
issued 8,333 shares of its common stock, and five-year term warrants to purchase 4,167 shares of the Company’s common stock
at an exercise price of $7.20 per share, for an aggregate purchase price of $50 thousand, in a private placement.



| | c. | Share-Based Compensation
| | -- | ------------------------



| | 1) | On March 28, 2011, the board of directors and stockholders of
                                                             the Company adopted and approved the InspireMD, Inc. 2011 UMBRELLA
                                                             Option Plan (the “Umbrella Plan”). Under the Umbrella
                                                             Plan, the Company reserved 2,367,025 shares of the Company’s
                                                             common stock as awards to the employees, consultants, and service
                                                             providers to the Company and its subsidiaries and affiliates worldwide.
                                                             At a special meeting of stockholders of the Company held on October
                                                             31, 2011, the stockholders approved an amendment to the Umbrella
                                                             Plan to add an additional 1,382,975 shares of common stock for a
                                                             total of 3,750,000 shares.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Umbrella Plan currently consists of three components, the primary
                                                           plan document that governs all awards granted under the Umbrella Plan,
                                                           and two appendices: (i) Appendix A, designated for the purpose of grants
                                                           of stock options and restricted stock to Israeli employees, consultants,
                                                           officers and other service providers and other non-U.S. employees,
                                                           consultants, and service providers, and (ii) Appendix B, which is the
                                                           2011 US Equity Incentive Plan, designated for the purpose of grants
                                                           of stock options and restricted stock awards to U.S. employees, consultants,
                                                           and service providers who are subject to the U.S. income tax.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| |  | The Umbrella Plan is administered by the compensation committee
                                                           of the board of directors. Unless terminated earlier by the board of
                                                           directors, the Umbrella Plan will expire on March 27, 2021.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | U.S. federal income tax consequences relating to the transactions
                                                           described under the Umbrella Plan are set forth in Section 409A of
                                                           the Internal Revenue Code of 1986, as amended (the “Code”)
                                                           and treasury regulations in 2004 to regulate all types of deferred
                                                           compensation. If the requirements of Section 409A of the Code are not
                                                           satisfied, deferred compensation and earnings thereon will be subject
                                                           to tax as it vests, plus an interest charge at the underpayment rate
                                                           plus 1% and a 20% penalty tax. Certain stock options and certain types
                                                           of restricted stock are subject to Section 409A of the Code.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pursuant to the current Section 102 of the Ordinance, which came
                                                           into effect on January 1, 2003, options may be granted through a trustee
                                                           (i.e., Approved 102 Options) or not through a trustee (i.e., Unapproved
                                                           102 Options).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | On July 11, 2011,
                                                                               the board of directors of the Company appointed
                                                                               Mr. Sol J. Barer as a new director (“Director
                                                                               A”), with a term expiring at the Company’s
                                                                               2012 annual meeting of stockholders. In connection
                                                                               with his appointment, Director A was granted an
                                                                               option to purchase 250,000 shares of the Company’s
                                                                               common stock at an exercise price of $6.00 per
                                                                               share (the “$6.00 Option”). The $6.00
                                                                               Option was exercisable immediately until September
                                                                               30, 2011. In calculating the fair value of the
                                                                               $6.00 Option, the Company used the following assumptions:
                                                                               dividend yield of 0% and expected term of 0.11
                                                                               years; expected volatility of 53%; and risk-free
                                                                               interest rate of 0.17%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, in connection with his appointment, Director A was
                                                           granted an option to purchase 125,000 shares of common stock at an
                                                           exercise price of $10.00 per share, the closing price of the common
                                                           stock on the date of grant (the “$10.00 Option”), subject
                                                           to the terms and conditions of the 2011 US Equity Incentive Plan under
                                                           the Umbrella Plan. The $10.00 Option vests and becomes exercisable
                                                           in three equal annual installments beginning on the one-year anniversary
                                                           of the date of grant, provided that in the event that Director A is
                                                           either (i) not reelected as a director at the Company’s 2012
                                                           annual meeting of stockholders, or (ii) not nominated for reelection
                                                           as a director at the Company’s 2012 annual meeting of stockholders,
                                                           the option vests and becomes exercisable on the date Director A fails
                                                           to be reelected or nominated. The $10.00 Option has a term of 10 years
                                                           from the date of grant. In calculating the fair value of the $10.00
                                                           Option, the Company used the following assumptions: dividend yield
                                                           of 0% and expected term of 5.5-6 years; expected volatility of 62%-63%;
                                                           and risk-free interest rate of 1.67%-1.85%.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The fair value of the options granted to Director A, using the
                                                           Black-Scholes option pricing model, was approximately $1.7 million.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On September 28, 2011, Director A exercised the $6.00 Option to
                                                           purchase 250,000 shares of common stock, resulting in gross proceeds
                                                           to the Company of $1,500 thousand.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-32







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



| |  | On November 16, 2011, the Company’s board of directors approved
                                                           the appointment of Director A as the chairman of the board of directors.
                                                           In connection with his appointment as chairman of the board of directors,
                                                           the Company issued Director A 725,000 shares of common stock and an
                                                           option to purchase 725,000 shares of common stock at an exercise price
                                                           of $7.80 per share, the closing price of the common stock on the date
                                                           of grant. The fair value of the granted shares is approximately $5.7
                                                           million and was recorded as an expense in the Consolidated Financial
                                                           Statements for the year ended June 30, 2012. In calculating the fair
                                                           value of these options, the Company used the following assumptions:
                                                           dividend yield of 0% and expected term of 5.5 years; expected volatility
                                                           of 61.6%; and risk-free interest rate of 1.07%. The options have terms
                                                           of 10 years from the date of grant, and the vesting terms are as follows:
                                                           tranche A vests and become exercisable in twenty four equal monthly
                                                           installments, tranches B and C vest and become exercisable upon meeting
                                                           certain performance conditions. The fair value of the options, using
                                                           the Black-Scholes option-pricing model was approximately $3.1 million.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On June 18, 2012, the Company’s board of directors approved
                                                           the extension of the date by which the conditions to the vesting of
                                                           tranches B and C must occur. As of this date the performance condition
                                                           of tranche B was deemed probable and the performance condition of tranche
                                                           C was deemed not probable. The Company continues to record expense
                                                           related to tranche B, in accordance with the fair value that was caculated
                                                           at the grant date. Tranche C was treated as a new grant, and the Company
                                                           calculated the fair value of the new grant on the date of the extension
                                                           using the following assumptions: dividend yield of 0% and expected
                                                           term of 5 years; expected volatility of 66%; and risk-free interest
                                                           rate of 0.69%. The fair value using the Black-Scholes option-pricing
                                                           model was approximately $192 thousand.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | On August 5, 2011 and effective August 8, 2011, the Board appointed
                                                               another two new directors ( “Director B” and “Director
                                                               C”). Director B was appointed for a term expiring at the
                                                               Company’s 2012 annual meeting of stockholders and Director
                                                               C was appointed for a term expiring at the Company’s 2013
                                                               annual meeting of stockholder. In connection with their appointment,
                                                               the directors were each granted an option to purchase shares of
                                                               common stock at an exercise price of $7.80 per share, the closing
                                                               price of the common stock on the date of grant (the “$7.80
                                                               Options”). The grant to Director B was for 25,000 shares
                                                               and is subject to the terms and conditions of the 2011 US Equity
                                                               Incentive Plan.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The grant to Director C was for
6,250 shares and is subject to the 2006 Employee Stock Option Plan, a sub-plan of the Company’s 2011 Umbrella Option Plan.
The $7.80 Options vests and become exercisable in two equal annual installments beginning on the one-year anniversary of the date
of grant. In the case of Director B’s option, in the event that Director B is either (i) not reelected as a director at
the Company’s 2012 annual meeting of stockholders, or (ii) not nominated for reelection as a director at the Company’s
2012 annual meeting of stockholders, the option vests and becomes exercisable on the date of Director B’s failure to be
reelected or nominated. In the case of Director C’s option, in the event that Director C is required to resign from the
board due to medical reasons, the option vests and becomes exercisable on the date of Director C’s resignation for medical
reasons. The $7.80 Options have terms of 10 years from the date of grant.



In calculating the fair value
of the $7.80 Options, the Company used the following assumptions: dividend yield of 0% and expected term of 3-4 years; expected
volatility of 67%-70%; and risk-free interest rate of 0.45%-0.78%.



| |  | The fair value of the options granted to the above-mentioned new
                                                           directors, using the Black-Scholes option-pricing model, is approximately
                                                           $118 thousand.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | On August 5, 2011, options to purchase 81,161 shares of common
                                                               stock were granted to former directors at a cash exercise price
                                                               of $4.92 per share replacing options to purchase 81,161 shares
                                                               of common stock held by former directors that expired during the
                                                               second quarter of 2011. The options had terms of five years. In
                                                               calculating the fair value of the options, the Company used the
                                                               following assumptions: dividend yield of 0% and expected term of
                                                               3.5 years; expected volatility of 69%; and risk-free interest rate
                                                               of 0.62%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-33







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The fair value of the options
granted to the former directors, using the Black-Scholes option-pricing model, is approximately $424,000.



| | 5) | During 2011, the Company entered into investor relations consulting
                                                               agreements with investor relations companies to provide investor
                                                               relations services. Pursuant to the consulting agreements, in addition
                                                               to monthly fees in a range of $3,000 to $16,500, the Company issued
                                                               to the investor relations companies:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                                                                                            one-year warrant to
                                                                                                            purchase 20,290 shares
                                                                                                            of common stock of
                                                                                                            the Company at an
                                                                                                            exercise price of
                                                                                                            $4.92 per share, valued
                                                                                                            at $21 thousand;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | 12,500
                                                                                                            restricted shares
                                                                                                            of the Company’s
                                                                                                            common stock, valued
                                                                                                            at $62 thousand, and
                                                                                                            a five-year warrant
                                                                                                            to purchase 12,500
                                                                                                            shares of common stock
                                                                                                            of the Company at
                                                                                                            an exercise price
                                                                                                            of $6.00 per share,
                                                                                                            valued at $30 thousand;
                                                                                                            and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | 6,250
                                                                                                            shares of the Company’s
                                                                                                            common stock, valued
                                                                                                            at $68.75 thousand.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company recorded share-based
compensation expenses of $181.75 thousand related to these issuances.



| | 6) | On January 30, 2012, the Company appointed a new director (“Director
                                                               D”) to its board of directors. In connection with his appointment,
                                                               the Company issued Director D an option to purchase 25,000 shares
                                                               of its common stock, which will vest one-third annually in 2013,
                                                               2014 and 2015 on the anniversary of the date of grant, provided
                                                               that if he is (i) not reelected as a director at our 2014 annual
                                                               meeting of stockholders, or (ii) not nominated for reelection as
                                                               a director at our 2014 annual meeting of stockholders, the option
                                                               vests and becomes exercisable on the date of such failure to be
                                                               reelected or nominated.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In calculating the fair value
of these options, the Company used the following assumptions: dividend yield of 0% and expected term of 5.5-6.5 years; expected
volatility of 58-60%; and risk-free interest rate of 1.01-1.26%. The options have terms of 10 years from the date of grant, and
the fair value of the options, using the Black-Scholes option-pricing model, was approximately $106,000.



| | 7) | On June 18, 2012 the Company’s board of directors issued
                                                               Directors A, B, C and D options to purchase 12,500 shares of common
                                                               stock at an exercise price of $3.16 per share, the closing price
                                                               of the common stock on the date of grant. In calculating the fair
                                                               value of these options, the Company used the following assumptions:
                                                               dividend yield of 0% and expected term of 5.5-6.5 years; expected
                                                               volatility of 65%-66%; and risk-free interest rate of 0.78%-0.97%.
                                                               The options have terms of 10 years from the date of grant, and
                                                               become exercisable in three equal annual installments. The fair
                                                               value of the options, using the Black-Scholes option-pricing model,
                                                               was approximately $23 thousand each.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 8) | As of June 30, 2012, the Company had reserved 1,332,967 ordinary
                                                               shares for issuance under the plans as described above. The following
                                                               table summarizes information about warrants and share options to
                                                               employees:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-34







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



|                                     |  | Year ended June 30,                |          
|------------------------------------ |  | ---------------------------------- | ---------
|                                     |  | 2012                               |          
|                                     |  | (Audited)                          |          
|                                     |  | Number of warrants
    and options |          
|Outstanding - beginning of period    |  |                                    | 1,098,631
|Granted*                             |  |                                    | 1,579,250
|Forfeited                            |  |                                    | (106,799 
|Exercised                            |  |                                    | (250,000 
|                                     |  |                                    |          
|Outstanding -end of period           |  |                                    | 2,321,083
|                                     |  |                                    |          
|Exercisable at the end of the period |  |                                    | 904,108  



* Including 372,500 options with
performance conditions in the year ended June 30, 2012.



The following table summarizes
information about warrants and share options to non-employees:



|                                     |  | Year ended June 30,                |          
|------------------------------------ |  | ---------------------------------- | ---------
|                                     |  | 2012                               |          
|                                     |  | (Audited)                          |          
|                                     |  | Number of warrants and
    options |          
|Outstanding - beginning of period    |  |                                    | 1,999,103
|Granted*                             |  |                                    | 239,086  
|Forfeited                            |  |                                    | (114,246 
|Exercised                            |  |                                    | -        
|                                     |  |                                    |          
|Outstanding - end of period          |  |                                    | 2,123,943
|                                     |  |                                    |          
|Exercisable at the end of the period |  |                                    | 2,056,710



* Including 19,479 and 24,349
options with performance conditions in the years ended June 30, 2012 and 2011, respectively. See Note 2m.



F-35







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The following table provides additional
information about all warrants and options outstanding and exercisable:



|               |  | Outstanding as of June 30,
    2012      |          
|-------------- |  | ---------------------------------------- | ---------
|               |  | (Audited)                                |          
|Exercise price |  | Warrants and
    options
    outstanding |          
|0-0.004        |  |                                          | 976,534  
|0.732          |  |                                          | 51,253   
|0.752          |  |                                          | 83,636   
|2.92           |  |                                          | 126,250  
|3.16           |  |                                          | 97,500   
|3.20           |  |                                          | 75,000   
|3.96           |  |                                          | 146,089  
|4.92           |  |                                          | 862,582  
|6.00           |  |                                          | 784,808  
|6.90           |  |                                          | 3,652    
|7.00           |  |                                          | 20,290   
|7.20           |  |                                          | 188,179  
|7.72           |  |                                          | 53,750   
|7.80           |  |                                          | 836,750  
|8.00           |  |                                          | 10,000   
|8.40           |  |                                          | 2,500    
|10.00          |  |                                          | 125,000  
|10.40          |  |                                          | 1,250    
|               |  |                                          | 4,445,024



The weighted average of the remaining
contractual life of total vested and exercisable warrants and options as of June 30, 2012 is 4.46 years.



The aggregate intrinsic value
of the total exercisable warrants and options as of June 30, 2012 is $4,440 thousand.



The total intrinsic value of options
exercised was $800 thousand for the year ended June 30, 2012. No options were exercised during the year ended June 30, 2011.



The weighted average fair value
of warrants and options granted was approximately $4.24 and $3.32 for the years ended June 30, 2012 and 2011, respectively. The
weighted average fair value of warrants and options granted was estimated using the Black-Scholes option-pricing model.



| | 9) | The following table sets forth the assumptions that were used
                                                               in determining the fair value of options granted to employees for
                                                               the years ended June 30, 2012 and 2011,:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                         |  | Year ended June 30 |               
|------------------------ |  | ------------------ | --------------
|                         |  | 2012               |               
|                         |  | (Audited)          |               
|Expected life            |  |                    | 0.17-6.5 years
|Risk-free interest rates |  |                    | 0.03%-2.79%   
|Volatility               |  |                    | 55%-71%       
|Dividend yield           |  |                    | 0%            



F-36







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The following table sets forth
the assumptions that were used in determining the fair value of warrants and options granted to non-employees for the years ended
June 30, 2012 and 2011:



|                         |  | Year ended June 30 |           
|------------------------ |  | ------------------ | ----------
|                         |  | 2012               |           
|                         |  | (Audited)          |           
|Expected life            |  |                    | 2-10 years
|Risk-free interest rates |  |                    | 0.3%-1.97%
|Volatility               |  |                    | 47%-65%   
|Dividend yield           |  |                    | 0%        



The Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate expected term. Accordingly, as to plain vanilla
options granted, the expected term was determined using the simplified method, which takes into consideration the option’s
contractual life and the vesting periods (for non-employees, the expected term is equal to the option’s contractual life).



The Company estimates its forfeiture
rate based on its employment termination history, and will continue to evaluate the adequacy of the forfeiture rate based on analysis
of employee turnover behavior and other factors (for non-employees the forfeiture rate is nil). The annual risk-free rates are
based on the yield rates of zero coupon non-index linked U.S. Federal Reserve treasury bonds as both the exercise price and the
share price are in dollar terms.  The Company’s expected volatility is derived from a blended volatility, based on
its historical data and that of a peer group of public companies.



| | 10) | As of June 30, 2012, the total unrecognized compensation cost
                                                                on employee and non-employee stock options, related to unvested
                                                                stock-based compensation, amounted to approximately $2,745 thousand.
                                                                This cost is expected to be recognized over a weighted-average
                                                                period of approximately 1.96 years. This expected cost does not
                                                                include the impact of any future stock-based compensation awards.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes
the allocation of total share-based compensation expense in the Consolidated Statements of Operations:



|                           |  | Year ended June 30 |       
|-------------------------- |  | ------------------ | ------
|                           |  | 2012               |       
|                           |  | ($ in thousands)   |       
|                           |  | (Audited)          |       
|Revenue                    |  | $                  | 68    
|Cost of revenues           |  |                    | 192   
|Research and development   |  |                    | 370   
|Sales and marketing        |  |                    | 375   
|General and administrative |  |                    | 9,549 
|                           |  | $                  | 10,554



F-37







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The Company recorded $62 thousand
of share-based compensation as part of Property, Plant and Equipment in the year ended June 30, 2011.



| | d. | Acquisition and cancellation of shares
| | -- | --------------------------------------



Following a settlement agreement
signed on June 5, 2011, the Company issued 4,696 shares of common stock. The Company issued a stock certificate in the name of
the plaintiff for such shares for the Company to hold in trust pending consummation of the settlement terms under the settlement
agreement. On June 10, 2012, both parties agreed to amend the settlement agreement to provide that the Company would pay $24 thousand
rather than issue the shares. Whereas the shares were never released to the plaintiff, and both parties agreed to cancel the share
certificate evidencing the shares, the Company cancelled the shares and recorded $21 thousand as a deduction from equity. The
difference was recorded as “General and administrative” based on the cash amount paid net of the fair value of the
cancelled shares as of the cancellation date.



| | e. | On April 5, 2012, the Company issued the 2012 Convertible
                                                                      Debenture and 2012 Warrants to purchase an aggregate of
                                                                      835,866 shares of its common stock at an exercise price
                                                                      of $7.20 per share in a private placement transaction. See
                                                                      Note 6.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 11 - TAXES ON INCOME



| | a. | Tax laws applicable
                                                                       to the Company and its subsidiaries
| | -- | ------------------------------------------------------------------------------------------------------------------------------



Taxation in the United States



InspireMD, Inc. is taxed under U.S.
tax laws.



Taxation in Israel



InspireMD Ltd. is taxed under the
Israeli Income Tax Ordinance.



On December 6, 2011, the "Tax
Burden Distribution Law" Legislation Amendment (2011) was published in the Official Gazette. Under this law, the previously
approved gradual decrease in the corporate tax rate was cancelled. The Corporate tax rate will increase to 25% beginning 2012.

Taxation in Germany



InspireMD GmbH
is taxed according to the tax laws in Germany. Accordingly, the applicable tax rates are corporate tax rate of 15.825% and trade
tax rate of 12.075%.



| | b. | Tax rate applicable
                                                                       to the Company
| | -- | ---------------------------------------------------------------------------------------------------------



Amendment of the Law for the
Encouragement of Capital Investments, 1959



The Israeli Law for Encouragement
of Capital Investments, 1959 was amended as part of the Economic Policy Law for the years 2011-2012, which was passed in the Knesset
(the Israeli parliament) on December 29, 2010. The amendment became effective as of January 1, 2011.



The amendment set alternative benefit
tracks to the ones then in place, as follows: (i) an investment grants track designed for enterprises located in national development
zone A and (ii) two new tax benefits tracks (for preferred enterprises and for special preferred enterprises), which provide for
application of a unified tax rate to all preferred income of the company, as defined in the amendment.





F-38







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



The tax rates at company level,
under the law, were as follows:



|Years                                          |  | Development Zone
    A |    |   | Other Areas in Israel | 
|---------------------------------------------- |  | ---------------------- | -- | - | --------------------- | 
|                                               |  |                        |    |   |                       | 
|“Preferred enterprise”                         |  |                        |    |   |                       | 
|2011-2012                                      |  |                        | 10 | % |                       | 
|2013-2014                                      |  |                        | 7  | % |                       | 
|2015 and thereafter                            |  |                        | 6  | % |                       | 
|“Special Preferred Enterprise” commencing 2011 |  |                        | 5  | % |                       | 



The benefits granted to the preferred
enterprises were to be unlimited in time, unlike the benefits granted to special preferred enterprises, which were to be limited
for a period of 10 years. The benefits were to be granted to companies that qualified under criteria set in the amendment; for
the most part, those criteria were similar to the criteria that were set in the law prior to its amendment.



Under the transitional provisions
of the amendment, an Israeli company was allowed to continue to enjoy the tax benefits available under the law prior to its amendment
until the end of the period of benefits, as defined in the law. The company was allowed to set the “year of election”
no later than tax year 2012, provided that the minimum qualifying investment commenced not later than the end of 2010. On each
year during the period of benefits, the company would have been able to opt for application of the amendment, thereby making available
to itself the tax rates above. Company’s opting for application of the amendment was irrecoverable.



| | c. | Carry forward tax
                                                                       losses
| | -- | -----------------------------------------------------------------------------------------------



As of June 30, 2012, InspireMD Ltd.
had a net carry forward tax loss of approximately $18 million. Under Israeli tax laws, the carry forward tax losses can be utilized
indefinitely. InspireMD, Inc. had a net carry forward tax loss of approximately $10 million. Under U.S. tax laws, InspireMD, Inc.’s
tax losses can be utilized two years back and twenty years forward. InspireMD, Inc.'s carry forward tax losses will begin to expire
on June 30, 2031.



| | d. | Tax assessments
| | -- | ---------------



The Company and its subsidiaries
have not been assessed for tax purposes since incorporation.



| | e. | Loss before income taxes
| | -- | ------------------------



The components of loss before income
taxes are as follows:



|                                       |  | Year ended June 30 |        
|-------------------------------------- |  | ------------------ | -------
|                                       |  | 2012               |        
|                                       |  | ($ in thousands)   |        
|                                       |  | (Audited)          |        
|Profit (loss)  before taxes on income: |  |                    |        
|InspireMD, Inc.                        |  | $                  | (11,078
|InspireMD Ltd.                         |  |                    | (6,501 
|InspireMD GmbH                         |  |                    | (4     
|                                       |  | $                  | (17,583



F-39







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



Current taxes on income



Tax expenses in the amount of $14 thousand and $37
thousand for the years ended June 30, 2012 and 2011, respectively, are related to non-U.S. operations.



Following is a reconciliation of
the theoretical tax expense, assuming all income were taxed at the regular tax rates applicable to the Company in the U.S. (see
c above), and the actual tax expense:



|                                                                                                                                                   |  | Year ended June 30 |       
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                                                                                                   |  | 2012               |       
|                                                                                                                                                   |  | ($ in thousands)   |       
|                                                                                                                                                   |  | (Audited)          |       
|Loss before taxes on income, as reported
    in the statements of operations                                                                       |  | $                  | 17,583
|Theoretical tax benefit                                                                                                                            |  |                    | (5,984
|Increase in tax benefit resulting from permanent
     differences                                                                                  |  |                    | 1,448 
|                                                                                                                                                   |  |                    |       
|Increase (decrease) in taxes on income resulting
    from the computation of deferred taxes at a rate which is different from the theoretical rate |  |                    | (75   
|Increase (decrease) in uncertain tax positions -
    net                                                                                           |  |                    | (71   
|Decrease in theoretical tax benefit resulting from
    subsidiaries different tax rate                                                             |  |                    | 1,408 
|Change in corporate tax rates, see c above                                                                                                         |  |                    | (245  
|Change in valuation allowance                                                                                                                      |  |                    | 3,533 
|                                                                                                                                                   |  | $                  | 14    



As of June 30, 2012 and 2011, the
Company determined that it was more likely than not that the benefit of the operating losses would not be realized and consequently,
management concluded that full valuation allowances should be established regarding the Company’s deferred tax assets.



The changes in the valuation allowance
for the years ended June 30, 2012 and 2011 were as follows:



|                                     |  | Year ended June 30 |      
|------------------------------------ |  | ------------------ | -----
|                                     |  | 2012               |      
|                                     |  | ($ in thousands)   |      
|                                     |  | (Audited)          |      
|Balance at the beginning of the year |  | $                  | 4,517
|Changes during the year              |  |                    | 3,533
|Balance at the end of the year       |  | $                  | 8,050



F-40







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS





| | f. | Accounting for Uncertain
                                                                       Tax position
| | -- | ------------------------------------------------------------------------------------------------------------



Following is a reconciliation of
the total amounts of the Company’s unrecognized tax benefits during the year ended June 30, 2012 and 2011:



|                                                                                             |  | Year ended June 30 |    
|-------------------------------------------------------------------------------------------- |  | ------------------ | ---
|                                                                                             |  | 2012               |    
|                                                                                             |  | ($ in thousands)   |    
|                                                                                             |  | (Audited)          |    
|Balance at beginning of period                                                               |  | $                  | 71 
|Increase in unrecognized tax benefits as a result of tax positions taken during the year     |  |                    |    
|Decrease in unrecognized tax benefits as a result of tax positions taken during a prior year |  |                    | (71
|Balance at end of period                                                                     |  | $                  | -  



All of the above amounts of unrecognized
tax benefits would affect the effective tax rate if recognized.



A summary of open tax years by major
jurisdiction is presented below:





|Jurisdiction |  | Years    
|------------ |  | ---------
|U.S.         |  | 2008-2011
|Israel       |  | 2006-2011
|Germany      |  | 2008-2011





The Company and its subsidiaries
applied for a change of fiscal year for its tax filings to end in June 30, 2012 in the different territories.



| | g. | Deferred income tax:
| | -- | --------------------



|                                              |  | Year ended June 30 |       
|--------------------------------------------- |  | ------------------ | ------
|                                              |  | 2012               |       
|                                              |  | ($ in thousands)   |       
|                                              |  | (Audited)          |       
|Short-term:                                   |  |                    |       
|Allowance for doubtful accounts               |  |                    | 54    
|Provision for vacation and recreation
    pay |  |                    | 70    
|                                              |  |                    | 124   
|Long-term:                                    |  |                    |       
|R&D expenses                                  |  |                    | 746   
|Beneficial conversion feature                 |  |                    | (1,251
|Non cash issuance costs                       |  |                    | 89    
|Share-based compensation                      |  |                    | 693   
|Carry forward tax losses                      |  |                    | 7,631 
|Accrued severance pay, net                    |  |                    | 18    
|                                              |  |                    | 7,926 
|Less-valuation allowance                      |  |                    | (8,050
|                                              |  | $                  | -     



F-41







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



NOTE 12 - SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION



Balance sheets:



| | a. | Accounts receivable:
| | -- | --------------------



|                                 |  | Year Ended June 30, |      
|-------------------------------- |  | ------------------- | -----
|                                 |  | 2012                |      
|                                 |  | ($ in thousands)    |      
|                                 |  | (Audited)           |      
|1) Trade:                        |  |                     |      
|Open accounts                    |  | $                   | 2,039
|Allowance for doubtful accounts  |  |                     | (215 
|                                 |  | $                   | 1,824
|2)  Other:                       |  |                     |      
|Due from government institutions |  | $                   | 124  
|Advance payments to suppliers    |  |                     | 118  
|Miscellaneous                    |  |                     | 22   
|                                 |  | $                   | 264  



The changes in “Allowance
for doubtful accounts” during the years ended June 30, 2012 and 2011 are as follows:



|                               |  | Year ended June 30 |    
|------------------------------ |  | ------------------ | ---
|                               |  | 2012               |    
|                               |  | ($ in thousands)   |    
|                               |  | (Audited)          |    
|Balance at beginning of period |  | $                  | 155
|Additions during the period    |  |                    | 78 
|Exchange rate differences      |  |                    | (18
|Balance at end of period       |  | $                  | 215



| | b. | Inventories:
| | -- | ------------



|                           |  | June 30,         |      
|-------------------------- |  | ---------------- | -----
|                           |  | 2012             |      
|                           |  | ($ in thousands) |      
|                           |  | (Audited)        |      
|Finished goods             |  | $                | 479  
|Work in process            |  |                  | 1,115
|Raw materials and supplies |  |                  | 150  
|                           |  | $                | 1,744



As of June 30, 2012, the Company
recorded a provision for slow moving inventory in the amount of $443 thousand.



| | c. | Inventory
                                                                                           on consignment
| | -- | -------------------------------------------------------------------------------------------------------------------



The changes in inventory on consignment
during the years ended June 30, 2012 and 2011 are as follows:



F-42







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



|                                                   |  | Year ended June 30, |    
|-------------------------------------------------- |  | ------------------- | ---
|                                                   |  | 2012                |    
|                                                   |  | ($ in thousands)    |    
|                                                   |  | (Audited)           |    
|Balance at beginning of period                     |  | $                   | 82 
|Costs of revenues deferred during
    the period   |  |                     | 63 
|Costs of
    revenues recognized during the period |  |                     | (82
|Balance at end of period                           |  | $                   | 63 



As of June 30, 2012 and 2011, Inventory
on consignment included an amount of $63 thousand and $82 thousand, respectively, related to products sales for which product
returns could not be reliably estimated, with the remainder relating to products sales for which returns were reliably estimated.



| | d. | Accounts
                                                                                           payable and accruals-other:
| | -- | -------------------------------------------------------------------------------------------------------------------------------



|                                    |  | June 30,         |      
|----------------------------------- |  | ---------------- | -----
|                                    |  | 2012             |      
|                                    |  | ($ in thousands) |      
|                                    |  | (Audited)        |      
|Employees and employee institutions |  | $                | 438  
|Accrued vacation and recreation pay |  |                  | 272  
|Accrued clinical trials expenses    |  |                  | 607  
|Provision for sales commissions     |  |                  | 194  
|Accrued expenses                    |  |                  | 1,197
|Due to government institutions      |  |                  | 22   
|Provision for returns               |  |                  | 139  
|Taxes payable                       |  |                  | 56   
|                                    |  | $                | 2,925



| | e. | Deferred
                                                                                           revenues
| | -- | ------------------------------------------------------------------------------------------------------------



The changes in deferred revenues
during the years ending June 30, 2012 and 2011 are as follows:



|                                     |  | Year ended June 30 |    
|------------------------------------ |  | ------------------ | ---
|                                     |  | 2012               |    
|                                     |  | ($ in thousands)   |    
|                                     |  | (Audited)          |    
|Balance at beginning of period       |  | $                  | -  
|Revenue deferred during the period   |  |                    | 25 
|Revenue recognized during the period |  |                    | (15
|Balance at end of period             |  | $                  | 10 



F-43







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



Statements of Operation:



| | f. | Financial
                                                                                           expenses, net:
| | -- | -------------------------------------------------------------------------------------------------------------------





|                                                              |  | Year ended June 30 |       
|------------------------------------------------------------- |  | ------------------ | ------
|                                                              |  | 2012               |       
|                                                              |  | ($ in thousands)   |       
|                                                              |  | (Audited)          |       
|Bank commissions                                              |  | $                  | 50    
|Interest income                                               |  |                    | (40   
|Exchange rate differences                                     |  |                    | 112   
|Interest expense (including debt issuance costs)              |  |                    | 1,238 
|Change in fair value of warrants
    and embedded derivatives |  |                    | (1,322
|                                                              |  | $                  | 38    







NOTE 13 - ENTITY
WIDE DISCLOSURES



The Company operates in one operating
segment.



Disaggregated financial data is
provided below as follows:



(1) Revenues by geographic area
and

(2) Revenues from principal customers.



Revenues are attributed to geographic
areas based on the location of the customers. The following is a summary of revenues by geographic areas:



|        |  | Year ended June 30 |      
|------- |  | ------------------ | -----
|        |  | 2012               |      
|        |  | ($ in thousands)   |      
|        |  | (Audited)          |      
|Russia  |  | $                  | 812  
|India   |  |                    | 120  
|Germany |  |                    | 445  
|Other   |  |                    | 3,972
|        |  | $                  | 5,349



By principal
customers:



|           |  | Year ended June 30 |   
|---------- |  | ------------------ | --
|           |  | 2012               |   
|           |  | (Audited)          |   
|Customer A |  |                    | 15
|Customer B |  |                    | 2 
|Customer C |  |                    | 8 



| |  | All tangible long lived assets are located
                                                      in Israel.
| |  | -----------------------------------------------------------------------------------------------------------



F-44







INSPIREMD, INC.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS



NOTE 15 - SUBSEQUENT
EVENTS:



On August 1, 2012 the Company’s
board of directors issued a consultant options with certain performance conditions to purchase 50,000 shares of common stock at
an exercise price of $4.72 per share, the closing price of the common stock on the date of grant.



On July 2, 2012, effective August
1, 2012, InspireMD Ltd. entered into a consultancy agreement (the “First Consultancy Agreement”) with a member of
the immediate family of the CEO, pursuant to which the consultant would be retained for sales services. Pursuant to the agreement,
she would be entitled to a fixed fee of $625 (2,500 NIS) for each full working day and a bonus fee up to $10,000 (40,000 NIS)
upon 100% achievement of set objectives. The First Consultancy Agreement was terminated on September 30, 2012.



On August 27, 2012, InspireMD
Ltd. entered into a revised consultancy agreement (the “Second Consultancy Agreement”) with a member of the immediate
family of the CEO, pursuant to which the consultant would be retained for sales and marketing services. Pursuant to the agreement,
she is entitled to options to purchase 60,871 shares of common stock at an exercise price of $5.80 per share. The revised agreement
also extended to September 2014 the exercise date on 30,435 options scheduled to expire upon the termination of the First Consultancy
Agreement.



On October 22, 2012, the Company,
InspireMD Ltd. and the licensor entered into the First Amendment to License Agreement (see Note 9b), which amended the license
agreement described above. Pursuant to the amendment, amongst other things, the licensor agreed to reduce the royalty owed with
respect to sales of MGuard Prime to 2.9% of all net sales both inside and outside the U.S. in exchange for (i) InspireMD Ltd.
waiving $85,000 in regulatory fees for the CE Mark that are owed by the licensor to InspireMD Ltd., (ii) InspireMD Ltd. making
full payment of royalties in the amount of $205,587 due to the licensor as of September 30, 2012 and (iii) 215,000 shares of the
Company’s common stock, that were valued at the closing price of the common stock on October 19, 2012 at $8.20 per share.
The consideration of the transaction is to be recorded as intangible asset and In process research and development expenses based
on the MGuard Prime registration status in the various territories.



On October 24, 2012, the Company
announced that its proprietary MGuard Embolic Protection Stent (EPS) was shown to be significantly superior when compared to standard
bare metal and drug eluting stents in achieving complete ST resolution and restoring normal blood flow in a major study of 432
randomized patients undergoing emergency coronary intervention for potentially fatal heart attacks.



On December 21, 2012 at the Annual
Meeting of Stockholders of the Company, it was voted to amend the Umbrella Plan to increase the total number of shares of common
stock authorized for issuance under such plan by 5 million shares and to permit the awarding of incentive stock options pursuant
to the U.S. portion of the plan.



From July 1, 2012 until the date
of the report, the Company issued a total of 771,640 shares of its common stock in connection with the exercise of 771,640 options
and warrants. The Company received aggregate cash proceeds equal to approximately $1 million in connection with such exercises.



F-45