**As
      filed with the Securities Exchange Commission on March 31,
      2008**







**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      20-F**




o
            REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                ACT
                OF 1934




OR




x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**




OR




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




OR




o
            SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
                ACT OF 1934







**GIVEN
      IMAGING LTD.**


*(Exact
      name of Registrant as specified in its charter)*




**Israel**


*(Jurisdiction
      of incorporation or organization)*




**Hermon
      Building, New Industrial Park**


**Yoqneam
      20692, Israel**


*(Address
      of principal executive offices)*




Securities
      registered or to be registered pursuant to Section 12(b) of the Act:




**Ordinary
      Shares, par value NIS 0.05 per share**




Securities
      registered or to be registered pursuant to Section 12(g) of the Act:
      None




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
      None.




The
      number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of December 31, 2007:




**29,241,785
      Ordinary Shares, par value NIS 0.05 per share**







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.




Yes o No x




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.




Yes o No x




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer o  Accelerated
      filer x  Non-accelerated
      filer o




Indicate
      by check mark which financial statement item the registrant has elected to
      follow.




Item
      17 o Item
      18 x




If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act).




Yes o No x












**TABLE
      OF CONTENTS**




Page**PART
                I**Item
                1.
            Identity
                of Directors, Senior Management and Advisors
            1Item
                2.
            Offer
                Statistics and Expected Timetable
            1Item
                3.
            Key
                Information
            1Item
                4.
            Information
                on the Company
            12Item
                4A.
            Unresolved
                Staff Comments
            30Item
                5.
            Operating
                and Financial Review and Prospects
            30Item
                6.
            Directors,
                Senior Management and Employees
            46Item
                7.
            Major
                Shareholders and Related Party Transactions
            54Item
                8.
            Financial
                Information
            61Item
                9.
            The
                Offer and Listing
            62Item
                10.
            Additional
                Information
            64Item
                11.
            Quantitative
                and Qualitative Disclosures About Market Risk
            75Item
                12.
            Description
                of Securities Other Than Equity Securities
            75**PART
                II**Item
                13.
            Defaults,
                Dividend Arrearages and Delinquencies
            76Item
                14.
            Material
                Modifications to the Rights of Security Holders and Use of
                Proceeds
            76Item
                15.
            Controls
                and Procedures
            76Item
                16.
            [Reserved]
            77Item
                16A.
            Audit
                Committee Financial Expert.
            77Item
                16B.
            Code
                of Ethics.
            77Item
                16C.
            Principal
                Accountant Fees and Services
            77Item
                16D.
            Exemptions
                From the Listing Standards for Audit Committees.
            77Item
                16E.
            Purchases
                of Equity Securities by the Issuer and Affiliated
                Purchasers
            77**PART
                III**Item
                17.
            Financial
                Statements
            78Item
                18.
            Financial
                Statements
            78Item
                19.
            Exhibits
            78




GIVEN,
      GIVEN & Design, PILLCAM, PILLCAM & Logo, PILLCAM IMAGING CAPSULE &
Design, AGILE, RAPID, RAPID ACCESS, ORDERWIN, ORDER WHEN I NEED, FINGERS HOLDING
      A CAPSULE & Logo, FINGERS HOLDING PILLCAM CAPSULE & Logo, ICCE, ICCE
      Logos, and International Conference on Capsule Endoscopy are Trademarks and/or
      Registered Trademarks of Given Imaging Ltd. its subsidiaries and/or affiliates
      in the United States and/or other countries. All other company or product names
      are the trademarks or registered trademarks of their respective holders. All
      rights not expressly granted are reserved.




ii




**P** **ART
      I**




**I** **TEM
      1.****IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS**




Not
      Applicable.




**I** **TEM
      2.****OFFER
      STATISTICS AND EXPECTED TIMETABLE**




Not
      Applicable.




**I** **TEM
      3.****Key
      Information******




The
      selected consolidated statements of operations data for the years ended December
      31, 2005, 2006 and 2007, and the selected consolidated balance sheet data as
      of
      December 31, 2006 and 2007, have been derived from our audited consolidated
      financial statements set forth elsewhere in this Form 20-F. These financial
      statements have been prepared in accordance with generally accepted accounting
      principles in the United States of America. The selected consolidated statements
      of operations data for the years ended December 31, 2003 and 2004, and the
      selected consolidated balance sheet data as of December 31, 2003, 2004 and
      2005,
      have been derived from our audited consolidated financial statements not
      included in this Form 20-F, which have been prepared in accordance with
      generally accepted accounting principles in the United States of America. You
      should read the selected consolidated financial information set forth below
      in
      conjunction with our consolidated financial statements and the related notes
      as
      well as Item 5 “Operating and Financial Review and Prospects” included elsewhere
      in this Annual Report on Form 20-F.




**Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**
              
              **2006(1)**
              
              **2007(1)****(in
                  thousands, except share and per share data)****Statements
                  of Operations Data:**Revenues
              
              $
              40,539
              
              $
              65,020
              
              $
              86,776
              
              $
              95,029
              
              $
              112,868Cost
                  of revenues
              
              
              (13,551
              )
              
              (17,734
              )
              
              (22,070
              )
              
              (24,154
              )
              
              (29,721
              )Early
                  repayment of royalty bearing government grants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,843
              )Gross
                  profit
              
              
              26,988
              
              
              47,286
              
              
              64,706
              
              
              70,875
              
              
              78,304Operating
                  expenses:Research
                  and development, gross
              
              
              (7,037
              )
              
              (7,363
              )
              
              (8,833
              )
              
              (12,678
              )
              
              (12,847
              )Royalty-bearing
                  government grants
              
              
              1,303
              
              
              1,140
              
              
              1,244
              
              
              1,867
              
              
              1,242Research
                  and development, net
              
              
              (5,734
              )
              
              (6,223
              )
              
              (7,589
              )
              
              (10,811
              )
              
              (11,605
              )Sales
                  and marketing
              
              
              (26,804
              )
              
              (33,652
              )
              
              (43,281
              )
              
              (50,732
              )
              
              (55,446
              )General
                  and administrative
              
              
              (5,312
              )
              
              (6,916
              )
              
              (9,657
              )
              
              (16,027
              )
              
              (20,981
              )Termination
                  of marketing agreement
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              22,860Other
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (422
              )Total
                  operating expenses
              
              
              (37,850
              )
              
              (46,791
              )
              
              (60,527
              )
              
              (77,570
              )
              
              (65,594
              )Operating
                  profit (loss)
              
              
              (10,862
              )
              
              495
              
              
              4,179
              
              
              (6,695
              )
              
              12,710Financing
                  income, net
              
              
              995
              
              
              956
              
              
              762
              
              
              3,980
              
              
              5,520Profit
                  (loss) before taxes on income and minority share
              
              
              (9,867
              )
              
              1,451
              
              
              4,941
              
              
              (2,715
              )
              
              18,230Income
                  tax benefit (expense)
              
              
              —
              
              
              690
              
              
              286
              
              
              (127
              )
              
              (4,548
              )Profit
                  (loss) before minority share
              
              
              (9,867
              )
              
              2,141
              
              
              5,227
              
              
              (2,842
              )
              
              13,682Minority
                  share in losses of subsidiary
              
              
              258
              
              
              747
              
              
              1,116
              
              
              1,334
              
              
              1,503Net
                  profit (loss)
              
              $
              (9,609
              )
              $
              2,888
              
              $
              6,343
              
              $
              (1,508
              )
              $
              15,185Basic
                  earnings (loss) per ordinary share (2)
              
              $
              (0.38
              )
              $
              0.11
              
              $
              0.23
              
              $
              (0.05
              )
              $
              0.52Diluted
                  earnings (loss) per ordinary share (2)
              
              $
              (0.38
              )
              $
              0.10
              
              $
              0.21
              
              $
              (0.05
              )
              $
              0.49Weighted
                  average number of ordinary shares used in computing basic earnings
                  (loss)
                  per ordinary share (2)
              
              
              25,493,073
              
              
              26,633,964
              
              
              27,781,223
              
              
              28,053,849
              
              
              28,961,968Weighted
                  average number of ordinary shares used in computing diluted earnings
                  (loss) per ordinary share (2)
              
              
              25,493,073
              
              
              29,353,448
              
              
              29,695,164
              
              
              28,053,849
              
              
              31,030,458









**As
                  of December 31,****2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2007****(in
                  thousands)****Balance
                  Sheet Data:**Cash
                  and cash equivalents
              
              $
              25,367
              
              $
              80,861
              
              $
              65,356
              
              $
              44,510
              
              $
              37,103Short
                  term investments
              
              
              —
              
              
              —
              
              
              288
              
              
              17,245
              
              
              23,191Working
                  capital
              
              
              34,970
              
              
              92,987
              
              
              86,217
              
              
              79,015
              
              
              74,996Marketable
                  securities
              
              
              —
              
              
              —
              
              
              21,664
              
              
              34,769
              
              
              41,629Total
                  assets
              
              
              55,569
              
              
              124,224
              
              
              149,110
              
              
              158,177
              
              
              177,316Long-term
                  liabilities
              
              
              1,192
              
              
              10,984
              
              
              24,246
              
              
              22,838
              
              
              3,938Total
                  liabilities
              
              
              8,847
              
              
              28,430
              
              
              47,005
              
              
              46,892
              
              
              41,725Accumulated
                  deficit
              
              
              (58,635
              )
              
              (55,747
              )
              
              (49,404
              )
              
              (50,912
              )
              
              (35,727
              )Total
                  shareholders’ equity
              
              
              44,798
              
              
              94,617
              
              
              102,044
              
              
              107,786
              
              
              133,595





(1)
            Effective
                January 1, 2006, we have adopted SFAS 123(R), which requires us to
                recognize as an expense the grant-date fair value of stock options
                and
                other equity-based compensation to employees, over their respective
                vesting period. Accordingly, our operating expenses in 2006 and 2007
                include a total of $5.2 million and $5.7 million, respectively, of
                additional compensation expense allocated among research and development
                expenses, marketing expenses and general and administrative expenses
                based
                on the division in which the recipient of the option grant is employed.
                For more information on the adoption of SFAS 123(R), see Note 1K
                to our
                consolidated financial statements.(2)
            See
                Notes 1L of the notes to our consolidated financial statements for
                an
                explanation of the number of shares used in computing earning (loss) per
                share data.




**CAUTIONARY
      LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS**




This
      Annual Report on Form 20-F contains forward-looking statements within the
      meaning of the “safe harbor” provisions of the U.S. Private Securities
      Litigation Reform Act of 1995. We have based these forward-looking statements
      on
      our current expectations and projections about future events. These statements
      include but are not limited to:




•
              the
                  adequacy of our cash balances and cash flow from operations to
                  support our
                  operations or future growth, in general or for specified periods
                  of time;•
              statements
                  as to the potential or expected acceptance of our current and future
                  products by the medical community, particularly
                  gastroenterologists;•
              statements
                  as to expected increases in sales, operating results and certain
                  expenses,
                  including research and development and sales and marketing expenses;•
              statements
                  as to anticipated reimbursement from U.S. and non-U.S. healthcare
                  payers
                  for our products;•
              expectations
                  as to the development of our products and technology, and the timing
                  of
                  enhancements to our products and new product launches;•
              expectations
                  as to the market opportunities for the Given System and other products,
                  including capsule endoscopes, for visualizing other sections of
                  the
                  gastrointestinal tract, such as the esophagus, stomach and the
                  colon, as
                  well as our ability to take advantage of those opportunities;•
              expectations
                  as to the timing, results and content of future clinical studies
                  and
                  publications;•
              statements
                  as to the expected outcome of legal and patent proceedings in which
                  we are
                  involved;•
              statements
                  as to the expectation for the content of future publications regarding
                  our
                  products;
  •
              expectations
                  as to the receipt and timing of regulatory clearances and approvals,
                  and
                  the anticipated timing of sales of the Given System in new markets
                  or for
                  new indications;•
              estimates
                  of the impact of changes in currency exchange rates on our operating
                  results;•
              expectations
                  as to the adequacy of our inventory of critical components and
                  finished
                  products;•
              expectations
                  as to the adequacy of our manufacturing facilities; and•
              statements
                  as to our expected treatment under Israeli and U.S. federal tax
                  legislation and the impact that new tax and corporate legislation
                  may have
                  on our operations.




In
      addition, forward-looking statements may be, but are not necessarily, identified
      by the use of forward-looking terminology such as “may,” “anticipates,”
“estimates,” “expects,” “intends,” “plans,” “believes,” and words and terms of
      similar substance. Forward-looking statements involve known and unknown risks,
      uncertainties and other factors which may cause the actual events, results,
      performance, circumstances or achievements of the Company to be materially
      different from any future events, results, performance, circumstances or
      achievements expressed or implied by such forward-looking statements. Factors
      that could cause actual events, results, performance, circumstances or
      achievements to differ from such forward-looking statements include, but are
      not
      limited to, the following: (1) our ability to obtain regulatory clearance for
      our products in one or more countries and adverse changes in regulatory
      environment, (2) our ability to have successful clinical trials and to provide
      evidence of the clinical and economic effectiveness of our products, (3) our
      success in implementing our sales, marketing and manufacturing plans, (4)
      protection and validity of patents and other intellectual property rights,
      (5)
      the impact of currency exchange rates, (6) the effect of competition by other
      companies, (7) the outcome of future litigation, (8) the reimbursement policies
      for our product from healthcare payers, (9) quarterly variations in operating
      results, (10) the possibility of armed conflict or civil or military unrest
      in
      Israel, and (11) other risks and factors disclosed in our filings with the
      U.S.
      Securities and Exchange Commission, including, but not limited to, risks and
      factors identified under such headings as “Risk Factors”, “Cautionary Language
      Regarding Forward-Looking Statements” and “Operating and Financial Review and
      Prospects” in this Annual Report on Form 20-F for the year ended December 31,
      2007. You are cautioned not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this Annual Report. Except for
      the Company’s ongoing obligations to disclose material information under the
      applicable securities laws, it undertakes no obligation to release publicly
      any
      revisions to any forward-looking statements, to report events or to report
      the
      occurrence of unanticipated events.


2


**RISK
      FACTORS**




**If
      we are unable to manufacture, market or sell the PillCam capsules, our revenues
      may decline significantly or we may not be able to maintain our expected annual
      growth rate.**




A
      substantial portion of our revenues and our annual revenue growth to date has
      resulted from sales of the PillCam SB capsule. We expect that a substantial
      majority of our revenues for the foreseeable future will continue to come from
      sales of the PillCam SB capsule. Sales of the PillCam SB capsule contributed
      $62.5 million, or 72%, in 2005, $76.4 million, or 80%, in 2006 and $90.6
      million, or 80% in 2007. In addition, we expect sales of other PillCam capsules,
      such as PillCam ESO and PillCam COLON, to increasingly contribute to our
      revenues in the future. If we are unable to manufacture, market or sell the
      PillCam capsules, and PillCam SB in particular, for any reason, including,
      for
      example, product recall, natural disaster, unavailability of components, war
      in
      Israel or as a result of a legal action against us, our revenues may decline
      significantly or we may not be able to maintain our expected annual growth
      rate.




**If
      we fail to increase utilization of our workstations and recurring orders of
      our
      PillCam SB capsule, we may not be able to achieve the growth rate we
      expect.**




Since
      sales of our PillCam SB capsule accounts for a substantial majority of our
      revenues, the level of recurring orders of our PillCam SB capsule by our
      customers is an important factor in growing our revenues. We are seeking to
      increase the level of recurring orders by a number of methods directed to
      increasing utilization of the PillCam capsules by physicians, including focused
      selling and marketing activities, frequent contact with our customers, improving
      reimbursement coverage, generating supporting clinical evidence to expand
      indications and educating physicians regarding the clinical benefits of the
      PillCam capsule, increasing operating efficiencies of our system to the benefit
      of physicians and collaborating with strategic industry participants. Increasing
      the level of recurring orders by our customers is also important to attracting
      new customers to purchase and use the Given System. If we are unable to increase
      utilization of our workstations and the level of recurring orders of our PillCam
      SB capsule, we may not be able to achieve the revenues necessary to maintain
      our
      growth rate.




**If
      the number of workstations or capsules we sell declines, we may not be able
      to
      achieve broader market penetration or may choose to place systems in the market
      at a discounted price, and our revenues and gross margins may be negatively
      affected.**




Our
      principal product is the Given System, consisting of a line of PillCam capsules
      and the related data recorder and computer workstation with our proprietary
      RAPID software. As of December 31, 2007, we had an installed base of nearly
      4,250 systems worldwide. Growth in our installed base of Given Systems has
      contributed to our revenue growth. Our success in making or increasing sales
      of
      the Given System depends on a number of factors. First, we must demonstrate
      that
      the Given System is clinically-effective and cost-effective in diagnosing a
      range of disorders of the gastrointestinal tract, and we must inform and educate
      both physicians and the third-party payers responsible for providing
      reimbursement coverage about the clinical and economic benefits of using the
      Given System. Second, we must broaden the applications for which the use of
      the
      Given System is reimbursed, expand the number of people with such reimbursement
      coverage and educate healthcare providers as to the clinical and economic
      benefits of using the Given System for such broader indications so that they
      are
      encouraged to adopt the Given System. Third, we must continue to improve
      operational efficiencies of the Given System and demonstrate and convince
      gastroenterologists that the Given System fits within their normal practice
      routines. If the number of workstations or capsules we sell declines, we may
      not
      be able to achieve broader market penetration or may choose to place them in
      the
      market at a discounted price, in which case our revenues and gross margins
      will
      be negatively affected.




**If
      we are unable to expand reimbursement coverage from third-party healthcare
      payers for procedures using the Given System, or if reimbursement is
      insufficient to create an economic benefit for purchasing or using the Given
      System when compared to alternative procedures, demand for the Given System
      and
      PillCam capsules may not grow at the rate we expect.**




Demand
      for the Given System depends significantly on the eligibility of the procedures
      performed using the Given System for reimbursement through government-sponsored
      healthcare payment systems and private third-party payers. Reimbursement
      practices vary significantly from country to country and within some countries,
      by region, and we must obtain reimbursement approvals on a country-by-country
      and region-by-region basis. In general, the process of obtaining reimbursement
      coverage approvals has been longer outside of the United States. Historically,
      we have experienced higher sales in territories in which we have received
      reimbursement coverage for capsule endoscopy using the Given System and in
      territories in which health authorities and regulators approved the marketing
      or
      use of capsule endoscopy. We may not be able to obtain further approvals in
      a
      timely manner or at all and existing reimbursement coverage policies may be
      revised from time to time outside of our control by third-party payers. If
      physicians, hospitals and other healthcare providers are unable to obtain
      sufficient coverage and reimbursement from third-party payers for procedures
      using the Given System, or if reimbursement is, or is perceived by our customers
      to be, insufficient to create an economic incentive for purchasing or using
      our
      product or does not adequately compensate physicians and health care providers
      compared to the other procedures they offer, demand for the Given System and
      the
      PillCam capsules may not grow at the rate we expect.




3




**Our
      future growth depends in part on our ability to market the PillCam SB capsule
      as
      a primary endoscopic diagnostic tool for a variety of disorders of the small
      intestine.**




The
      PillCam SB capsule has been cleared for marketing by the FDA for the detection
      of disorders of the small intestine. In recent years, sales of PillCam SB
      capsules have accounted for the significant majority of our revenues. Our
      ability to market and sell our line of PillCam capsules is highly dependent
      on
      the availability and adequacy of third party reimbursement for the procedures
      performed with the Given System. Most reimbursement policies today cover the
      small bowel capsule endoscopy procedure only after a previous procedure, such
      as
      endoscopy or radiology, has been performed and many of them contain other
      requirements making coverage for indications beyond obscure gastrointestinal
      bleeding, or OGIB, such as suspected Crohn’s disease, more difficult to obtain
      for our customers. Our ability to expand the use of the PillCam SB capsule
      depends substantially on our ability to convince third party payers to provide
      reimbursement coverage for the PillCam SB capsule as a primary diagnostic tool,
      without the requirement to perform a prior procedure, such as endoscopy or
      radiology, and to provide favorable and effective reimbursement coverage for
      the
      PillCam SB capsule for small bowel indications beyond OGIB. If we are unable
      to
      obtain such reimbursement coverage, sales of the PillCam SB capsule may not
      increase as we expect.




**If
      we are unable to expand the market for the PillCam ESO capsule and obtain
      adequate third-party reimbursement for the esophageal capsule endoscopy
      procedure, sales of the PillCam ESO capsule may not grow as we expect or at
      all.**




Our
      ability to market and sell our PillCam ESO capsule depends significantly on
      our
      ability to expand the use of the PillCam ESO capsule. To date, PillCam ESO
      has
      been used primarily in the detection of esophageal varices, a condition
      prevalent in patients suffering from cirrhosis, a chronic liver disease. As
      of
      January 31, 2008, approximately 31 million individuals in the United States
      had
      reimbursement coverage for using the esophageal capsule endoscopy procedure
      in
      the detection of esophageal varices. However, due to the limited prevalence
      of
      esophageal varices in the general population, we believe the market opportunity
      for the use of the PillCam ESO capsule in the detection of varices is limited.
      We believe that the primary market opportunity for our PillCam ESO capsule
      may
      be in the detection of Gastro-Esophageal Reflux Disease, or GERD, which is
      more
      prevalent in the general population than varices. However, in order to
      successfully market and sell the PillCam ESO capsule in the detection of GERD
      we
      must first generate and present clinical data supporting this use and,
      subsequently, to obtain adequate reimbursement coverage. Our ability to expand
      the use of the PillCam ESO capsule depends substantially on our ability to
      convince additional third party payers to provide reimbursement coverage for
      this capsule for the varices indication, the adequacy of such coverage and
      our
      ability to generate and present clinical data supporting reimbursement for
      the
      GERD indication. If we are unable to do so, sales of the PillCam ESO capsule
      may
      not grow as we expect or at all.




**If
      we are not successful in taking over marketing and sales of the PillCam ESO
      capsule in the United States following termination of our exclusive agreement
      with Ethicon Endo-Surgery, sales of our PillCam ESO capsule may not grow as
      we
      expect or at all.**




Until
      recently, InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson
      company, held exclusive rights to market our PillCam ESO capsule in the United
      States since this capsule received regulatory clearance in November 2004. In
      November 2007, Ethicon terminated the agreement with us and we regained all
      rights in connection with the PillCam ESO capsule in January 2008. Consequently,
      our future growth depends in part on our success in transitioning sales and
      marketing activities from Ethicon to us. Sales of the PillCam ESO capsule in
      2007 were insignificant and may continue to be lower than we expect if we are
      not successful in marketing the PillCam ESO capsule. This may negatively impact
      our revenue growth.




**If
      we are unable to market and sell our PillCam COLON capsule we may miss a
      significant market opportunity and may not grow as we
      expect.**




In
      2007, we began limited sales of our new PillCam COLON capsule in Europe. We
      intend to market and sell this capsule as a complementary tool for traditional
      colonoscopy for patients who are unable or unwilling to undergo traditional
      colonoscopy or have incomplete colonoscopy. However, in the United States the
      FDA has recently determined that the PillCam COLON is not substantially
      equivalent to any marketed device in the United States for visualization of
      the
      colon and therefore can not be cleared for marketing in the United States,
      our
      biggest market, through the 510(k) process based on the currently available
      clinical data. There can be no assurance that we will be able to receive FDA
      clearance for this capsule in the foreseeable future or at all or that the
      PillCam COLON will be accepted as comparable or superior to existing
      technologies for visualization of the colon. Our ability to market and sell
      the
      PillCam COLON successfully depends on one or more of the following:




4




•
              Receipt
                  of FDA marketing clearance in the United States: We cannot be sure
                  that
                  FDA clearance or other regulatory approvals will be granted. In
                  order to
                  obtain FDA clearance and other regulatory approvals, we will be
                  required
                  to demonstrate that the PillCam COLON is safe and effective for
                  its
                  intended purpose.•
              The
                  existence of clinical data sufficient to support the use of the
                  PillCam
                  COLON for visualization of the colon as compared to other colon
                  visualization methods: If clinical trials indicate that PillCam
                  COLON is
                  not as clinically-effective as other current methods, or if the
                  PillCam
                  COLON procedure causes unexpected complications or other unforeseen
                  negative effects, we may not obtain regulatory clearance to market
                  and
                  sell this capsule or physicians may be reluctant to use
                  it.•
              The
                  availability of sufficient clinical and cost-effectiveness data
                  for the
                  American Medical Association, or AMA, to provide a favorable permanent
                  “current procedural terminology”, or CPT, code and for private third-party
                  payers to make an adequate reimbursement decision to provide coverage
                  for
                  the PillCam COLON procedure.•
              The
                  availability of a reliable colon cleansing and preparation procedure
                  for
                  the PillCam COLON capsule, which is accepted by physicians and
                  patients.




If
      we are unable to achieve one or more of the above, we may not be able to market
      and sell the PillCam COLON capsule or the demand for the PillCam COLON may
      be
      lower than expected and sales of PillCam COLON may not contribute to our growth
      at the rate we expect or at all.




**We
      face direct competition from manufacturers of capsule endoscopy systems and
      may
      lose market share if we are unable to compete effectively in the marketplace.**




Olympus
      Corporation has a competing capsule endoscopy system for the small bowel, which
      it is selling in the United States, Europe and Australia. In addition, we
      believe that other companies in Korea and China began selling capsule endoscopy
      systems for the small bowel in Asian and possibly other countries outside the
      United States and are selling these systems at a lower price than ours. If
      we
      are unable to compete effectively in the marketplace against the Olympus capsule
      endoscopy system and other competing systems, we may lose market share,
      experience delays in completing sales as a result of longer decision making
      process among potential customers, or experience erosion of our gross margins
      as
      a result of growing price pressure.




**We
      face competition from large, well-established manufacturers of existing
      technologies for detecting gastrointestinal disorders, as well as from
      gastrointestinal products in general which compete for the limited capital
      expenditure budgets of customers.**




Competition
      for the Given System also comes from existing technologies for detecting
      gastrointestinal disorders and diseases. Existing technologies include
      traditional endoscopy and radiological imaging. The principal manufacturers
      of
      gastrointestinal endoscopes are Olympus, Hoya, and Fujinon. The principal
      manufacturers of equipment for radiological imaging are General Electric
      Healthcare Systems, Siemens Medical Solutions, a division of Siemens AG, Philips
      Medical Systems Ltd., Toshiba Corporation and Shimadzu Corporation for x-ray
      equipment. These companies have substantially greater financial resources than
      we do, and they have established reputations as well as worldwide distribution
      channels for medical instruments to physicians. If we are unable to convince
      physicians to adopt the Given System over the current technologies marketed
      by
      our competitors, our results of operations may suffer. For details regarding
      our
      cooperation agreement with Fujinon, see “Item 4 – Business Overview –
Competition.”




In
      addition to competition from products performing similar clinical functions
      to
      the Given System, there is also competition for the limited capital expenditure
      budgets of customers. Another capital equipment item for gastroenterology may
      compete with our system for the same capital budget, which is typically limited,
      and therefore the potential purchaser may be required to choose between the
      two
      items of capital equipment. If we are unable to market the Given System more
      effectively than other products which could be purchased using the same budget
      as the Given System, we may be unable to maintain our current growth rate.




**Because
      of the importance of our patent portfolio to our business, we may lose market
      share to our competitors if we fail to protect our
      technology.**




Protection
      of our technology is key to our future success. We rely on patent protection,
      as
      well as a combination of copyright, trade secret, design and trademark laws,
      nondisclosure and confidentiality agreements and other contractual restrictions
      to protect our proprietary technology. However, these legal means afford only
      limited protection and may not adequately protect our rights or permit us to
      gain or keep any competitive advantage. Currently, many of our patent
      applications are still pending and we will be able to use them to protect our
      technology against potential competitors only after they are issued. The process
      of issuing a patent may sometimes be lengthy and may not always result in issued
      patents in a form that will be advantageous to us or at all. Our patents and
      applications cover particular aspects of our products and technology and may
      be
      challenged, invalidated or circumvented by third parties. There may be other
      effective technologies, designs or methods relating to capsule endoscopy. If
      other effective methods are not covered by our patents or applications and
      our
      competitors are able to commercialize products using these methods, it could
      have an adverse effect on our sales. In addition, our competitors may obtain
      patents that will prevent us from using technologies, designs or methods we
      would like to integrate into our products. We may not be able to prevent the
      unauthorized disclosure or use of our technical knowledge or other trade secrets
      by former employees. Laws protecting intellectual property only provide
      protection in the jurisdiction they are enacted. The laws and judicial systems
      of foreign countries may not protect or enable enforcement of our intellectual
      property rights to the same extent as the laws of the United States. If we
      do
      not adequately protect our intellectual property, our competitors or other
      parties could make products similar to ours and compete more efficiently with
      us, which could result in a decrease in our market share. For information
      regarding our patent litigation with Olympus, see Item 8 – Legal
      Proceedings.




5




**If
      we are unable to successfully manage the introduction of new or improved
      products into the market, our operating results may be negatively
      affected.**




We
      began marketing and selling the Given System in August 2001. Since then, we
      have
      introduced new products or significant improvements to existing components
      of
      the Given System frequently. Newer products or system components may not be
      able
      to support and work with older product versions. For example, our PillCam COLON
      capsule only works with RAPID 5.0 or newer versions of the RAPID software.
      In
      order for as many of our customers as possible to utilize our most advanced
      capsule endoscopy technology, we need to manage new product introductions and
      installations efficiently, addressing concerns of customers regarding product
      upgrade costs, time constraints and training and education in light of possible
      short product cycles. If we are unable to cause our customers to use the most
      advanced technology available or effectively address compatibility issues
      between older and newer products, we may harm our competitive position and
      our
      sales may be negatively affected. In addition, a failure to successfully manage
      the transition to newer products, may result in obsolete inventory of older
      products, which we may be required to write off. This will negatively affect
      our
      operating results.




**If
      we are unable to introduce new capsules and products for use in the
      gastrointestinal tract our growth may be negatively
      affected.**




Our
      objective is to expand the use of the Given System as a platform to be used
      with
      a variety of products and indications. We intend to add to our current PillCam
      capsules by developing and introducing new capsules and products. There can
      be
      no assurance that we will be able to develop new products that will enjoy
      widespread market acceptance as superior to existing technologies for detection
      of abnormalities in other parts of the gastrointestinal tract or that can be
      used in other parts of the gastrointestinal tract. In addition, we will be
      required to obtain FDA clearance in the United States and other regulatory
      approvals outside of the United States before commercially distributing the
      Given System for use in other parts of the gastrointestinal tract or introducing
      new products for use in the gastrointestinal tract. These regulatory processes
      can be lengthy and expensive and we cannot be sure that FDA clearance or other
      regulatory approvals will be granted. In order to obtain FDA clearance and
      other
      regulatory approvals, and to obtain reimbursement coverage for use of new
      products, we may be required to conduct additional clinical trials to
      demonstrate the diagnostic and cost-effectiveness of these new products. If
      future clinical trials indicate that new products are not as
      clinically-effective or cost-effective as current methods, or that it may cause
      unexpected complications or other unforeseen negative effects, we may not obtain
      regulatory clearance to market and sell these new products or obtain
      reimbursement coverage, and our growth would be adversely affected.




**Any
      disruption in the United States, our primary market for our products, may result
      in a material reduction in our revenues and negatively affect our operating
      results.**




Since
      we began selling the Given System in 2001, most of our revenues have been
      generated from sales in the United States. Sales in the United States accounted
      for $63.9 million, or 74%, of our revenues in 2005, $66.4 million, or 70%,
      of
      our revenues in 2006 and $72.3 million, or 64%, in 2007. Any disruption to
      our
      operations or market in the United States resulting from changes in management
      or the sales team of our U.S. subsidiary, adverse changes in reimbursement
      policies, new regulatory requirements, macro-economic changes and other events,
      many of which are outside our control, may result in a material reduction in
      our
      revenues and negatively affect our operating results.




**If
      we are unable to successfully market and sell our products in Japan, one of
      our
      significant growth opportunities may be materially adversely
      affected.**




In
      April 2007, we received regulatory clearance to market our capital equipment
      and
      PillCam SB capsule in Japan and subsequently initial reimbursement coverage
      for
      the PillCam SB capsule was announced for indications involving obscure
      gastrointestinal bleeding. Suzuken Co. Ltd., one of Japan’s largest
      pharmaceutical and medical device distributors, has exclusive rights to
      distribute our products in Japan. Suzuken also owns 15% of our Japanese
      subsidiary. Consequently, our future growth in the Japanese market depends
      significantly on the success of Suzuken and on our business relationship with
      Suzuken. In addition, marketing our other products in Japan will require
      additional, product-specific regulatory clearances. In particular, the current
      regulatory clearance we have obtained in Japan covers an early version of our
      data recorder of which we now have only limited inventory remaining. We have
      applied for clearance for our more advanced version of data recorder, similar
      to
      the version we sell in the United States and Europe. Generally, the process
      for
      obtaining marketing clearance for medical devices in Japan could range from
      six
      months for products with only very minor modifications from previous cleared
      product versions to a few years in case of a completely new device. There is
      no
      assurance that we will receive regulatory clearances in Japan for any of our
      additional products. Finally, our main competitor in the field of capsule
      endoscopy is based in Japan and competition may be intense once it enters the
      Japanese market. If we are unable to successfully market and sell our products
      in Japan for any of the foregoing or other reasons, one of our significant
      growth opportunities will be materially adversely affected.




6




**Because
      the medical device industry is litigious, we are susceptible to intellectual
      property suits that could cause us to incur substantial costs or pay substantial
      damages or prohibit us from selling our products.**




There
      is a substantial amount of litigation over patent and other intellectual
      property rights in the medical device industry. We are currently a party to
      patent litigation in the United States against Olympus Corporation and its
      affiliates. For a detailed description, see “Item 8 – Financial
      Information – Legal Proceedings.”




Whether
      a product infringes a patent involves complex legal and factual issues, the
      determination of which is often uncertain. While we have attempted to ensure
      that the Given System does not infringe other parties’ valid patents and
      proprietary rights, searches typically performed to identify potentially
      infringed patents of third parties are not always conclusive and, because patent
      applications can take many years to issue, there may be applications now pending
      of which we are unaware, which may later result in issued patents which our
      current or future products may infringe. In addition, our competitors or other
      parties may assert that our product and the methods it employs may be covered
      by
      patents held by them. If our products infringe a valid patent, we could be
      prevented from selling them unless we can obtain a license or redesign the
      product to avoid infringement. A license may not always be available or may
      require us to pay substantial royalties. We also may not be successful in any
      attempt to redesign our product to avoid any infringement. Infringement and
      other intellectual property claims, with or without merit, can be expensive
      and
      time-consuming to litigate and can divert management’s attention from operating
      our business.




**We
      are subject to extensive regulation by the FDA which could restrict the sale
      and
      marketing of the Given System and could cause us to incur significant
      costs.**




FDA
      regulations may require us to submit for clearance improvements and
      modifications of the Given System, including new or improved PillCam capsules
      and new or improved RAPID software versions, before we are allowed to market
      them in the United States. FDA regulations also prohibit us from promoting
      or
      advertising our cleared products for uses not within the scope of our clearances
      or making unsupported safety and effectiveness claims. Currently, the Given
      System has been cleared by the FDA for the detection of abnormalities of the
      small intestine and the esophagus. Noncompliance with applicable regulatory
      requirements can result in enforcement action which may include recalling
      products, ceasing product marketing, paying significant fines and penalties,
      and
      similar FDA actions which could limit product sales or delay or halt product
      shipment. Additionally, if we are unable to receive FDA clearance for new or
      improved products, such as PillCam COLON, the marketing and sale of these
      products will be delayed or cancelled, which in turn may materially adversely
      affect our growth potential. Unanticipated changes in existing regulatory
      requirements or adoption of new requirements could also materially adversely
      affect our financial condition and results of operations.




We
      are required to adhere to the FDA’s Medical Device Reporting regulation, which
      requires that manufacturers report to the FDA if their device may have caused
      or
      contributed to a death or serious injury or malfunctioned in a way that would
      likely cause or contribute to a death or serious injury if it were to recur.
      The
      FDA also requires us to adhere to the Quality System Regulation, which covers
      the methods and documentation of the design, testing, production, control,
      quality assurance, labeling, packaging and shipping of the Given System. The
      FDA
      enforces the Quality System Regulation through inspections. Our quality system
      is also subject to the Medical Devices Directive of the European Union requiring
      compliance with the International Standard Organization’s standard ISO
      9001:2000, ISO 13485:1996 and ISO 13485:2003, which are quality standards
      setting forth requirements for medical device manufacturers that are more
      specific than the general requirements specified in ISO 9001. If we fail a
      Quality System Regulation inspection by the FDA or any other regulator, our
      operations could be disrupted and our manufacturing delayed. Failure to take
      adequate corrective action in response to a Quality System Regulation inspection
      could force a shutdown of our manufacturing operations and a recall of the
      Given
      System, which would have a material adverse effect on our product sales,
      financial condition and results of operations.




**If
      we or our distributors do not obtain and maintain the necessary regulatory
      approvals in a specific country or region, we will not be able to market and
      sell the Given System in that country or region.**




In
      addition to the United States, Germany, France, Australia and Israel, where
      we
      market and sell the Given System directly with our own direct sales and
      marketing organizations, we sell the Given System in over 60 other countries.
      To
      be able to market and sell the Given System in a specific country or region,
      we
      or our distributors must comply with the regulations of that country or region.
      While the regulations of some countries do not impose barriers to marketing
      and
      selling the Given System or only require notification, others require that
      we or
      our distributors obtain the approval of a specified regulatory body. These
      regulations, including the requirements for approvals, and the time required
      for
      regulatory review vary from country to country. Obtaining regulatory approvals
      is expensive and time-consuming, and we cannot be certain that we or our
      distributors will receive regulatory approvals for all of our products in each
      country or region in which we plan to market our products. If we modify the
      Given System, we or our distributors may need to apply for new regulatory
      approvals before we are permitted to sell it. We may not continue to meet the
      quality and safety standards required to maintain the authorizations that we
      or
      our distributors have received. If we or our distributors are unable to maintain
      our authorizations in a particular country or region, we will no longer be
      able
      to sell our products in that country or region, and our ability to generate
      revenues will be materially adversely affected.




7




**Our
      failure to comply with radio frequency regulations in a specific country or
      region could impair our ability to commercially distribute and market the Given
      System in that country or region.**




The
      Given System includes a wireless radio frequency transmitter and receiver,
      and
      is therefore subject to equipment authorization requirements in a number of
      countries and regions. In the United States, Europe and Japan, authorities
      require advance clearance of all radio frequency devices before they can be
      sold
      or marketed in these jurisdictions. Modifications to the approved system design
      and specifications may require new or further regulatory approvals before we
      are
      permitted to market and sell a modified system. If we are unable to maintain
      our
      current approvals or obtain any additional required approvals from the
      authorities responsible for the radio frequency regulations in these and other
      jurisdictions where we sell the Given System, an enforcement action could be
      brought to prevent the sale or use of the Given System in these countries.
      Any
      such action could negatively affect our results of operations.




**Some
      of our activities may subject us to risks under federal and state laws
      prohibiting “kickbacks” and false or fraudulent claims.**




Certain
      U.S. federal and state laws, including but not limited to the federal
      anti-kickback statute, prohibit, among other things, the offer, payment,
      solicitation or receipt of any form of remuneration in return for the referral
      of healthcare items or services reimbursable by a federal or state health care
      program such as Medicare or Medicaid. While the federal anti-kickback statute
      applies only to products or services for which payment may be made in whole
      or
      in part by a federal or state health care program, state laws often also apply
      to private third party payers such as commercial insurance plans. Other federal
      and state laws, including the Federal False Claims Act, prohibit individuals
      or
      entities from knowingly presenting, or causing to be presented, claims for
      payment to Medicare, Medicaid, or other third-party payers that are false or
      fraudulent, or are for items or services that were not provided as claimed.




These
      laws may apply to the sales, marketing and other promotional activities of
      manufacturers of medical devices, such as us, and may limit the kinds of
      financial arrangements we may have with hospitals, physicians, and other
      potential purchasers of medical devices. The anti-kickback statute, similar
      federal and state laws, and false claims laws prescribe substantial civil and
      criminal penalties for noncompliance. A government action against us under
      one
      of these legal authorities could result in financial and other penalties, delay
      or prohibit sales of some or all of our products or services and, even if
      unsuccessful, could cause adverse publicity and be costly to respond to, and
      thus could have a material adverse effect on our business, results of operations
      and financial condition.




**We
      rely on local distributors to market and distribute the Given System in most
      of
      the territories in which we sell it.**




With
      the exception of Australia, France, Germany, Israel and the United States,
      we
      rely on distributors for the marketing and distribution of the Given System.
      Under most of our agreements with local distributors, a distributor is granted
      the right to market the Given System for a specified period in a particular
      country or region, subject to the attainment of minimum sales targets. The
      distributor is required to prepare and submit to us for our approval a sales
      plan for the Given System and to obtain the requisite regulatory and
      reimbursement approvals for the Given System. Our success in generating sales
      in
      countries or regions where we have engaged local distributors depends in part
      on
      the efforts of  others
      whom we do not control. In 2007, we derived $24.7 million, or 21.8%, of our
      revenues from sales to local distributors, compared to $15.7 million, or 16.5%,
      from sales to local distributors in 2006. To date, we have changed a number
      of
      our distributors due to a failure to meet minimum sales targets and other
      reasons. If a distributor is terminated by us or goes out of business, it may
      take us a period of time to locate an alternative distributor and to train
      its
      personnel to market the Given System and our ability to sell the Given System
      in
      that distributor’s country or region could be adversely affected.




**Our
      reliance on single source suppliers could harm our ability to meet demand for
      the Given System in a timely manner or within budget.**




We
      depend on single source suppliers for some of the components necessary for
      the
      production of the Given System. For example, we have sole suppliers for the
      imaging sensor and transmitter of our PillCam capsules. If the supply of these
      components is disrupted or terminated, or if these suppliers are unable to
      supply the quantities of components that we require, we may not be able to
      find
      alternative sources for these key components. Although we maintain a strategic
      inventory of key components, the inventory may not be sufficient to satisfy
      the
      demand for our products if supply is interrupted, and is subject to risk of
      loss
      due to catastrophic events such as fire at a storage facility. As a result,
      we
      may be unable to meet demand for our products, which could harm our ability
      to
      generate revenues, lead to customer dissatisfaction and damage our reputation.
      If we are required to change the manufacturer of any of these key components
      of
      the Given System, there may be a significant delay in locating a suitable
      alternative manufacturer. Additionally, we may be required to verify that the
      new manufacturer maintains facilities and procedures that comply with FDA and
      other applicable quality standards and with all applicable regulations and
      guidelines. The delays associated with the selection of a new manufacturer
      could
      delay our ability to manufacture our product in a timely manner or within
      budget. Furthermore, in the event that the manufacturer of a key component
      of
      our product ceases operations or otherwise ceases to do business with us, we
      may
      not have access to the information necessary to enable another supplier to
      manufacture the component. The occurrence of any of these events could harm
      our
      ability to meet demand for the Given System in a timely manner or within budget.




8




**Conditions
      in Israel affect our operations and may limit our ability to produce and sell
      our product which could decrease our revenues.**




Our
      corporate offices, manufacturing facilities (other than our PillCam SB backup
      production line in Ireland), and research and development facilities are located
      in Israel. Political, economic and military conditions in Israel may directly
      affect our operations. Since the establishment of the State of Israel in 1948,
      a
      number of armed conflicts have taken place between Israel and its Arab neighbors
      and a state of hostility, varying in degree and intensity, has led to security
      and economic problems for Israel. Any escalation in these hostilities or any
      future armed conflict, political instability or violence in the region, could
      prevent us from using our corporate offices and primary manufacturing facility
      in Israel, harm our ability to manufacture and sell our products.




**If
      we lose our key personnel or are unable to attract and retain additional
      personnel, our business and ability to compete will be harmed.**




We
      are dependent on the principal members of our management, scientific staff
      and
      sales team. In order to implement our business strategy, we will need to keep
      our key personnel with expertise in research and development, clinical testing,
      government regulation, manufacturing, sales, marketing and finance. Our product
      development plans depend in part on our ability to retain engineers with
      expertise in a variety of technical fields. The loss of a number of these
      persons or our inability to attract and retain qualified personnel could harm
      our business and our ability to compete.




**Our
      operations could be disrupted as a result of the obligation of key personnel
      in
      Israel to perform military service.**




Generally,
      all male adult citizens and permanent residents of Israel between ages 21 and
      45
      are obligated, unless exempt, to take part in military reserve duty annually.
      Many of our male employees are currently obligated to perform annual reserve
      duty. Additionally, all Israeli residents who perform reserve duty are subject
      to being called to active duty at any time under emergency circumstances. Our
      operations could be disrupted by the absence for a significant period of one
      or
      more of our officers or employees due to military service. Any such disruption
      to our operations could delay our business plans.




**Our
      international operations will expose us to the risk of fluctuations in currency
      exchange rates.**




In
      2007, we derived 67.5% of our revenues in U.S. dollars and 23.3% in Euro, with
      the remainder denominated in Japanese Yen and other currencies. The currency
      denomination of our revenues depends on the location of the customer or the
      distributor used to fulfill our customers’ orders. Conversely, in 2007, in
      addition to our U.S. dollar and Euro-denominated liabilities, 31% of our
      expenses were denominated in New Israeli Shekels, or Shekels. Our
      Shekel-denominated liabilities consist principally of salaries and related
      personnel expenses. We anticipate that for the foreseeable future a material
      portion of our liabilities will continue to be denominated in Shekels. If the
      value of a currency in which our receivables are denominated devalues against
      the value of a currency in which our liabilities are denominated, there will
      be
      a negative impact on our operating margins, as well as on our net income. Our
      revenues and expenses may not always be fully hedged against our currency
      exposure through financial instruments. In addition, if we wish to maintain
      the
      dollar-denominated value of our products in non-U.S. markets, devaluation in
      the
      local currencies of our customers relative to the U.S. dollar could cause our
      customers to cancel or decrease orders or default on payment. In addition,
      as of
      December 31, 2007, 38% of our cash and cash equivalents were denominated in
      currencies other than the U.S. dollar and we are therefore subject to the risk
      of exchange rate fluctuations among the U.S. dollar, the Yen, the Shekel, the
      Australian dollar and the Euro.




**Recent
      global economic market conditions may negatively affect our liquidity and
      financial results.**




As
      of
      December 31, 2007, we had $37.1 million in cash and cash equivalents, which
      were
      held in bank accounts and deposits with maturities of three months or less
      located with a number of high rated banks inside and outside of Israel. In
      addition, as of December 31, 2007, we had $41.6 million invested in marketable
      securities and $23.1 million invested in short term investments. Approximately
      two thirds of these cash balances were invested in securities issued by the
      United States government or its agencies and in AAA money market funds. The
      remainder was held in corporate bonds and commercial paper that were
      highly-rated by rating agencies at the time of investment. Our cash and
      investments are subject to general credit, liquidity, market and interest rate
      risks, which may be exacerbated by the dislocation that has affected various
      sectors of the financial markets since the middle of 2007 and caused credit
      and
      liquidity issues for a number of reputable financial institutions. These risks
      associated with our investment portfolio may have a negative effect on our
      liquidity and financial results.


9




**The
      use of the Given System, including ingestion of the PillCam capsules, could
      result in product liability claims that could be expensive, damage our
      reputation and harm our business.**




Our
      business exposes us to an inherent risk of potential product liability claims
      related to the manufacturing, marketing and sale of medical devices. The medical
      device industry has historically been litigious, and we face financial exposure
      to product liability claims if the use of our product were to cause or
      contribute to injury or death, whether by aggravating existing patient symptoms
      or otherwise. There is also the possibility that defects in the design or
      manufacture of the Given System might necessitate a product recall. Although
      we
      maintain product liability insurance for the Given System, the coverage limits
      of these policies may not be adequate to cover future claims. In the future,
      we
      may be unable to maintain product liability insurance on acceptable terms or
      at
      reasonable costs and such insurance may not provide us with adequate coverage
      against potential liabilities. A product liability claim, regardless of merit
      or
      ultimate outcome, or any product recall could result in substantial costs to
      us,
      damage to our reputation, customer dissatisfaction and frustration and a
      substantial diversion of management attention. A successful claim brought
      against us in excess of, or outside of, our insurance coverage could have a
      material adverse effect on our financial condition and results of operations.




**The
      price of our shares could fluctuate significantly as a result of a number of
      factors, including varying quarterly financial performance or our failure to
      meet our guidance or the expectations of analysts or investors, which may lead
      to additional volatility in our share price.**




Our
      ordinary shares commenced trading on the Nasdaq Global Market in October 2001
      and on the Tel Aviv Stock Exchange in March 2004. In 2007, the closing price
      of
      our shares has ranged from $19.25 to $31.49 per share on the Nasdaq Global
      Market and NIS 81.47 to NIS 135.90 on the Tel Aviv Stock Exchange. The price
      of
      our shares could fluctuate significantly for, among other things, the following
      reasons: future announcements concerning us or our competitors, the existence
      and outcome of litigation concerning our intellectual property assets, changes
      in third-party reimbursement practices, regulatory developments, and new
      clinical or economic data regarding our current or future products. In addition,
      it is our practice to provide guidance to the market as to our expected revenues
      and earnings per share based on information available to us at the time of
      the
      guidance. If our operating results do not meet our guidance or the expectations
      of securities analysts or investors, the price of our shares would likely
      decline. In addition, based on our experience to date, we believe that many
      of
      our customers delay purchasing our products until the end of the fiscal quarter
      because they believe this will enable them to negotiate more favorable terms.
      Therefore, revenues from sales are concentrated at the end of each fiscal
      quarter making it difficult for us to determine the success of each quarter
      until its end. This may result in lower than expected quarterly revenues if
      external or other events cause potential customers to defer their purchasing
      decisions even for a short period of time. Furthermore, we believe that demand
      for systems and capsules may be materially affected by seasonal factors during
      the summer months when physicians and administrators are more likely to postpone
      purchasing decisions due to summer vacations and patients are more likely to
      postpone less urgent diagnostic procedures until later in the year **.** Both
      of
      these factors may result in slower sales during the summer. Share price
      fluctuations may be exaggerated by low trading volume of our ordinary shares
      and
      changes in trading practices in our ordinary shares, such as short selling.
      Securities class action litigation has often been brought against companies
      following periods of volatility in the price of their shares. Any securities
      litigation claims brought against us could result in substantial expense and
      divert management’s attention from our business.




**The
      largest beneficial owner of our shares, IDB Holding Corporation Ltd., has
      significant influence over matters requiring shareholder
      approval.**




The
      largest beneficial owners of our shares, four individuals in Israel who together
      control IDB Holding Corporation Ltd., beneficially owned approximately 43.9%
      of
      our ordinary shares as of December 31, 2007. As a result, IDB Holding
      Corporation Ltd. could exercise a significant influence over our operations
      and
      business strategy and has sufficient voting power to control the outcome of
      matters requiring shareholder approval. These matters may include:




•
              the
                  composition of our board of directors which has the authority to
                  direct
                  our business and to appoint and remove our officers;•
              approving
                  or rejecting a merger, consolidation or other business combination;•
              raising
                  future capital; and•
              amending
                  our articles of association which govern the rights attached to
                  our
                  ordinary shares.




This
      concentration of ownership of our ordinary shares could delay or prevent proxy
      contests, mergers, tender offers, open-market purchase programs or other
      purchases of our ordinary shares that might otherwise give our other
      shareholders the opportunity to realize a premium over the then-prevailing
      market price of our ordinary shares. This concentration of ownership may also
      adversely affect our share price.




10




**Future
      sales of our ordinary shares in the public market and low trading volume could
      adversely affect our share price.**




As of December 31, 2007, we had 29,241,785 million ordinary shares outstanding.
      Approximately 50% of these shares are “control securities” available for resale
      on the Nasdaq Global Market subject, however, to volume limitations under Rule
      144. In addition, all of our ordinary shares are available for resale on the
      Tel
      Aviv Stock Exchange, subject to compliance with Regulation S under the
      Securities Act of 1933. Most of these restricted securities are held by the
      largest beneficial owner of our shares, IDB Holding Corporation Ltd. Future
      sales of these restricted shares, or the perception that these sales could
      occur, could adversely affect the market price of our ordinary shares. We have
      periodically experienced a low trading volume of our ordinary shares, and if
      one
      or a small number of parties buys or sells a large number of our ordinary
      shares, we may experience volatility in our share price and the price and
      liquidity of our shares may be adversely affected.




**Our
      ordinary shares are traded on more than one market and this may result in price
      variations.**




Our
      ordinary shares are traded on the Nasdaq Global Market and the Tel Aviv Stock
      Exchange. Trading in our ordinary shares on these markets is made in different
      currencies (dollars on the Nasdaq Global Market, and Shekels on the Tel Aviv
      Stock Exchange) and at different times (due to different time zones, trading
      days and public holidays in the United States and Israel). The trading prices
      of
      our ordinary shares on these two markets may differ due to these and other
      factors. Any decrease in the trading price of our ordinary shares on one of
      these markets could cause a decrease in the trading price of our ordinary shares
      on the other market.




**If
      we are characterized as a passive foreign investment company, our U.S.
      shareholders may suffer adverse tax consequences.**




If,
      for any taxable year, our passive income, or our assets which produce passive
      income, exceed specified levels, we may be characterized as a passive foreign
      investment company, or PFIC, for U.S. federal income tax purposes. This
      characterization could result in adverse U.S. tax consequences for our U.S.
      shareholders that may include having gains realized on the sale of our shares
      treated as ordinary income, rather than as capital gains and potential payment
      of additional tax which apply to such gains. Furthermore, in certain cases,
      long-term capital gains rates might also be denied for certain dividends that
      may be paid by us to our shareholders. We believe we were not a PFIC for the
      fiscal year ended December 31, 2007. However, the tests for determining PFIC
      status are applied annually and are based in part on reference to the market
      value of our shares and valuing our intangible assets using the methods
      prescribed for publicly traded corporations, and it is difficult to make
      accurate predictions of future income and assets, which are relevant to this
      decision. Accordingly, we cannot  give
      any
      assurance that we will not become a PFIC, in particular, since the value of
      our
      shares is likely to fluctuate. For a more detailed discussion of the
      consequences of our being classified as a PFIC, see “Taxation and Government
      Programs—United States Federal Income Taxation—Passive Foreign Investment
      Company Considerations.” U.S. shareholders are urged to consult with their own
      U.S. tax advisors with respect to the U.S. tax consequences of investing in
      our
      ordinary shares.




**The
      government grants we have received from the Office of the Chief Scientist in
      Israel for research and development expenditures limit our ability to
      manufacture products and transfer technologies outside of Israel and require
      us
      to satisfy specified conditions. If we fail to satisfy these conditions, we
      may
      be required to pay additional royalties to the Office of the Chief Scientist
      or
      be subject to criminal charges.**




From
      1998
      through 2007, we received royalty-bearing grants from the government of Israel
      through the Office of the Chief Scientist of the Ministry of Industry and Trade
      for the financing of a portion of our research and development expenditures
      in
      Israel. While we have paid our entire royalty obligation resulting from these
      grants, the terms of the Chief Scientist grants prohibit us from manufacturing
      products developed using these grants outside of Israel without special
      approvals and completely prohibit the transfer of our technologies and related
      intellectual property rights outside of Israel. This restriction may impair
      our
      ability to outsource manufacturing, engage in change in control transactions
      or
      otherwise transfer our technology outside Israel. We currently hold an approval
      from the Office of the Chief Scientist to manufacture limited quantities of
      the
      PillCam SB capsule in a facility in Ireland and we will be required to obtain
      an
      approval before manufacturing the PillCam ESO capsule or the PillCam COLON
      capsule outside of Israel. If we fail to comply with any of the conditions
      imposed by the Office of the Chief Scientist, we may be required to pay
      additional royalties to the Office of the Chief Scientist or be subject to
      criminal charges.




**We
      receive significant tax benefits that may be reduced or eliminated in the
      future.**




Our
      investment program in leasehold improvements and equipment at our manufacturing
      facility in Yoqneam, Israel has been granted “approved enterprise” status and we
      are therefore eligible for significant tax benefits under the Israeli Law for
      Encouragement of Capital Investments. From time to time, the government of
      Israel has considered reducing or eliminating the tax benefits available to
      approved enterprise programs such as ours. These tax benefits may not be
      continued in the future at their current levels or at all. If these tax benefits
      were reduced or eliminated, the amount of taxes that we pay would likely
      increase. In addition, our approved enterprise status imposes certain
      requirements on us, such as the location of our manufacturing facility, location
      of certain subcontractors and the extent to which we may outsource portions
      of
      our production process. If we do not meet these requirements, the law permits
      the authorities to cancel the tax benefits retroactively. See Item 10
“Additional Information—Taxation.”




11




**We
      may not be able to enforce covenants not to compete and therefore may be unable
      to prevent competitors from benefiting from the expertise of some of our former
      employees involved in research and development activities.**




We
      currently have non-competition agreements with substantially all of our
      employees who are involved in research and development, nearly all of whom
      are
      located in Israel. These agreements prohibit our employees, if they cease
      working for us, from directly competing with us or working for our competitors
      for a limited period of time following termination of employment. In many
      jurisdictions, courts are increasingly refusing to enforce restrictions on
      competition by former employees or have interpreted them narrowly. For example,
      in Israel, courts have required employers seeking to enforce non-compete
      undertakings of a former employee to demonstrate that the competitive activities
      of the former employee will harm one of a limited number of material interests
      of the employer which have been recognized by the courts, such as the secrecy
      of
      a company’s confidential commercial information or its intellectual property. If
      we cannot demonstrate that harm would be caused to us, we may be unable to
      prevent our competitors from benefiting from the expertise of our former
      employees.




**ITEM
      4.****INFORMATION
      ON THE COMPANY**




**A.**  **HISTORY
        AND DEVELOPMENT OF THE COMPANY**




Given
      Imaging Ltd. was incorporated by RDC Rafael Development Corporation under the
      laws of the State of Israel in January 1998. We are registered with the Israeli
      registrar of companies in Jerusalem. Our registration number is 51-257802-2.
      Our
      address is Hermon Building, New Industrial Park, Yoqneam 20692, Israel. Our
      telephone number is 04-909-7777. Our agent in the United States is our
      subsidiary Given Imaging, Inc. Given Imaging, Inc.’s address is 3950 Shackelford
      Road, Suite 500, Duluth GA 30096.




See
      Items 5 and 18 for a description of capital expenditures by us for the past
      three fiscal years. We have not made any divestitures during the same time
      period.




**B.**  **BUSINESS
        OVERVIEW**




We
      develop, manufacture and market innovative diagnostic products for the
      visualization and detection of disorders of the gastrointestinal tract. We
      pioneered capsule endoscopy, a proprietary approach to visual examination of
      the
      gastrointestinal tract through the use of a miniaturized video camera contained
      in a ingestible disposable capsule. Our principal product, which incorporates
      our core technology, is the Given System, a proprietary wireless imaging system
      that uses our disposable video capsules, which we refer to as the PillCam
      capsules. The PillCam video capsules are easily ingested by the patient and
      move
      naturally through the gastrointestinal tract without discomfort while wirelessly
      transmitting to a portable recorder, enabling the gastroenterologist to view
      high quality video, images and data on our workstation, utilizing our
      proprietary RAPID software. We believe that capsule endoscopy provides a
      patient-friendly solution that addresses a significant market opportunity and
      overcomes many of the shortcomings of traditional diagnostic tools for
      gastrointestinal disorders. We believe that each segment of the gastrointestinal
      tract presents meaningful opportunities for patient-friendly diagnostic
      procedures. In 2001, we commenced marketing the Given System, our capsule
      endoscopy platform, with the M2A capsule (which we re-branded in 2004 as the
      PillCam Small Bowel capsule, or PillCam SB), for detection of disorders of
      the
      small bowel. As of December 31, 2007, we had an installed base of nearly 4,250
      Given Systems and had sold more than 650,000 PillCam SB capsules in over 60
      countries worldwide. A substantial portion of our revenues and our annual
      revenue growth to date has resulted from sales of the PillCam SB capsule. Since
      November 2004, we also market and sell the PillCam ESO capsule for visualizing
      the esophagus. In 2007, we began selling the first generation of our PillCam
      COLON capsule in Europe following receipt of the CE mark. During 2007, we had
      limited initial sales of the PillCam COLON capsule and in 2008 we plan to
      continue gradual sales into specific markets following the completion of ongoing
      clinical trials. We have also developed the AGILE Patency Capsule and system,
      which is a dissolvable capsule that enables physicians to determine whether
      there are obstructions or strictures in the gastrointestinal tract that may
      prevent passage of our PillCam SB capsule. We launched the original Patency
      Capsule and scanner in Europe in November 2003. Following receipt of FDA
      clearance, we began marketing and selling the AGILE Patency System in the United
      States in May 2006.




Our
      long-term objective, subject to further development and receipt of regulatory
      clearances and/or approvals, is to establish the Given System as a platform
      for
      diagnosis of disorders in all parts of the gastrointestinal tract and the
      PillCam capsules as a primary diagnostic administered to patients with such
      suspected disorders.




**Disorders
      of the Gastrointestinal Tract**




The
      gastrointestinal tract is a series of organs in the body responsible for
      digesting food. These organs principally include the mouth, esophagus, stomach,
      small intestine and colon. The following is an illustration of the
      gastrointestinal tract:




12









The
      upper gastrointestinal tract consists of the mouth, esophagus, stomach and
      duodenum, which is the first portion of the small intestine. The esophagus
      is an
      approximately ten inch long tube that connects the throat and the stomach.
      The
      stomach is a sac-like organ that produces enzymes to break down food. The small
      intestine is an approximately 21 foot long hollow organ that is primarily
      responsible for absorption of food components. The three parts of the small
      intestine are the duodenum, the jejunum and the ileum. The small intestine
      is
      located in the abdominal cavity between the stomach and the large intestine,
      or
      colon. The lower gastrointestinal tract consists of the lower two-thirds of
      the
      small intestine (the jejunum and the ileum) and the colon. The colon is the
      final portion of the gastrointestinal tract and is primarily responsible for
      absorbing water before waste is excreted.




The
      gastrointestinal tract is susceptible to various disorders. Typical symptoms
      of
      such disorders include heartburn, upper or lower abdominal pain, bleeding,
      diarrhea, constipation, anemia, weight loss and nausea. Some of these symptoms
      are not specific to any particular disorder, but may be common to more than
      one
      underlying disorder, often requiring the gastroenterologist to make a
      differential diagnosis. We believe that PillCam capsule endoscopy can have
      a
      significant role in assisting gastroenterologists in making an evidence-based
      diagnosis. The disorders causing the above-mentioned symptoms may include:




•
              *inflammatory
                  bowel disease*,
                  including Crohn’s disease and ulcerative colitis, both of which inflame
                  the lining of the digestive tract;•
              *Obscure
                  bleeding and iron deficiency anemia (IDA)*;•
              *celiac
                  disease,*which causes damage to the intestine due to an allergic reaction
                  to gluten
                  in the diet;•
              *Gastro-esophageal
                  reflux disease*,
                  which is the flow-back of acidic stomach content into the esophagus,
                  causing*esophagitis*,
                  which is inflammation of the esophageal lining, or*Barrett’s
                  esophagus*,
                  a
                  pre-cancerous condition;
  •
                *irritable
                    bowel syndrome*,
                    which is a functional disorder characterized by abdominal pain
                    or cramping
                    and changes in bowel function without any organic manifestation;•
                *peptic
                    ulcer disease*,
                    which occurs when the lining of the stomach or duodenum is worn
                    away by
                    stomach acid; and•
                *growths,*such
                    as tumor or polyps, which may be
                    cancerous.
 
 Our
                    products currently assist in the diagnosis of disorders of the
                    small
                    intestine, the esophagus and the colon.
 
 •
                *Small
                    intestine disorders*.
                    According to a study published in 2001 by the American Gastroenterology
                    Association, or AGA, approximately 19 million Americans suffer
                    from
                    numerous disorders of the small intestine, including bleeding,
                    Crohn’s
                    disease, celiac disease, chronic diarrhea, irritable bowel syndrome
                    and
                    small bowel cancer. Prior to the development of capsule endoscopy,
                    there
                    was no convenient and effective method for visualizing the lumen
                    of the
                    entire small intestine. In 2006, the American Society of Gastrointestinal
                    Endoscopy, or ASGE, published a guideline document, which recommends
                    capsule endoscopy of the small bowel as a first line test for
                    imaging
                    small bowel mucosa.
 13




•
                *Esophageal
                    disorders*.
                    GERD is the frequent backward flow, or reflux, of stomach contents
                    into
                    the esophagus due to an improperly functioning valve between
                    the stomach
                    and esophagus. Stomach acid, enzymes and bile irritate the esophagus
                    and
                    cause a wide range of symptoms and complications, most commonly
                    persistent, severe heartburn and chest pain. According to the
                    AGA study
                    mentioned above, there are approximately 9 million physician
                    office visits
                    each year diagnosing GERD. If left untreated, GERD can lead to
                    ulceration
                    of the esophagus, respiratory problems or esophageal cancer.
                    It is
                    estimated that approximately 10% to 15% of patients with GERD
                    symptoms
                    have Barrett’s esophagus, a pre-cancerous condition with an associated
                    risk for esophageal cancer. Another serious disorder of the esophagus
                    is
                    known as esophageal varices, a life-threatening complication
                    caused by
                    severe bleeding from small veins in the esophagus, usually associated
                    with
                    chronic liver disease. Thus, it is very important to screen patients
                    with
                    cirrhosis of the liver for the presence of varices and to monitor
                    those
                    patients with known varices. We believe that the PillCam ESO
                    capsule may
                    provide an effective method for screening for and detecting esophageal
                    varices.•
                *Colon
                    Disorders*Colonic
                    disorders, including colorectal cancer, inflammatory bowel disease
                    such as
                    ulcerative colitis and Crohn’s colitis, diverticulosis, and lower
                    gastrointestinal hemorrhage, account for significant mortality.
                    According
                    to data from the American Cancer Society, in the United States
                    colon
                    cancer is the third most common cancer diagnosed in both men
                    and women and
                    the second leading cause of death from cancer. It was recently
                    estimated
                    that each year approximately 150,000 Americans are diagnosed
                    with this
                    cancer and approximately 50,000 Americans die from colorectal
                    cancer.
                    Importantly, most colorectal cancer cases and deaths are thought
                    to be
                    preventable with screening tests that allow for the detection
                    and removal
                    of precancerous lesions. Despite the ever-growing body of evidence
                    supporting the benefits of colorectal cancer screening, most
                    eligible
                    average-risk Americans do not undergo any form of screening,
                    including
                    conventional screening colonoscopy. Numerous reasons have been
                    postulated
                    to explain this including patient fears, presumed procedural
                    discomfort,
                    and embarrassment. The PillCam COLON capsule was developed for
                    use as a
                    safe, minimally invasive, non-sedation requiring, patient-friendly
                    modality to visualize the colon and rectum.




***Current
      Detection Methods for Gastrointestinal Disorders***




The
      most common methods for detection of gastrointestinal disorders, including
      disorders of the small intestine, are endoscopy and radiological imaging.




*Traditional
      Endoscopy*




A
      traditional endoscope is a device consisting of a flexible tube and an optical
      system. There are several types of endoscopic procedures used to identify
      disorders in the gastrointestinal tract. The basic endoscopic procedures
      available include:




•
              *Upper
                  endoscopy.*In
                  upper endoscopy, the physician inserts an endoscope, which is an
                  approximately 3.5 foot long tube, through the patient’s mouth. In
                  esophagogastroduodenoscopy, or EGD, the gastroscope passes down
                  the
                  esophagus and into the stomach and duodenum for visual examination.
                  In
                  esophagoscopy, only the esophagus is viewed.•
              *Colonoscopy.*In
                  colonoscopy, the physician inserts a colonoscope, which is an
                  approximately 5.5 foot long endoscope, into the patient’s colon through
                  the anus. Colonoscopy is the primary method for detecting disorders
                  of the
                  colon and is the standard screening tool for early detection of
                  colon
                  cancer.•
              *Push
                  enteroscopy.*Push enteroscopy involves the insertion of an approximately six
                  foot long
                  push enteroscope into the mouth. Due to the length and curvature
                  of the
                  small intestine, push enteroscopy enables the physician to view
                  only the
                  first one-third of the small intestine. The procedure is lengthy
                  and
                  difficult to perform for both the physician and the patient.•
              *Double
                  balloon endoscopy*.
                  This technique involves the use of a balloon at the end of a special
                  enteroscope camera and an overtube, which is a tube that fits over
                  the
                  endoscope, and which is also fitted with a balloon. This technique
                  allows
                  viewing the entire small bowel and therapeutic intervention once
                  pathology
                  is identified. However, it requires sedation and is skill- and
                  time-
                  intensive.




A
      traditional endoscope can perform both diagnostic and limited treatment
      functions. In a traditional endoscopic procedure, the physician is able to
      control the movement of the endoscope through the gastrointestinal tract, to
      stop the endoscope and examine more closely a particular area in the
      gastrointestinal tract and to take a tissue sample or seal a bleeding site
      using
      the endoscope. However, traditional endoscopy has some risks and limitations,
      including the following:




14




•
              *Requires
                  sedation.*Due to the need to insert a tube through the mouth or anus, a traditional
                  endoscopic examination typically requires sedation of the patient
                  due to
                  patient discomfort.•
              *Involves
                  potential complications.*Potential complications of traditional endoscopic procedures include
                  difficulty in breathing while the tube is inserted in the mouth,
                  perforation or tearing of the intestinal wall, post-procedural
                  infection
                  and vomiting, abdominal swelling, sore throat, diarrhea and
                  cross-contamination resulting from inadequate disinfection of endoscopes.•
              *Causes
                  patient anxiety, discomfort and pain.*Many patients are unwilling to undergo traditional endoscopic procedures
                  due to the pain and discomfort associated with having a tube inserted
                  through the mouth or anus.•
              *Requires
                  substantial time commitment.*Patients undergoing a traditional endoscopic procedure are required
                  to
                  remain in the physician’s office or hospital during the procedure. In
                  addition, the effects of the sedation cause the patient to be inactive
                  for
                  several hours following the
                  procedure.




*Radiological
      Imaging*




Radiological
      imaging is a commonly used method for initial detection of the small intestine
      and other parts of the gastrointestinal tract. Radiological imaging is used
      for
      detection of disorders of the esophagus only in limited situations,  generally
      where gross structural lesions are suspected. During a radiological imaging
      examination, the patient swallows a contrast medium (such as barium), which
      is a
      dense liquid that coats the internal organs and makes them appear on x-ray
      film.
      The procedure produces a series of black and white x-ray images of the lumen,
      or
      cavity, of the small intestine.




A
      more detailed examination, the double contrast small intestine enema, or
      enteroclysis, requires insertion of a tube through the mouth or nose, which
      is
      then pushed through the stomach and duodenum. High density barium and then
      methyl cellulose, a gel-like material used to expand the intestine, are injected
      through the tube into the patient’s small intestine prior to a series of x-ray
      exposures.




Radiological
      imaging also has risks and limitations as a diagnostic tool, including the
      following:




•
              *Cannot
                  provide direct imaging of the mucosa*.
                  Radiological imaging does not provide a detailed view of soft tissue,
                  including the mucosa, or internal layer of the gastrointestinal
                  tract. In
                  addition, radiological imaging does not provide clear visualization
                  of
                  ulcerations or flat malignant lesions. A lesion must have a certain
                  mass
                  and a distinguishable shape in order to be detected by
                  radiology.•
              *Has
                  difficulty detecting small pathologies.*Radiological imaging has difficulty detecting smaller-sized disorders
                  or
                  pathologies (typically less than five millimeters in diameter).
                  Larger
                  pathologies of up to ten millimeters in diameter can also remain
                  undetected.•
              *Has
                  difficulty detecting strictures.*Radiological imaging has difficulty detecting strictures - which
                  are a
                  three dimensional phenomena, and with a two-dimensional image this
                  is not
                  easily detected and frequently misdiagnosed.•
              *Causes
                  patient discomfort.*Radiological imaging is uncomfortable for patients, requiring them
                  to
                  drink barium, which has an unpleasant chalky taste. A double contrast
                  procedure is even more uncomfortable due to the insertion of a
                  tube into
                  the body through the mouth or nose. These preparatory measures
                  can induce
                  vomiting, particularly in a double contrast procedure if the injected
                  contrast liquids return to the stomach. In elderly patients, the
                  passage
                  of barium can be difficult and can result in blockage requiring
                  the use of
                  disimpaction techniques. There is some morbidity associated with
                  barium
                  induced blockage in elderly patients.•
              *Exposes
                  patient to radiation.*Radiological imaging poses increased risks of exposure to ionizing
                  radiation for the patient. A double contrast procedure requires
                  three to
                  five times the amount of radiation to the patient. Tracking the
                  progress
                  of a disorder through repeated radiological imaging increases this
                  risk.




**The
      Given Imaging Solution**




The
      Given System features the PillCam capsule endoscope, a miniaturized video camera
      contained in a disposable capsule that is naturally ingested by the patient
      and
      delivers high quality color video images of the inside of the gastrointestinal
      tract in a painless manner. Capsule endoscopy with our PillCam capsules
      represents a fundamentally new approach to visual examination of the
      gastrointestinal tract and provides a solution to many of the shortcomings
      of
      other procedures by offering the following benefits:




•
              *Patient-friendly
                  procedure with no sedation*.
                  Capsule endoscopy provides a patient-friendly tool for the diagnosis
                  of
                  patients that present symptoms of suspected disorders of the small
                  intestine, the esophagus and the Colon. Procedures with the PillCam
                  capsules require no sedation and the capsules are easily ingested
                  by the
                  patient and do not use x-rays to produce images. Procedures with
                  PillCam
                  SB and PillCam ESO do not require significant patient preparation.
                  The
                  PillCam COLON procedure requires preparation and cleansing of the
                  colon
                  prior to ingesting the capsule, similar to colonoscopy. While this
                  preparation is unpleasant to the patient, the PillCam COLON procedure
                  itself, similar to other PillCam procedures, does not require sedation
                  or
                  the insertion of a tube into the body. We believe that this
                  patient-friendly solution may increase the number of patients who
                  undergo
                  diagnosis for gastrointestinal disorders of the small intestine,
                  the
                  esophagus and the colon, since existing methods have been intimidating
                  or
                  uncomfortable for many potential candidates.




15




•
              *Improved
                  or comparable diagnostic yield for PillCam SB and PillCam
                  ESO*.
                  The PillCam SB capsule is the only wireless test that provides
                  direct
                  imaging of the entire small intestine. By comparison, double balloon
                  endoscopy involves inserting a tube into the body, requires sedation
                  and
                  is skill- and time-intensive. Other methods provide access only
                  to
                  approximately the first third of the small intestine. As a result,
                  clinical trials demonstrate that the PillCam SB capsule has a
                  significantly higher diagnostic yield in detecting disorders of
                  the small
                  intestine when compared to other traditional modalities, including
                  push
                  enteroscopy and radiological imaging. Diagnostic yield means the
                  number or
                  percent of patients that had a diagnosis made using a specific
                  test. In
                  addition, as demonstrated through clinical studies and on-going
                  experience
                  with the Given System, a negative finding from the PillCam SB capsule,
                  unlike conventional small bowel diagnostic techniques, has significant
                  diagnostic value as it may allow physicians to rule out the existence
                  of
                  certain suspected abnormalities based on this finding thereby avoiding
                  the
                  need to engage in additional costly or inconvenient diagnostic
                  procedures.
                  Data from clinical trials reviewed by the FDA for clearing PillCam
                  ESO
                  demonstrated that the ability of the Given System to assist the
                  physician
                  in detecting disorders of the esophagus is comparable to that of
                  traditional endoscopy.Results
                  from initial clinical studies with the PillCam COLON suggest that
                  it is a
                  promising modality for evaluating the colon. While we believe that
                  the
                  PillCam COLON procedure will eventually provide a less invasive
                  alternative to traditional colonoscopy, further capsule and procedure
                  development as well as significant additional clinical data to
                  support the
                  use of this capsule as a screening tool are necessary before we
                  can
                  realize this market opportunity to its fullest potential. In the
                  meantime,
                  we market PillCam COLON in Europe for visualization of the colon
                  and as a
                  complementary tool to traditional colonoscopy in patients who are
                  unable
                  or unwilling to undergo colonoscopy or other colon visualization
                  techniques. However, to date we have not been successful in obtaining
                  FDA
                  clearance to market this capsule in the United States.•
              *Administered
                  on an outpatient basis*.
                  The PillCam capsule is generally administered in an outpatient
                  setting
                  with a brief visit to the physician’s clinic or hospital. In the case of
                  the PillCam SB capsule, the patient can go about his or her daily
                  routine
                  as the capsule transmits images and other data to the portable
                  data
                  recorder. In the case of the PillCam ESO capsule, the procedure
                  can be
                  completed in a short visit to the physician’s office. We believe the Given
                  System offers a significant opportunity for gastroenterologists
                  and
                  endoscopy departments to expand their business by increasing the
                  number of
                  procedures performed at their office or facility.•
              *Detects
                  small pathologies*.
                  Unlike radiological imaging procedures, the PillCam video capsule
                  provides
                  direct visualization of the intestinal mucosa which allows detailed
                  (up to
                  0.1 millimeter) visualization of small pathologies. This increases
                  the
                  possibility of detecting and diagnosing at an early stage, pathologies
                  that might otherwise go undetected.•
              *Natural
                  passage requires no insufflation*.
                  Many traditional endoscopic procedures require insufflation, or
                  the
                  forcing of air into the gastrointestinal tract. This process can
                  cause
                  considerable patient discomfort. The Given System does not require
                  insufflation because the PillCam capsule is ingested and moves
                  with the
                  natural contractions of the digestive tract. The absence of insufflation
                  allows the PillCam capsule to capture images of the gastrointestinal
                  tract
                  in its normal physiological state. This approach, called “physiological
                  endoscopy,” allows the physician to clearly view the
                  mucosa.•
              *Provides
                  convenient digital reporting, storage and remote consulting
                  capabilities*.
                  The physician can review the video produced by the Given System
                  without
                  seeing the patient or having him or her remain in the office or
                  clinic
                  during the review, thereby providing the physician with greater
                  flexibility. In addition, the RAPID software includes various features
                  that enhance the physician’s efficiency and productivity, such as
                  innovative display methods for faster review, localizing findings,
                  help in
                  identifying anatomical landmarks for easy orientation, managing
                  images and
                  patient information, reporting modules and convenient options for
                  sending
                  still images or short video files to the patient file, to the referring
                  physician or a colleague for consultation. Some of these features
                  are
                  proprietary and covered by patent applications, which we believe
                  add an
                  additional competitive advantage as physicians become more comfortable
                  using these functions.•
              *Provides
                  a cost-effective diagnostic tool*.
                  We believe that the PillCam SB capsule endoscopy procedure is more
                  cost-effective from a third party payor perspective than traditional
                  methods for imaging the gastrointestinal tract. With respect to
                  the
                  PillCam SB capsule for the small bowel, two economic outcomes studies
                  reported by the Office of Health Policy and Clinical Outcomes of
                  the
                  Thomas Jefferson University in Philadelphia concluded that diagnosing
                  small intestinal bleeding or Crohn’s disease using the PillCam SB capsule
                  procedure is cost-effective from a third party payor perspective.
                  We
                  believe that the Given System may result in additional cost savings
                  due to
                  the reduction in physician resources and facility costs permitted
                  by the
                  outpatient nature of the PillCam SB capsule procedure, its higher
                  diagnostic yield – in the case of the PillCam SB capsule – and
                  the potential for earlier diagnosis of disorders, allowing earlier
                  therapeutic intervention or other change in patient
                  management.




16




The
      Given System also has some limitations. The PillCam capsule moves naturally
      through the gastrointestinal tract; consequently, the capsule’s passage is not
      controlled by the physician who cannot stop or steer the capsule for close-up
      detailed viewing of suspected disorders. In addition, the Given System, unlike
      a
      traditional endoscope, cannot take biopsies or be used for minor surgical
      procedures, such as cauterizing bleeding sites in the gastrointestinal tract.
      While endoscopes may be used in patients with obstructions or strictures in
      the
      gastrointestinal tract, the PillCam capsule may not pass naturally through
      the
      gastrointestinal tract of patients with obstructions or strictures, and
      accordingly the Given System is not recommended for use in these
      patients.




**Our
      Products**




The
      Given System consists of three components:




*PillCam
      capsules.*




The
      PillCam capsules are miniaturized disposable color video cameras encased in
      a
      plastic shell, which incorporate one or more specially developed imaging devices
      based on complementary metal oxide semiconductor, or CMOS, technology. Other
      components include optics, white-light emitting diodes for illumination, an
      application-specific integrated circuit device for control and image
      transmission, low-power silver oxide batteries, an antenna and other discrete
      electronic components.




Until
      their use, the PillCam capsules are stored in a hermetically sealed package.
      Before the patient ingests a capsule, the package is opened and the removal
      of
      the capsule from the package triggers a switch that activates the capsule.
      After
      the patient ingests the PillCam capsule with a small amount of water, the
      capsule passes naturally through the gastrointestinal tract. The PillCam
      capsules are excreted naturally from the body, usually within a day or two,
      without pain or discomfort.




We
      are currently selling the following PillCam capsules:




•
              *PillCam
                  SB*–
                  Our initial capsule for the Given System was PillCam SB video capsule
                  for
                  visualization of the small intestine. The PillCam SB capsule measures
                  11mm
                  x 26mm and transmits images at a rate of two images per second
                  for
                  approximately eight hours, resulting in approximately 50,000 images,
                  at
                  which time the operation is stopped and recording ceases. After
                  ingesting
                  the capsule at the physician’s office, during the procedure, the patient
                  can continue his or her daily routine as the capsule transmits
                  to a
                  portable data recorder and then return the data recorder to the
                  physician’s office for review and diagnosis. The PillCam SB capsule is
      used for a variety of conditions of the small intestine,
                  including obscure
                  bleeding, suspected Crohn’s disease, iron deficiency anemia and suspected
                  small bowel tumors. In late 2007, we began marketing our newest
                  version of
                  the small bowel capsule, PillCam SB 2. This new capsule has improved
                  optics, illumination and field of view and operates at a rate of
                  two
                  frames per second. We believe that the diagnostic capabilities
                  of PillCam
                  SB 2 are better than the diagnostic capabilities of the first generation
                  PillCam SB capsule.•
              *PillCam
                  ESO*–
                  In November 2004, we received FDA clearance for our first generation
                  of
                  the PillCam ESO capsule for visualization of the esophageal mucosa.
                  The
                  PillCam ESO capsule contains an imaging device and light source
                  at both
                  ends of the capsule. The patient ingests the PillCam ESO capsule
                  in the
                  physician’s office. In early 2008, we began marketing our newest version
                  of our esophageal capsule, PillCam ESO 2. PillCam ESO 2 has improved
                  optics and illumination compared to the first PillCam ESO and a
                  frame rate
                  of up to 18 frames per second. We believe that the PillCam ESO
                  2 capsule
                  provides physicians better image quality and a more precise view
                  of the
                  esophageal mucosa and suspected pathologies, which in turn are
                  more likely
                  to result in improved diagnostic capabilities compared to the first
                  generation of the PillCam ESO capsule.•
              *PillCam
                  COLON*–
                  PillCam COLON is the third video capsule we developed. We began
                  selling
                  this product in Europe in the second half of 2007, following receipt
                  of
                  the CE mark permitting us to market this product in the European
                  Union.
                  Currently, this product does not have FDA clearance for marketing
                  in the
                  United States. We plan to increase sales of this product gradually,
                  following completion of additional clinical trials that are underway
                  in
                  Europe. The PillCam COLON capsule measures 11 mm by 31 mm, slightly
                  larger
                  than PillCam SB and PillCam ESO. Since the lumen of the colon is
                  wider
                  than the small bowel and it is highly compartmentalized, we have
                  integrated new features into PillCam COLON. The capsule has tiny
                  cameras
                  at each end which capture four images a second for up to 10 hours.
                  Similar
                  to other methods of colon visualization, the PillCam COLON capsule
                  procedure includes a colon cleansing and preparation procedure,
                  as well as
                  additional prokinetic agents to enhance capsule propulsion. The
                  platform
                  for PillCam COLON includes the same components as PillCam SB and
                  PillCam
                  ESO, including a sensor array and data recorder. Upon completion
                  of the
                  procedure, the physician downloads the recorded data to a RAPID
                  workstation to review the images.•
              *AGILE
                  Patency System –*The
                  AGILE Patency System consists of the AGILE Patency capsule, a dissolvable
                  capsule the same size as the PillCam SB with a radio frequency
                  identification (RFID) tag packed in a lactose and barium powder.
                  The AGILE
                  Patency capsule is ingested by the patient and allows physicians
                  to
                  confirm free passage of a PillCam capsule in a patient’s gastrointestinal
                  tract.




17




*Data
      recorder and sensor array.*




After
      ingestion by the patient, the PillCam capsule transmits information from the
      body to a proprietary wireless data recorder through an array of antennae,
      or
      sensor array, that are secured with adhesive pads to the abdomen, in the case
      of
      a procedure performed with a PillCam SB or a PillCam COLON capsule, or to the
      chest, in the case of a procedure performed with a PillCam ESO capsule. The
      data
      recorder is worn on a belt around the waist of the patient for the duration
      of
      the examination.




*Computer
      workstation with proprietary RAPID software.*




After
      the recording ceases, the data recorder is returned to the physician’s office at
      the patient’s convenience, where it is connected to the RAPID computer
      workstation, our capsule endoscopy platform, for transfer of the data captured
      during the test. Our proprietary RAPID software then processes the data received
      from the capsule. The RAPID software also includes a number of proprietary
      algorithms relating to the speed of processing imaging data, as well as to
      the
      visual presentation of this data. The Given workstation presents a video stream
      for viewing by the physician. The physician can review the video carefully,
      save
      specific images for the patient file, or attach the thumbnail images and the
      short video file to an e-mail in order to send to the referring physician or
      consult with a colleague. The “Multiview” feature of our RAPID software provides
      users with a simultaneous viewing mode of two or four consecutive images,
      thereby accelerating review speed. In addition, the RAPID software contains
      a
      proprietary algorithm that we developed called SBI, or suspected blood
      indicator, which automatically marks images that correlate with the existence
      of
      suspected bleeding. In addition, we provide our users with the RAPID Reader,
      which is a narrowed version of the RAPID Workstation software that can be
      installed on a standard personal computer, allowing the physician to review
      RAPID videos at any time and place as convenient.




Important
      features of our RAPID software include:




•
              “Automatic
                  Mode,” which uses advanced software resulting in more efficient review
                  of
                  the video;•
              “Quick
                  View,” which allows fast preview of the video and highlights potentially
                  interesting images in the video stream; and•
              Image
                  atlas, which compares the on-screen case image with known reference
                  images
                  stored in the database. The reference images can be searched by
                  findings,
                  diagnosis, or using Capsule Endoscopy Structured Terminology, or
                  CEST.




In
      the United States and Europe we also market our RAPID Real Time Viewing device.
      This is a dedicated handheld device with our RAPID Real Time software that
      enables real-time viewing during a capsule endoscopy procedure with our PillCam
      capsules. The RAPID Real Time Viewing device also allows the physician to
      activate the data recorder and transfer data from the data recorder to a data
      storage device, like a disk-on-key. These features enable remote customer sites
      that do not have access to a permanent workstation to administer our PillCam
      capsules to patients and then deliver the results to a central location for
      processing and interpretation.




*Warranty
      and Service*




Our
      standard warranty for our PillCam capsules is typically 18 months from the
      date
      of manufacture. Our standard warranty for other components of the Given System
      normally extends for a period of one to two years from the date of the first
      installation at the customer’s location with the exception of the Sensor Array,
      which carries a limited warranty of six months from installation or 10 months
      from delivery. Generally, no warranty is provided more than 16 months from
      the
      date of shipment of the Given System to the customer. During the warranty
      period, we are obligated to repair or replace, at our election, every defective
      product.




When
      a customer reports a problem with the Given System, first line service is
      normally provided by our own technical personnel in the territories in which
      we
      operate directly, such as the United States, Germany, France and Australia.
      In
      territories in which we operate through a distributor, the distributor is
      responsible for providing first line service. If our personnel in the field
      or
      our distributors are not able to resolve the problem, the defective part is
      shipped to our main facility in Israel for repair or replacement. Often, the
      defective part is replaced promptly out of a stock of spare parts we maintain
      in
      all of our direct territories. Occasionally, we are able to resolve service
      calls using remote access software that allows us to provide maintenance and
      support services for our products from a remote location, including our
      distributor’s office, through a telephone line.




When
      the warranty expires, our customers are offered the opportunity to sign a
      post-sale customer support contract with us. Under this contract, the customer
      pays a fixed amount per year in consideration for receiving our maintenance
      and
      support services. As of December 31, 2007, we had an installed base of nearly
      4,250 systems worldwide, of which 1,999 were under warranty and 660 were covered
      by a service contract.




18




**Clinical
      Studies**




Clinical
      studies are an important part of our product development and market development
      activities. We use clinical studies during product development to optimize
      the
      development process. Most of our clinical studies are conducted for market
      development purposes. With these trials we strive to demonstrate the clinical
      and economic benefits of our products to support their use by physician and
      reimbursement coverage by third party payers. Many of the investigators
      conducting clinical studies relating to capsule endoscopy using our products
      have presented their results at major gastroenterology meetings or submitted
      them for publication in peer-reviewed medical journals. Accordingly, the number
      of presentations and publications of studies evaluating the Given System is
      constantly growing and hundreds of articles, editorials and case reports have
      been published in peer reviewed journals to date. These papers provide the
      results of clinical studies as well as accumulated experience from on-going
      use
      of the Given System for a range of indications. We believe that these
      presentations and publications assist our marketing and educational efforts
      and
      support our efforts to obtain new reimbursement coverage policies and expand
      existing policies.




Examples
      of our clinical studies activity
      include:




*PillCam
      SB* .
      To
      demonstrate the clinical and economic benefits of the Given System, the PillCam
      SB capsule has been tested in clinical studies sponsored by us and by
      independent third parties. Our clinical studies program is conducted in a number
      of countries, primarily Australia, France, Germany, Israel, Italy, the
      Netherlands, Spain, Sweden, the United Kingdom, Japan and the United States.
      Initially, our clinical studies program focused on patients suffering from
      suspected bleeding in the small intestine. Subsequent clinical trials have
      focused more on evaluating the performance of the PillCam SB capsule in
      detecting other disorders of the small intestine, primarily suspected Crohn’s
      disease, and also tumors, malabsorption (such as celiac disease), mucosal
      injuries induced by long-term use of NSAIDs (non-steroidal anti-inflammatory
      drugs, such as aspirin) and the performance of the PillCam SB capsule in
      children over the age of ten.




The
      results of these clinical studies to date have demonstrated that capsule
      endoscopy with our PillCam SB has a comparable or higher diagnostic yield in
      the
      detection of disorders of the small intestine than comparable methods, such
      as
      push-enteroscopy and radiological examinations, such as barium follow-through
      and computerized tomography (CT). In 2007, we initiated a clinical study that
      examines the efficacy of PillCam SB capsule in patients with suspected
      inflammatory bowel disease. We also initiated studies to examine a possible
      role
      of the PillCam SB capsule in Cystic Fibrosis and Ulcerative Colitis.




*PillCam
      ESO* . We
      have
      recently completed and submitted for publication the results of a multi-center,
      multinational clinical study evaluating the PillCam ESO for the detection of
      esophageal varices. In this study, our first generation PillCam ESO capsule
      was
      used. The authors stated that the minimal invasiveness, good tolerance and
      good
      agreement of capsule endoscopy with the traditional modality of
      Esophageal-Gastro-Duodonoscopy, or EGD, might increase adherence to screening
      programs. We
      believe that this conclusion suggests a more important role for PillCam ESO
      in
      the management of the treatment of cirrhotic patients and may contribute to
      further reimbursement coverage and increased sales of the PillCam ESO capsule.
      In 2008, we plan to conduct a multicenter study in the United States with our
      new PillCam ESO 2 capsule, to evaluate the effectiveness of this capsule in
      detecting Suspected Barrett’s, a pre-cancerous esophageal condition that may
      develop in patients suffering from Gastro Esophageal Reflux Disease, or GERD,
      compared to standard EGD.




*PillCam
      COLON* .
      Following encouraging results of two small preliminary studies in 2006, in
      2007
      we conducted a large multi-center, study with PillCam COLON in five European
      countries. This study was designed to evaluate the use of PillCam COLON in
      the
      visualization of the colon. The study concluded that PillCam COLON capsule
      endoscopy is a promising new modality that in the future may challenge
      traditional methods used today for colorectal cancer screening. We believe
      this
      is the biggest market opportunity for the PillCam COLON capsule. According
      to
      guidelines of professional associations in the United States, it is estimated
      that approximately 12.5 million people over the age of 50 or that are otherwise
      at increased risk for colon cancer need to be screened each year in the United
      States, yet patient compliance is only around 50 percent. Patient compliance
      rates in Europe are believed to be even lower than this. We believe that the
      PillCam COLON procedure will eventually provide a less invasive alternative
      to
      traditional colonoscopy. However, further capsule and procedure development
      as
      well as significant additional clinical data to support the use of this capsule
      as a screening tool are necessary before we can realize this market opportunity.
      Our clinical study activities relating to the colon also include trials designed
      to optimize the colon cleansing and preparation procedure that is an important
      factor in a successful examination of the colon. In the meantime, we market
      PillCam COLON in Europe for visualization of the colon in patients who are
      unable or unwilling to undergo traditional colonoscopy or in cases of incomplete
      colonoscopies. To date, we have not been able to receive FDA clearance to market
      this capsule in the United States.




The
      PillCam capsules are not recommended for use by patients who have known or
      suspected gastrointestinal obstructions, narrowing, and certain other
      abnormalities, such as swallowing disorders. In patients with unsuspected or
      unknown obstructions, narrowing or certain other abnormalities of the
      gastrointestinal tract, the PillCam capsules can potentially become blocked
      from
      natural excretion, requiring hospitalization, and in some cases surgery, to
      remove it. According to the 2005 ICCE consensus report that was published in
      November 2005 in the peer-review journal Endoscopy, which defines practice
      guidelines and protocols for the use of both PillCam SB and PillCam ESO capsules
      by gastroenterologists, the rate of capsule retention depends on the indication.
      The rate of retention in patients with obscure gastrointestinal bleeding is
      1.5%
      (15 out of 1089 cases); in patients with known Crohn’s disease is 5% (4 out of
      80 cases); and in patients with suspected Crohn’s disease is 1.4% (1 out of 71
      cases). The consensus report stated that the PillCam capsule has been reported
      to identify areas of narrowing of the gastrointestinal tract and there is
      nothing to indicate that the capsule itself is creating any obstructions or
      narrowing. The consensus report also stated that, while there is no accepted
      method of completely avoiding capsule retention, it is clear that obtaining
      a
      good medical history is the best single method. Patients with abdominal pain,
      distension and nausea should be suspected of having a potential for capsule
      retention. Other risk factors include known Crohn’s disease and a history of
      chronic NSAID use that is not necessarily current. A history of small bowel
      obstruction, previous small bowel resection or previous abdominal surgery are
      not in and of themselves indicators of probable retention. Once retention has
      been diagnosed, only endoscopic and surgical intervention have been shown to
      be
      effective for removal of the capsule. Surgical intervention is also recommended
      by the consensus report because it allows removal and treatment of the pathology
      that resulted in the capsule retention in the first place. There is no available
      data on the success of medical therapies for retention, such as initiating
      a
      course of steroids, stopping NSAIDs, or using prokinetics to aid in passing
      the
      capsule.




19




**The
      Patency System**




We
      expect that the availability of the AGILE Patency System will contribute to
      an
      increased use of the PillCam SB capsule in the diagnosis of suspected or known
      gastrointestinal obstructions or narrowing, such as suspected or known Crohn’s
      disease.




The
      AGILE Patency System consists of the AGILE Patency capsule, a dissolvable
      capsule the same size as the PillCam with a radio frequency identification
      (RFID) tag packed in a lactose and barium powder. The AGILE Patency capsule
      is
      ingested by the patient and allows physicians to confirm free passage of a
      PillCam capsule in a patient’s gastrointestinal tract. The reusable component of
      the AGILE Patency System is a hand-held Patency Scanner, which detects the
      signal from the RFID tag. If the scanner indicates that the tag is no longer
      in
      the gastrointestinal tract, patency has been established and the patient can
      ingest a PillCam capsule without fear of impaction in a stricture. If the
      scanner indicates that the tag is located in the patient’s body, an obstruction
      preventing the passage of the PillCam capsule may exist. If the AGILE Patency
      capsule remains in the body, it starts dissolving after 30 hours into small
      fragments that are naturally excreted. Since  the
      capsule contains barium, in those instances where the AGILE Patency capsule
      is
      not excreted after ingestion, the physician may detect its location within
      the
      body using fluoroscopy.




**Marketing
      and Distribution**




** Beginning
      in 2007, our sales and marketing operations were organized in three geographical
      regions: Americas (United States, Canada and Latin America); EMEA (Europe,
      Middle East and Africa) and Asia-Pacific (Japan, Australia and the rest of
      Asia). This organization enables us to focus on the particular needs of each
      region.




We
      market the Given System using either direct or indirect sales, depending on
      the
      potential size of the market and local market conditions. Currently, we market
      the Given System directly in Australia, France, Germany, the United States
      and
      Israel. In the United States, which accounted for 70% of our revenues in 2006
      and 64% of our revenues in 2007, we market our products primarily through our
      wholly-owned subsidiary, Given Imaging, Inc., located in Duluth, Georgia. As
      of
      December 31, 2007, we had a direct sales force in the United States of
      approximately 71 field sales representatives. We have approximately 16 field
      sales representatives in the other jurisdictions in which we directly market
      the
      Given System.




In
      addition to our direct markets, we market and sell our products in more than
      60
      other countries through local distributors or representatives. Sales to our
      local distributors worldwide accounted for 21.8% of our revenues in 2007. As
      part of the cooperation agreement we signed with Fujinon Corporation in March
      2007, we began collaborating with Fujinon in the distribution of our products
      in
      a few countries. For example, Fujinon now distributes our products in China
      where their presence is more significant than ours. For more information on
      our
      agreement with Fujinon, see under the heading “Competition” in this Item 4.
      Under standard terms of our distribution agreements, we generally grant to
      one
      distributor in each particular country or region the right to market the Given
      System for a defined period. During the contract period, the distributor is
      required to meet minimum sales targets set out in each distribution agreement.
      We may, in our sole discretion, upon prior written notice, terminate a
      distribution agreement with a distributor in the event that a distributor fails
      to meet its minimum sales targets. To date, we have changed a number of our
      distributors due to failure to meet minimum sales targets and other reasons.
      We
      have the right not to renew a distribution agreement if we are unable to reach
      an agreement with the distributor as to minimum sales targets during any renewal
      period. Each distributor is responsible for obtaining and maintaining any
      regulatory approvals or registrations required to sell the Given System in
      that
      distributor’s sales territory. Each distributor is also responsible for
      preparing and submitting to us for our approval a marketing plan for the Given
      System in that distributor’s sales territory. After receiving our approval of
      the marketing plan, each distributor is responsible for implementing the
      marketing plan, including, participating in local and national trade shows,
      conducting education and training sessions and conducting sponsored marketing
      clinical trials in its sales territory.




In
      Japan, we operate through Given Imaging, K.K., our Japanese subsidiary, that
      was
      established as a joint venture with Marubeni Corporation and Suzuken Co., Ltd.
      to commercialize the Given System in Japan. Marubeni is one of Japan’s largest
      trading companies and Suzuken is one of Japan’s largest pharmaceutical
      distributors. To date, Marubeni and Suzuken together invested an aggregate
      of
      $9.0 million in Given Imaging K.K. in consideration of an aggregate 49%
      interest. We retain a 51% controlling interest. In addition, Suzuken has been
      appointed by Given Imaging K.K. as its exclusive distributor in Japan. We
      received regulatory clearance to market our RAPID workstation and PillCam SB
      capsule in Japan in April 2007. Additionally, effective October 1, 2007,
      Japanese authorities announced initial reimbursement coverage for procedures
      using our PillCam SB capsule for small bowel indications with obscure bleeding.
      This reimbursement covers the entire adult population in Japan. Following these
      developments, we expect that our business in Japan will significantly contribute
      to our expected growth in 2008. For more information regarding our business
      in
      Japan, see “Item 5 - Operating Results.”




20




Most
      of our revenues come from recurring sales of our PillCam capsules. Our marketing
      strategy in our mature and educated markets in the United States, Europe and
      Australia focuses on increasing the utilization of PillCam capsules by each
      account and consequently increasing capsule reorders. We seek to achieve this
      by
      providing a complete platform for capsule endoscopy that may be used for
      diagnostic purposes in more than one area of the gastrointestinal tract,
      frequently visiting our customers and maintaining a closer relationship with
      them, educating them about updated data on the clinical and economic benefits
      of
      our products and enhancing the operating efficiencies of the Given System.
      In
      new markets, such as Japan, our initial focus is on driving the placement of
      Given Systems in order to expand our market penetration in gastroenterology
      physician offices and gastroenterology departments within hospitals. At the
      same
      time, we do market development activities, such as, clinical trials, working
      with payers to obtain appropriate reimbursement and educational activities
      with
      the purpose of defining and expanding the market for the PillCam ESO and PillCam
      COLON capsule in territories in which these products have regulatory clearance
      so that we are able to have the full benefit of the Given platform.




The
      clinical benefits of capsule endoscopy and its place in routine practice
      management are demonstrated in the ICCE consensus reports. The ICCE is an annual
      scientific meeting dedicated to presentations and discussions of the
      most  recent
      advances in the field of capsule endoscopy. This annual conference serves as
      a
      basis for establishing a community of physicians who utilize the Given System
      and accelerates the dissemination of new clinical data. In ICCE 2005 a group
      of
      gastroenterology opinion leaders from around the world issued consensus reports,
      which define practice guidelines and protocols for the use of both PillCam
      SB
      and PillCam ESO by gastroenterologists in several disease states. These
      consensus reports were developed in response to the need to formalize practice
      guidelines for using capsule endoscopy. The consensus reports focused on five
      areas: gastrointestinal bleeding, inflammatory bowel disease, celiac disease,
      use of bowel preparations and prokinetics, and esophageal capsule endoscopy.
      The
      consensus reports were published in the October 2005 issue of Endoscopy, the
      official, peer-reviewed publication of the European Society of Gastrointestinal
      Endoscopy (ESGE) and an update was published in 2007. This update includes
      practice guidelines for using capsule endoscopy in the detection of small bowel
      tumors and expanded definitions of disease states such as iron deficiency anemia
      and suspected Crohn’s disease. We view the consensus reports as a significant
      tool in our marketing activities and we believe the reports will help us
      establish capsule endoscopy as a standard practice worldwide. In 2007, we held
      one ICCE conference in the United States and a second in Europe.




In
      order to drive strong growth in the future, we need to demonstrate and convince
      gastroenterologists that the Given System fits within their normal practice
      routines. Our newest version, RAPID 5.0, which was cleared for marketing in
      the
      United States in 2007, includes features that we believe significantly improve
      physicians’ reading efficiency and diagnostic confidence, which we expect will
      drive physicians to incorporate capsule endoscopy into their daily routine.
      We
      intend to continue investing in training and education of our customers to
      help
      them realize the full potential of our newest technology.




We
      also use trade shows and scientific meetings and offer workshops, courses,
      videos and seminars to educate our customers. In 2007, we participated in the
      Digestive Disease Week (DDW) and the annual meeting of the American College
      of
      Gastroenterology (ACG) in the United States, the United European Gastro Week
      (UEGW) in Paris, and numerous other regional, national and local trade shows.
      In
      addition, we held numerous regional and local courses and seminars and trained
      hundreds of physicians and nurses on capsule endoscopy and our products. We
      believe that these education programs helped also to expand the knowledge of
      participating physicians and provide an independent endorsement of the clinical
      value and importance of the Given System.




A
      variety of special interest groups related to capsule endoscopy have been formed
      in the United States, Europe and Japan to provide a dynamic forum to share
      knowledge, encourage research, and support the advancement of capsule endoscopy.
      One of the first groups formed was the Capsule Endoscopy Special Interest Group,
      which is sponsored by the American Society of Gastrointestinal Endoscopy, or
      ASGE. In Europe, a group of leading gastroenterologists gathered to form the
      European Capsule Endoscopy Group (ECEG). A similar group, the Capsule Endoscopy
      Study Group (CESG), was formed to complete the first clinical trials for capsule
      endoscopy in Japan and to educate the Japanese physician community on the
      practical application of capsule endoscopy. We believe that these groups in
      the
      United States, Europe and Japan provide an important contribution to the broad
      adoption of capsule endoscopy within these markets.




Since
      2005, we have sponsored the operation of a web portal dedicated to capsule
      endoscopy, www.CapsuleEndoscopy.org. This
      portal addresses gastroenterology professionals and provides training and
      educational materials and information, including a virtual image atlas, clinical
      papers, course information and discussion forums for a variety of clinical
      topics. Over 4,500 members from more than 106 countries have already enrolled
      at
      the site as of December 31, 2007.




In
      November 2007, we announced the termination of our exclusive sales
      representation, co-promotion and cooperation agreement with Ethicon
      Endo-Surgery, a Johnson & Johnson company, which was signed in May 2004.
      InScope, a business division of Ethicon Endo-Surgery had exclusive rights to
      market our PillCam ESO capsule in the United States during this period and
      performed sales and market development activities. Ethicon cited a shift in
      its
      strategic priorities within gastroenterology and other areas as the reason
      for
      ending the relationship. As a result of this termination, we regained full
      responsibility for the marketing and sale of the PillCam ESO capsule in the
      United States at the beginning of 2008. In accordance with the terms of
      termination, Ethicon will continue to fund existing clinical trial activities
      relating to this capsule until they are completed. For more information on
      the
      termination of the agreement with Ethicon and its consequences, see “Item 5 -
      Operating Results.”




21




Effective
      January 1, 2007, a permanent CPT Code was assigned to our PillCam ESO capsule
      by
      the American Medical Association, or AMA, and the Center for Medicare and
      Medicaid Services, or CMS, and, thereafter, we saw the first third-party
      reimbursement coverage for procedures with the PillCam ESO capsule to evaluate
      esophageal varices in patients diagnosed with cirrhosis of the liver, a chronic
      liver disease. As of December 31, 2007, approximately 31 million people in
      the
      United States had coverage for this indication. In 2007, we completed and
      submitted for publication the results of a large multi-center study to evaluate
      the use of PillCam ESO in the evaluation of esophageal varices in patients
      diagnosed with cirrhosis of the liver. The authors stated that the minimal
      invasiveness, good tolerance and good agreement of capsule endoscopy with the
      traditional modality of Esophageal-Gastro-Duodonoscopy, or EGD, might increase
      adherence to esophageal screening programs. We believe that this conclusion
      suggests a more important role for PillCam ESO in the management of the
      treatment of cirrhotic patients and may contribute to further reimbursement
      coverage and increased sales of the PillCam ESO capsule.




With
      the
      release of PillCam ESO 2, a growing body of positive clinical data, initial
      reimbursement coverage, and the benefit of a few years of market development
      activities, we believe we are well positioned to assume full responsibility
      over
      the marketing and sales of PillCam ESO from Ethicon and expect sales of this
      capsule to grow in 2008. However, sales of the PillCam ESO capsule are expected
      to remain low compared to sales of our PillCam SB capsule in the foreseeable
      future.




**Manufacturing**




We
      purchase both custom and off-the-shelf components from a number of suppliers.
      Except as described below, the components and services we purchase are available
      from more than one supplier.




*PillCam
      Capsules*




The
      manufacture of the PillCam capsules is a complex process involving a number
      of
      separate processes and components. Our manufacturing process consists primarily
      of assembling externally purchased components and sub-assemblies in an
      environmentally controlled area. After assembly, each PillCam capsule is
      inspected and packaged.




We
      manufacture the PillCam capsules at our facilities in Yoqneam, Israel. Two
      production lines are used to manufacture the PillCam SB capsule and one to
      manufacture the PillCam ESO capsule. We also have one production line which
      we
      use to manufacture the PillCam COLON and one production line for our AGILE
      Patency capsule. We have also installed at a facility in Ireland one
      semi-automated production line for the PillCam SB capsule for back-up purposes.
      We believe we have adequate capacity to manufacture capsules needed to satisfy
      estimated demand for the foreseeable future.




There
      are single-source suppliers for two key components of the PillCam capsule:




•
              A
                  U.S.-based supplier developed the imaging sensor that is integrated
                  into
                  the PillCam capsules based on our specifications and is also manufacturing
                  and supplying this imaging sensor exclusively to us. Under our
                  contract
                  with this supplier, it may not offer the imaging sensor as a standard
                  catalog part. In the event that this supplier ceases operations
                  or enters
                  into liquidation, we are entitled to receive all information necessary
                  to
                  manufacture the sensor upon the payment of reasonable royalties
                  to be
                  agreed upon with the supplier. We signed an amendment, effective
                  as of
                  June 2005, to our development and manufacturing agreement with
                  this
                  supplier and agreed that it will develop and manufacture an enhanced
                  version of the imaging sensor based on specifications that we provide.
                  This amendment also extended the initial term of the agreement
                  until
                  November 2012, with an option to extend that term by mutual agreement.
                  Under this amendment, we have agreed to specified minimum purchase
                  commitments, which we may terminate if the supplier fails to satisfy
                  agreed-upon performance criteria. We have agreed to purchase the
                  enhanced
                  sensor only from this supplier and the supplier has agreed to sell
                  the
                  sensor exclusively to us. The agreement permits the supplier to
                  disregard
                  the exclusive sales requirement if we materially breach the agreement
                  and
                  fail to cure such breach within a specified time.•
              A
                  Canadian company, supplies the transmitter that is integrated into
                  the
                  PillCam capsules. This company began supplying the transmitter
                  to us in
                  the fourth quarter of 2004. We currently expect that this Canadain
                  supplier will fulfill substantially all of our future needs for
                  transmitters for the PillCam capsules. The agreement includes non-compete
                  provisions prohibiting this supplier from selling the transmitters
                  to
                  other parties and, for a certain period of time following termination
                  of
                  the agreement, from transferring any of the intellectual property
                  and
                  design specifications associated with the development of the transmitter
                  to any potential competitors in our market. In July 2005, we agreed
                  with
                  this supplier that it will develop and manufacture an enhanced
                  version of
                  the transmitter based on specifications that we provide. In addition,
                  the
                  initial term of the agreement was extended until April 2012, subject
                  to
                  earlier termination in specified circumstances, with the option
                  to extend
                  annually thereafter for up to five
                  years.


22




We
      believe that we would be able to arrange substitute sources of supply for these
      two components within approximately one year of lead time. We believe that
      if we
      need to find a substitute source of supply, our inventory of components and
      finished products, together with our right to submit final purchase orders
      prior
      to termination of our agreements with these suppliers, are sufficient to
      continue sales of the Given System for all or most of the lead-time
      period.




We
      depend
      on single source suppliers with whom we do not have long term contracts for
      some
      other components necessary for the production of the Given System, such as
      the
      electrical circuit boards in our PillCam capsules and our computer workstations.
      For a description of the risks associated with our dependence on single source
      suppliers, see Item 3 - Risk Factors.




*Portable
      Data Recorder and Sensor Array*




We
      designed our portable data recorder, sensor array and their related accessories.
      Data recorders are manufactured externally and assembled and tested at our
      facilities. Sensor arrays are manufactured and assembled externally and are
      tested at our facilities. We have established a back-up facility outside Israel
      for testing workstations, data recorders and sensor arrays.




*Computer
      Workstation*




Our
      computer workstation is an off-the-shelf computer workstation pre-loaded with
      our proprietary RAPID software and integrated software that together allow
      us to
      service the workstation from remote locations through standard telephone
      connections.




*Manufacturing
      Facilities and Disaster-Preparedness*




In
      order to maintain our special tax benefits under our approved enterprise status,
      we are required to conduct our manufacturing and a majority of our
      subcontracting in specific locations in Israel. We currently plan to continue
      these practices as we increase our manufacturing capacity. For more information,
      see “Taxation and Government Programs-Israeli Tax Considerations and Government
      Programs — Taxation of Companies —Tax Benefits under the Law for the
      Encouragement of Capital Investments, 1959.”




We
      have also taken the following measures for disaster-preparedness:




•
              We
                  have installed one back-up semi-automatic production line at a
                  facility in
                  Ireland. Our backup line has the capacity to manufacture approximately
                  15,000 PillCam SB capsules per month. We believe that this line
                  can be
                  operational upon 60 days’ notice.•
              Our
                  practice is to hold inventory of critical components, such as the
                  imaging
                  sensor and the transmitter, for a period of time ranging from
                  approximately two to 18 months, depending on the risk profile we
                  allocate
                  to each critical component.•
              Our
                  practice is to hold approximately six weeks’ inventory of finished
                  products at our offices in Israel, Sydney, Hamburg, Paris and Duluth,
                  Georgia.•
              We
                  maintain back-up copies of all production files, original certifications
                  and all proprietary software masters outside of our facilities
                  in
                  Israel.




The
      FDA requires us to adhere to the Quality System Regulation which requires
      manufacturers to follow elaborate design, testing, control, documentation and
      other quality assurance procedures during the manufacturing process. In
      addition, we are required to comply with the Medical Devices Directive of the
      European Union requiring adherence to the International Standard Organization’s
      standard ISO 9001 and EN 46001, a European quality standard setting forth
      requirements for medical device manufacturers that are more specific than the
      general requirements specified in ISO 9001. These quality standards contain
      requirements that are generally similar to the Quality System Regulation
      required by the FDA.




**Intellectual
      Property**




An
      important part of our competitive strategy is to seek, when appropriate,
      protection for our products and proprietary technology through the use of
      various United States and foreign patents, trademarks, trade secrets and
      contractual arrangements. We intend to prosecute and defend our proprietary
      technology.




We
      acquired the rights to our first issued U.S. and Israeli patents in January
      1998
      under a technology purchase and license agreement with Rafael Armament
      Development Authority. See Item 7 “Major Shareholders and Related Party
      Transactions.” These patents expire in January 2014 and January 2015,
      respectively. In addition, we hold 89 additional issued patents in the United
      States, Australia, France, Germany, India, Israel, Italy, Japan, South Korea,
      Spain, Taiwan and the United Kingdom covering different elements of our
      technology.




23




These
      patents expire between 2017 and 2025. We also hold six utility models in Japan
      and nine utility models in Germany. As of December 31, 2007, we also had more
      than 500 pending patent applications worldwide based on approximately 180
      priority applications relating to various elements and functions of our product
      and its enhancements.




We
      seek to protect our product names and logos through trademark use and
      registration in the United States and other countries. GIVEN, GIVEN &
Design, PILLCAM, PILLCAM & Logo, PILLCAM IMAGING CAPSULE & Design,
      AGILE, RAPID, RAPID ACCESS, ORDERWIN, ORDER WHEN I NEED, FINGERS HOLDING A
      CAPSULE & Logo, FINGERS HOLDING PILLCAM CAPSULE & Logo, ICCE, ICCE
      Logos, and International Conference on Capsule Endoscopy are our trademarks
      or
      registered trademarks.




In
      March 2004, the U.S. Patent and Trademark Office, or USPTO, notified us that
      it
      would conduct a reexamination of some of the claims in our first U.S. patent
      known as the ‘531 patent, pursuant to a request submitted by Olympus
      Corporation. In April 2006, the USPTO issued a decision confirming the validity
      of 13 of the original 17 claims of the ‘531 patent. In September 2006, we
      appealed the rejection of the other four claims and this appeal is currently
      pending.




We
      currently are engaged in patent litigation against Olympus Corporation and
      its
      affiliates in the District Court for the Eastern District of Pennsylvania.
      For
      more information, see “Item 8 – Financial Information – Legal Proceedings.”




**Competition**




** Olympus
      Corporation has been marketing and selling a competing capsule endoscopy system
      in Europe and Australia since October 2005. In September 2007, Olympus received
      FDA clearance to market its capsule endoscopy system and small bowel capsule
      in
      the United States. According to public sources, Olympus is also seeking
      regulatory clearance to market its capsule endoscopy system in Japan. In
      addition to Olympus, a Chinese company is selling its capsule endoscopy systems
      in China at lower prices than our system and presented its systems at industry
      trade shows outside Asia. Finally, according to publicly available information,
      in 2007 a South Korean company began selling a competing system in Korea as
      well
      as in Europe and
      Australia.




We
      believe that we have a competitive advantage compared to Olympus and other
      sellers of capsule endoscopes in the capsule endoscopy market. First, we were
      the first company to sell and market capsule endoscopes in the most mature
      markets in the United States, Europe and Japan and have a large installed base
      of customers. Second, we have been concentrating primarily on the development
      and sale of capsule endoscopy systems and are selling a platform enabling us
      to
      use our line of PillCam capsules for diagnosing disorders in parts of the
      gastrointestinal tract other than the small bowel, while Olympus and other
      companies have only announced the launch of a small bowel capsule at this time.
      Finally, we have a patent portfolio that we believe protects critical aspects
      of
      our technology and creates technological barriers for our competitors, which
      may
      force them to enter the market with inferior products or delay their entry
      into
      certain territories.




In
      addition, we face competition from existing technologies for detecting
      gastrointestinal disorders and diseases, including traditional endoscopy and
      radiology. Our success depends in large part on convincing physicians to adopt
      the Given System over current technologies.




Three
      companies control the major portion of the worldwide gastrointestinal
      traditional endoscopy market. These companies, Olympus, Hoya and Fujinon, have
      marketed and sold flexible endoscopic equipment for many years. These companies
      have substantially greater financial resources than we do, and they have
      established reputations as well as worldwide distribution channels for medical
      instruments to gastroenterologists. We are aware of research and development
      efforts by some of these companies and other individuals and companies to
      develop and bring to market imaging capsules or other minimally invasive imaging
      techniques.




To
      strengthen our competitive position, in March 2007 we signed a cooperation
      agreement with Fujinon Corporation. The goal of the agreement is to build closer
      collaboration between the companies in research and development, component
      sourcing, marketing and product distribution worldwide, except in Japan. Under
      the terms of the agreement, we and Fujinon will collaborate to develop future
      products for the gastrointestinal endoscopy and diagnostic field. The agreement
      also grants Fujinon non-exclusive rights to distribute our capital equipment
      and
      small bowel products including our RAPID workstation and data recorders, PillCam
      SB, and AGILE Patency capsules in certain countries worldwide, which will be
      determined by the two companies on a case-by-case basis. As of December 31,
      2007, Fujinon distributes our products in China.




In
      addition, there are several companies focused on radiological diagnostics that
      provide x-ray machines and other imaging products used for barium series
      radiological examinations. These companies include but are not limited to GE
      Healthcare, Siemens Medical Solutions, Philips Medical Systems, Toshiba
      Corporation and Shimadzu Corporation.




In
      addition to competition from products performing similar clinical functions
      to
      the Given System, there is also competition among gastrointestinal products
      for
      the limited capital expenditure budgets of customers. For example, another
      capital equipment item for gastroenterology may compete with our system for
      the
      same hospital capital budget, which is typically limited, and therefore the
      potential purchaser may be required to choose between the various items of
      capital equipment.




24


**U.S.
      Government Regulation**




*FDA
      Clearance and Regulation of the Given System*




All
      the products we market and sell in the United States have received FDA
      clearance. Our first clearance was received in August 2001 for the first
      generation of the PillCam SB capsule. In November 2004, we received FDA
      marketing clearance for our PillCam ESO capsule and in 2006 we received
      clearance to market our AGILE Patency capsule and scanner. During 2007 we
      received clearance to market a number of new products, such as the new PillCam
      SB 2 and PillCam ESO 2 capsules and the newest version of our RAPID software,
      RAPID 5.0. All of our products that have been cleared to date by the FDA, have
      been cleared through such 510(k) clearance process. However, the FDA has
      recently determined that the PillCam COLON is not substantially equivalent
      to
      any marketed device in the United States for visualization of the colon and
      therefore can not be cleared for marketing in the United States through the
      510(k) process that is further described below.




*FDA
      Clearance and Regulation of the Future Products*




Any
      new medical device that we wish to commercially distribute in the United States
      will likely require either 510(k) clearance or premarket application approval
      from the FDA prior to commercial distribution. 510(k) clearance or amendment
      to
      premarket application is also required when a change is made to a legally
      marketed device or to expand the product label.




*510(k)
      Clearance Process.* To
      obtain 510(k) clearance, an applicant must submit a premarket notification
      demonstrating that the proposed device is substantially equivalent in intended
      use and in safety and effectiveness to a “predicate device” - either a
      previously 510(k) cleared device or a pre-amendment device for which the FDA
      has
      not called for premarket applications. The FDA’s 510(k) clearance process
      usually takes from three to 12 months, but it can last longer. After a device
      receives 510(k) clearance, any modification that could significantly affect
      its
      safety or effectiveness, or that  would
      constitute a major change in its intended use, requires a new 510(k) clearance
      or could even require a premarket application approval. The FDA requires each
      manufacturer to make this determination in the first instance, but the FDA
      can
      review any such decision. If the FDA disagrees with the determination, the
      agency may retroactively require the manufacturer to seek 510(k) clearance
      or
      premarket application approval. The FDA also can require the manufacturer to
      cease marketing and/or recall the modified device until 510(k) clearance or
      pre-market application approval is obtained. Our PillCam ESO video capsule
      and
      the advanced versions of the RAPID software and data recorder have received
      FDA
      marketing clearance under the 510(k) clearance process.




*De
      Novo Classification* .
      If the
      FDA denies 510(k) clearance of a device because it is novel and an adequate
      predicate device does not exist, the “de novo classification” procedure can be
      invoked based upon reasonable assurance that the device is safe and effective
      for its intended use. This procedure approximates the level of scrutiny in
      the
      510(k) process but may add several months to the clearance process. If the
      FDA
      grants the request, the device is permitted to enter commercial distribution
      in
      the same manner as if 510(k) clearance had been granted. We received our
      original FDA clearance for the Given System pursuant to the de novo
      classification procedure which is intended for novel but low risk devices.
      Our
      application for clearance under the de novo classification procedure included
      clinical data from a non-significant risk study. We cannot be sure that future
      studies of the Given System in the United States will be eligible for the same
      abbreviated regulatory treatment.




*Premarket
      Application Approval Process.* If the
      FDA denies 510(k) clearance for a product and denies de novo classification,
      the
      product must follow the premarket application approval process, which requires
      proof of the safety and effectiveness of the device to the FDA’s satisfaction. A
      premarket application must provide extensive preclinical and clinical trial
      data
      and also information about the device and its components regarding, among other
      things, device design, manufacturing and labeling. After approval of a premarket
      application, a new premarket application or premarket application supplement
      is
      required in the event of a modification to the device, its labeling or its
      manufacturing process. The premarket application approval pathway is much more
      costly, lengthy and uncertain. It generally takes from one to three years or
      longer.




*FCC
      Clearance and Regulation*




Because
      the Given System includes a wireless radio frequency transmitter and receiver,
      it is subject to equipment authorization requirements in the United States.
      The
      U.S. Federal Communications Commission, or FCC, requires advance clearance
      of
      all radio frequency devices before they can be sold or marketed in the United
      States. These clearances ensure that the proposed products comply with FCC
      radio
      frequency emission and power level standards and will not cause interference.
      We
      received an equipment certificate from the FCC in March 2001 based on the
      current system design and specifications for the Given System. Any modifications
      to the Given System may require new or further FCC approval before we are
      permitted to market and sell a modified system, and it could take several months
      to obtain any necessary FCC approval.




25




*Anti-Kickback
      and False Claims Laws*




In
      the United States, there are federal and state anti-kickback laws that prohibit
      the payment or receipt of kickbacks, bribes or other remuneration intended
      to
      induce the purchase or recommendation of healthcare products and services.
      Violations of these laws can lead to civil and criminal penalties, including
      exclusion from participation in federal healthcare programs. These laws
      constrain the sales, marketing and other promotional activities of manufacturers
      of medical devices such as Given, by limiting the kinds of financial
      arrangements (including sales programs) we may have with hospitals, physicians
      and other potential purchasers of the medical devices. Other provisions of
      state
      and federal law provide civil and criminal penalties for presenting, or causing
      to be presented, to third-party payers for reimbursement, claims that are false
      or fraudulent, or which are for items or services that were not provided as
      claimed. Since we are providing coding and billing advice to purchasers of
      our
      products, and since we cannot be sure that the government will regard any
      billing errors as inadvertent, we could be subject to an enforcement proceeding
      in a case where our advice was deemed to have caused the submission of improper
      claims.




*Health
      Insurance Portability and Accountability Act of 1996 and Related
      Laws*




U.S.
      Federal and state laws protect the confidentiality of certain patient health
      information, including patient records, and restrict the use and disclosure
      of
      that protected information. In particular, the U.S. Department of Health and
      Human Services promulgated patient privacy rules under the Health Insurance
      Portability and Accountability Act of 1996, or HIPAA.




These
      privacy rules protect medical records and other personal health information
      by
      limiting their use and disclosure, giving individuals the right to access,
      amend
      and seek accounting of their protected health information and limiting most
      use
      and disclosures of health information to the minimum amount reasonably necessary
      to accomplish the intended purpose. Because we are selling products and services
      to persons and entities subject to HIPAA and are exposed to
      personally-identifiable health information in the course of our operations,
      we
      also may be subject to HIPAA, as well as similar state laws. HIPAA imposes
      civil
      and criminal penalties for violations of its provisions, which could be
      substantial. State privacy laws have their own penalty provisions which could
      apply in a given case.




**Regulation
      in Europe**




Commercialization
      of medical devices in member countries of the European Union is regulated by
      directives adopted by the European Union. The European Union presently requires
      that all medical products bear the CE mark, an international symbol of adherence
      to quality assurance standards and demonstrated clinical effectiveness.
      Compliance with the Medical Device Directive, as certified by a recognized
      European Notified Body, permits the manufacturer to affix the CE mark on its
      products. We received our initial authorization to affix the CE mark to the
      Given System in May 2001 and have since received such authorization for other
      products. We have authority to affix the CE mark to all our products that are
      currently commercially available in the European Union. In 2007, we received
      the
      CE mark for our new small bowel, esophageal and colon capsules, as well as
      for
      our RAPID 5.0 software.




If
      we modify the Given System, we may need to apply for permission to affix the
      CE
      mark to the modified product. Additionally, we will need to apply for a CE
      mark
      for any new products that we may develop in the future. We cannot be certain
      that we will be able to obtain permission to affix the CE mark for new or
      modified products or that we will continue to meet the quality and safety
      standards required to maintain the permissions that we receive. If we are unable
      to maintain permission to affix the CE mark to our products, we will no longer
      be able to sell our products in member countries of the European
      Union.




In
      Europe, the frequency range in which the Given System operates is subject to
      technical standards for radio frequency use developed by the Short Range Device
      Maintenance Group of the European Conference of Postal and Telecommunications
      Administrations. We currently have clearance to operate our system in Europe
      based on the current system design and specifications; however, modifications
      to
      the Given System may require new or further approvals before we are permitted
      to
      market and sell a modified system, and it could take several months to obtain
      any necessary approvals.




**Regulation
      in Other Countries**




In
      order for us to market the Given System in countries other than the United
      States, we must obtain regulatory approvals and comply with extensive safety
      and
      quality regulations in these countries. These regulations, including the
      requirements for approvals or clearance and the time required for regulatory
      review, vary from country to country. Failure to obtain regulatory approval
      or
      clearance in any foreign country in which we plan to market our product may
      harm
      our ability to generate revenue and harm our business.




In
      all of the countries in which we are currently selling the Given System we
      have
      either received regulatory approval or clearance or been informed that approval
      or clearance is not required. Renewals or updates of the regulatory status
      of
      our products in all these countries are done annually.




26




In
      Japan, we received regulatory clearance to market our RAPID workstation and
      PillCam SB capsule in April 2007. The clearance we have received covers an
      early
      version of our data recorder of which we now have only limited inventory
      remaining. Marketing our other products in Japan will require additional,
      product-specific regulatory clearances. In 2007, we submitted an application
      for
      marketing clearance for our DR 2.0 data recorder. We intend to submit
      applications for at least a few additional products in 2008. Generally, the
      process for obtaining marketing clearance for medical device in Japan could
      range from six months for products with only very minor modifications from
      previous cleared product versions to a few years in case of a completely new
      device.




**Third-Party
      Reimbursement**




*Reimbursement
      in the United States*




In
      the United States, healthcare providers that purchase medical devices generally
      rely on third-party payers, such as Medicare, Medicaid, private health insurance
      plans and health maintenance organizations, to reimburse all or a portion of
      the
      cost of the devices, as well as any related healthcare services utilizing the
      devices. FDA clearance does not result in coverage and reimbursement by
      third-party payers.




*Coding.* Generally, a current procedural terminology, or CPT, code is necessary to
      facilitate claims for reimbursement. If a procedure is not covered by an
      appropriate existing code, an application for a new code can be made to the
      American Medical Association, or AMA. However, this process can be lengthy,
      typically taking two or more years before the new code is effective. In the
      meantime, claims may be submitted using a miscellaneous CPT code or using a
      temporary G-code, if one is established by the Department of Health and Human
      Services’ Centers for Medicare and Medicaid Services, or CMS. In December 2002,
      CMS established a temporary G-code specifically for capsule endoscopy. In
      October 2003, the American Medical Association assigned a permanent CPT code
      for
      capsule endoscopy of the small bowel, effective January 1, 2004. With the
      assignment of the permanent CPT code for capsule endoscopy of the small bowel,
      the temporary G-code was abolished. In November 2006, the AMA and CMS assigned
      a
      permanent CPT code for capsule endoscopy of the esophagus, effective January
      1,
      2007.




For
      capsule endoscopy of the small bowel performed in a physician’s office, the CPT
      code includes a global value for both the technical and the professional
      components of the procedure. In the outpatient hospital setting, claims are
      submitted using the CPT code and paid by Medicare under the Ambulatory Payment
      Classification, or APC, which covers the technical component and includes the
      cost of the facility and supplies related to the procedure. The physician is
      paid separately for the interpretation. In January 2003, CMS established a
      New
      Technology APC for capsule endoscopy of the small bowel in the hospital
      outpatient setting and, in November 2004, CMS reclassified the APC into a GI
      diagnostic category for payment in an outpatient hospital setting, effective
      January 1, 2005.




For
      capsule endoscopy of the esophagus performed in a physician’s office, the CPT
      code includes a global value for both the technical and the professional
      components of the procedure. In the outpatient hospital setting, claims are
      submitted using the CPT code and paid by Medicare under the APC, which covers
      the technical component and includes the cost of the facility and supplies
      related to the procedure. The physician is paid for the interpretation
      separately. In November 2006, CMS assigned an upper gastrointestinal (GI)
      diagnostic category APC for capsule endoscopy of the esophagus in the hospital
      outpatient setting effective January 2007.




*Reimbursement
      Coverage.* A
      payor’s decision to cover a device or medical procedure is independent of the
      coding process, although the existence of an appropriate CPT code and APC may
      assist in obtaining coverage. Generally, payers may deny coverage if they
      determine that a procedure was not reasonable or necessary as determined by
      the
      payor, was experimental or was used for an unapproved indication. During the
      past several years, the major third-party payers have substantially revised
      their reimbursement methodologies in an attempt to contain their healthcare
      reimbursement costs.




Third-party
      payers in the United States began issuing coverage policies for capsule
      endoscopy in early 2002. Initially, all reimbursement policies provided coverage
      for capsule endoscopy of the small bowel only for the diagnosis of obscure
      gastrointestinal bleeding. Subsequently, reimbursement coverage has been
      expanded to include other indications and as of December 31, 2007, most Medicare
      carriers and private payers, with a total insured population in the United
      States of approximately 209 million individuals, also cover capsule endoscopy
      of
      the small bowel for suspected Crohn’s disease, suspected small bowel tumors and
      other small bowel pathologies.




We
      continuously are making efforts to improve reimbursement coverage for the
      PillCam SB capsule. For example, we are working with third party payers to
      expand the number of International Statistical Classification of Diseases,
      known
      as ICD, diagnosis codes, for small bowel diseases. ICD diagnosis codes are
      used
      to classify diseases and a wide variety of medical symptoms, findings and
      complaints and to report diagnoses to payers to support medical necessity for
      services provided. We believe that the availability of more ICD diagnosis codes
      for small bowel-related conditions will enhance the ability of physicians to
      submit and receive payment for claims relating to small bowel diagnostic
      procedures using our PillCam SB capsule, which, in turn, may result in an
      increased usage of this capsule.




27




Almost
      all of the reimbursement policies currently in effect require that a previous
      procedure, such as endoscopy or radiology, be performed prior to using the
      Given
      System and some may require prior authorization. We intend to continue our
      efforts to establish the Given System as a primary tool administered to patients
      with suspected disorders of the small bowel and to convince third party payers
      to provide reimbursement coverage for capsule endoscopy as a primary diagnostic
      tool by presenting to them economic and health outcomes analyses showing the
      benefits of using the PillCam SB capsule as a primary diagnostic tool. To this
      end, the peer-reviewed journal Disease Management published in its Winter 2004
      issue an economic analysis of using PillCam SB capsules as a first-line tool
      for
      diagnosing patients with suspected Crohn’s disease. The study, conducted by
      researchers at Thomas Jefferson University, concluded that using the PillCam
      SB
      capsule as a first line procedure for detecting small bowel Crohn’s disease is
      less costly from a third-party payor perspective than existing  diagnostic
      approaches. This publication supports the company’s efforts to convince payers
      to revise policies to cover PillCam SB capsules when performed as a first line
      procedure in patients with suspected Crohn’s disease. As a result of these
      efforts, several third-party payers issued new or updated policies that do
      not
      require other endoscopic procedures prior to performing small bowel capsule
      endoscopy. As of December 31, 2007, approximately 30 million individuals in
      the
      United States now have coverage under these new or updated policies.




As
      of December 31, 2007, approximately 31 million individuals had reimbursement
      coverage for capsule endoscopy of the esophagus using our PillCam ESO capsule
      to
      evaluate esophageal varices in patients diagnosed with cirrhosis of the liver,
      a
      chronic liver disease. Numerous payers are reimbursing this procedure on a
      case-by-case basis. We expect that the publication of additional clinical data
      will facilitate coverage of esophageal capsule endoscopy by additional
      third-party payers during 2008. We have established a toll-free reimbursement
      help-line whereby reimbursement specialists assist our customers with general
      information about the process of submitting prior authorizations, claims and
      appeals in the event of a denial.




*Reimbursement
      Rates.* Even if
      a device or medical procedure is covered, reimbursement rates must be adequate
      for most providers to use it routinely. Reimbursement rates vary depending
      on
      the third-party payor and individual insurance plan involved, the procedure
      performed and other factors. Medicare reimbursement for inpatient hospital
      services is based on a fixed amount per admission based on the patient’s
      specific diagnosis and the procedure performed during the hospital stay. As
      a
      result, any illness to be treated or procedure to be performed in an inpatient
      setting will be reimbursed only at a prescribed rate set by the government.
      However, the Given System is not typically subject to these restrictions for
      hospital inpatient services because the capsule endoscopy procedure is most
      often performed on an outpatient basis and reimbursed by Medicare under the
      outpatient regulations, which allows for separate reimbursement. Medicare is
      covering the capsule endoscopy procedure under the outpatient regulations
      because the Given System is purchased for placement in an outpatient setting,
      where patients are not admitted to a hospital as an in-patient for the capsule
      endoscopy procedure.




In
      2007, for procedures performed in a physician’s office, the national average
      global fee paid by Medicare under the CPT code for capsule endoscopy of the
      small bowel was $955, a decrease of 3.2% compared to 2006. For procedures
      performed in an outpatient hospital setting, the national average physician
      fee
      paid by Medicare was $180, a decrease of 4.8% compared to 2006, and the national
      average payment rate to the hospital for the technical component was $583.
      These
      payment rates are modified annually. Effective January 1, 2008, the national
      average global fee paid by Medicare for a procedure in a physician’s office was
      decreased to $944, the national average physician fee for the professional
      component of a hospital outpatient procedure was decreased to $178 and the
      national average payment rate to the hospital for the technical component
      increased to $607 due to an increase in the APC rate for gastrointestinal small
      bowel procedures classified under APC 142.




For
      capsule endoscopy of the esophagus, in 2007, the national average global fee
      paid by Medicare for a procedure in a physician’s office was $743.. The national
      average physician fee paid by Medicare in an outpatient hospital setting was
      $53
      and the national average payment rate to the hospital for the technical
      component was $511, under the APC 141 for upper gastrointestinal procedures.
      Effective January 1, 2008, the national average global fee paid by Medicare
      for
      a procedure in a physician’s office increased to $756, the national average
      physician fee paid by Medicare in an outpatient hospital setting increased
      to
      $55 and the national average payment rate to the hospital for the technical
      component increased to $541 under the APC 141 for upper gastrointestinal
      procedures.




*Coverage
      Outside the United States*




In
      countries outside the United States, coverage is obtained from various sources,
      including governmental authorities, private health insurance plans, and labor
      unions. In some foreign countries, private insurance systems may also offer
      payments for some therapies. Although not as prevalent as in the United States,
      health maintenance organizations are emerging in certain European countries.
      Coverage systems in international markets vary significantly by country and,
      within some countries, by region. Coverage approvals must be obtained on a
      country-by-country or region-by-region basis. In general, the process of
      obtaining coverage approvals has been slower outside of the United States.




In
      Europe, the population with reimbursable access to capsule endoscopy at the
      end
      of 2007 remained largely unchanged compared to 2006 and was approximately 166
      million. The number of people in Europe with reimbursement for expanded
      indications at the end of 2007 was also similar to 2006 at approximately 101
      million. In 2008, we expect that French authorities will approve reimbursement
      for PillCam SB capsule endoscopy for over 60 million citizens in
      France.




28


In
      Japan,
      authorities announced initial reimbursement coverage for our PillCam SB capsule.
      Effective October 1, 2007, the entire adult population in Japan is eligible
      for
      reimbursement of the PillCam SB capsule procedure for small bowel indications
      with obscure gastrointestinal bleeding.




In
      Australia, reimbursement coverage for use of capsule endoscopy in the detection
      of gastrointestinal bleeding exists for all residents who hold Australian and/or
      New Zealand citizenship, providing coverage for approximately 20 million
      residents.




While
      coverage in Austria, Switzerland, Spain, Germany and Australia is generally
      limited to the indication of suspected small intestinal bleeding, the public
      healthcare systems in the Czech Republic, Denmark, Italy, Israel, Portugal,
      Sweden and the United Kingdom cover capsule endoscopy for broader indications,
      including suspected Crohn’s disease. We cannot provide any assurance that we
      will obtain any additional approvals in a timely manner or at all.




**C.**  **ORGANIZATIONAL
        STRUCTURE**




Given
      Imaging Ltd. is organized under the laws of the State of Israel and, as of
      December 31, 2007, held directly and indirectly the percentage indicated of
      the
      outstanding capital stock of the following subsidiaries:




**Name
                  of Subsidiary**
              
              **Country
                  of Incorporation**
              
              **Percentage Ownership**Given
                  Imaging Pty. Ltd.
              
              
              Australia
              
              
              100Given
                  Imaging, Inc.
              
              
              United
                  States
              
              
              100Given
                  Imaging s.a.s.
              
              
              France
              
              
              100Given
                  Imaging GmbH
              
              
              Germany
              
              
              100Given
                  Imaging B.V.
              
              
              Netherlands
              
              
              100Given
                  Imaging KK
              
              
              Japan
              
              
              51Given
                  Imaging PTE (Asia-Pacific) Ltd.
              
              
              Singapore
              
              
              100




**D.**  **PROPERTY,
      PLANTS AND EQUIPMENT**


We
      have a total of approximately 10,300 square meters (approximately 110,869 square
      feet) in Yoqneam, Israel, hosting our corporate headquarters and a number of
      production lines, under a lease that expires in December 31, 2015.




We
      believe that our existing facilities will be adequate to meet our needs in
      Israel for the foreseeable future.




Our
      subsidiaries are party to the following leases:




•
              Given
                  Imaging, Inc. leases 2,318 square meters (24,919 square feet) of
                  office
                  space in Duluth, Georgia under a sub-lease that expires in September
                  2009;•
              Given
                  Imaging GmbH leases approximately 818 square meters (8,801 square
                  feet) of
                  office space in Hamburg, Germany, pursuant to a lease for an indefinite
                  term that may be terminated by us or the landlord with an advance
                  notice
                  of six months;•
              Given
                  Imaging Pty. Ltd. leases 244 square meters (2,626 square feet)
                  of office
                  space in North Ryde, Australia, pursuant to a lease that expires
                  in
                  February 2011;•
              Given
                  Imaging s.a.s. leases a total of 241.5 square meters (2,598 square
                  feet)
                  of office space in Paris, France, consisting of 168 square meters
                  (1,808
                  square meters) pursuant to a lease that expires in September 2010
                  and that
                  may be terminated by us at the end of each three year period upon
                  six
                  months’ notice and additional 73.5 square meters (791 square feet)
                  pursuant to a lease that expires in January 2012 and that may be
                  terminated by us at the end of October 2008;•
              Given
                  Imaging K.K. leases 443 square meters (4,765 square feet) of office
                  space
                  in Tokyo, pursuant to a lease that expires in August 2010;
                  and•
              Given
                  Imaging PTE (Asia-Pacific) Ltd. leases 102 square meters (1,101
                  square
                  feet) of office space in Singapore, pursuant to a lease that expires
                  on
                  August 31, 2010.




29




**ITEM
      4A.**  **UNRESOLVED
      STAFF COMMENTS**


****Not
      Applicable.****




**ITEM
      5.****OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS******




**A.**  **OPERATING
      RESULTS**


**Overview**




We
      develop, manufacture and market innovative diagnostic products for disorders
      of
      the gastrointestinal tract. Our principal product, which incorporates our core
      technology, is the Given System, a proprietary wireless imaging system that
      represents a fundamentally new approach to visual examination of the
      gastrointestinal tract. The Given System uses a miniaturized video camera
      contained in a disposable capsule, which we refer to as the PillCam capsule,
      that is easily ingested by the patient and delivers high quality color video
      in
      a noninvasive manner. Our long-term objective, subject to further development
      and receipt of regulatory clearances and/or approvals, is to establish the
      Given
      System as a platform for diagnosis of disorders in all parts of the
      gastrointestinal tract and the PillCam capsules as a primary diagnostic tool
      administered to patients with such suspected disorders. We believe that each
      segment of the gastrointestinal tract presents meaningful opportunities for
      patient-friendly diagnostic procedures.




In
      2001,
      we commenced marketing the Given System with the PillCam SB capsule for
      detection of disorders of the small bowel. As of December 31, 2007, we had
      an
      installed base of nearly 4,250 Given Systems and had sold over 650,000 PillCam
      SB capsules in more than 60 countries worldwide. Since November 2004, we also
      market and sell our PillCam ESO capsule for visualization of the esophagus.
      In
      the second half of 2007, we began selling the first generation of our PillCam
      COLON capsule in Europe following receipt of the CE mark to market this capsule
      throughout the European Union. To date, we have not been able to obtain FDA
      clearance to market the PillCam COLON capsule in the United States. We have
      also
      developed and are selling in the United States, Europe and several other
      jurisdictions, a patency capsule, which is a dissolvable capsule that enables
      physicians to determine whether there are obstructions or strictures in the
      gastrointestinal tract that may prevent passage of our PillCam capsules.




We
      were incorporated in Israel in January 1998. We raised approximately $53.2
      million of net proceeds in our initial public offering and were listed on the
      Nasdaq Global Market in October 2001. We completed a follow-on offering in
      June
      2004 in which we raised additional net proceeds of $44.3 million. Since March
      2004, our shares have also been listed on the Tel Aviv Stock Exchange. Since
      our
      inception, we have devoted substantially all of our resources to developing
      the
      Given System, performing clinical trials and marketing and selling the Given
      System and PillCam capsules.




*Revenues*




** We
      derive
      our revenues from sales of the Given System, consisting of a RAPID workstation,
      a portable data recorder, and disposable PillCam capsules, and from recurring
      sales of our PillCam capsules to our installed base. We also derive a small
      portion of our revenues from post-sale customer support contracts entered into
      by customers at the end of the warranty period for the computer workstation
      and
      data recorders. We also derive limited revenues from sales of our AGILE Patency
      System.




*Revenue
      breakdown.* In the
      early years since we commenced sales of the Given System, the majority of our
      revenues came from sale of the Given System to new customers. However, with
      nearly 4,250 systems now installed worldwide, of which nearly 2,640 are in
      the
      United States, a substantial majority of our revenues is generated from reorders
      of our PillCam capsules, particularly PillCam SB capsules, by existing
      customers. The proportion of our revenues derived from sales of capital
      equipment components of the Given System, such as the RAPID workstations and
      portable data recorders, and revenues derived from sales of the PillCam
      capsules, which generate recurring sales, is an important indicator of our
      results of operations. In recent years, we have seen a gradual increase in
      the
      share of revenues generated  from
      recurring sale of our PillCam capsules. In 2007, we derived approximately 80.3%
      of our revenues from sales of the PillCam SB capsules, compared to 80.4% of
      our
      revenues in 2006 and 72.1% of our revenues in 2005. Sales of the PillCam ESO
      capsule represented approximately 0.9% of our revenues in 2007, compared to
      1.5%
      of our revenues in 2006 and 5.0% of our revenues in 2005. Sales of PillCam
      COLON
      represented approximately 1.0% of our revenues in 2007. We expect that a
      substantial majority of our revenues in the future will continue to come from
      recurring sales of our PillCam capsules.




30


The
      following table sets forth information for the periods indicated regarding
      the
      breakdown of our revenues:




$
              
              **%
                  of annual revenues****2005**
              
              **2006**
              
              **2007**
              
              **2005**
              
              **2006**
              
              **2007****(U.S.
                  dollar in thousands)**Workstations
                  and data recorders
              
              $
              17,831
              
              $
              14,104
              
              $
              15,267
              
              
              20.5
              %
              
              14.8
              %
              
              13.5
              %PillCam
                  SB capsule
              
              
              62,528
              
              
              76,360
              
              
              90,614
              
              
              72.1
              
              
              80.4
              
              
              80.3PillCam
                  COLON capsule
              
              
              N/A
              
              
              N/A
              
              
              1,106
              
              
              N/A
              
              
              N/A
              
              
              1.0PillCam
                  ESO capsule
              
              
              4,384
              
              
              1,438
              
              
              1,012
              
              
              5.1
              
              
              1.5
              
              
              0.9Patency
                  system and capsule
              
              
              174
              
              
              353
              
              
              523
              
              
              0.2
              
              
              0.4
              
              
              0.4Service
              
              
              1,859
              
              
              2,774
              
              
              4,346
              
              
              2.1
              
              
              2.9
              
              
              3.9Total
              
              $
              86,776
              
              $
              95,029
              
              $
              112,868
              
              
              100.0
              %
              
              100.0
              %
              
              100
              %









*Workstations
      and data recorders.* In
      2007,
      our revenues from the sale of workstations and data recorders increased compared
      to our revenues from the sale of these products in 2006 due to the initial
      clearance we received to market our system and Pillcam SB capsule in Japan.
      Typically, in new markets sales of capital equipment are more significant than
      sales of disposables such as the PillCam capsules. In the more mature markets,
      such as Europe and the United States, our revenues from sale of workstations
      and
      data recorders are decreasing compared to prior periods. The decrease in
      revenues from sale of capital equipment in those other markets is attributable
      to both lower quantities of workstations and data recorders sold and lower
      average selling price. We believe that, except in Japan and France, sales of
      workstations and data recorders is not likely to grow at historical rates or
      at
      all since a majority of gastroenterologists in our main markets already have
      access to a capsule endoscopy system. Another important reason for this decrease
      in sales of capital equipment was our continued focus on increasing utilization
      and reorders of the PillCam SB capsule in existing accounts over capital
      equipment sale.




In
      addition, with the introduction of new products or newer versions of existing
      products or as part of our promotional activities, we place our capital
      equipment or replace older equipment of many customers with newer versions
      of
      our capital equipment at a reduced price. This resulted in a lower average
      selling price for our capital equipment and contributed to the decline in
      revenues from sales of capital equipment.




In
      2008, revenues from sales of workstations and data recorders may increase
      further in Japan and France. Generally, however, we believe that a significant
      majority of our revenues in the foreseeable future will come from the sale
      of
      capsules compared to capital equipment.




*PillCam
      SB.* Substantially
      all of our revenues from capsule sales were attributed to sales of the PillCam
      SB capsule, which we began selling worldwide in the fourth quarter of 2001.
      We
      expect recurring sales of the PillCam SB capsule to continue to account for
      a
      substantial majority of our revenues from capsule sales in 2008. The primary
      reasons for this are:




•
              Most
                  small bowel indications for which the PillCam SB capsule is used
                  are
                  covered by governmental and commercial reimbursement
                  policies.•
              Several
                  reimbursement policies cover small bowel capsule endoscopy as a
                  primary
                  diagnostic tool, without the requirement to perform other diagnostic
                  procedures prior to using the PillCam SB capsule. We expect this
                  trend to
                  contribute to more capsule endoscopy procedures of the small bowel
                  being
                  performed.•
              We
                  recently began selling in the United States our new small bowel
                  capsule,
                  PillCam SB 2, which is more advanced then previous versions.•
              Our
                  sales force is primarily focused on selling capsules and the market
                  for
                  the PillCam SB capsule is currently a more developed market compared
                  to
                  the market for our PillCam ESO capsule or PillCam COLON capsule.•
              Receipt
                  of regulatory clearance to market the PillCam SB capsule in Japan
                  in April
                  2007.




*PillCam
      ESO* .
      We have
      marketed the PillCam ESO in the Unites Stated since November 2004. From 2005
      through the end of 2007, sales of our PillCam ESO were insignificant due
      primarily to the lack of reimbursement coverage, as well as limited clinical
      data to support widespread use of the PillCam ESO capsule.




31




Effective
      January 1, 2007, a permanent CPT Code was assigned to our PillCam ESO capsule
      by
      the American Medical Association, or AMA, and the Center for Medicare and
      Medicaid Services, or CMS, and during 2007 we saw the first third-party
      reimbursement coverage for procedures with the PillCam ESO capsule to evaluate
      esophageal varices in patients diagnosed with cirrhosis of the liver, a chronic
      liver disease. In addition, in late 2006, we completed a large multi-center
      study to evaluate the use of PillCam ESO in the evaluation of esophageal varices
      in patients diagnosed with cirrhosis of the liver. As of December 31, 2007,
      approximately 31 million individuals in the United States had reimbursement
      coverage for using the esophageal capsule endoscopy procedure in the detection
      of esophageal varices. Reimbursement coverage for the use of PillCam ESO in
      the
      detection of Gastro-Esophageal Reflux Disease, or GERD, which is more prevalent
      in the general population than varices, is not expected before additional
      clinical data supporting such use is available.




In
      the
      first quarter of 2008, we began marketing and selling PillCam ESO 2, our newest
      version of our esophageal capsule. We believe that this new capsule is a
      significant improvement over the prior version and will contribute to increased
      demand for PillCam ESO. The existence of initial reimbursement and favorable
      clinical data to support to use of PillCam ESO in the evaluation of esophageal
      varices, are also expected to gradually increase the demand for our PillCam
      ESO
      capsule, mostly for the varices indication. However, because esophageal varices
      is not a prevalent condition in the general population, we expect that sales
      of
      PillCam ESO in the foreseeable future will continue to be small compared to
      sales of PillCam SB. We expect a more significant increase in sales of PillCam
      ESO when and if there is clinical data and reimbursement coverage to support
      and
      cover the use of this capsule in GERD patients. In 2008, we intend to begin
      market development activities for the GERD market.




In
      November 2007, we announced the termination of our exclusive sales
      representation, co-promotion and cooperation agreement with Ethicon
      Endo-Surgery, a Johnson & Johnson company, which was signed in May 2004.
      InScope, a business division of Ethicon Endo-Surgery had exclusive rights to
      market our PillCam ESO capsule in the United States during this period and
      performed sales and market development activities. Ethicon cited a shift in
      its
      strategic priorities within gastroenterology and other areas as the reason
      for
      ending the relationship. As a result of this termination, we regained full
      responsibility for the marketing and sale of the PillCam ESO capsule in the
      United States at the beginning of 2008. In accordance with the terms of
      termination, Ethicon has paid us $1.2 million to continue to fund existing
      clinical trial activities in 2008 relating to the PillCam ESO capsule until
      they
      are completed. In addition, Ethicon has paid us $7.6 million in fees associated
      with the termination of the agreement.




*PillCam
      COLON* .
      PillCam
      COLON is the third video capsule we developed. We believe the launch of this
      capsule in Europe in the second half of 2007 reinforces the Given Platform
      as
      the leading product for capsule endoscopy and demonstrates our commitment to
      this field. Sales of PillCam COLON in 2007 were limited. This capsule became
      available in Europe only in the second half of 2007. In addition, this capsule
      is a new tool for diagnosis of colon disorders and we expect it will take time
      to educate physicians about its benefits and how it can fit into their practice
      management routines. Finally, there is only limited clinical evidence to support
      the use of this capsule. We are currently conducting a number of clinical trials
      that we believe will support our market development activities. In the meantime,
      we market PillCam COLON in Europe as a complementary tool for colonoscopy
      offering a method for visualization of the colon in patients who are unable
      or
      unwilling to undergo traditional colonoscopy or in cases of incomplete
      colonoscopies.




PillCam
      COLON has not yet received FDA marketing clearance in the United States. The
      FDA
      has recently determined that the PillCam COLON capsule is not substantially
      equivalent to any marketed device in the United States for visualization of
      the
      colon and therefore can not be cleared for marketing in the United States,
      our
      biggest market, through the 510(k) process, based on the currently available
      clinical data. There can be no assurance that we will be able to obtain FDA
      clearance for the PillCam COLON capsule, or even if we do, that this capsule
      will achieve widespread market acceptance as superior to existing technologies
      for visualization of the colon. We believe the following are important factors
      in determining the success of this product in the foreseeable
      future:




•
              Receipt
                  of FDA marketing clearance in the United States: We cannot be sure
                  that
                  FDA clearance or other regulatory approvals will be granted. In
                  order to
                  obtain FDA clearance and other regulatory approvals, we will be required
                  to demonstrate that the PillCam COLON is safe and effective for
                  its
                  intended purpose.•
              Clinical
                  data sufficient to support the use of the PillCam COLON for visualization
                  of the colon as compared to other diagnostic modalities: If clinical
                  trials indicate that PillCam COLON is not as clinically-effective
                  as other
                  current methods, or if the PillCam COLON procedure causes unexpected
                  complications or other unforeseen negative effects, we may not
                  obtain
                  regulatory clearance to market and sell this capsule.•
              The
                  availability of sufficient clinical and cost-effectiveness data
                  for the
                  American Medical Association, or AMA, to provide a favorable permanent
                  “current procedural terminology”, or CPT, code, and for private
                  third-party payers to make an adequate reimbursement decision to
                  provide
                  coverage for the PillCam COLON procedure.•
              The
                  availability of a reliable colon cleansing and preparation procedure
                  for
                  the PillCam COLON capsule, which is accepted by physicians and
                  patients.




32




We
      believe that there is a significant market and a long-felt need among physicians
      and patients for a simple, cost-effective and non-invasive technique for
      colorectal cancer screening, which represents a significant market opportunity
      for the PillCam COLON capsule. According to guidelines of professional
      associations in the United States, it is estimated that approximately 12.5
      million people over the age of 50 or that are otherwise at increased risk for
      colon cancer need to be screened each year in the United States, yet patient
      compliance is only around 50 percent. Patient compliance rates in Europe are
      believed to be even lower. We believe that the PillCam COLON procedure will
      eventually provide a less invasive alternative to traditional colonoscopy.
      However, further capsule and procedure development as well as significant
      additional clinical data to support the use of this capsule as a screening
      tool
      are necessary before we can realize this market opportunity. In the meantime,
      we
      market PillCam COLON in Europe for visualization of the colon in patients who
      are unable or unwilling to undergo traditional colonoscopy or in cases of
      incomplete colonoscopies.




While
      we expect sales of PillCam COLON to increase gradually, we do not expect that
      the PillCam COLON capsule will contribute significantly to our revenues in
      2008
      for the following reasons:




•
              We
                  are not likely to receive FDA clearance for the PillCam COLON capsule
                  in
                  2008;•
              Clinical
                  data for the PillCam COLON is limited; and•
              Reimbursement
                  for the PillCam COLON procedure is not expected in 2008.




*PillCam capsule reorders.* The
      portion of our total revenues resulting from recurring capsule sales is an
      important indicator for measuring our results of operations because it indicates
      the level of adoption by physicians of the Given System. We seek to increase
      the
      level of recurring sales of our PillCam capsule by a number of methods,
      including:




•
              broadening
                  the reimbursed indications, conducting clinical trials to prove
                  the
                  clinical benefits of capsule endoscopy compared to other diagnostic
                  procedures of the gastrointestinal tract and educating physicians
                  regarding the clinical benefits of the PillCam
                  capsules;•
              increased
                  selling and marketing activities and more frequent contact with
                  our
                  customers to inform and educate them about our technology; and•
              enhancing
                  operating efficiencies of the system to allow physicians to incorporate
                  capsule endoscopy into their daily practice routines.




The
      following table sets forth information for the periods indicated regarding
      the
      total numbers of PillCam SB capsules sold and the percentage of revenues derived
      from such sales which represent reorders:




**2005**
              
              **2006**
              
              **2007**Total
                  number of PillCam SB capsules sold*
              
              
              135,500
              
              
              165,000
              
              
              191,800Number
                  of PillCam SB capsule sales representing reorders
              
              
              128,760
              
              
              155,840
              
              
              177,000%
                  of revenues from capsule sales that represent reorders
              
              
              95%
              
              
              94.4%
              
              
              92.3%








*
              Sales
                  of PillCam ESO began in November 2004 and reorders in subsequent
                  years
                  were negligible primarily due to the lack of reimbursement. Accordingly,
                  reorders of PillCam ESO are not included in the above
                  table.




*Seasonality*




We
      believe that demand for systems and capsules may be affected by seasonal factors
      during the summer months when physicians and administrators are more likely
      to
      postpone purchasing decisions relating to the Given System due to summer
      vacations, and patients are more likely to postpone less urgent diagnostic
      procedures until later in the year. We believe that the seasonal effect in
      the
      third quarter may become more pronounced if the portion of our revenues derived
      from reorders continues to grow.




*Geographical
      breakdown*




We
      derived 66% of our revenues in 2007 from the Americas, compared to 71% in 2006.
      The following table sets forth the geographic breakdown of our revenues for
      the
      periods indicated:




33




**2005**
              
              **2006**
              
              **2007**Americas
              
              
              75%
              
              
              71%
              
              
              66%EMEA
              
              
              19%
              
              
              23%
              
              
              24%APAC
              
              
              6%
              
              
              6%
              
              
              10%




We
      expect that a significant portion of our revenues in the foreseeable future
      will
      continue to come from the United States, mainly due to our ability to leverage
      existing market share to generate additional sales, a favorable reimbursement
      system and general acceptance of new technologies among physicians. In Japan,
      we
      received marketing clearance for the Given System and our PillCam SB in April
      2007 and began selling the Given System there. Since Japan is a new market,
      we
      expect to initially focus on the placement of systems in order to expand our
      market penetration. Behind the United States, Japan is considered one of the
      largest markets in the world for medical devices for use in the gastrointestinal
      tract. Therefore, we believe that the Japanese market represents a significant
      growth opportunity for our business in 2008 and beyond.




*Reimbursement*




We
      believe that the existence of reimbursement coverage and the amount of
      reimbursement will continue to significantly affect the proportion of our
      revenues that are derived from sales in the United States. Availability of
      reimbursement is a key factor in the decision of physicians and healthcare
      providers to purchase the Given System and perform capsule endoscopy procedures.
      Once a payor has decided to provide reimbursement for use of the Given System,
      the level of reimbursement coverage provided also becomes a key factor in a
      physician’s decision. We estimate that as of December 31, 2007, reimbursement
      for small bowel capsule endoscopy was available worldwide to approximately
      500
      million people. In the United States approximately 209 million people are
      covered with most reimbursement policies providing coverage for a number of
      small bowel indications, including obscure bleeding, suspected Crohn’s disease,
      suspected small bowel tumors and other small bowel pathologies. In Europe,
      reimbursement coverage for small bowel capsule endoscopy was available for
      approximately 166 million people as of December 31, 2007, and reimbursement
      coverage for expanded indications, such as Crohn’s disease and other small bowel
      disorders was available for approximately 101 million people at the end of
      2007.
      While we initially expected that reimbursement in France will be in place in
      late 2007, the process with French authorities is taking longer than we
      expected. We now believe the reimbursement process in France could be completed
      in the first half of 2008, which will result in coverage for approximately
      60
      million people. This represents a significant growth opportunity for us in
      Europe.




Another
      significant growth opportunity stems from the decision of Japanese authorities
      to reimburse capsule endoscopy of the small bowel. Effective October 1, 2007,
      the entire adult population in Japan (approximately 105 million people) is
      eligible for reimbursement of the PillCam SB capsule procedure for small bowel
      indications with obscure gastrointestinal bleeding. We believe this
      reimbursement will contribute to significant growth in sales of the Given System
      with the PillCam SB capsule in Japan. Finally, reimbursement coverage for use
      of
      the PillCam SB capsule in the detection of gastrointestinal bleeding is
      available for approximately 20 million individuals in Australia and New Zealand.




In
      addition to continuing our efforts to expand reimbursement coverage, we have
      made significant efforts in educating our customers regarding coverage
      conditions and rates. For example, we maintain more frequent contact with
      existing and potential payers on the one hand, and with our customers on the
      other hand. We believe that increased customer awareness and knowledge is
      important to remove any misunderstandings that may exist among physicians
      regarding the availability of reimbursement or coverage rates and to allow
      more
      patients the benefit of our technology. We also maintain a reimbursement
      telephone support line to respond directly to inquiries from customers.




In
      2007, we also continued our efforts to improve reimbursement coverage for the
      PillCam SB capsule. First, we are working with third party payers to expand
      the
      number of International Statistical Classification of Diseases, known as ICD,
      diagnosis codes, for small bowel diseases. ICD diagnosis codes are used to
      classify diseases and a wide variety of medical symptoms, findings and
      complaints and to report diagnoses to payers to support medical necessity for
      services provided. We believe that the availability of more ICD diagnosis codes
      for small bowel-related conditions will enhance the ability of physicians to
      submit and receive payment for claims relating to small bowel diagnostic
      procedures using our PillCam SB capsule, which, in turn, may result in an
      increased usage of this capsule. Second, we continue our efforts to establish
      the PillCam SB capsule as a primary diagnostic tool for patients with suspected
      disorders of the small bowel and to convince third party payers to provide
      reimbursement coverage for capsule endoscopy as a primary diagnostic tool.
      Coverage as a primary diagnostic tool means that physicians will be able to
      prescribe the PillCam SB capsule at their discretion, without the requirement
      to
      perform any previous endoscopic diagnostic procedure. We believe this could
      increase physicians’ use of the PillCam SB capsule. To convince the payers, we
      will need to present to them economic and health outcomes analyses showing
      the
      benefits of using the PillCam SB capsule as a primary diagnostic tool. As of
      December 31, 2007, approximately 30 million individuals in the United States
      had
      reimbursement coverage for PillCam SB as a primary diagnostic tool.




In
      the United States, effective January 1, 2008, the national average global fee
      paid by Medicare for a procedure in a physician’s office was decreased to $944
      from $955 in 2007 and the physician fee for the professional component of a
      hospital outpatient procedure was decreased to $178 from $180 in 2007.
      Reimbursement rates may also be modified in the future. Based on recent history,
      we do not expect that modest changes to reimbursement rates will have a material
      effect on our business.




34




Effective
      January 1, 2007, we have a permanent CPT code for the esophageal capsule
      endoscopy procedure with our PillCam ESO. We have also obtained the first few
      reimbursement policies for this procedure with 31 million individuals in the
      United States covered as of December 31, 2007.




To
      date,
      there is no reimbursement coverage for procedures with our PillCam COLON
      capsule. This capsule is new to the market and more clinical evidence will
      be
      necessary to support reimbursement. Reimbursement coverage for this capsule
      is
      not expected in 2008.




*Competition*




** Olympus
      Corporation has been marketing and selling a competing capsule endoscopy system
      in Europe and Australia since October 2005. In September 2007, Olympus received
      FDA clearance to market its capsule endoscopy system and small bowel capsule
      in
      the United States. According to public sources, Olympus is also seeking
      regulatory clearance to market its capsule endoscopy system in Japan. In
      addition to Olympus, a Chinese company is selling its capsule endoscopy systems
      in China at lower prices than us and presented its systems at industry trade
      shows outside Asia. Finally, according to publicly available information, in
      2007 a South Korean company began selling a competing system in Korea as well
      as
      in Europe and Australia.




The
      effect of competition from Olympus or other possible direct competitors is
      uncertain. On the one hand, we may lose market share, be forced to reduce the
      price of our products or experience delays in completing sales as a result
      of a
      longer decision making process among potential customers. On the other hand,
      we
      believe that the entry of Olympus into the capsule endoscopy market further
      validates the market opportunity of our PillCam platform and may result in
      greater market acceptance of our products, which we believe have a number of
      advantages over competing products. First, we were the first company to sell
      and
      market capsule endoscopes in the most mature markets in the United States,
      Europe and Japan and have a large installed base of customers. Second, we have
      been concentrating primarily on the development and sale of capsule endoscopy
      systems and have a platform enabling us to use our line of PillCam capsules
      for
      diagnosing disorders in areas of the gastrointestinal tract in addition to
      the
      small bowel, while Olympus only has a small bowel capsule at this time and
      has
      not announced the development of other capsules. Third, we believe our
      technological solution, and in particular our software solution, is superior
      to
      the products introduced by competitors. Finally, we have a patent portfolio
      that
      we believe protects critical aspects of our technology and may create
      technological barriers for our competitors, which may force them to enter the
      market with inferior products or delay their entry into certain territories.




*Customers
      and customer concentration*




We
      market and sell the Given System through a direct sales force in the United
      States, Germany, France, Australia and Israel. We rely on third-party
      distributors in international markets outside these countries. We sell the
      Given
      System primarily to hospitals, gastroenterology offices and gastroenterology
      outpatient facilities. In 2007, we derived $24.7 million, or 21.8%, of our
      revenues from sales to local distributors, compared to $15.7 million, or 16.5%
      in 2006. The increase in sales to distributors is attributable primarily to
      increased sales to our exclusive distributor in Japan after we received
      regulatory clearance to market our PillCam SB in Japan. Our direct sales
      revenues are derived from a large number of individual customers and have higher
      gross margins. In 2007, no single direct sales customer accounted for more
      than
      0.3% of our revenues and no single distributor accounted for more than 4.6%
      of
      our revenues. It is our policy to require collateral or security in connection
      with sales to distributors. Due to these factors and the geographical dispersion
      of our customers, we believe that we adequately control our exposure to credit
      risks associated with accounts receivable. To date, we have not experienced
      any
      material bad debts and we have collected substantially all of our
      receivables.




*Cost
      of revenues and gross margins*




Cost
      of revenues consists primarily of materials and components, as well as
      manufacturing costs and related depreciation of our production facilities,
      the
      salary and related costs of our technical staff assembling our products,
      royalties payable to the Office of the Chief Scientist, or OCS, warranty costs
      and product liability insurance. In December 2007, we made an early repayment
      of
      all our outstanding royalty obligation and accrued interest to the OCS. The
      repayment resulted in a charge of $4.8 million to cost of revenues.




The
      principal factors affecting our gross margins are related to the volume of
      PillCam capsules we sell, the sale prices, the product mix (namely, the
      proportion of our revenues derived from sales of workstations and portable
      data
      recorders, compared to sales of the PillCam capsules), as well as the percentage
      of our sales made as direct sales. In general, our gross margins from capsule
      sales are higher than our average gross margins from sales of capital equipment,
      such as workstations and data recorders. A primary reason for the lower gross
      margins is that from time to time, with the introduction of new products or
      newer versions of existing products or as part of our promotional activities,
      we
      place our capital equipment or replace older equipment of many customers with
      newer versions of our capital equipment at a reduced price or at no charge.
      In
      addition, our gross margins in territories in which we use our direct sales
      force are generally higher than our gross margins in territories in which we
      market and sell our products through third-party distributors. In the future,
      our gross margins may also be negatively affected by the emergence of direct
      competition in the field of capsule endoscopy.




35




*Operating
      expenses*




*Research
      and development.* Our
      research and development expenses consist primarily of costs associated with
      the
      design, development, pre-manufacture and testing of, and enhancements to, the
      Given System, clinical studies and obtaining regulatory approvals, patent costs,
      sponsored research costs and other expenses related to our product development
      and research program. We expense our research and development costs as they
      are
      incurred. “Research and development expenses, net” are net of grants received
      from the Israeli Government through the Office of the Chief Scientist of the
      Ministry of Industry and Trade. We plan to continue investing in research and
      development, as we enhance the Given System, pursue the development of new
      products and perform more clinical trials to drive continued expansion of
      reimbursement for the PillCam capsules worldwide.




*Sales
      and marketing.* Our
      sales and marketing expenses consist primarily of salaries, commissions to
      our
      sales force, travel and related costs for our internal sales staff and costs
      related to marketing activities such as medical meetings, medical training
      and
      education, trade shows, and promotional and public relations activities, as
      well
      as costs associated with development of our website. We expect that our selling
      and marketing expenses will increase in the future as we increase sales of
      PillCam capsules, further expand our sales and marketing team, expand our
      educational activities and expand our promotional efforts. From November 2004
      until December 31, 2007, our marketing expenses included commissions we paid
      Ethicon Endo-Surgery under our exclusive sales representation, co-promotion
      and
      cooperation agreement for the marketing of the PillCam ESO capsule. Under this
      agreement, we paid Ethicon commissions on sales in the United States at a rate
      of 50% on the sale of the PillCam ESO capsule and 10% on sales of capital
      equipment parts of the Given System, including workstations and data recorders,
      to customers that use the PillCam ESO capsule. Under the terms of the agreement,
      as of December 31, 2007, we received from Ethicon milestone payments totaling
      $25 million. We have recorded these milestone payments as a reduction of
      commission expenses and recognize them ratably over the term of the agreement.
      Our agreement with Ethicon was terminated in January 2008. Ethicon has paid
      us
      $7.6 million in fees associated with the termination of the agreement. In
      addition, Ethicon has paid us $1.2 million to continue to fund existing clinical
      trial activities in 2008 relating to the PillCam ESO capsule until they are
      completed. As a result of the early termination of our agreement with Ethicon,
      we accelerated the effect of the milestone payments we had received from Ethicon
      prior to the termination and recorded additional credit to operating expenses
      of
      approximately $23 million in the fourth quarter of 2007. This credit has
      resulted in an increase to our net income in a similar amount. We will record
      additional credit to operating expenses of approximately $5.4 million as a
      result of this early termination during the first quarter of 2008.




*General
      and administrative.* Our
      general and administrative expenses consist primarily of salaries and related
      costs for our executive and administrative staff, insurance premiums, and legal,
      accounting and consulting expenses. Our general and administrative expenses
      increased significantly in 2007 and expect to continue at a relatively high
      level in 2008, primarily as a result of legal expenses associated with our
      patent litigation in the United States with Olympus.




*Equity-based
      compensation* .
      Our
      operating expenses also include amortization of stock-based compensation, which
      is allocated among research and development expenses, marketing expenses and
      general and administrative expenses based on the division in which the recipient
      of the option grant is employed. In December 2004, the Financial Accounting
      Standard Board, or FASB, issued a new Financial Accounting Standard, SFAS
      123(R), that requires companies, including Given Imaging, to recognize as an
      expense the grant-date fair value of stock options and other equity-based
      compensation to employees. Effective January 1, 2006, we adopted SFAS 123(R)
      using the modified prospective method for the valuation of our equity-based
      compensation. The adoption of SFAS 123(R) resulted in the recognition of $5.7
      million of additional compensation expense in 2007, compared to $5.2 million
      of
      additional compensation expense in 2006, the first year in which this accounting
      standard was in effect. The application of FAS 123(R) has a material impact
      on
      our earnings per share. In 2008, we expect to continue our practice of granting
      stock options and other equity awards to our directors, officers, employees
      and
      consultants. The resulting compensation expenses in 2008 will be impacted by
      various factors, including the number of options we grant and their fair value
      at the date of grant.




*Financing
      income, net.* Financing income, net consists primarily of interest earned on our cash
      balances, income from marketable securities and foreign exchange gains or
      losses, net of financing expenses. Financing expenses consist primarily of
      bank
      fees and currency fees.




*Taxes.* In 2007,
      Israeli companies were generally subject to income tax at the corporate tax
      rate
      of 29%. This tax rate is expected to be gradually reduced to a rate of 25%
      by
      2010. However, our investment program in leasehold improvements and equipment
      at
      our manufacturing facility in Yoqneam, Israel has been granted approved
      enterprise status and, therefore, we are eligible for the reduced tax benefits
      described later in this section in “Corporate Tax.” These benefits should result
      in income recognized by us from our investment program being tax exempt for
      a
      specified period. However,  these
      benefits may not be applied to reduce the tax rate for any income that is not
      derived from sales of our product manufactured at our facility in Yoqneam,
      Israel.




36




As
      of December 31, 2007, we have recorded a net deferred tax asset of $1.4 million.
      On a regular basis, we estimate our actual current tax exposure and assess
      temporary differences resulting from differing treatment of items for tax and
      accounting purposes. These differences result in deferred tax assets and
      liabilities, which are included within our consolidated balance sheet. The
      deferred tax asset represents our assessment of accumulated losses that could
      be
      carried forward to future years to reduce taxable income in those future years.
      We consider projected future taxable income and tax planning strategies in
      making this assessment. We must then assess the likelihood that our deferred
      tax
      assets will be recovered and, to the extent we believe that recovery is not
      likely, we must establish a valuation allowance. To the extent we establish
      a
      valuation allowance or increase this allowance in a period, we must include
      an
      expense within the tax provision in the statement of operations. The deferred
      tax asset may be realized over time, depending upon the generation of future
      taxable income during the periods in which those accumulated losses become
      deductible.




Significant
      management judgment is required in determining our deferred tax assets and
      liabilities and any valuation allowance recorded against our net deferred tax
      assets. Based upon our projections for future taxable income of our subsidiaries
      over the periods in which the deferred tax assets are deductible, we believe
      that it is more likely than not that we will realize the benefits of this
      deferred tax asset. However, the amount of the deferred tax asset considered
      realizable could be reduced in the near term if estimates of future taxable
      income during the carry-forward period are reduced.  Significant management
      judgement is also required in determining our tax liability under FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which we
      adopted on January 1, 2007.




*Minority
      share in losses (profits) of subsidiary* .
      Minority share in losses (profits) of subsidiary consists of the losses
      attributed to the 49% interest of minority shareholders in our 51% controlled
      Japanese subsidiary, Given Imaging K.K.




**Critical
      Accounting Policies**




Our
      significant accounting policies are more fully described in Note 1 to our
      consolidated financial statements. However, certain of our accounting policies
      are particularly important to the description of our financial position and
      results of operations. In applying these critical accounting policies, our
      management uses its judgment to determine the appropriate assumptions to be
      used
      in making certain estimates. Those estimates are based on our historical
      experience, the terms of existing contracts, our observation of trends in the
      industry, information provided by our customers and information available from
      other outside sources, as appropriate. These estimates are subject to an
      inherent degree of uncertainty. With respect to our policies on revenue
      recognition, warranty costs and inventories, our historical experience is based
      principally on our operations since we commenced selling the Given System in
      the
      second quarter of 2001. Our critical accounting policies include:




•
              *Revenue
                  recognition.*We
                  recognize revenues from sales of the Given System upon delivery,
                  provided
                  that collection of payment is probable, there is persuasive evidence
                  of an
                  arrangement, no significant obligations in respect of installation
                  remain
                  and the price is fixed or determinable. Our arrangements with customers
                  and distributors do not contain product return rights. Certain
                  of our
                  sales contracts include a post-contract customer support, or PCS,
                  component. We defer recognition of the revenue attributed to the
                  PCS
                  component of the sale and recognize revenue based on the term of
                  the
                  support period, which is generally a one-year period following
                  the sale.
                  The fair value of the PCS component is based on the price at which
                  we sell
                  customer support contracts separately following the expiration
                  of the
                  standard warranty period for our products.•
              *Inventories.*Inventories are stated at the lower of cost or market, cost being
                  determined on the basis of the average cost method for raw materials
                  and
                  finished goods and on the basis of actual manufacturing costs for
                  work-in-progress and sub-contractors. We write down fully the cost
                  of
                  components in our inventory which we discover do not perform during
                  the
                  production process. As we expand and enhance our manufacturing
                  operations,
                  the write down of amounts of non-performing components in our inventory
                  may change. Spare parts and raw materials that are no longer used
                  in
                  producing our products are written down to their fair market value.
                  In
                  addition, we add to the cost of finished products held in inventory
                  the
                  overhead from our manufacturing process.•
              *Foreign
                  currency translation*.
                  In preparing our consolidated financial statements, we are required
                  to
                  translate non-U.S. dollar amounts in our financial statements and
                  the
                  financial statements of our subsidiaries into U.S. dollars. Under
                  the
                  relevant accounting guidance the treatment of any gains or losses
                  resulting from this translation is dependent upon our management’s
                  determination of the functional currency of each subsidiary. The
                  functional currency is determined based on management’s judgment and
                  involves consideration of all relevant economic facts and circumstances
                  affecting the subsidiary. Generally, the currency in which the
                  subsidiary
                  transacts a majority of its transactions, including billings, financing,
                  payroll and other expenditures would be considered the functional
                  currency. However, any dependency upon the parent and the nature
                  of the
                  subsidiary’s operations must also be considered. If any subsidiary’s
                  functional currency is deemed to be the local currency, then any
                  gain or
                  loss associated with the translation of that subsidiary’s financial
                  statements into U.S. dollars would be included as other comprehensive
                  income. However, if the functional currency of a subsidiary is
                  deemed to
                  be the U.S. dollar, then any gain or loss associated with the translation
                  of these financial statements would be included within statement
                  of
                  operations. Based on our assessment of the factors discussed above,
                  we
                  consider the U.S. dollar to be the functional currency for each
                  of our
                  subsidiaries. Therefore, all gains and losses from translations
                  are
                  recorded in our statement of operations and are included in determining
                  our net income. In the event that we determine that the functional
                  currency of these or any future subsidiaries is not the U.S. dollar,
                  any
                  foreign currency gains or losses would not affect our net income
                  for the
                  year presented.




37




•
              *Accounting
                  for income taxes.*As
                  part of the process of preparing our consolidated financial statements
                  we
                  are required to estimate our income taxes in each of the jurisdictions
                  in
                  which we operate. This process requires us to estimate our actual
                  current
                  tax exposure and make an assessment of temporary differences resulting
                  from differing treatment of items for tax and accounting purposes.
                  These
                  differences result in deferred tax assets and liabilities, which
                  are
                  included within our consolidated balance sheet. We must then assess
                  the
                  likelihood that our deferred tax assets will be recovered and,
                  to the
                  extent we believe that recovery is not likely, we must establish
                  a
                  valuation allowance. To the extent we establish a valuation allowance
                  or
                  increase this allowance in a period, we must include an expense
                  within the
                  tax provision in the statement of operations. Significant management
                  judgment is required in determining our deferred tax assets and
                  liabilities and any valuation allowance recorded against our net
                  deferred
                  tax assets. We have recorded a deferred tax asset, net of $1.4
                  million as
                  of December 31, 2007. Based upon our projections for future taxable
                  income in our U.S. subsidiary over the periods in which the deferred
                  tax
                  assets are deductible, we believe that it is more likely than not
                  that we
                  will realize the unreserved benefits of these deductible differences.
                  The
                  amount of the deferred tax asset considered realizable, however,
                  could be
                  reduced in the near term if estimates of future taxable income
                  during the
                  carry forward period are reduced. Effective January 1, 2007, we
                  adopted
                  the provision of FASB Interpretation No. 48, “Accounting for Uncertainties
                  in Income Taxes” which prescribes a recognition threshold and measurement
                  process for recording in the financial statements uncertain tax
                  positions
                  taken or expected to be taken in a tax return. We performed our
                  evaluation mainly for the tax years ended December 31, 2004 and
                  thereafter
                  and for earlier tax years which remain subject to examination by
                  local tax
                  authorities in some tax jurisdictions.•
              *Accounting
                  for Equity Awards.*Effective January 1, 2006, we adopted SFAS No. 123(R), which supersedes
                  Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
                  to Employees”. Generally, the approach in SFAS 123(R) is similar to the
                  approach described in SFAS 123 “Accounting for Stock-Based Compensation”
                  (“SFAS No. 123”). However, SFAS 123(R) requires all equity-based payments
                  to employees, including grants of employee stock options, to be
                  recognized
                  in the statement of income based on their fair values. We elected
                  the
                  modified-prospective method and therefore prior periods were not
                  restated.
                  Under the modified-prospective method, compensation costs recognized
                  in
                  2007 include also compensation costs for all share-based payments
                  granted
                  prior to, but not yet vested, as of December 31, 2007. In 2007,
                  we
                  recognized equity-based compensation expense under SFAS 123(R)
                  in the
                  amount of $5.7 million. When calculating this equity-based compensation
                  expense we took into consideration awards that are ultimately expected
                  to
                  vest. Therefore, this expense has been reduced for estimated forfeitures.
                  In our pro forma information required under SFAS No. 123 for the
                  periods
                  prior to fiscal 2007, we accounted for forfeitures as they occurred.
                  We
                  elected to apply the intrinsic value-based method prescribed in
                  APB
                  Opinion No. 25 for our equity-based compensation to employees and
                  directors and provide the pro forma disclosure provisions of SFAS
                  No. 123,
                  as amended by SFAS No. 148, “Accounting for Stock-Based Compensation -
                  Transition and Disclosure, an amendment of SFAS No. 123”. As such, we
                  computed and recorded compensation expense for grants whose terms
                  were
                  fixed with respect to the number of shares and option price only
                  if the
                  market price on the date of grant exceeded the exercise price of
                  the stock
                  option. The compensation cost for the fixed plans was recorded
                  over the
                  period the employee performs the service to which the stock compensation
                  relates.




38




**Results
      of Operations**




Our
      consolidated statements of operations data for the years ended December 31,
      2005, 2006 and 2007 are set forth below:




**Year
                  ended December 31,****2005**
              
              **2006(*)**
              
              **2007(*)****(in
                  thousands)****Statements
                  of Operations Data:**Revenues
              
              $
              86,776
              
              $
              95,029
              
              $
              112,868Cost
                  of revenues
              
              
              (22,070
              )
              
              (24,154
              )
              
              (29,721
              )Early
                  repayment of royalty bearing government grants
              
              
              —
              
              
              —
              
              
              (4,843
              )Gross
                  profit
              
              
              64,706
              
              
              70,875
              
              
              78,304Operating
                  expenses:Research
                  and development, gross
              
              
              (8,833
              )
              
              (12,678
              )
              
              (12,847
              )Royalty-bearing
                  government grants
              
              
              1,244
              
              
              1,867
              
              
              1,242Research
                  and development, net
              
              
              (7,589
              )
              
              (10,811
              )
              
              (11,605
              )Sales
                  and marketing
              
              
              (43,281
              )
              
              (50,732
              )
              
              (55,446
              )General
                  and administrative
              
              
              (9,657
              )
              
              (16,027
              )
              
              (20,981
              )Termination
                  of marketing agreement
              
              
              —
              
              
              —
              
              
              22,860Other
              
              
              —
              
              
              —
              
              
              (422
              )Total
                  operating expenses
              
              
              (60,527
              )
              
              (77,570
              )
              
              (65,594
              )Operating
                  profit (loss)
              
              
              4,179
              
              
              (6,695
              )
              
              12,710Financing
                  income, net
              
              
              762
              
              
              3,980
              
              
              5,520Profit
                  (loss) before taxes on income and minority interest
              
              
              4,941
              
              
              (2,715
              )
              
              18,230Income
                  tax benefit (expense)
              
              
              286
              
              
              (127
              )
              
              (4,548
              )Profit
                  (loss) before minority share
              
              
              5,227
              
              
              (2,842
              )
              
              13,682Minority
                  share in losses of subsidiary
              
              
              1,116
              
              
              1,334
              
              
              1,503Net
                  profit (loss)
              
              $
              6,343
              
              $
              (1,508
              )
              $
              15,185




*
      2006
      and 2007 operating expenses include (i) $5.2 million and $5.7 million,
      respectively, of expenses resulting from the grant of options and the
      application of SFAS 123(R), and (ii) $1.1 million and $5.2 million,
      respectively, of legal expenses resulting from our patent litigation with
      Olympus.




39




Our
      historical operating results as a percentage of net revenues for the years
      ended
      December 31, 2005, 2006 and 2007 are set forth below:




**Year
                  ended December 31,****2005**
              
              **2006**
              
              **2007****Statements
                  of Operations Data:**Revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100
              %Cost
                  of revenues
              
              
              25.4
              
              
              25.4
              
              
              26.3Early
                  repayment of royalty bearing government grant
              
              
              —
              
              
              —
              
              
              4.3Gross
                  profit
              
              
              74.6
              
              
              74.6
              
              
              69.4Operating
                  expenses:Research
                  and development, gross
              
              
              (10.2
              )
              
              (13.3
              )
              
              (11.4
              )Royalty-bearing
                  government grants
              
              
              1.4
              
              
              2.0
              
              
              1.1Research
                  and development, net
              
              
              (8.8
              )
              
              (11.3
              )
              
              (10.3
              )Sales
                  and marketing
              
              
              (49.9
              )
              
              (53.4
              )
              
              (49.1
              )General
                  and administrative
              
              
              (11.1
              )
              
              (16.9
              )
              
              (18.6
              )Termination
                  of marketing agreement
              
              
              —
              
              
              —
              
              
              20.2Other
              
              
              —
              
              
              —
              
              
              (0.4
              )Total
                  operating expenses
              
              
              (69.8
              )
              
              (81.6
              )
              
              (58.2
              )Operating
                  profit (loss)
              
              
              4.8
              
              
              (7.0
              )
              
              11.2Financing
                  income, net
              
              
              0.9
              
              
              4.2
              
              
              4.9Profit
                  (loss) before taxes on income and minority share
              
              
              5.7
              
              
              (2.8
              )
              
              16.1Income
                  tax benefit (expense)
              
              
              0.3
              
              
              (0.1
              )
              
              (4.0
              )Profit
                  (loss) before minority share
              
              
              6.0
              
              
              (2.9
              )
              
              12.1Minority
                  share in losses of subsidiary
              
              
              1.3
              
              
              1.4
              
              
              1.3Net
                  profit (loss)
              
              
              7.3
              %
              
              (1.5)
              %
              
              13.4




*Year
      Ended December 31, 2007 compared to Year Ended December 31,
      2006*




*Revenues.* Revenues
      increased by $17.8 million, or 18.8%, to $112.8 million in 2007 from $95.0
      million in 2006. This increase was primarily due to an increase of $14.3
      million, or 18.7%, in sales of our PillCam SB, an increase of $1.2 million,
      or
      8.3%, in revenues from sales of capital equipment, namely workstation and data
      recorder, an increase of $1.6 million in revenues from service contracts and
      individual parts, and revenues of $1.1 million from sales of our PillCam COLON
      capsule. Approximately 85% of the $17.8 million increase in revenues was
      attributable to increases in the number of products and services sold,
      approximately 5% was attributable to a higher average selling price of some
      of
      our products and approximately 10% was attributable to the impact of currency
      fluctuation. This increase in revenues was partially offset by a decrease of
      $0.4 million, or 29.6%, in revenues from our PillCam ESO capsules. The increase
      in revenues from capital equipment sales is attributable primarily to initial
      sales of the Given System in Japan following receipt of regulatory clearance
      in
      Japan.




*Cost
      of revenues and gross margins.* Cost of
      revenues, excluding a charge related to the early repayment of royalty bearing
      participation to the Office of Chief Scientist in Israel, increased to $29.7
      million in 2007, compared to $24.2 million in 2006. Gross margins, excluding
      the
      effect of the payment to the Office of Chief Scientist, or OCS, were 73.7%,
      compared to 74.6% in 2006. The decrease in gross margins was mainly due to
      discounts on workstations sold. Gross margins, including the effect of the
      charge resulted from the early repayment to OCS, were 69.4%




*Research
      and development.* Gross
      research and development expenses were $12.8 million, similar to 2006. Labor
      expenses increased by $0.8 million compared to 2006. Labor expenses in 2007
      included $0.4 million of stock-option compensation expenses as a result of
      the
      adoption of SFAS 123(R), compared to $0.6 million in 2006. Expenses related
      to
      quality assurance, maintenance of patents and other general expenses relating
      to
      research and development projects increased by $0.6 million. These increases
      were off set by a decrease of $1.1 million in R&D projects and a decrease of
      $0.3 million in clinical trials.




40


Research
      and development expenses, net of grants received from the Office of the Chief
      Scientist in Israel, totaled $11.6 million in 2007, compared to
      $10.8 million in 2006. Grants totaling $1.2 million were received in 2007
      compared to $1.9 million received in 2006. In both years, the grants were
      received for new products under development. The decrease in grants received
      in
      2007 is attributable to our decision to end our participation in the grant
      program of the OCS and to accelerate repayment of our royalty obligations to
      the
      OCS.




*Sales
      and marketing.* Sales
      and marketing expenses increased by $4.7 million, or 9.3%, to $55.4 million
      in
      2007 from $50.7 million in 2006. This increase consisted primarily of an
      increase of $4.3 million in employment-related expenses due to increased
      number of sales and marketing employees, an increase of $1.0 million in
      commissions to our sales representatives, and expenses of $0.7 million for
      setting up a subsidiary in Singapore. These increases were partially offset
      by a
      decrease of $1.2 million in commissions to Ethicon due to lower sales of our
      PillCam ESO capsule.




*General
      and administrative.* General
      and administrative expenses increased by $5.0 million, or 30.9%, to $21.0
      million in 2007 from $16.0 million in 2006. This increase was primarily due
      to an increase of $4.2 million in legal expenses resulting from the patent
      litigation with Olympus and an increase of $0.5 million resulting from
      additional stock-option compensation expense.




*Financing
      income, net.* Financing income, net, increased by $1.5 million to $5.5 million in 2007 from
      $4.0 million in 2006. The increase was due mainly to exchange rate gains.




*Taxes
      on income.* We
      had a
      tax expense of $4.5 million in 2007 compared to a tax expense of $0.1 million
      in
      2006. The increase in tax expense is mainly due to income resulting from the
      termination of our agreement with Ethicon Endo-Surgery ($3.0 million) and from
      taxes on increased profitability of our U.S subsidiary.




*Minority
      share in losses of subsidiary.* Minority
      share in losses of a subsidiary, Given Imaging K.K., was $1.5 million in 2007,
      compared to $1.3 million in 2006. Given Imaging K.K. started marketing
      activities in Japan on October 1, 2007, when national reimbursement became
      effective.




*Year
      Ended December 31, 2006 compared to Year Ended December 31,
      2005*




*Revenues.* Revenues
      increased by $8.2 million, or 9.5%, to $95.0 million in 2005 from $86.8 million
      in 2005. This increase was primarily due to an increase of $13.8 million, or
      22.1%, in sales of our PillCam SB capsule and an increase of $0.8 million in
      service contract revenues. Approximately 97% of the $13.8 million increase
      in
      sales of the PillCam SB capsule was attributable to increases in number of
      capsules sold, and approximately 3% was attributable to the higher average
      selling price of capsules compared to 2005. The increase in service contract
      revenues was attributable mainly to the increased number of maintenance
      agreements in the United States. These increases were partially offset by a
      decrease of $3.6 million, or 22.5%, in revenues from sales of capital equipment,
      namely workstation and data recorder, and by a decrease of $3.0 million in
      revenues from our PillCam ESO capsules. Approximately 52% of the decrease in
      revenues from capital equipment sales is attributable to lower quantities and
      48% of the decrease is attributable to lower average selling price. We sold
      a
      smaller number of capital equipment items primarily because a majority of
      gastroenterologists in the United States already have access to a capsule
      endoscopy system. The lower selling price is mainly due to promotional
      activities during the year and an increase of second systems sold to existing
      customers, which were sold at a significant discount.




*Cost
      of revenues and gross margins.* Cost of
      revenues increased to $24.2 million in 2006 compared to $22.1 million in 2005,
      while gross margins remained at 74.6% in 2006, similar to 2005. The increase
      in
      cost of revenues was mainly due to an increase of $1.4 million in consumption
      of
      raw materials, an increase of $0.3 million in labor expenses and an increase
      of
      $0.6 in other manufacturing costs. The increase was slightly offset by a
      decrease of $0.2 million in royalties payable to the Office of the Chief
      Scientist.




*Research
      and development.* Gross
      research and development expenses increased by $3.9 million, or 43.5%, to $12.7
      million in 2006 from $8.8 million in 2005. This increase was due mainly to
      a
      $1.4 million increase in labor expenses, $0.6 million of stock-options
      compensation expenses as a result of the adoption of SFAS 123(R), an increase
      of
      $0.6 million in investments in R&D projects, an increase of $0.7 million in
      investments in clinical trials and an increase of $0.5 million in other
      expenses.




Research
      and development expenses, net of grants received from the office of the Israeli
      Chief Scientist, totaled $10.8 million in 2006, compared to $7.6 million in
      2005. Grants totaling $1.9 million were received in 2006 compared to $1.2
      million received in 2005. In both years, the grants were received for new
      products under development.




*Sales
      and marketing.* Sales
      and marketing expenses increased by $7.4 million, or 28.6%, to $50.7 million
      in
      2006 from $43.3 million in 2005. This increase consisted primarily of an
      increase of $6.1 million in employment-related expenses due to increased
      number of sales and marketing employees, mainly in the United States, an
      additional $1.8 million of stock options-related compensation expenses as a
      result of the adoption of SFAS 123(R), an increase of $1.0 million in expenses
      related to our participation in trade shows and other marketing events, an
      increase of $0.5 million in clinical and regulatory activities in Japan and
      an
      increase of $0.8 in travel expenses. These increases were offset by a decrease
      of $1.5 million in commissions to Ethicon Endo-Surgery for sales of our PillCam
      ESO capsule and ancillary products, and a decrease of $1.3 million in the
      provision for uncollectible sales tax at our U.S. subsidiary of
      2005.




41




*General
      and administrative.* General
      and administrative expenses increased by $6.3 million, or 66.0%, to $16.0
      million in 2006 from $9.7 million in 2005. This increase was primarily due
      to an expense of $2.8 million resulting from additional stock-options
      compensation expense following the adoption of SFAS 123(R), an increase of
      $2.3
      million in salaries and fringe benefits, resulting mainly from changes in
      management, an increase of $0.7 million in legal and other professional expenses
      and an increase of $0.5 million in investments in information
      systems.




*Financing
      income, net.* Financing income, net, increased by $3.2 million to $4.0 million in 2006 from
      $0.8 million in 2005. The increase was due mainly to a change in our investment
      policy. Financing income in 2006 was generated from interest income of $1.6
      million from short-term deposits, income of $1.8 million from marketable
      securities and $0.8 million of exchange gains, offset by bank expenses of $0.3
      million.




*Taxes
      on income.* We
      had a
      tax expense of $0.1 million in 2006 compared to a tax benefit of $0.3 million
      in
      2005.




**Impact
      of Currency Fluctuations**




** Our
      sales
      to our customers in 2007 were denominated 67.5% in U.S. dollars, 23.3% in Euros
      and 9.2% in other currencies, depending on the location of the customer or
      the
      distributor used to fulfill our customers’ orders. In 2007, 31% of our expenses,
      principally salaries and related personnel expenses were denominated in Shekels,
      and we expect this level of Shekel expenses to continue for the foreseeable
      future. During 2007, the U.S. dollar weakened against the Shekel by 9.0%. In
      addition, 49% of our expenses were denominated in U.S. dollars, 13% were
      denominated in Euros and 7.0% were denominated in Yen or other currencies.
      If
      the value of a currency in which our revenues are denominated weakens against
      the value of a currency in which our expenses are denominated, there will be
      a
      negative impact on the profit margins for sales of our products. In addition,
      as
      of December 31, 2007, 38% of our cash and cash equivalents were denominated
      in
      currencies other than U.S. dollar and we are therefore subject to the risk
      of
      exchange rate fluctuations among U.S. dollar, Yen, Shekel, Australian dollar
      and
      Euro. In 2007, we have used different hedging tools in order to minimize the
      effect of currency fluctuations on our income. If we wish to maintain the
      dollar-denominated value of our product in non-U.S. markets, devaluation in
      the
      local currencies of our customers relative to the U.S. dollar could cause our
      customers to cancel or decrease orders or default on payment.




**B.**  **LIQUIDITY
        AND CAPITAL RESOURCES**


From
      our inception through December 31, 2007, we raised a total of $152 million
      through public and private sales of our equity securities. As of
      December 31, 2007, we had a cash balance of approximately $101.8 million,
      consisting of $37.1 million in cash and cash equivalents,$41.6 million invested
      in marketable securities and $23.1 million in short term investments. Our
      working capital, which we calculate by subtracting our current liabilities
      from
      our current assets, was $75.0 million.




We believe that our cash reserves and expected cash from operations will be
      sufficient to meet our anticipated cash needs for working capital and capital
      expenditures in 2008.




The
      following table sets forth the components of our cash flows for the periods
      indicated:




**2005**
              
              **2006**
              
              **2007****(in
                  thousands)**Net
                  cash provided by operating activities
              
              $
              13,488
              
              $
              2,861
              
              $
              11,375Net
                  cash used in investing activities
              
              
              (29,883
              )
              
              (30,757
              )
              
              (23,958
              )Net
                  cash provided by financing activities
              
              
              1,069
              
              
              6,795
              
              
              4,936Effect
                  of exchange rate changes on cash
              
              
              (179
              )
              
              255
              
              
              240Decease
                  in cash and cash equivalents
              
              $
              (15,505
              )
              $
              (20,846
              )
              $
              (7,407
              )




Net
      cash provided by operating activities was $11.4 million in 2007, compared to
      $2.9 million in 2006 and $13.5 million in 2005. The increase in net cash from
      operating activities in 2007 compared to 2006 resulted primarily from an
      increase in net income of $16.7 million, a decrease of $10.1 million in
      marketable securities, a decrease of $4.4 million in inventories and an increase
      of $8.0 million in accounts payable, offset by an increase of $17.5 million
      in
      trade and non-trade accounts receivable and a decrease of $13.7 million in
      deferred income. The decrease in net cash from operating activities in 2006
      compared to 2005 resulted primarily from a reduction of $2.6 million in net
      income (excluding compensation expenses which do not have an effect on cash
      flow) to $3.7 million, compared to net income of $6.3 million in 2005, an
      increase of $2.0 million in inventories, a net increase in trading securities
      of
      $5.1 million and a decrease of $4.8 in accounts receivable due to $5.0 million
      received in 2006 from Ethicon Endo-Surgery for the milestone achieved in 2005
      under our agreement with Ethicon.




42




Net
      cash used in investing activities was $24.0 million in 2007, compared to $30.8
      million in 2006 and $29.9 million in 2005. Investing activities in 2007
      consisted primarily of investment of $5.8 million in fixed assets and an
      investment of $17.8 million in marketable securities, net of proceeds from
      sales
      of such securities. Our capital expenditures in 2007 consisted primarily of
      investments of $2.7 million in manufacturing machinery and equipment, $1.3
      million in computer hardware and software, and $1.1 million in patents.
      Investment activities in 2006 consisted primarily of investing $24.9 million
      in
      marketable securities and $5.9 million in capital expenditures and the
      capitalization of costs associated with our patents and trademarks. Our capital
      expenditures in 2006 consisted primarily of $1.9 million in machinery and
      equipment, $0.5 million in new real property leases on our facilities, $1.3
      million in computers and software, $0.4 million in office furniture and
      equipment and $1.2 million in patents. Our capital expenditures in 2005
      consisted primarily of $2.3 million in machinery and equipment, $2.8 million
      in
      new real property leases on our facilities, $0.9 million in computers and
      software, $0.5 million in office furniture and equipment and $0.9 million in
      patents. We expect to continue investing significant amounts in 2008 in order
      to
      support our growth plans.




Net
      cash provided by financing activities was $4.9 million in 2007, compared to
      $6.8
      million in 2006 and $1.1 million in 2005. In 2007, net cash provided by
      financing activities resulted primarily from proceeds of $4.3 million received
      from the exercise of employee stock options. In 2006, net cash provided by
      financing activities resulted primarily from proceeds of $2.0 million received
      from the exercise of employee stock options and $4.8 million representing a
      minority investment in our Japanese subsidiary, Given Imaging K.K. In 2005,
      net
      cash provided by financing activities resulted primarily from proceeds from
      the
      exercise of employee stock options.




**Market
      Risk**




As
      of
      December 31, 2007, we had $37.1 million in cash and cash equivalents, which
      were
      invested in bank accounts and deposits with maturities of three months or less
      located with a number of highly-rated banks inside and outside of Israel. In
      addition, as of December 31, 2007, we had $41.6 million invested in marketable
      securities and $23.1 million invested in short term investments. We invest
      these
      additional amounts in longer-term financial instruments in order to seek to
      achieve a higher yield. Approximately two thirds of these cash balances were
      invested in securities issued by the United States government or its agencies
      and in AAA money market funds. The remainder was held in corporate bonds and
      commercial paper that were highly-rated by rating agencies at the time of
      investment. All investments are made in compliance with investment policies
      approved by the audit committee of our board of directors. Our cash and
      investments are subject to general credit, liquidity, market and interest rate
      risks, which may be exacerbated by the dislocation that has affected various
      sectors of the financial markets since the middle of 2007 and caused credit
      and
      liquidity issues for a number of reputable financial institutions. For more
      information about market risks, see “Item 3 – Risk Factors,” “Item 5 -
      Operating and Financial Review and Prospects – Impact of Currency
      Fluctuations” and “Item 11 – Quantitative and Qualitative Disclosures About
      Market Risks.”




**Corporate
      Tax**




Israeli
      companies were generally subject to income tax at the corporate rate of 29%
      in
      2007. This tax rate is expected to be gradually reduced to a rate of 25% by
      2010. As of December 31, 2007, our net operating loss carry-forwards for
      Israeli tax purposes amounted to $4.0 million. Under Israeli law, net operating
      losses can be carried forward indefinitely and offset against certain future
      taxable income.




In
      addition, our investment program in equipment and leasehold improvements at
      our
      manufacturing facility in Yoqneam, Israel has been granted approved enterprise
      status and we are, therefore, eligible for tax benefits under the Law for the
      Encouragement of Capital Investments, 1959 (the “Investment Law”). Subject to
      compliance with applicable requirements, the portion of our undistributed income
      derived from our approved enterprise program will be exempt from corporate
      tax
      for a period of ten years commencing in the first year in which we generate
      taxable income. The ten-year period may not extend beyond the later of
      14 years from the year in which approval was granted or 12 years from
      the year in which operations or production by the enterprise began. We received
      approved enterprise status for investments beginning in 1999. According to
      a
      recent reform to the Investment Law, we are permitted to claim tax benefits
      in
      respect of future investments retroactively on our corporate tax returns instead
      of filing an application for tax benefits in advance with the Investment Center,
      the administrator of the Investment Law, and without prior approval and without
      submitting any reports to the Investment Center. Audits of any claim for tax
      benefits will take place by the Israeli income tax authority as part of the
      general tax audits it may perform from time to time. We cannot assure our
      shareholders that we will receive approvals in the future for approved
      enterprise status or that tax benefits for approved investments will continue
      at
      current levels or at all.




We
      expect that a substantial portion of the income we derive in the future will
      be
      from this approved enterprise program. These benefits should result in income
      recognized by us being tax exempt for a specified period after we begin to
      report taxable income and exhaust any net operating loss carry-forwards. These
      benefits may not be applied to reduce the tax rate for any income that is not
      derived from sales of our products manufactured at our facility in Yoqneam,
      Israel.




43




Our
      approved enterprise status imposes certain requirements on us, such as the
      location of our manufacturing facility, location of certain subcontractors
      and
      the extent to which we may outsource portions of our production process. These
      requirements limit our ability to pursue production arrangements that may
      otherwise be more favorable to us if we want to maintain these tax benefits.
      Therefore, we may be required to weigh the possible loss of these benefits
      against other benefits from pursuing arrangements which are not, or which may
      not be considered by the relevant Israeli authorities to be, in compliance
      with
      these requirements. If we do not meet these requirements, Israeli law permits
      the authorities to cancel such tax benefits retroactively.




As
      of December 31, 2007, the net operating loss carry-forwards of our
      subsidiaries for tax purposes amounted to $31 million. A subsidiary’s net
      operating loss carry-forwards for tax purposes relating to a jurisdiction are
      generally available to offset future taxable income of such subsidiary in that
      jurisdiction, subject to applicable expiration dates.




**Government
      Grants**




Our
      research and development efforts have been financed, in part, through grants
      from the Office of the Chief Scientist of the Israeli Ministry of Industry,
      Trade and Labor. We have received approval for grants totaling $7.5 million
      from
      the Office of the Chief Scientist, including $0.7 million which was provided
      by
      the Office of Chief Scientist to support our 2007 research and development.




Under
      Israeli law, royalties on the revenues derived from sales of the Given System
      or
      any part of the Given System are payable to the Israeli government, generally
      at
      the rate of 3.0% during the first three years of sales and 3.5% beginning with
      the fourth year. The maximum aggregate royalties paid generally cannot exceed
      100% of the grants made to us. The amount bears interest equal to the 12-month
      London Interbank Offered Rate (LIBOR) applicable to dollar deposits that is
      published on the first business day of each calendar year. Royalties are paid
      on
      our consolidated revenues.




In
      light
      of our available cash position, we have recently paid all our outstanding
      royalty obligation and accrued interest of approximately $4.8 million to the
      Office of the Chief Scientist. This payment resulted in a one-time charge of
      approximately $4.8 million to our statement of operations in the fourth quarter
      of 2007.  As a result of this payment, we have no further outstanding
      royalty obligations to the Office of the Chief Scientist in
      Israel.




We
      continue to be involved in non-royalty bearing government-funded research
      programs inside and outside of Israel. One example is our leadership of a
      European consortium that will develop an integrated imaging and bio-sensing
      system to screen for cancer of the gastrointestinal (GI) tract. This “Nano-based
      capsule-Endoscopy with Molecular Imaging and Optical biopsy,” or NEMO project,
      began in December 2006. In addition to Given Imaging, this consortium includes
      other European companies and institutions. The NEMO group will invest a total
      of
€4.7 million over the next three years in this research, of which the European
      Commission will contribute €2.8 million. Our expected gross and net contribution
      during this period is €1.3 million and €0.6 million, respectively. The objective
      of the NEMO project is to increase patient compliance with currently recommended
      screening guidelines by developing an advanced cancer screening system that
      is
      patient-friendly, highly-sensitive and specific for early detection of cancer.
      To achieve this, NEMO will attempt to integrate optical technologies with
      Nano-technologies, bio-sensing and maneuvering technologies to create a unique
      PillCam capsule endoscope capable of secretion analysis and the detection of
      marked and deep tissue disorders. We believe that the combination of the image
      and molecular analysis to mark the tumor may provide a novel and effective
      medical device for mass screening of gastrointestinal cancer.




**C.**  **RESEARCH
        AND DEVELOPMENT**


Our
      gross research and development expenditures were $12.8 million for the year
      ended December 31, 2007, $12.7 million for the year ended December 31, 2006
      and
      $8.8 million for the year ended December 31, 2005. Our research and development
      activities are conducted by our research and development and regulatory affairs
      staff primarily at our headquarters in Israel. Our research and development
      efforts are focused primarily on developing new capsules to be used in the
      detection of abnormalities in the colon, improvements to our existing products
      and new technologies for future expansion of our product offering. In 2007,
      we
      completed the development of the newest version of our Pillcam SB and PillCam
      ESO capsules and received FDA clearance to market these capsules in the United
      States. In addition, we completed the development of our newest software, RAPID
      5.0, and received FDA clearance for this product in May 2007. We view our
      innovation and focus on capsule endoscopy technology as an important competitive
      advantage and intend to continue our focus on research and development
      activities.




**D.**  **TREND
        INFORMATION**


See
      discussion in Parts A and B of Item 5 “Operating Results and Financial Review
      and Prospects.”




**E.**  **OFF-BALANCE
        SHEET ARRANGEMENTS**
  N/A


44




**F.**  **CONTRACTUAL
        OBLIGATIONS**


The
      following table of our material contractual obligations as of December 31,
      2007,
      summarizes the aggregate effect that these obligations are expected to have
      on
      our cash flows in the periods indicated:




**Payments
                  due by period****Contractual
                  obligations**
              
              **Total**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **Later
                  Years****(in
                  thousands)**Capital
                  Leases(1)
              
              $
              569
              
              $
              121
              
              $
              101
              
              $
              103
              
              $
              105
              
              $
              139Operating
                  Leases(2)
              
              
              16,831
              
              
              3,580
              
              
              3,021
              
              
              2,268
              
              
              1,731
              
              
              6,231Purchasing
                  Obligations
              
              
              17,640
              
              
              6,510
              
              
              1,500
              
              
              2,250
              
              
              2,250
              
              
              5,130Tax
                Contingency Reserve(3)
              
              
              2,901
              
              
              2,901
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              37,941
              
              $
              13,112
              
              $
              4,622
              
              $
              4,621
              
              $
              4,086
              
              $
              11,500







(1)
              Consists
                  of capital leases for motor vehicles.(2)
              Consists
                  of operating leases for office and manufacturing space and motor
                  vehicles.(3)
              Tax
                contingency resulting from the termination of our agreement with
                Ethicon
                Endo-Surgery.




45




**ITEM
      6.**  **DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES**




**A.**  **DIRECTORS
      AND SENIOR MANAGEMENT**




Our
      executive officers and directors and their ages and positions as of the date
      of
      this annual report are as follows:




**Name**
              
              **Age**
              
              **Position****Executive
                  Officers:**Nachum
                  (Homi) Shamir
              
              54
              
              President,
                  Chief Executive Officer and DirectorKevin
                  Rubey
              
              50
              
              Chief
                  Operations OfficerYuval
                  Yanai
              
              55
              
              Chief
                  Financial OfficerChristopher
                  Rowland
              
              46
              
              President,
                  AmericasKazem
                  Samandari
              
              57
              
              President,
                  Asia-Pacific/JapanManfred
                  Gehrtz
              
              57
              
              President,
                  EMEAOri
                  Braun
              
              51
              
              Senior
                  Vice President of Business DevelopmentKeith
                  Chrzanowski
              
              47
              
              Senior
                  Vice President, Global Human ResourcesDaphna
                  Levy
              
              54
              
              Senior
                  Vice President, General Manager, Israel**Directors:**Israel
                  Makov (1)
              
              68
              
              Chairman
                  of the Board of DirectorsDoron
                  Birger(2)
              
              56
              
              DirectorJames
                  M. Cornelius (1)(2)(3)(4)
              
              64
              
              DirectorMichael
                  Grobstein (1)(2)(3)(4)
              
              65
              
              DirectorDennert
                  O. Ware (3)
              
              66
              
              DirectorArie
                  Mientkavich
              
              65
              
              DirectorProf.
                  Anat Loewenstein
              
              48
              
              Director







(1)
              Member
                  of our executive committee.(2)
              Member
                  of our compensation and nominating committee.(3)
              Member
                  of our audit committee.(4)
              Outside
                  director under the Israeli Companies
                  Law.




**Nachum (Homi) Shamir** has
      served as our President and Chief Executive Officer and a director since April
      9, 2006. Prior to joining us, Mr. Shamir served as Corporate Vice President
      of
      Eastman Kodak Company and as the President of Eastman Kodak’s Transaction and
      Industrial Solutions Group, which includes several business units, including
      Kodak Versamark, Inc. (whose operations were previously those of Scitex Digital
      Printing Inc.) of which Mr. Shamir was President and Chief Executive Officer.
      From June 2003 to January 2004, Mr. Shamir served as the President and Chief
      Executive Officer of Scitex Corporation. From January 2001 to January 2004,
      he
      served as the President and Chief Executive Officer of Scitex Digital Printing,
      having previously served as its Chief Operating Officer since July 2000. Prior
      thereto, Mr. Shamir was Managing Director and General Manager of Scitex Digital
      Printing (Asia Pacific) Pte Ltd., from the incorporation of this Singapore-based
      company in 1994. From 1993 until 1994 he was with the Hong Kong based Scitex
      Asia Pacific (H.K.) Ltd. Before joining Scitex, Mr. Shamir held senior
      management positions at various international companies mainly in the Asia
      Pacific regions. Mr. Shamir holds a B.Sc from the Hebrew University of Jerusalem
      and an M.P.A. from Harvard University.




**Kevin
      Rubey** has
      served as our Chief Operations Officer since June 2001. Prior to joining
      us, from 1998 to May 2001, Mr. Rubey worked at Eastman Kodak Company,
      where he led global manufacturing and operations for the Health Imaging Business
      Unit. From 1996 to 1998, Mr. Rubey was Manufacturing Director of the
      Medical Imaging Business Unit of Imation Corporation, a U.S. information
      technology company specializing in data storage and color image management.
      Prior to that, from 1977 to 1996, Mr. Rubey worked at the 3M Corporation in
      a variety of positions in the health, consumer and information technology
      businesses. Mr. Rubey holds a B.Sc. in mechanical engineering and an M.B.A.
      from the University of Minnesota.




**Yuval
      Yanai** has
      served as our Chief Financial Officer since September 1, 2005. From October
      2000
      through August 2005, he served as Senior Vice President and Chief Financial
      Officer of Koor Industries Ltd., one of Israel’s largest holding corporations.
      Prior to that, from April 1998 to September 2000 he served as Vice President
      and
      Chief Financial Officer of NICE Systems Ltd., an Israeli global provider of
      Insight from Interactions, and from 1991 to April 1998, he was the Vice
      President, Finance and Chief Financial Officer of Elscint Ltd., a former Israeli
      company engaged in the manufacturing of medical imaging devices that was
      acquired by larger companies in this field. He joined Elscint in 1985 and served
      as Corporate Controller and Corporate Treasurer through 1991. Previously, Mr.
      Yanai served as a director of Makteshim-Agan Industries Ltd., Equity One, Inc.,
      BVR Systems Ltd., Tadiran Communication Ltd., The Elisra Group and Telrad
      Networks Ltd. Mr. Yanai holds a B.Sc. in Accounting and Economics from the
      Tel
      Aviv University.




46




**Christopher
      Rowland** has
      served as President of our Americas region since May 2006. He joined us in
      February 2006 as our Senior Vice President of Business Development and Corporate
      Strategy. Prior to that, Mr. Rowland worked for 17 years at Boston Scientific
      Corporation, a medical device company, in various sales, marketing and general
      management positions across all Boston Scientific divisions and in several
      countries. Most recently he was Vice President of Marketing for the Endovations
      division of Boston Scientific, where he had responsibility for all marketing,
      product development and launch activities of products in the gastrointestinal
      field. Prior to that, from 1985 until 1989 Mr. Rowland worked for Xerox
      Corporation in various sales positions. Mr. Rowland has a B. Sc. in Marketing
      from Southern Illinois University.




**Kazem
      Samandari** has
      served as the President of our Asia Pacific/Japan Region since July 2007. Prior
      to joining us, from 2004 to 2007, Mr. Samandari was Executive Vice President
      Global Sales & Marketing at Eastman Kodak, Inkjet Printing Solutions. From
      1994 to 2004, Mr. Samandari served as the Vice President of Scitex Digital
      Printing operations in Asia Pacific & Japan and was responsible for the
      commercial, technical & legal aspects of the activities in the region. From
      1986 to 1994, Mr. Samandari served as Managing Director of GMC Digital Systems,
      a high-tech start-up company founded in 1984, which was a pioneer in the field
      of high speed, high performance, digital printing equipment. Mr. Samandari
      holds
      an M.S. degree in electrical & electronics engineering and a Ph.D. in
      technical sciences and industrial economy from the Swiss Federal Institute
      of
      Technology.




**Manfred
      Gehrtz** has
      served as President, EMEA since April 2007. Prior to that, he was President,
      International between January 2006 and March 2007. Prior to that, from January
      2004 until December 2005, Mr. Gehrtz served as our Corporate Vice President,
      General Manager for Europe. Prior to joining us, from 1995 to 2003, Mr. Gehrtz
      was Managing Director, the head of the Endoscope Division and Vice President
      of
      Medical Systems Europe at Olympus Optical Co. (Europa) GmbH, a developer of
      products in the fields of photography, endoscopy, microscopy, communication
      and
      diagnostics. From 1990 to 1995, Mr. Gehrtz was Managing Director and Chief
      Executive Officer of Aesculap Meditec GmbH, a German company that develops
      and
      manufactures medical laser systems. Prior to that, from 1986 to 1990, Mr. Gehrtz
      was a Specialist, Lab Manager and Production Facility Manager at IBM Deutschland
      GmbH. Mr. Gehrtz holds a Ph.D. in Physical Chemistry and an M.Sc. in Physics
      from the University of Munich, Germany. From 1983 to 1985, Mr. Gehrtz was a
      Post-Doctoral Fellow at the IBM Research Laboratory in San Jose,
      California.




**Ori
      Braun** has
      served as Senior Vice President - Business Development since October 2006.
      Prior
      to joining us, Mr. Braun served as President of Valor Inc., a leader in
      productivity increasing engineering software solutions to the PCB design,
      fabrication and assembly industry. From 2004 to 2005, he served as President
      of
      LifeWatch Inc., a leading cardiac monitoring services company. From 1985 to
      2004
      he founded and held various CEO and executive positions at 3DV Systems Inc.,
      a
      company developing and selling 3D camera technology, at Helios Software
      Engineering Ltd., a company in the business of simulation technology that was
      acquired by Cadence Design Systems Inc., and at Lansoft Computing Ltd. Between
      1994 and 1996, Mr. Braun held the position of Vice President Business
      Development at Rafael Development Corporation, or RDC, a large shareholder
      of
      Given Imaging, which is a holding company controlled by Discount Investment
      Corporation Ltd., or DIC, another significant shareholder of Given Imaging.
      Mr.
      Braun holds a B.Sc. in Mechanical Engineering from the Ben Gurion University
      in
      Beer Sheva, Israel.




**Keith
      A. Chrzanowski** has
      served as our Senior Vice President of Human Resources since January 1,
      2008.  Prior to that, from January 2005, until December 2007, he was
      Director of Human Resources of our Americas region.  Prior to joining us,
      from July 2002 until January 2005, Mr. Chrzanowski was Senior Director/Vice
      President of Human Resources for McKesson Provider Technologies, a division
      of
      McKesson  specializing in delivering software to include automation and
      robotics, business process re-engineering, analytics, and other services that
      connect healthcare providers, physicians, payors and patients across all care
      settings.  From July 2000 until July 2002, Mr. Chrzanowski was Vice
      President of Human Resources for Spherion’s Outsourcing Group which provided
      services to Fortune 500 customers.  From 1991 to 2000, Mr. Chrzanowski
      worked as a Human Resource Manager and Director of Human Resources for
      diagnostic and medical supply divisions which initially were a part of Baxter
      Healthcare and eventually acquired by Cardinal Health in 1999.  Prior to
      joining Baxter, Mr. Chrzanowski worked for Schlumberger Industries in the United
      States and Canada as a Human Resources Manager from 1987 until 1991.  From
      1983 until 1987 Mr. Chrzanowski held a variety of Human Resources positions
      in
      support of Beecham’s Consumer Products businesses.  Mr. Chrzanowski has a
      B.A. in Communications from Western Illinois University and an M.A. in
      Organizational Theory from Norwich University.




**Daphna
      Levy** has
      served as our Senior Vice President and General Manager, Israel, since January
      2008. Prior to that, from January 2002 until December 2007, Ms. Levy served
      as
      our Vice President-Research and Development and from November 2000 until
      December 2001 as manager of our algorithm group. Prior to joining us, from
      January 1999 until November 2000, Ms. Levy was a project leader at Interspark
      Ltd., a subsidiary of Philips DAP. From 1996 to 1999, Ms. Levy served as manager
      of an image processing group at Rafael – Armament Development Authority.
      Ms. Levy holds an M.Sc. in electrical engineering from Santa Clara University,
      California, a B.Sc. in electrical engineering from the Israel Institute of
      Technology and an M.B.A. from Tel Aviv University, Rekanati School of Business.




47




**Israel
      Makov** has
      served as the Chairman of our board of directors since July 2007. Prior to
      joining us, he served as President and Chief Executive Officer of Teva
      Pharmaceutical Industries Ltd. from April 2002 until March 2007 and is currently
      serving as Advisor to the Board of Directors of Teva. Previously, he served
      as
      Teva’s Chief Operating Officer from January 2001, Executive Vice President from
      1999 and Vice President for Business Development from 1995 until 1999. Prior
      to
      joining Teva, Mr. Makov was Chief Executive Officer of Gottex from 1993-1995,
      Chief Executive Officer of Yachin Hakal Ltd. from 1991 until 1993 and Chairman
      of Axiom Ltd. from 1987 until 1991. Mr. Makov was also a director of Bank
      Hapoalim Ltd. from October 2002 until February 2006, a director of Ramot at
      Tel
      Aviv University from 2001 until January 2006, and one of the founders and a
      director of the INNI-Israel National Nanotechnology Initiative since 2003.
      Mr.
      Makov has also served on the Board of Governors of the Technion – Israel
      Institute of Technology since 2006 and on the Board of Governors of the Weizmann
      Institute of Science since 2007. Mr. Makov holds a B.Sc. in Agriculture and
      M.Sc. in Economics from the Hebrew University Jerusalem.




**Doron
      Birger** has
      served as a director since June 2000. From August 2002 until July 2007, Mr.
      Birger was the Chairman of our board of directors. Mr. Birger has served as
      Chief Executive Officer of Elron Electronic Industries since August 2002,
      President since 2001, Chief Financial Officer from 1994 to August 2002, and
      Corporate Secretary from 1994 to 2001. Mr. Birger is a director of RDC
      Rafael Development Corporation and a director or chairman of the board of
      directors of many privately held companies in the Elron group in the fields
      of
      medical devices, semiconductors, communication and advanced materials. From
      1991
      to 1994, Mr. Birger was Chief Financial Officer at North Hills
      Electronics Ltd., an advanced electronics company. From 1990 to 1991,
      Mr. Birger served as Chief Financial Officer of Middle-East
      Pipes Ltd., a manufacturer in the metal industry. From 1988 to 1990,
      Mr. Birger served as Chief Financial Officer of Maquette Ltd., a
      manufacturer and exporter of fashion items. From 1981 to 1988, Mr. Birger
      was Chief Financial Officer and director at Bateman Engineering Ltd. and
      I.D.C. Industrial Development Company Ltd. Mr. Birger holds a B.A. and
      an M.A. in economics from the Hebrew University, Jerusalem.




**James
      M. Cornelius** has
      served as a director since October 2001 and was elected as an outside director
      in December 2001. Mr. Cornelius was elected Chief Executive Officer of
      Bristol-Myers Squibb (BMS) on April 30, 2007 and also became Chairman of BMS
      in
      February 2008. Prior to that, he served as interim Chief Executive Officer
      of
      BMS from September 12, 2006. He has been as a member of the BMS Board since
      January 2005. From November 15, 2005 to April 21, 2006, Mr. Cornelius was
      Chairman of the Board and Chief Executive Officer of Guidant Corporation (a
      leading cardiac and vascular medical device company listed on the NYSE), until
      the sale of Guidant to Boston Scientific Corporation. From 2000 until 2006,
      Mr.
      Cornelius served as the non-executive Chairman of the board of directors of
      Guidant Corporation. From 1994 until 2000, Mr. Cornelius served as the Senior
      Executive and Chairman of Guidant Corporation. From 1983 to 1994, Mr. Cornelius
      was a director, member of the Executive Committee, and Chief Financial Officer
      of Eli Lilly and Company. From 1980 to 1982, Mr. Cornelius served as President
      and Chief Executive Officer of IVAC Corporation, formerly part of Eli Lilly’s
      Medical Device and Diagnostics Division. Mr. Cornelius also serves as a director
      for The DIRECTV Group, Inc. Mr. Cornelius holds a B.A. in accounting and an
      M.B.A from Michigan State University.




**Michael
      Grobstein** has
      served as a director since October 2001 and was elected as an outside director
      in December 2001. Mr. Grobstein serves as a director of Bristol-Myers
      Squibb, as chairman of its audit committee and a member of its compensation
      and
      management development committee. Mr. Grobstein served as a director of
      Guidant Corporation from 1999 to 2006, at which time Guidant was acquired by
      Boston Scientific Corporation. During that period, he was chairman of Guidant’s
      audit committee and a member of its corporate governance committee.
      Mr. Grobstein worked with Ernst & Young LLP from 1964 to 1998, and
      was admitted as a partner in 1975. At Ernst & Young, Mr. Grobstein
      served as a Vice Chairman-International Operations from 1993 to 1998, as Vice
      Chairman-Planning, Marketing and Industry Services from 1987 to 1993, and Vice
      Chairman-Accounting and Auditing Services from 1984 to 1987. In these positions,
      Mr. Grobstein, among other things, oversaw the global strategic planning of
      the firm, was responsible for developing and implementing the firm’s worldwide
      audit service delivery process and consulted with multinational corporations
      on
      a wide variety of financial reporting matters. Mr. Grobstein is a certified
      public accountant in the United States and holds a B.Sc. in accounting from
      the
      University of Illinois.




**Arie Mientkavich** has
      served as a director since July 2007. **** In
      addition, he has served as Chairman of the Board of Directors of Elron
      Electronic Industries since January 2007 and in parallel as Chairman of the
      Boards of Rafael Development Corporation Ltd., or RDC, and Clal Tourism Ltd.
      Elron and RDC are our affiliates. Mr. Mientkavich has also been a director
      of
      Medingo Ltd. since November 2007, Chairman of the Board of Directors of Gazit
      Globe (Development) Ltd. and Deputy Chairman of IDB Holding Corporation Ltd.
      since 2006 and Deputy Chairman of Gazit Globe Ltd. since 2005. Prior to this,
      from 1997 through January 2006, Mr. Mientkavich served as Chairman of the Board
      of Directors of Israel Discount Bank Ltd. and its major subsidiaries, Israel
      Discount Bank of New York, Mercantile Discount Bank Ltd. and Discount Management
      Provident Funds. Between 1987 and 1997, Mr. Mientkavich served as Active
      Chairman of the Board of the Israel Securities Authority—the Israeli equivalent
      of the United States Securities and Exchange Commission. Prior to that, from
      1979 through 1987, he was the General Counsel of the Israeli Ministry of
      Finance. Mr. Mientkavich holds degrees in Political Science and Law from the
      Hebrew University, Jerusalem and is a member of the Israeli Bar
      Association.




48




**Dennert
      (Denny) O. Ware** has
      served as a director since July 2007. Prior to joining our board of directors,
      he served as a Director, President and Chief Executive Officer of Kinetic
      Concepts, Inc., or KCI, from April 2000 to December 2006. Before joining KCI,
      he
      served as President and Chief Executive Officer of Boehringer Mannheim
      Corporation, a market leader in medical diagnostic equipment. He joined
      Boehringer in 1972 as Vice President of Technical Affairs of DePuy, the
      company’s Orthopedic Division. He later held senior management positions in the
      Diagnostic Division and became President and Chief Executive Officer of
      Boehringer Mannheim’s North American operations in 1997 a position he held until
      the acquisition of Boehringer Mannheim Group by Hoffman La Roche in 1998. After
      this acquisition, Mr. Ware continued on as President and Chief Executive Officer
      of Roche Diagnostics Corp until the end of 1999. Mr. Ware holds a BSChE degree
      from Purdue University and an M.B.A from Indiana University.




**Prof.
      Anat Loewenstein** has
      served as a director since August 2005. Prof. Loewenstein completed her training
      in Johns Hopkins University Hospital in Baltimore in 1996. She has been the
      Director of the Department of Ophthalmology, Tel Aviv Medical Center since
      January 2000, Vice Dean of the Sackler School of Medicine, Tel Aviv University
      since September 2006, and a Professor at the Sackler School of Medicine since
      April 1999. In addition, since 2000 Prof. Loewenstein has been a member of
      the
      Advisory Board of Notal Vision Ltd., a medical device company in the area of
      diagnostic ophthalmology, and from 1996 until 1997 she served as an advisor
      to
      Talia Technologies Ltd., which developed an instrument in diagnostic
      ophthalmology. She is the principal investigator in multiple multicenter drug
      and device studies for Pfizer, Novartis, Roche and Zeiss. She is a member of
      the
      IRB committee of the Israeli Ministry of Health. Prof. Loewenstein holds an
      M.D.
      from the Hebrew University of Jerusalem and Masters Degree in Health
      Administration from Tel Aviv University.




**B.**  **COMPENSATION**


The
      aggregate compensation paid by us and our subsidiaries to our directors and
      executive officers for the year ended December 31, 2007 was $7.9 million
      (excluding director fees detailed below). This amount includes $3.7 million
      of
      stock based-compensation as described below. This amount also includes
      approximately $0.2 million set aside or accrued to provide pension, severance,
      retirement or similar benefits or expenses, but does not include business
      travel, relocation, professional and business association dues and expenses
      reimbursed to office holders, and other benefits commonly reimbursed or paid
      by
      companies in Israel.




In
      2007, we granted our directors and executive officer a total of 1,178,742
      options to purchase our ordinary shares and 6,000 restricted shares. This number
      includes 580,742 options granted to Mr. Makov in consideration for his
      engagement as Chairman of our board of directors and 100,000 options granted
      to
      Mr. Shamir, our President and Chief Executive Officer. The exercise price of
      these options ranges between $21.77 and $29.42 with a weighted average exercise
      price of $27.52. Equity awards granted to executive officers typically vest
      ratably over a four-year period. Equity awards granted to non-employee directors
      typically vest after one year of continued service on the board of directors
      or
      a committee thereof. The exercise price of these options was equal to the fair
      market value of our ordinary shares on the date of grant. These options will
      expire five years from the date of grant.




The
      regular fees for each non-employee director include a quarterly fee of $6,250
      for their service on our board of directors, and a $1,500 fee for attending
      and
      participating in each meeting of the board of directors or any committee of
      the
      board of directors. The total amount of these payments in 2007 was $0.4 million.
      The directors’ fees for service by our director, Doron Birger, are paid to Elron
      Electronic Industries, where he serves as President and Chief Executive Officer.
      In addition, all of our directors were reimbursed for their expenses for each
      board of directors meeting attended.




Please
      see Item 7 “Major Shareholders and Related Party Transactions—Agreements with
      Directors and Officers — Employment Agreements” for information regarding the
      employment agreements and compensation of Nachum Shamir, our President and
      Chief
      Executive Officer and Mr. Israel Makov, the Chairman of our board of directors.




**C.**  **BOARD
        PRACTICE**


**Board
      of Directors and Officers**




Our
      articles of association provide that we may have up to 12 directors. Each of
      our
      directors is elected at an annual general meeting of our shareholders by a
      vote
      of the holders of a majority of the voting power present and voting at that
      meeting, except the outside directors under the Israeli Companies Law, whose
      election process is described below. Our board of directors currently consists
      of eight directors. Each director listed above will hold office until the next
      annual general meeting of our shareholders, except for our outside directors
      who
      were initially elected in December 2001 for a three-year term and are now
      serving their third three-year term, which will expire December 31, 2010. Other
      than Nachum Shamir, our President and Chief Executive Officer, and Mr. Israel
      Makov, our Chairman, none of our directors are our employees or are party to
      a
      service contract with us. Messrs. Chen Barir and Eyal Lifschitz left our board
      of directors in July 2007.




A
      simple majority of our shareholders at a general meeting may remove any of
      our
      directors from office, except the outside directors nominated under the Israeli
      Companies Law, and elect directors in their stead or fill any vacancy, however
      created. In addition, vacancies on the board of directors, other than vacancies
      created by an outside director, may be filled by a vote of a majority of the
      directors then in office. Our board of directors may also appoint additional
      directors up to the maximum number permitted under our articles of association.
      A director so chosen or appointed will hold office until the next annual meeting
      of our shareholders.




49




Each
      of our executive officers serves at the discretion of the board of directors
      and
      holds office until his or her successor is elected or until his or her earlier
      resignation or removal. In 2007, we hired Mr. Kazem Samandari as president
      of
      our Asia-Pacific/Japan region. Effective January 1, 2008, Mr. Keith Chrzanowski
      became our Senior Vice President of Human Resources and Ms. Daphna Levy was
      appointed Senior Vice President and General Manager, Israel. Mr. Mark Gilreath,
      our former Chief Marketing Officer, left us at the end of 2007.




There
      are no family relationships among any of our directors or executive officers.
      All of our executive officers have signed employment agreements.




**Outside
      and Independent Directors**




Under
      Israel’s Companies Law, companies incorporated under the laws of the State of
      Israel whose shares are listed on an exchange, including the Nasdaq Global
      Market, are required to appoint at least two outside directors. Outside
      directors are required to meet standards of independence set forth in the
      Israeli Companies Law. Outside directors are elected by a majority vote at
      a
      shareholders’ meeting, provided that either (1) the majority of shares voted at
      the meeting, including at least one-third of the shares of non-controlling
      shareholders voted at the meeting, vote in favor of the election of the outside
      director, or (2) the total number of shares voted against the election of the
      outside director does not exceed one percent of the aggregate voting rights
      in
      the company. The initial term of an outside director is three years. Under
      a
      recent amendment to the Israeli Companies Law, an outside director of a company
      whose shares are dually listed on an Israeli exchange and on a foreign exchange,
      including the Nasdaq Global Market, may be re-elected to one or more additional
      three-year terms, subject to the conditions described above for election of
      outside directors, if the audit committee and the board of directors have
      determined that these additional terms benefit the company in light of the
      outside director’s expertise and contribution to the company and the reasons for
      this determination have been presented to the shareholders prior to their
      approval of the re-election. Previously, an outside director could serve a
      maximum of two terms as an outside director. Outside directors may only be
      removed by the same percentage of shareholders as is required for their
      election, or by a court, and then only if the outside directors cease to meet
      the statutory requirements for their appointment or if they violate their duty
      of loyalty to the company. If an outside directorship becomes vacant and there
      are no other two serving outside directors, a company’s board of directors is
      required under the Companies Law to call a shareholders’ meeting immediately to
      appoint a new outside director. Our two outside directors are James Cornelius
      and Michael Grobstein. At our annual shareholders meeting in July 2007, they
      were elected to a third term as outside directors, which will expire in December
      2010.




Each
      committee of a company’s board of directors is required to include at least one
      outside director and our audit committee is required to include both outside
      directors. An outside director is entitled to compensation as provided in
      regulations adopted under the Companies Law and is otherwise prohibited from
      receiving any other compensation, directly or indirectly, in connection with
      services provided as an outside director.




An
      amendment to the Companies Law that became effective on January 19, 2006
      provides that every outside director appointed to the board of directors of
      an
      Israeli company must qualify as a “financial and accounting expert” or as
“professionally competent,” as such terms are defined in the applicable
      regulations under the Companies Law, and that at least one outside director
      must
      qualify as a “financial and accounting expert.” We comply with these
      requirements. In addition, this amendment requires Israeli companies to
      determine how many directors, in addition to the outside directors, qualify
      as
“financial and accounting experts” taking into account the nature of the
      company’s business, the complexity of the activities carried out by the company
      and the size of its board of directors. In February 2006, our board of directors
      determined that at least one of our directors will be a “financial and
      accounting expert,” in addition to the outside directors. Currently, Doron
      Birger qualifies as a “financial and accounting expert,” as defined in the
      applicable regulations.




In
      addition to the requirements of the Companies Law, we comply with the Nasdaq
      Global Market listing requirements, under which a majority of the members of
      our
      board of directors (including all members of our audit committee) are required
      to be independent, as that term is defined in the rules of the Nasdaq Global
      Market. Our board of directors has determined that all of our directors, except
      Messrs. Makov and Shamir, qualify as independent directors in accordance with
      the applicable rules.




**Audit
      Committee**




Under
      the Companies Law, the board of directors of any company whose shares are listed
      on any exchange must also appoint an audit committee comprised of at least
      three
      directors including all of the outside directors. The audit committee may not
      include the chairman of the board of directors, the general manager, the chief
      executive officer, a director employed by the company or who provides services
      to the company on a regular basis, or a controlling shareholder or a relative
      of
      a controlling shareholder. Under the Nasdaq Global Market listing requirements,
      we are required to have an audit committee consisting of at least three members,
      each of whom must be “independent”, as defined under the rules of the Nasdaq
      Global Market and the Securities Exchange Act of 1934 (the “Exchange Act”), and
      each of whom must be able to read and understand fundamental financial
      statements. In addition, one member of the audit committee must have past
      employment experience in finance or accounting or other comparable experience
      which results in the individual’s financial sophistication. We believe that each
      of the current members of our audit committee, Michael Grobstein, James
      Cornelius and Dennert Ware, meets these independence and financial literacy
      requirements. In addition, the board of directors has determined that Mr.
      Grobstein has the requisite experience and is the financial expert serving
      on
      our audit committee.




50




Under
      the Companies Law, the role of the audit committee is to identify irregularities
      in the business management of the company, in consultation with the internal
      auditor and the company’s independent accountants, and suggest an appropriate
      course of action. In addition, it is the role of the audit committee to approve
      transactions with related parties and other corporate actions specified in
      the
      Companies Law. Under the Nasdaq Global Market listing requirements, our audit
      committee has adopted an audit committee charter setting forth its
      responsibilities. The audit committee charter governing the actions of our
      audit
      committee states that in fulfilling this role the committee is entitled to
      rely
      on interviews and consultations with our management, our internal auditor and
      our independent public accountants, and is not obligated to conduct any
      independent investigation or verification. The charter also states that the
      audit committee is required to nominate the company’s independent accountants,
      which the shareholders subsequently are required to approve.




**Internal
      Auditor**




Under
      the Companies Law, the board of directors must appoint an internal auditor
      nominated by the audit committee. The role of the internal auditor is to examine
      whether a company’s actions comply with the law and orderly business procedure.
      Under the Companies Law, the internal auditor may be an employee of the company
      but not an interested party or an office holder, or affiliate, or a relative
      of
      an interested party or an office holder, nor may the internal auditor be the
      company’s independent accountant or its representative. An interested party is
      defined in the Companies Law as any person or entity holding 5% or more of
      the
      outstanding shares or the voting rights in the company, any person or entity
      who
      has the right to designate one director or more or the chief executive officer
      of the company or any person who serves as a director or as a chief executive
      officer. Our internal auditor is an employee of the Israeli member firm of
      Deloitte Touche Tohmatsu.




**Compensation
      and Nominating Committee**




Our
      compensation and nominating committee consists of our directors James Cornelius,
      Doron Birger and Michael Grobstein. In accordance with the rules of the Nasdaq
      Global Market, our compensation and nominating committee adopted a charter,
      which sets forth its responsibilities. Pursuant to the charter, the compensation
      and nominating committee is authorized to make decisions regarding executive
      compensation and terms and conditions of employment, as well as to recommend
      that the board of directors issue options under our stock option plans. The
      compensation and nominating committee is also responsible for recommending
      to
      the board of directors nominees for board membership. The composition of the
      committee satisfies the Nasdaq Global Market’s independent director
      requirements.




**Executive
      Committee**




We
      have an executive committee, consisting of three directors: Michael Grobstein
      (Chairman), Israel Makov and James Cornelius. According to the committee’s
      charter:




•
              the
                  executive committee must be comprised of at least three directors
                  and the
                  majority of the committee’s members must qualify as “independent
                  directors” under applicable law and the Nasdaq Global Market independent
                  director requirements (and one member must qualify as an “outside
                  director” under the Israeli Companies Law);•
              the
                  Chairman of our board of directors must serve as a member of the
                  executive
                  committee;•
              the
                  executive committee shall meet as needed to conduct and oversee
                  our
                  affairs and fulfill its responsibilities and not less than once
                  each
                  quarter;•
              the
                  executive committee may exercise the full powers of our board of
                  directors
                  between board meetings where, at the discretion of the chairman
                  of the
                  board, timely action is required or warranted, provided that the
                  committee
                  may not act in lieu of our board in any matter in respect of which
                  the
                  delegation of powers is prohibited under applicable law or that
                  requires
                  the approval of our shareholders; and•
              the
                  committee is otherwise granted, among other things, the mandate
                  to review
                  the details of our business strategy and make recommendations to
                  the
                  board, to oversee and assist our chief executive officer as necessary,
                  to
                  monitor organization and management changes in our company and
                  take any
                  other action delegated or assigned from time to time by our board
                  of
                  directors.


51




**D.**  **EMPLOYEES**


As
      of December 31, 2007, we and our subsidiaries had 458 employees of whom 232
      were based in Israel, 150 in the United States, 50 in Europe, 13 in Japan and
      13
      in Asia-Pacific. This reflects an increase of 14.8 % in the number of employees
      since December 31, 2006. This increase was mainly in research and development
      employees in Israel and as a result of hiring new employees to our Japanese
      subsidiary to support the increasing business in Japan following regulatory
      clearance for our products there in April 2007. We expect our headcount to
      increase further in 2008, primarily in research and development, manufacturing
      and sales and marketing.




Under
      Israeli law, we and our employees in Israel are subject to protective labor
      provisions, including restrictions on working hours, minimum wages, minimum
      vacation, minimum termination notice, sick pay, severance pay and social
      security as well as equal opportunity and anti-discrimination laws. Orders
      issued by the Israeli Ministry of Labor and Welfare make certain industry-wide
      collective bargaining agreements and collective bargaining agreements in the
      electricity, steel and electronics industries applicable to us. These agreements
      affect matters such as cost of living adjustments to salaries, length of working
      hours and week, recuperation, travel expenses, and pension rights. Our employees
      are not represented by a labor union. We provide our employees with benefits
      and
      working conditions above the required minimum and which we believe are
      competitive with benefits and working conditions provided by similar companies
      in Israel. We have written employment agreements with all of our Israeli
      employees and with our senior non-Israeli employees. Competition for qualified
      personnel in our industry is intense and we dedicate significant resources
      to
      employee retention. We have never experienced labor-related work stoppages
      and
      believe that our relations with our employees are good.




**E.**  **SHARE
        OWNERSHIP**


**Share
      Ownership by Directors and Executive Officers**




For
      information regarding ownership of our ordinary shares by our directors and
      executive officers, and regarding options to purchase our ordinary shares
      granted to Nachum Shamir, our President and Chief Executive Officer and to
      Israel Makov, the Chairman of our board of directors, see Item 7 “Major
      Shareholders and Related Party Transactions.”




**Stock
      Option Plans**




*2006
      Equity Incentive Plan*




Our
      2006 Equity Incentive Plan provides for the grant of options to purchase our
      ordinary shares or the grant of restricted stock to eligible employees,
      directors and consultants of us or our subsidiaries. The 2006 equity plan is
      administered by our Board of Directors and Compensation and Nominating
      Committee. The plan contains provisions concerning the vesting, price, exercise
      and other terms of awards; however, in many cases our Compensation and
      Nominating Committee has authority to grant awards under different terms at
      its
      discretion. We have reserved for issuance a total of 4,000,000 authorized but
      unissued ordinary shares under the 2006 equity plan. As of December 31, 2007,
      we
      had outstanding under this plan options to purchase 1,968,392 shares and 106,000
      shares of restricted stock.




The
      2006 equity plan permits us to grant a number of equity instruments, such as
      options, restricted stock, restricted stock units and stock appreciation rights.
      Our previous plans only permitted the grant of options. Option awards under
      this
      plan must be granted at no less than the fair market value of our ordinary
      shares on the date of the grant and the term of the awards may not exceed ten
      years. Our current policy is that options granted under the 2006 equity plan
      expire five years following the date of the grant.




Generally,
      where a grant of an award under the plan is the first grant of equity to a
      particular person, 50% of the award is exercisable on the second anniversary
      of
      the date of grant, and 25% becomes exercisable on each of the third and fourth
      anniversaries of the date of the grant. In cases of subsequent grants, awards
      vest in four equal installments beginning with the first anniversary of the
      grant. To the extent the awards have vested, they may be exercised in whole
      or
      in part from time to time until their expiration.




In
      case of participating employees and consultants, upon the termination of their
      employment or service, all unvested awards are cancelled. All vested awards
      may
      be exercised within 180 days following termination. All vested awards not
      exercised within this period are automatically forfeited and cancelled. Unvested
      awards to non-employee directors whose service is terminated or discontinued
      for
      any reason other than for cause after more than five years of service on our
      board of directors, will automatically vest and become exercisable immediately
      prior to termination or discontinuation of service. These vested awards may
      be
      exercised within 180 days following termination of service, except in cases
      of
      where termination or discontinuation of service is a result of statutory
      requirements, death, disability or other circumstances of forced cessation
      of
      service, in which case awards may be exercised at any time until their
      expiration date. In a case of termination for cause of a plan participant,
      all
      awards, whether vested or unvested, are automatically forfeited and
      cancelled.




52




Under
      this plan, in the event of an acquisition or merger in which we are not the
      surviving entity and the acquiring entity does not agree to assume the awards,
      all outstanding, but unvested, awards will be accelerated and exercisable,
      ten
      days prior to the acquisition or merger. In addition, if the employment of
      a
      holder of outstanding awards is terminated in anticipation of or during the
      12
      month period following an acquisition or merger, all awards that are scheduled
      to vest within two years of such acquisition or merger, will be automatically
      accelerated and exercisable, subject to certain adjustments and
      exceptions.




Awards
      granted under the 2006 equity plan to Israeli residents may be granted under
      Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards
      or
      the ordinary shares issued upon their exercise must be deposited with a trustee
      for at least two years following the date of the grant. Under Section 102,
      any
      tax payable by an employee from the grant or exercise of the awards is deferred
      until the transfer of the awards or ordinary shares by the trustee to the
      employee or upon the sale of the awards or ordinary shares. Gains on awards
      granted under the 2006 equity plan are subject to a mixed tax rate as follows:
      First, any profit derived from the excess of the average price of the ordinary
      shares of the company during the 30 trading days prior to the date of grant
      over
      the exercise price of the options and other tax deductible expenses concerning
      the sale, referred to as the average profit at grant date, is subject to regular
      income tax based on the individual tax rate of the exercising person. Second,
      any profit resulting from the excess of the selling price of the shares
      underlying the options over the average profit at grant date is subject to
      capital gains tax at a rate of 25%, if all the conditions and requirements
      under
      Section 102 are fulfilled. Options granted under the plan to U.S. residents
      may
      also qualify as incentive stock options within the meaning of Section 422
      of the U.S. Internal Revenue Code of 1986. The exercise price for incentive
      stock options must not be not less than the fair market value on the date the
      option is granted, or 110% of the fair market value if the option holder holds
      more than 10% of our share capital.




*2003
      Stock Option Plan*




Our
      2003 stock option plan provides for a grant of options to our directors,
      employees and consultants, including members of our medical advisory committee,
      and to the directors, employees or consultants of our subsidiaries. We have
      reserved a total of 2,500,000 ordinary shares for issuance under the plan.
      In
      addition, we have reserved for issuance under the plan any ordinary shares
      underlying unvested options granted under our 1998 and 2000 stock option plans
      that expired without exercise. As of December 31, 2007, we had outstanding
      options to purchase 2,132,655 shares under the 2003 stock option plan




The
      plan is substantially similar to our 2000 stock option plan. Generally, where
      a
      grant of options under the plan is our first grant of options to that person,
      the options are not exercisable before the second anniversary of the date of
      grant, at which time 50% of the options become exercisable with 25% becoming
      exercisable on each of the third and fourth anniversaries of the date of the
      grant. However, in cases of subsequent grants, options vest in four equal
      installments beginning with the first anniversary of the grant. Our Compensation
      and Nominating Committee has the authority to accelerate the time periods for
      the vesting of options. Unexercised options expire ten years after the date
      of
      grant. To the extent the options have been vested, they may be exercised in
      whole or in part from time to time until their expiration. Upon the termination
      of the employment of an employee other than for cause, the employee may exercise
      all vested options. Our Compensation and Nominating Committee determined that
      in
      respect of grants made beginning in 2006, optionees will have 180 days to
      exercise vested options following termination. If the employment of an employee
      is terminated for cause, all of his or her vested and unvested options will
      be
      automatically forfeited and cancelled.




In
      the event of an acquisition or merger, we will endeavor to ensure that the
      rights of the holders of outstanding options are maintained. If we are unable
      to
      do so or if our board of directors resolves otherwise, all outstanding, but
      unvested, stock options will be accelerated and exercisable, ten days prior
      to
      the acquisition or merger. In addition, if the employment of a holder of
      outstanding options is terminated in anticipation of or during the 12 month
      period following an acquisition or merger, all outstanding but unvested stock
      options will be accelerated and exercisable, subject to certain adjustments
      and
      exceptions.




Options
      granted under the 2003 plan to Israeli residents may be granted under Section
      102 of the Israeli Income Tax Ordinance pursuant to which the options or the
      ordinary shares issued upon their exercise must be deposited with a trustee
      for
      a minimum period equal to the shorter of 30 months commencing on the date of
      grant or 24 months commencing on the end of the year in which the grant was
      made. Under Section 102, any tax payable by an employee from the grant or
      exercise of the options is deferred until the transfer of the options or
      ordinary shares by the trustee to the employee or upon the sale of the options
      or ordinary shares. Gains on options granted in 2003 and later are subject
      to a
      mixed tax rate as follows: First, any profit derived from the excess of the
      average price of the ordinary shares of the company during the 30 trading days
      prior to the date of grant over the exercise price of the options and other
      tax
      deductible expenses concerning the sale, referred to as the average profit
      at
      grant date, is subject to regular income tax based on the individual tax rate
      of
      the exercising person. Second, any profit resulting from the excess of the
      selling price of the shares underlying the options over the average profit
      at
      grant date is subject to capital gains tax at a rate of 25%, if all the
      conditions and requirements under Section 102 are fulfilled. Options granted
      under the plan to U.S. residents may also qualify as incentive stock options
      within the meaning of Section 422 of the U.S. Internal Revenue Code of
      1986. The exercise price for incentive stock options must not be not less than
      the fair market value on the date the option is granted, or 110% of the fair
      market value if the option holder holds more than 10% of our share
      capital.




53




*2000
      Stock Option Plan*




Our
      2000 stock option plan provides for the grant of options to our directors,
      employees or consultants, including members of our medical advisory committee,
      and to the directors, employees or consultants of our subsidiaries. As of
      December 31, 2007, we had outstanding options to purchase 568,137 shares under
      the 2000 stock option plan. Ordinary shares underlying options which expire
      without exercise under the 2000 stock option plan become available for issuance
      under the 2003 stock option plan.




The
      plan is administered by our Compensation and Nominating Committee which makes
      recommendations to our board of directors regarding grantees of options and
      the
      terms of the grant, including exercise prices, vesting schedules, acceleration
      of vesting and other matters necessary in the administration of the plan. Upon
      the recommendation of our Compensation and Nominating Committee, options granted
      under the plan to Israeli residents may be granted under Section 102 of the
      Israeli Income Tax Ordinance pursuant to which the options or the ordinary
      shares issued upon their exercise must be deposited with a trustee for at least
      two years. Any tax payable by an employee from the grant or exercise of the
      options is deferred until the transfer of the options or ordinary shares by
      the
      trustee to the employee or upon the sale of the options or ordinary shares.
      Options granted under the plan to U.S. residents may also qualify as incentive
      stock options within the meaning of Section 422 of the U.S. Internal
      Revenue Code of 1986. The exercise price for incentive stock options must not
      be
      not less than the fair market value on the date the option is granted, or 110%
      of the fair market value if the option holder holds more than 10% of our share
      capital.




Under
      the 2000 stock option plan, options issued under the plan are not exercisable
      before the second anniversary of the date of grant at which time 50% of the
      options become exercisable with 25% becoming exercisable on each of the third
      and fourth anniversaries of the date of grant. Unexercised options expire ten
      years after the date of grant. If the employment of an employee is terminated
      for cause, all of his or her vested and unvested options will automatically
      be
      forfeited and cancelled.




In
      the event of an acquisition or merger, we will endeavor to ensure that the
      rights of the holders of outstanding options are maintained. If we are unable
      to
      do so or if our board of directors resolves otherwise, all outstanding, but
      unvested, stock options will be accelerated and exercisable, ten days prior
      to
      the acquisition or merger.




*1998
      Stock Option Plan*




Our
      1998 stock option provides for the grant of options to our directors, employees,
      or consultants, including members of our medical advisory committee. Our 1998
      stock option plan has been superseded by our 2000 stock option plan and we
      have
      ceased issuing options under our 1998 stock option plan. As of December 31,
      2007, we had outstanding options to purchase 37,500 shares under the 1998 stock
      option plan. Ordinary shares underlying options which expire without exercise
      under the 1998 stock option plan become available for issuance under the 2003
      stock option plan.




Under
      the 1998 stock option plan, options issued under the plan are not exercisable
      before the second anniversary of the date of grant at which time 50% of the
      options become exercisable with 25% becoming exercisable on each of the third
      and fourth anniversaries of the date of grant. Unexercised options expire ten
      years after the date of grant. If the employment of an employee is terminated
      for cause, all of his or her vested and unvested options will automatically
      be
      forfeited and cancelled.




**ITEM
      7.****MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS******




**A.**  **MAJOR
        SHAREHOLDERS**


The
      following table sets forth certain information regarding the beneficial
      ownership of our outstanding ordinary shares as of December 31, 2007 for: (1)
      each person who we believe beneficially owns 5% or more of the outstanding
      ordinary shares, (2) each of our directors individually, (3) each of our
      executive officers individually, and (4) all of our directors and executive
      officers as a group. Beneficial ownership of shares is determined under rules
      of
      the Securities and Exchange Commission and generally includes any shares over
      which a person exercises sole or shared voting or investment power. The table
      also includes the number of shares underlying options that are exercisable
      within 60 days of December 31, 2007. Ordinary shares subject to these options
      are deemed to be outstanding for the purpose of computing the ownership
      percentage of the person holding these options, but are not deemed to be
      outstanding for the purpose of computing the ownership percentage of any other
      person.




The
      shareholders listed below do not have any different voting rights from our
      other
      shareholders. Unless otherwise noted below, each shareholder’s address is c/o
      Given Imaging Ltd., P.O. Box 258, Yoqneam 20692, Israel.




54




**Name
                  and Address**
              
              **Number
                  of Shares**
                **Beneficially**
                **Owned**
              
              **Percentage
                  of**
                **Shares**
                **Beneficially Owned****Principal
                  shareholders:**IDB
                  Holding Corporation Ltd. (1)
              
              
              12,724,808
              
              
              43.9
              %AXA
                  Assurances I.A.R.D. Mutuelle, AXA Assurances Vie Mutuelle, AXA
                  Courtage
                  Assurance Mutuelle, AXA, AXA Financial, Inc.(2)
              
              
              3,347,839
              
              
              11.4**Directors
                  and executive officers:**Nachum
                  Shamir (3)
              
              
              180,000
              
              
              *Yuval
                  Yanai (4)
              
              
              47,500
              
              
              *Kevin
                  Rubey (5)
              
              
              225,000
              
              
              *Christopher
                  Rowland (6)
              
              
              38,000
              
              
              *Mark
                  Gilreath (7)
              
              
              173,900
              
              
              *Kazem
                  Samandari (8)
              
              
              6,000
              
              
              *Manfred
                  Gehrtz (9)
              
              
              88,500
              
              
              *Ori
                  Braun
              
              
              —
              
              
              —Keith
                  Chrzanowski (10)
              
              
              3,505
              
              
              *Daphna
                  Levy (11)
              
              
              6,550
              
              
              *Israel
                  Makov
              
              
              —
              
              
              —Doron
                  Birger (12)
              
              
              8,044,058
              
              
              27.5James
                  M. Cornelius (13)
              
              
              254,038
              
              
              *Michael
                  Grobstein (14)
              
              
              206,000
              
              
              *Arie
                  Mientkavich
              
              
              —
              
              
              —Dennert
                  O. Ware
              
              
              —
              
              
              —Anat
                  Loewenstein (15)
              
              
              33,000
              
              
              *All
                  directors and executive officers as a group (16)
              
              
              14,067,261
              
              
              48.1
              %




*
        Less
        than 1%


(1)
              Based
                  on a Schedule 13D/A filed on June 4, 2007 and on information provided
                  to
                  us supplementally, this number consists of 5,340,070 ordinary shares
                  owned
                  by Elron Electronic Industries Ltd., or Elron, 4,719,528 ordinary
                  shares
                  owned by Discount Investment Corporation Ltd., or DIC, 2,662,110
                  ordinary
                  shares owned by RDC Rafael Development Corporation Ltd., or RDC,
                  and 3,100
                  ordinary shares held by subsidiaries of Clal Insurance Enterprises
                  Holdings Ltd., or CIEH, for their own account. This number does
                  not
                  include 277,114 Ordinary Shares held for members of the public
                  through
                  mutual funds, provident funds, pension funds, exchange traded funds
                  and
                  insurance policies which are managed by companies controlled by
                  CIEH,
                  which disclaims beneficial ownership of these shares. Based on
                  information
                  contained in that Schedule 13D/A and on information provided to
                  us
                  supplementally, Elron owns all of the outstanding shares of DEP
                  Technology
                  Holdings Ltd. which, in turn, holds 50.1% of the voting power of
                  RDC. As a
                  result, Elron may be deemed to be the beneficial owner of the ordinary
                  shares owned by RDC. As of June 4, 2007, DIC owned approximately
                  48.6% of
                  the outstanding shares of Elron and, as a result, DIC may be deemed
                  to be
                  the beneficial owner of the ordinary shares owned by RDC and by
                  Elron. IDB
                  Holding Corporation Ltd., or IDBH, owns the majority of the outstanding
                  shares of IDB Development Corporation Ltd., or IDBD, which, in
                  turn, owns
                  the majority of the outstanding shares of DIC and CIEH. As a result,
                  IDBH
                  may be deemed to be the beneficial owner of the ordinary shares
                  owned by
                  DIC, RDC and Elron, and the ordinary shares held by subsidiaries
                  of CIEH
                  for their own account. The address of each of DIC, IDBH and IDBD
                  is The
                  Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023,
                  Israel.
                  The address of RDC is Building 7, New Industrial Park, Yoqneam
                  20692,
                  Israel. The address of Elron is The Triangular Tower, 42nd Floor,
                  3
                  Azrieli Center, Tel Aviv 67023, Israel. IDBH, IDBD and DIC are
                  public
                  companies traded on the Tel Aviv Stock Exchange. Elron is a public
                  company
                  traded on the Tel Aviv Stock Exchange and on the Nasdaq Global
                  Select
                  Market.As
                  of December 31, 2007, (i) Ganden Holdings Ltd., or Ganden, a private
                  Israeli company controlled by Nochi Dankner and his sister Shelly
                  Bergman,
                  held, directly and through a wholly-owned subsidiary, approximately
                  50.04%
                  of the outstanding shares of IDBH; (ii) Shelly Bergman, through
                  a
                  wholly-owned company, held approximately 4.23% of the outstanding
                  shares
                  of IDBH; (iii) Ytzhak Dankner (the father of Shelly Bergman and
                  Nochi
                  Dankner), through a wholly-owned subsidiary, held 3.0% of IDBH's
                  shares;
                  (iv) Avraham Livnat Ltd., or Livnat, a private Israeli company
                  controlled
                  by Avraham Livnat, held, directly and through a wholly-owned subsidiary,
                  approximately 11.69% of the outstanding shares of IDBH; and (v)
                  Manor
                  Holdings BA Ltd., or Manor, a private company controlled by Ruth
                  Manor and
                  Isaac Manor, held, directly and through a majority-owned subsidiary,
                  approximately 11.68% of the outstanding shares of
                  IDBH.




55




Subsidiaries
                  of Ganden, Livnat and Manor have entered into a shareholders agreement
                  with respect to their shares of IDBH constituting, respectively,
                  31.02%,
                  10.34% and 10.34% of the outstanding shares of IDBH, for the purpose
                  of
                  maintaining and exercising control of IDBH as a group. Their additional
                  holdings in IDBH are not subject to the shareholders agreement.
                  The term
                  of the shareholders agreement expires in May 2023. Based on the
                  foregoing,
                  Ganden, Manor and Livnat (by reason of their control of IDBH) and
                  Nochi
                  Dankner, Shelly Bergman, Ruth Manor, Isaac Manor and Avraham Livnat
                  (by
                  reason of their control of Ganden, Manor and Livnat, respectively)
                  may be
                  deemed to share with DIC, Elron and RDC the power to vote and dispose
                  of
                  our ordinary shares held by these entities, and also to share with
                  subsidiaries of CIEH the power to vote and dispose of our ordinary
                  shares
                  held by these subsidiaries for their own account.Nochi
                  Dankner is Chairman and Chief Executive Officer of IDBH, the Chairman
                  of
                  IDBD and DIC and a director of Elron. Zehava Dankner, the mother
                  of Nochi
                  Dankner and Shelly Bergman and the wife of Yitzhak Dankner, is
                  a director
                  of IDBH, IDBD and DIC. Isaac Manor and Zvi Livnat (a son of Avraham
                  Livnat) are directors of IDBH, IDBD and DIC. Shai Livnat (another
                  son of
                  Avraham Livnat) is a director of IDBD. Dori Manor (the son of Isaac
                  and
                  Ruth Manor) is a director of IDBH, IDBD, DIC and Elron.The address of Nochi Dankner is The Triangular Tower, 44th Floor,
                  3
                  Azrieli Center, Tel Aviv 67023, Israel. The address of Shelly Bergman
                  is 9
                  Mishmar Ezrehi Street, Afeka, Tel Aviv 69697, Israel. The address
                  of Ruth
                  Manor and Isaac Manor is 26 Hagderot Street, Savyon 56526, Israel.
                  The
                  address of Avraham Livnat is Taavura Junction, Ramle 72102, Israel.
                  These
                  individuals disclaim beneficial ownership of the shares owned by
                  the
                  foregoing entities except to the extent of their pecuniary interest
                  therein. On September 29, 2003, Elron and DIC entered into a voting
                  agreement pursuant to which, among other things, DIC agreed to
                  vote all of
                  its ordinary shares in favor of nominees to our board of directors
                  proposed by Elron. The voting agreement is for a term of one year
                  and
                  renews automatically each year thereafter unless terminated by
                  notice of
                  either party to the other party no later than August 30 in each
                  year, or
                  unless earlier terminated by agreement of both parties
                  thereto.(2)
              Based
                  on a Schedule 13G/A filed on February 14, 2008, consists of 3,231223
                  ordinary shares owned by Alliance Bernstein L.P., or Alliance,
                  and 116,616
                  ordinary shares owned by AXA Equitable Life Insurance Company,
                  or AXA
                  Equitable. Based on information contained in the Schedule 13G/A,
                  Alliance
                  and AXA Equitable are subsidiaries of AXA Financial, Inc. AXA Financial,
                  Inc. is a parent holding company with respect to the holdings of
                  Alliance
                  and AXA Equitable. Each of Alliance and AXA Equitable operates
                  under
                  independent management and makes independent decisions. AXA Financial,
                  Inc. is controlled by AXA Assurances I.A.R.D Mutuelle, AXA Assurances
                  Vie
                  Mutuelle and AXA Courtage Assurance Mutuelle (collectively, the
“Mutuelles
                  AXA”), as a group. Based on information contained in the Schedule 13G/A,
                  the majority of the shares reported in such schedule are held for
                  investment purposes on behalf of client accounts unaffiliated with
                  the
                  reporting entities. The address of AXA Assurances I.A.R.D Mutuelle
                  and AXA
                  Assurances Vie Mutuelle is 26, rue Drouot, 75009 Paris, France.
                  The
                  address of AXA Courtage Assurance Mutuelle is 26, rue Drouot, 75009
                  Paris,
                  France. The address of AXA is 25, avenue Matignon, 75008 Paris,
                  France.
                  The address of AXA Financial, Inc. is 1290 Avenue of the Americas,
                  New
                  York, NY 10104. Each of the Mutuelles AXA, as a group, expressly
                  disclaims
                  beneficial ownership of any securities owned by the foregoing entities.(3)
              Consists
                  of 5,000 ordinary shares, 100,000 shares of restricted stock and
                  options
                  to purchase 75,000 ordinary shares.(4)
              Consists
                  of 5,000 ordinary shares and options to purchase 42,500 ordinary
                  shares.(5)
              Consists
                  of options to purchase 225,000 ordinary shares.(6)
              Consists
                  of 3,000 ordinary shares and options to purchase 35,000 ordinary
                  shares.(7)
              Consists
                  of 1,400 ordinary shares and options to purchase 172,500 ordinary
                  shares.
                  Mr. Gilreath left Given Imaging at the end of 2007.(8)
              Consists
                  of 6,000 restricted shares.(9)
              Consists
                  of 1,000 ordinary shares and options to purchase 87,500 ordinary
                  shares.(10)
              Consists
                  of 380 ordinary shares and options to purchase 3,125 ordinary
                  shares.(11)
              Consists
                  of options to purchase 6,550 ordinary shares.(12)
              Consists
                  of 2,878 ordinary shares and options to purchase 39,000 ordinary
                  shares
                  owned by Mr. Birger personally, 2,662,110 ordinary shares owned
                  by RDC
                  Rafael Development Corporation and 5,340,070 ordinary shares owned
                  by
                  Elron Electronic Industries. Mr. Birger is a director of RDC Rafael
                  Development Corporation and President and Chief Executive Officer
                  of Elron
                  Electronic Industries and by virtue of his position may be deemed
                  to have
                  voting and investment power, and thus beneficial ownership with
                  respect to
                  the shares that Elron Electronic Industries and RDC Rafael Development
                  Corporation own. Mr. Birger disclaims such beneficial ownership
                  except to
                  the extent of his pecuniary interest therein.(13)
              Consists
                  of 121,038 ordinary shares and options to purchase 133,000 ordinary
                  shares.(14)
              Consists
                  of 30,000 ordinary shares and options to purchase 176,000 ordinary
                  shares.(15)
              Consists
                  of options to purchase 33,000 ordinary shares.(16)
              Includes
                  12,724,808 ordinary shares beneficially owned by IDB Holding Corporation,
                  as well as ordinary shares and options to purchase ordinary shares
                  beneficially held by directors and officers in their personal capacities
                  or by their nominees. Our directors and officers disclaim beneficial
                  ownership of the shares owned by the foregoing entities except
                  to the
                  extent of their pecuniary interest
                  therein.




56




**B.**  **RELATED
        PARTY TRANSACTIONS**


**Registration
      Rights Agreement**




In
      July 2007, our shareholders approved a Registration Rights Agreement among
      us,
      Elron, DIC and RDC. Elron, DIC and RDC own an aggregate of 43.9% of our ordinary
      shares and are collectively referred to as the “affiliated shareholders.” This
      Registration Rights Agreement has replaced earlier registration rights granted
      by us to Elron, DIC, RDC, entities affiliated with OrbiMed Capital LLC and
      other
      shareholders in connection with a private placement completed in September
      2000,
      before our initial public offering. These earlier registration rights expired
      in
      October 2006.




Our
      board of directors believes that this agreement is necessary to protect the
      market for our ordinary shares. During 2006, the affiliated shareholders
      demonstrated their commitment to our business by increasing their ownership
      level by purchasing additional shares in the open market. The Registration
      Rights Agreement provides the affiliated shareholders means for liquidity that
      are otherwise not available to them under applicable law given their ownership
      level. At the same time, it increases the likelihood that a sale by the
      affiliated shareholders will be coordinated with us and not disrupt the ordinary
      activity in the market for our shares due to the sale of a large number of
      shares at one time or during a short period.




The
      main terms of the proposed registration rights agreement are as
      follows:




*Demand
      Registration Rights*




At
      the request of one or more of the affiliated shareholders holding at least
      5% of
      our then outstanding ordinary shares, we must use our best efforts to register
      any or all of these shareholders’ ordinary shares on the condition that the
      minimum aggregate offering price of the shares to be registered is at least
      $15
      million. We must also give notice of the registration to other affiliated
      shareholders and include in the registration any ordinary shares that they
      request to include. This registration also may include ordinary shares offered
      by us for our own account and by our directors and officers. We may only be
      requested to carry out two of these demand registrations.




In
      connection with any such demand registration, the managing underwriter may
      limit
      the number of shares offered for marketing reasons. In such case, the managing
      underwriter must exclude first any shares to be registered by us for the
      company’s own account and, second, any shares to be registered by our directors
      and officers. Thereafter, the shares to be registered by the affiliated
      shareholders would be reduced pro rata among the affiliated shareholders
      requesting inclusion of their shares according to the number of shares held
      by
      each of them.




*Incidental
      Registration Rights*




The
      affiliated shareholders also have the right to request that we include their
      ordinary shares in any registration statements filed by us in the future for
      the
      purposes of a public offering, subject to specified limitations. The managing
      underwriter may limit the number of shares offered for marketing reasons. In
      this case, the managing underwriter must exclude first any shares to be
      registered by us, unless we initiated the registration, second the shares that
      the affiliated shareholders have requested to include in the registration,
      and
      third the shares of the party initiating the registration.




*Form
      F-3 Registration Rights*




At
      the request of an affiliated shareholder, we must make our best efforts to
      register such shareholder’s ordinary shares on Form F-3. We must also give
      notice of the registration to other affiliated shareholders to whom we have
      granted registration rights and include in the registration any ordinary shares
      they request to include. These demand rights may only be exercised if nine
      months have passed since the last registration that we filed in which the
      affiliated shareholder requesting registration was entitled to include its
      shares. The minimum aggregate offering price of the shares to be registered
      is
      $15 million, in case of an underwritten offering, or $5.0 million, in case
      of a
      non-underwritten offering. The managing underwriter may limit the number of
      shares offered for marketing reasons. In such case, the rights of each
      shareholder to include its ordinary shares in the registration are allocated
      in
      the same manner as in a demand registration described above.




57


*Termination*




All
      registration rights will expire on the fifth anniversary of the agreement.
      With
      respect to any shareholder, registration rights will expire if that shareholder
      can sell all of its ordinary shares within a 90 day period under Rule 144 under
      the United States Securities Act of 1933, as amended.




*Expenses*




Generally,
      we will pay all expenses incurred in carrying out the above registrations,
      as
      well as the fees and expenses of one legal counsel for the selling shareholders
      in each registration.




**Agreement
      for Travel Services**




Diesenhaus
      is a provider of travel services in Israel and is controlled by IDB Holding
      Corporation Ltd., which beneficially owns approximately 43.9% of our ordinary
      shares. The terms of our engagement with Diesenhaus are similar to the terms
      we
      have with other providers of travel services to us. In 2007, we paid Diesenhaus
      a total of $71,000, or 8.5% of our travel expenses. This agreement was approved
      by our audit committee and board of directors in accordance with Israeli
      law.




**Agreement
      for Mobile Communication Services.**




In
      December 2005, we entered into an agreement with Cellcom Ltd., an Israeli
      provider of mobile communication services. Cellcom is controlled by IDB Holding
      Corporation Ltd., which beneficially owns approximately 43.9% of our ordinary
      shares. Under the agreement, Cellcom will be the sole provider of mobile
      communication to us during the term of the agreement. This agreement was
      approved by our audit committee and Board of Directors in accordance with
      Israeli law. In 2007, we paid Cellcom a total of $178,000.




**Directors
      Fees**




We
      pay directors fees in respect of service by our directors (other than our
      President and Chief Executive Officer, Nachum Shamir, and Chairman, Israel
      Makov). See Item 6 “Directors, Senior Management and Employees —
Compensation.”




**Agreements
      with Directors and Officers**




We
      maintain written employment agreements with all of our officers. These
      agreements all contain provisions standard for a company in our industry
      regarding noncompetition, confidentiality of information and assignment of
      inventions. The enforceability of covenants not to compete in Israel is
      limited.




*Employment
      Agreement with the Chairman of the Board of Directors*




In
      June
      2007, we entered into an employment agreement with Mr. Israel Makov, who serves
      as the Chairman of our board of directors. This agreement was approved by our
      shareholders in the annual shareholders meeting held in July 2007. In
      consideration for his service as a director and Chairman of the Board of
      Directors, Mr. Makov receives a monthly payment of NIS 60,000 (approximately
      $16,500 as of the date of this annual report), subject to adjustment based
      on
      the Israeli Consumer Price Index, in lieu of any statutory or other typical
      adjustments. In addition, Mr. Makov is entitled to pension, disability, study
      fund, health insurance and other benefits in accordance with standard terms
      of
      employment in Israel, including a monthly deduction to severance fund in lieu
      of
      statutory severance. The total monthly contributions required to be made by
      us
      under all these items is 23.3% of base salary and the total contribution by
      Mr.
      Makov is 7.5% of base salary. Mr. Makov is entitled to vacation and sick leave
      in accordance with standard practices in Israel. We reimburse Mr. Makov for
      all
      business-related expenses and provide him with directors’ and officers’
insurance coverage and indemnification, in accordance with the terms approved
      by
      our shareholders.




In
      addition, we granted Mr. Makov options to purchase 580,742 of our ordinary
      shares. The exercise price of these options is $29.42, equal to the closing
      price of the ordinary shares on the NASDAQ Global Market on July 18, 2007,
      the
      date of the annual meeting of our shareholders approving this grant. These
      options will vest in three installments - 50% on the second anniversary of
      the
      grant and 25% on each of the third and fourth anniversary of the grant. These
      options may be exercised by Mr. Makov at any time during a period beginning
      with
      the vesting date of each installment and ending four years thereafter. Any
      options not exercised within the exercise period will be forfeited and
      cancelled. In the event of a “change of control” of Given Imaging, Mr. Makov
      will be entitled to full acceleration of his options, which will then terminate
      if not exercised within 12 months. “Change of control” is defined as a change in
      share ownership of our company resulting in a person who is not holding,
      personally or on his own behalf, at least 5% of our ordinary shares on the
      effective date of the agreement owning a number of shares giving such person
      effective control over our business.




58




Mr.
      Makov’s employment agreement contains provisions standard for a firm in our
      industry regarding non-competition and confidentiality of information.




Either
      we
      or Mr. Makov may terminate his employment for any reason upon three months’
prior written notice, in which case Mr. Makov is entitled to receive his base
      salary and benefits payable during the notice period and continued vesting
      of
      options during a period of six months following termination. Vested options
      will
      terminate if not exercised within 12 months after the latest vesting date.
      Mr.
      Makov’s employment may be terminated by us for cause immediately and without any
      termination-related payments.




The
      compensation of Mr. Makov as described above represents the entire compensation
      that Mr. Makov is entitled to receive from us. All terms described above are
      in
      lieu of the fees (in cash and equity) ordinarily paid to our non-employee
      directors and any payments, including bonus payments, typically paid to our
      officers and employees.




*Employment
      Agreement with our President and Chief Executive
      Officer*




We
      have
      an employment agreement with Mr. Shamir, which we signed in April 2006. The
      employment agreement contains provisions standard for a firm in our industry
      regarding non-competition, confidentiality of information and assignment of
      inventions. Since Mr. Shamir is also a director, under Israeli law his
      employment agreement and terms, as well as any changes to the agreement, are
      subject to approval by our shareholders. Our shareholders approved the
      employment agreement with Mr. Shamir in May 2006. In July 2007, our shareholders
      approved an amendment to Mr. Shamir’s employment contract in light of our
      improved performance during Mr. Shamir’s first year in office as Chief Executive
      Officer.




Under
      the
      amended agreement, Mr. Shamir was entitled to (1) an annual base salary of
      $400,000, effective July 1, 2007, compared to $354,750 annual base salary prior
      to that date, (2) a cash bonus of up to $800,000, or 200% of the annual base
      salary, subject to meeting certain personal and company performance targets
      determined from time to time at the discretion of the board of directors, and
      (3) a grant of options to purchase 100,000 of our ordinary shares at an exercise
      price of $29.42, which is equal to the closing price of the ordinary shares
      on
      the Nasdaq Global Market on the date the shareholders approved this grant.
      This
      grant will vest in four equal installments beginning on the first anniversary
      of
      the date of the grant. Mr. Shamir is also entitled to other standard benefits,
      such as a car allowance, medical and life insurance benefits and reimbursement
      of expenses. In respect of 2007, our audit committee and board of directors
      approved a bonus to Mr. Shamir of $450,000. This bonus is subject to approval
      by
      our shareholders at our next annual shareholders’ meeting expected in June
      2008.




Mr.
      Shamir’s employment may be terminated by either side without cause upon three
      months’ prior written notice. Mr. Shamir’s employment may also be terminated by
      us immediately for cause or by Mr. Shamir immediately for “good reason,” which
      consists of an uncured breach of the employment agreement by us or a continuous
      and material reduction in the scope or conditions of Mr. Shamir’s employment.
      Under the amended employment agreement, in the event of a termination of Mr.
      Shamir by us without cause or by Mr. Shamir for “good reason” (with the
      definition expanded to include relocation outside the Atlanta, Georgia area)
      ,
      Mr. Shamir will be entitled to (A) a lump sum payment equal to two times the
      sum
      of (1) his annual base salary, plus (2) his target bonus for the year of
      termination (assuming for this purpose that all relevant performance objectives
      had been met); (B) acceleration of vesting of any equity award scheduled to
      vest
      during a period of twenty-four (24) months following termination; and (C) the
      value of his accrued and unused vacation days and continuation of benefits,
      such
      as health and life insurance policies and car allowance, for a period of
      twenty-four (24) months following termination.




The
      amended employment agreement provides that we will gross-up any excise tax
      that
      may be imposed on Mr. Shamir under Section 4999 of the Internal Revenue Code
      of
      1986, as amended, in case payments to him resulting from his termination trigger
      this tax provision.




In
      addition, the amended agreement provides for full acceleration of all unvested
      options upon a termination by us without cause or by Mr. Shamir for “good
      reason” in connection with a change of control event. “Change of control” is as
      defined in the Company’s 2006 Equity Incentive Plan, as amended, that was
      approved by the shareholders in May 2006.




For
      fiscal year 2008, our audit committee and board of directors approved for Mr.
      Shamir (1) an annual base salary of $416,000, effective July 1, 2008, (2) a
      cash
      bonus of up to 200% of Mr. Shamir’s annual base salary, subject to meeting
      certain personal and company performance targets determined from time to time
      at
      the discretion of the board of directors, and (3) a grant of options to purchase
      100,000 of our ordinary shares, the exercise price of which will be equal to
      the
      closing price of the ordinary shares on the Nasdaq Global Market on the date
      the
      shareholders approve the grant, vesting in four equal installments beginning
      on
      the first anniversary of the date of the grant. The compensation of Mr. Shamir
      in 2008 as described above is subject to approval by our shareholders at our
      next annual shareholders’ meeting expected in June 2008.




59


*Exculpation,
      Insurance and Indemnification*




Under
      the Companies Law, an Israeli company may not exculpate an office holder from
      liability for a breach of the duty of loyalty of the office holder. However,
      a
      company may approve an act performed in breach of the duty of loyalty of an
      office holder provided that the office holder acted in good faith, the act
      or
      its approval does not harm the company, and the office holder discloses the
      nature of his or her personal interest in the act and all material facts and
      documents a reasonable time before discussion of the approval. An Israeli
      company may exculpate an office holder in advance from liability to the company,
      in whole or in part, for a breach of duty of care, subject to specified
      exceptions, but only if a provision authorizing such exculpation is inserted
      in
      its articles of association. Our articles of association include such a
      provision.




An
      Israeli company may indemnify an office holder in respect of certain liabilities
      either in advance of an event or following an event provided a provision
      authorizing such indemnification is inserted in its articles of association.
      Our
      articles of association contain such an authorization. An undertaking by an
      Israeli company to indemnify an office holder must be limited to foreseeable
      liabilities and reasonable amounts determined by the board of directors. A
      company may indemnify an office holder against the following liabilities
      incurred for acts performed as an office holder:




•
              a
                  financial liability imposed on him or her in favor of another person
                  pursuant to a judgment, settlement or arbitrator’s award approved by a
                  court;•
              reasonable
                  litigation expenses, including attorneys’ fees, incurred by the office
                  holder or imposed by a court in proceedings instituted against
                  him or her
                  by the company, on its behalf or by a third party, or in connection
                  with
                  criminal proceedings in which the office holder was acquitted or
                  as a
                  result of a conviction for a crime that does not require proof
                  of criminal
                  intent; and•
              reasonable
                  expenses incurred by the office holder in connection with an investigation
                  or other proceeding by a governmental authority, if such proceeding
                  did
                  not result in an indictment of the office holder, or if such proceeding
                  did not result in an indictment of the office holder and the office
                  holder
                  was requested to pay a fine for a crime that does not require proof
                  of
                  criminal intent.
  An
        Israeli company may insure an office holder against the following liabilities
        incurred for acts performed as an office holder:
  •
              a
                  breach of duty of loyalty to the company, to the extent that the
                  office
                  holder acted in good faith and had a reasonable basis to believe
                  that the
                  act would not prejudice the company;•
              a
                  breach of duty of care to the company or to a third party; and•
              a
                  financial liability imposed on the office holder in favor of a
                  third
                  party.
  An
        Israeli company may not indemnify, insure or exculpate an office holder against
        any of the following:
  •
              a
                  breach of duty of loyalty, except for insurance and indemnification
                  where
                  the office holder acted in good faith and had a reasonable basis
                  to
                  believe that the act would not prejudice the company;•
              a
                  breach of duty of care committed intentionally or recklessly;•
              an
                  act or omission committed with intent to derive illegal personal
                  benefit;
                  or•
              a
                  fine levied against the office holder.




Under
      the Companies Law, exculpation, indemnification and insurance of office holders
      must be approved by our audit committee and our board of directors and, in
      respect of our directors, by our shareholders as well.




Our
      articles of association allow us to exculpate, indemnify and insure our office
      holders to the fullest extent permitted by the Companies Law. Our office holders
      are currently covered by a directors and officers’ liability insurance policy.
      To date, no claims for directors and officers’ liability insurance have been
      filed under this policy.




We
      have entered into agreements with each of our office holders undertaking to
      exculpate, indemnify and insure them to the fullest extent permitted by law.
      We
      may enter into additional agreements to indemnify or insure our directors and
      officers when circumstances change or when new directors and officers join
      us.
      This indemnification is limited to events and amounts determined as foreseeable
      by the board of directors, and the insurance is subject to our discretion
      depending on its availability, effectiveness and cost. In the opinion of the
      U.S. Securities and Exchange Commission, however, indemnification of directors
      and office holders for liabilities arising under the Securities Act is against
      public policy and therefore unenforceable.




60


**C.**  **INTERESTS
        OF EXPERTS AND COUNSEL**


Not
      applicable.




**ITEM
      8.**  **FINANCIAL
      INFORMATION**




**A.**  **CONSOLIDATED
      FINANCIAL STATEMENTS AND OTHER INFORMATION**




**Financial
      Statements**




See
      Item 18 for audited consolidated financial statements.




**Export
      Sales**




Our
      manufacturing facilities for the data recorder and the PillCam capsules forming
      part of the Given System are located in Israel. Most of our products are
      exported out of Israel. For information regarding our revenues by geographic
      market, see Item 5: “Operating and Financial Review and Prospects.”




**Legal
      Proceedings**




*Patent
      Disputes*




On
      May 19, 2006, Olympus Corporation, Olympus Medical Systems Corp. and Olympus
      America Inc., collectively referred to in this section as “Olympus,” filed a
      complaint against us in the District Court for the Eastern District of
      Pennsylvania. In the complaint, Olympus alleged that our capsule endoscopes
      infringe U.S. Patent No. 5,010,412, or the ‘412 patent, entitled “High
      Frequency, Low Power Light Source for Video Camera.” Olympus contended that the
‘412 patent covers low power light sources of the kind used by us in our PillCam
      capsules. According to the complaint, Olympus did not develop this technology.
      Instead, in July 2005, Olympus acquired the ‘412 patent from The Boeing Company.
      The ‘412 patent will expire in December 2008. In addition, Olympus sought a
      declaratory judgment that a capsule endoscope product for which it was then
      seeking FDA clearance would not infringe our ‘531 patent and that the ‘531
      patent is invalid. The ‘531 patent is our first patent that we acquired from
      Rafael Armament Development Authority, or Rafael, which is a division of the
      Israeli Defense Ministry. Olympus also requested an injunction preventing us
      from selling in the United States any product that infringes the ‘412 patent, as
      well as damages in an unspecified amount.




We
      filed our answer and counterclaim on October 20, 2006. In our answer and
      counterclaim we denied infringement of the ‘412 patent, and asserted that the
‘412 patent is invalid. In addition, we alleged that the ‘531 patent is valid
      and will be infringed by Olympus once it begins offering to sell its capsule
      endoscopy product in the United States. We also alleged that the Olympus product
      will infringe our U.S. Patent Nos. 6,934,093, entitled “Optical System,”
7,022,067, entitled “System and Method For Controlling In Vivo Camera Capture
      and Display Rate,” and 7,119,814, entitled “System and Method for Annotation on
      a Moving Image.” We also requested an injunction to prevent Olympus from selling
      in the United States any product that infringes our patents. We also stated
      that
      if Olympus sells its capsule endoscopy system in the United States, we may
      request the assessment of damages.




Olympus
      filed its reply and “counterclaims in response” on November 13, 2006, denying
      that Olympus will infringe our ‘531, ‘093, ‘067 and ‘814 patents, and alleging
      that our patents are invalid. We filed our reply to Olympus’s counterclaims on
      December 6, 2006, denying Olympus’s counterclaim.




On
      March 30, 2007, Olympus filed an amended complaint asserting that our capsule
      endoscopes infringe three additional patents owned by Olympus: U.S. Patent
      #5,794,226 entitled “Image Manipulation System Including Means For Assigning a
      File Name,” U.S. Patent #6,269,379 entitled “Medical Image Filing System
      Enabling Registration and Retrieval of a Plurality of Medical Images,” and U.S.
      Patent #6,939,292 entitled “Capsule Type Endoscope.” We filed our answer to the
      amended complaint in April 2007 denying infringement of these patents and
      asserting their invalidity.




In
      September 2007, Olympus received FDA clearance to market its competing capsule
      endoscope system in the United States and it has since commenced selling
      activities. As a result, we amended our pleadings to add a request for damages
      in an unspecified amount. In the ongoing litigation, fact discovery ended in
      January 2008 and expert discovery is ongoing. Trial is set for November
      2008.




The
      outcome of this litigation, like all patent litigation, is uncertain. The
      ongoing litigation and any unfavorable outcome in the litigation will a material
      adverse effect on our business and our operating results and financial
      condition.




61




From
      time to time we may be involved in legal proceedings. Other than described
      above, currently we are not party to any legal proceedings whose outcome we
      expect will be material to our financial condition or results of
      operations.




**Dividend
      Policy**




We
      have never declared or paid any cash dividends on our ordinary shares and we
      do
      not anticipate paying any cash dividends on our ordinary shares in the
      foreseeable future. We currently intend to retain all future earnings to finance
      our operations and to expand our business. Any future determination relating
      to
      our dividend policy will be made at the discretion of our board of directors
      and
      will depend on a number of factors, including future earnings, capital
      requirements, legal restrictions, financial condition and future prospects
      and
      other factors the board of directors may deem relevant.




**Significant
      Changes**




Except
      as otherwise disclosed in this Form 20-F, there has been no significant change
      in our financial position since December 31, 2007.




**ITEM
      9.**  ****THE
      OFFER AND LISTING****


**A.**  **OFFER
      AND LISTING DETAILS**




*Nasdaq
      Global Market*




The
      following table lists the high and low closing sale prices of our ordinary
      shares for the periods indicated as reported by the Nasdaq Global
      Market:




**Annual
                  Highs and Lows**
              
              **High**
              
              **Low**2007
              
              $
              31.49
              
              $
              19.252006
              
              
              28.37
              
              
              14.462005
              
              
              36.04
              
              
              20.392004
              
              
              44.08
              
              
              17.872003
              
              $
              18.80
              
              $
              6.65




62




**Quarterly
                  Highs and Lows**
              
              **High**
              
              **Low**4th
                  quarter 2007
              
              $
              30.19
              
              $
              22.433rd
                  quarter 2007
              
              
              31.49
              
              
              25.022nd
                  quarter 2007
              
              
              31.42
              
              
              21.221st
                  quarter 2007
              
              
              22.04
              
              
              19.251st
                  quarter 2006
              
              
              28.37
              
              
              21.652nd
                  quarter 2006
              
              
              24.07
              
              
              15.063rd
                  quarter 2006
              
              
              19.85
              
              
              14.464th
                  quarter 2006
              
              $
              22.76
              
              $
              18.85
 
 **Most
                  Recent Six Months**
              
              **High**
              
              **Low**February
                  2008
              
              $
              17.06
              
              $
              14.36January
                  2008
              
              
              23.29
              
              
              15.59December
                  2007
              
              
              23.75
              
              
              22.43November
                  2007
              
              
              27.20
              
              
              23.12October
                  2007
              
              
              30.19
              
              
              28.25September
                  2007
              
              $
              27.76
              
              $
              25.47




On
      February 29, 2008, the closing price of our ordinary shares on the Nasdaq Global
      Market was $15.86 per share. We believe that as of February 29, 2008, there
      were
      approximately 9,000 holders of record of our ordinary shares.




*Tel
      Aviv Stock Exchange*




The
      following table lists the high and low closing sale prices of our ordinary
      shares for the periods indicated as reported by the Tel Aviv Stock
      Exchange:




**Annual
                  Highs and Lows**
              
              **High**
              
              **Low**2007
              
              NIS
              135.90
              
              NIS
              81.472006
              
              
              132.60
              
              
              65.022005
              
              NIS
              155.30
              
              NIS
              95.79
 
 **Quarterly
                  Highs and Lows**
              
              **High**
              
              **Low**4th
                  quarter 2007
              
              NIS
              123.60
              
              NIS
              47.173rd
                  quarter 2007
              
              
              135.90
              
              
              102.702nd
                  quarter 2007
              
              
              125.10
              
              
              86.141st
                  quarter 2007
              
              
              92.74
              
              
              81.471st
                  quarter 2006
              
              
              132.60
              
              
              101.602nd
                  quarter 2006
              
              
              109.80
              
              
              67.363rd
                  quarter 2006
              
              
              86.50
              
              
              65.024th
                  quarter 2006
              
              NIS
              98.27
              
              NIS
              80.54




63




**Most
                  Recent Six Months**
              
              **High**
              
              **Low**February
                  2008
              
              NIS
              61.98
              
              NIS
              47.17January
                  2008
              
              
              90.58
              
              
              58.99December
                  2007
              
              
              91.50
              
              
              87.53November
                  2007
              
              
              108.60
              
              
              90.26October
                  2007
              
              
              123.60
              
              
              111.40September
                  2007
              
              NIS
              112.80
              
              NIS
              102.70




The
      average exchange ratio of NIS to U.S. dollar in 2007 was NIS 4.1081 to
      $1.00.




**B.**  **PLAN
          OF DISTRIBUTION**
 
 Not
          applicable.
 
 **C.**  **MARKETS**




Our
      ordinary shares have traded publicly on the Nasdaq Global Market under the
      symbol “GIVN” since October 2001 and on the Tel Aviv Stock Exchange under
      the symbol “GIVN” since March 2004. Our ordinary shares trade publicly only on
      the Nasdaq Global Market and the Tel Aviv Stock Exchange.




**D.**  **SELLING
        SHAREHOLDERS**
 
 Not
        applicable.
 
 **E.**  **DILUTION**
 
 Not
        applicable.
 
 **F.**  **EXPENSES
        OF THE ISSUE**
 
 Not
        applicable.


**ITEM
      10.**  **ADDITIONAL
      INFORMATION** ****




**A.**  **SHARE
        CAPITAL**
 
 Not
        applicable.
 
 **B.**  **MEMORANDUM
        AND ARTICLES OF ASSOCIATION**




**Objects**




Our
      objects under our memorandum of association are to engage in any type of
      manufacturing, trade, production, labor, agriculture, and professional and
      business services in all branches and areas of economic activity, to advance
      trade, importing and exporting, and any other object determined by our board
      of
      directors from time to time. Our objects under our articles of association
      are
      to engage in any lawful business.




**Transfer
      of Shares and Notices**




Fully
      paid ordinary shares are issued in registered form and may be freely transferred
      under our articles of association unless the transfer is restricted or
      prohibited by another instrument, Israeli law or the rules of a stock exchange
      on  which
      the
      shares are traded. Our articles of association provide that each shareholder
      of
      record is entitled to receive at least 21 days’ prior notice of any
      shareholders’ meeting.




64




**Election
      of Directors**




Our
      ordinary shares do not have cumulative voting rights for the election of
      directors. Rather, under our articles of association our directors are appointed
      by the holders of a simple majority of our ordinary shares at a general
      shareholder meeting. As a result, the holders of our ordinary shares that
      represent more than 50% of the voting power represented at a shareholder meeting
      have the power to elect or remove any or all of our directors, subject to the
      special approval requirements for outside directors described under
“Management-Outside Directors.” Under the Companies Law, the procedures for the
      appointment and removal and the term of office of directors, other than outside
      directors, may be contained in the articles of association of a company. Our
      articles of association currently do not contain provisions for staggered terms
      for directors. However, our articles of association may be amended in the future
      by a majority of our shareholders at a general shareholder meeting to provide
      for a staggered board or other method of electing our directors, other than
      with
      respect to our outside directors.




**Dividend
      and Liquidation Rights**




Our
      board of directors may declare a dividend to be paid to the holders of ordinary
      shares in proportion to the paid up capital attributable to the shares that
      they
      hold. Dividends may only be paid out of our profits and other surplus funds,
      as
      defined in the Companies Law, or as accrued over a period of eight quarters,
      whichever is higher, provided that there is no reasonable concern that a payment
      of a dividend will prevent us from satisfying out existing and foreseeable
      obligations as they become due. In the event of our liquidation, after
      satisfaction of liabilities to creditors, our assets will be distributed to
      the
      holders of ordinary shares in proportion to the paid up capital attributable
      to
      the shares that they hold. This right may be affected by the grant of
      preferential dividend or distribution rights to the holders of a class of shares
      with preferential rights that may be authorized in the future.




**Shareholder
      Meetings**




We
      are required to convene an annual general meeting of our shareholders once
      every
      calendar year within a period of not more than 15 months following the
      preceding annual general meeting. Our board of directors is required to convene
      a special general meeting of our shareholders at the request of two directors
      or
      one quarter of the members of our board of directors or at the request of one
      or
      more holders of 5% or more of our share capital and 1% of our voting power
      or
      the holder or holders of 5% or more of our voting power. All shareholder
      meetings require prior notice of at least 21 days. The chairperson of our
      board of directors or any other person appointed by the board presides over
      our
      general meetings. Under the Companies Law, shareholders entitled to participate
      and vote at general meetings are the shareholders of record on a date to be
      decided by the board of directors, which may be between four and 40 days
      prior to the date of the meeting.




**Quorum**




The
      quorum required for an ordinary meeting of shareholders consists of at least
      two
      shareholders present, in person or by proxy, who hold or represent between
      them
      at least one-third of our issued share capital. A meeting adjourned for lack
      of
      a quorum generally is adjourned to the same day in the following week at the
      same time and place or any time and place as the directors designate in a notice
      to the shareholders. At the reconvened meeting, the required quorum consists
      of
      one or more shareholders present in person or by proxy, unless the meeting
      was
      called pursuant to a request by our shareholders in which case the quorum
      required is the number of shareholders holding the minimum number of voting
      shares necessary to make such requisition as described under “—Shareholder
      Meetings.”




**Voting**




Holders
      of our ordinary shares have one vote for each ordinary share held on all matters
      submitted to a vote of shareholders at a shareholder meeting. Shareholders
      may
      vote at shareholder meetings either in person or by proxy. Israeli law does
      not
      provide for public companies such as us to have shareholder resolutions adopted
      by means of a written consent in lieu of a shareholder meeting. Shareholder
      voting rights may be affected by the grant of any special voting rights to
      the
      holders of a class of shares with preferential rights that may be authorized
      in
      the future. The Companies Law provides that a shareholder, in exercising his
      or
      her rights and performing his or her obligations toward the company and its
      other  shareholders,
      must act in good faith and in an acceptable manner, and avoid abusing his or
      her
      powers. This is required when voting at general meetings on matters such as
      changes to the articles of association, increasing the company’s registered
      capital, mergers and approval of related party transactions. A shareholder
      must
      also avoid oppression of other shareholders. In addition, any controlling
      shareholder, any shareholder who knows that its vote can determine the outcome
      of a shareholder vote and any shareholder who, under the company’s articles of
      association, can appoint or prevent the appointment of an office holder, is
      required to act with fairness towards the company. The Companies Law does not
      describe the substance of this duty and there is no binding case law that
      addresses this subject directly.




65




**Resolutions**




An
      ordinary resolution requires approval by the holders of a simple majority of
      the
      voting rights represented at the meeting, in person, by proxy or by voting
      instrument, and voting on the resolution.




Under
      the Companies Law, unless otherwise provided in the articles of association
      or
      applicable law, approval of all resolutions of the shareholders requires a
      simple majority. A resolution for the voluntary winding up of the company
      requires approval by holders of 75% of the voting rights represented at the
      meeting, in person, by proxy or by voting instrument and voting on the
      resolution.




**Access
      to Corporate Records**




Under
      the Companies Law, all shareholders generally have the right to review minutes
      of our general meetings, our shareholder register, our articles of association
      and any document we are required by law to file publicly with the Israeli
      Companies Registrar. Any shareholder who specifies the purpose of its request
      may request to review any document in our possession that relates to any action
      or transaction with a related party which requires shareholder approval under
      the Companies Law. We may deny a request to review a document if we determine
      that the request was not made in good faith, that the document contains a
      commercial secret or a patent or that the document’s disclosure may otherwise
      harm our interests.




**Acquisitions
      under Israeli Law**




*Tender
      Offer.* A person
      wishing to acquire shares or any class of shares of a publicly traded Israeli
      company and who would as a result hold over 90% of the company’s issued and
      outstanding share capital or of a class of shares is required by the Companies
      Law to make a tender offer to all of the company’s shareholders or all
      shareholders of such class of shares, as applicable, for the purchase of all
      of
      the issued and outstanding shares of the company or of that class of shares,
      as
      applicable. If the shareholders who do not respond to the offer hold less than
      5% of the issued share capital of the company or of that class of shares, as
      applicable, all of the shares that the acquirer offered to purchase will be
      transferred to the acquirer by operation of law. However, the shareholders
      may
      petition the court to alter the consideration for the acquisition. If the
      shareholders who did not agree to the offer hold more than 5% of the issued
      and
      outstanding share capital of the company or of such class of shares, as
      applicable, the acquirer may not acquire additional shares of the company or
      of
      such class of shares, as applicable, from shareholders who accepted the tender
      offer if following such acquisition the acquirer would then own over 90% of
      the
      company’s issued and outstanding share capital or of the shares comprising such
      class, as applicable.




The
      Companies Law provides that, except in specified circumstances, an acquisition
      of shares of a public company must be made by means of a tender offer if as
      a
      result of the acquisition a person becomes the owner of 25% or more of the
      voting rights. This rule does not apply if there is already another 25%
      shareholder of the company. We believe that IDB Holding Corporation Ltd., which
      is controlled by four individuals in Israel, currently holds more than 25%
      of
      our outstanding ordinary shares as determined in accordance with the Companies
      Law. Similarly, the Companies Law provides that, except in specified
      circumstances, an acquisition of shares in a public company must be made by
      means of a tender offer if as a result of the acquisition the purchaser becomes
      the owner of more than 45% of the voting rights, if at such time there is no
      45%
      or greater shareholder of the company.




*Merger.* The
      Companies Law permits merger transactions if approved by each party’s board of
      directors and the majority of each party’s shares voted on the proposed merger
      at a shareholders’ meeting. Shareholder approval is not required in certain
      specified circumstances, such as a merger between a company and its wholly-owned
      subsidiary. Under the Companies Law, merger transactions may be approved by
      holders of a simple majority of our shares present, in person or by proxy,
      at a
      general meeting and voting on the transaction. In determining whether
      the  required
      majority has approved the merger, if our shares are held by the other party
      to
      the merger, or by any person holding at least 25% of the outstanding voting
      shares or 25% of the means of appointing directors of the other party to the
      merger, then a vote against the merger by holders of the majority of the voting
      shares present and voting, excluding shares abstaining and shares held by the
      other party or by such person, or anyone acting on behalf of either of them,
      is
      sufficient to reject the merger transaction. In certain circumstances, a court
      may still approve the merger upon the request of holders of at least 25% of
      the
      voting rights of a company, if the court holds that the merger is fair and
      reasonable, taking into account the value of the parties to the merger and
      the
      consideration offered to the shareholders. Upon the request of a creditor of
      either party to the proposed merger, the court may delay or prevent the merger
      if it concludes that there exists a reasonable concern that, as a result of
      the
      merger, the surviving company will be unable to satisfy the obligations of
      any
      of the merging companies. In addition, a merger may not be executed unless
      at
      least 50 days have passed from the time that a proposal for approval of the
      merger has been filed with the Israeli Registrar of Companies and at least
      30
      days have passed from the approval of the shareholders of each of the parties.




**Anti-Takeover
      Measures**




The
      Companies Law allows us to create and issue shares having rights different
      to
      those attached to our ordinary shares, including shares providing certain
      preferred or additional rights to voting, distributions or other matters and
      shares having preemptive rights. In the future, if we do create and issue a
      class of shares other than ordinary shares, such class of shares, depending
      on
      the specific rights that may be attached to them, may delay or prevent a
      takeover or otherwise prevent our shareholders from realizing a potential
      premium over the market value of their ordinary shares. The authorization of
      a
      new class of shares will require an amendment to our articles of association
      which requires the prior approval of a majority of our shareholders at a general
      meeting. Shareholders voting at such a meeting will be subject to the
      restrictions under the Companies Law described in “Voting.”




66




**Transfer
      Agent and Registrar**




The
      transfer agent and registrar for our ordinary shares is American Stock
      Transfer & Trust Company. Its address is 59 Maiden Lane, New York, New
      York 10038 and its telephone number at this location is (212) 936-5100.




**C.**  **MATERIAL
        CONTRACTS**


Summaries
      of certain material contracts and amendments to these contracts are included
      in
      this Form 20-F in Item 4 - Information on the Company – Part B: Business
      Overview.




**D.**  **EXCHANGE
        CONTROLS**


Israeli
      residents generally may freely deal in foreign currency and foreign assets,
      and
      non-residents may freely deal in Israeli currency and Israeli assets. There
      are
      currently no Israeli currency control restrictions on remittances of dividends
      on the ordinary shares or the proceeds from the sale of the shares provided
      that
      all taxes were paid or withheld; however, legislation remains in effect pursuant
      to which currency controls can be imposed by administrative action at any
      time.




Non-residents
      of Israel may freely hold and trade our securities. Neither our memorandum
      of
      association nor our articles of association nor the laws of the State of Israel
      restrict in any way the ownership or voting of ordinary shares by non-residents,
      except that such restrictions may exist with respect to citizens of countries
      which are in a state of war with Israel. Israeli residents are allowed to
      purchase our ordinary shares.




**E.**  **TAXATION**


**Certain
      Material Israeli Tax Considerations and Government
      Programs**




The
      following is a description of the material Israeli income tax consequences
      of
      the ownership of our ordinary shares. The following also contains a description
      of material relevant provisions of the current Israeli income tax structure
      applicable to companies in Israel, with special reference to its effect on
      us.
      To the extent that the discussion is based on new tax legislation which has
      not
      been subject to judicial or administrative interpretation, we cannot assure
      shareholders that the tax authorities will accept the views expressed in the
      discussion in question. The discussion is not intended, and should not be taken,
      as legal or professional tax advice and is not exhaustive of all possible tax
      considerations.




The
      following description is not intended to constitute a complete analysis of
      all
      tax consequences relating to the ownership or disposition of our ordinary
      shares. Shareholders should consult their own tax advisors concerning the tax
      consequences of their particular situation, as well as any tax consequences
      that
      may arise under the laws of any state, local, foreign or other taxing
      jurisdiction.




*Taxation
      of Companies in Israel*




*General
      Corporate Tax Structure.* In 2007,
      Israeli companies were subject to corporate tax at the rate of 29% of taxable
      income. This tax rate is expected to decrease gradually to 25% by 2010. However,
      the effective tax rate payable by a company that derives income from an approved
      enterprise, as discussed further below, may be considerably less.




*Tax
      Benefits Under the Law for the Encouragement of Capital Investments,
      1959.* The Law
      for the Encouragement of Capital Investments, 1959, commonly referred to as
      the
      Investment Law, provides that a proposed capital investment in eligible
      facilities may, upon application to the Investment Center of the Ministry of
      Industry, Trade and Labor of the State of Israel, be designated as an approved
      enterprise. Each certificate of approval for an approved enterprise relates
      to a
      specific investment program delineated both by its financial scope, including
      its capital sources, and by its physical characteristics, for example, the
      equipment to be purchased and utilized under the program. The tax benefits
      derived from any certificate of approval relate only to taxable income
      attributable to the specific approved enterprise. If a company has more than
      one
      approval or only a portion of its capital investments is approved, its effective
      tax rate is the result of a weighted average of the applicable rates.




67




Generally,
      taxable income of a company derived from an approved enterprise is subject
      to
      company tax at the maximum rate of 25%, rather than the regular corporate tax
      rate, for a period of seven years, or ten years if the company qualifies as
      a
      foreign investors’ company as described below, commencing with the year in which
      the approved enterprise first generates taxable income. However, the ten-year
      period may not extend beyond the later of 14 years from the year in which
      approval was granted or 12 years from the year in which operations or
      production by the enterprise began. A company’s undistributed income derived
      from an approved enterprise in top priority locations (commonly known as “Zone
      A”) will be exempt from corporate tax for a period of ten years.




A
      company having an approved enterprise status may elect to receive an alternative
      package of benefits. Under the alternative package of benefits, a company’s
      undistributed income derived from an approved enterprise will be exempt from
      company tax for a period of between two and ten years from the first year of
      taxable income, depending on the geographic location of the approved enterprise
      within Israel, and the company will be eligible for a reduced tax rate for
      the
      remainder of the benefits period.




A
      company that has an approved enterprise in Zone A or that has elected the
      alternative package of benefits and that subsequently pays a dividend out of
      income derived from the approved enterprise during the tax exemption period
      will
      be subject to corporation tax on the gross amount of dividends distributed.
      The
      rate of the tax will be the rate which would have been applicable had the
      company not been tax exempt. This corporation tax rate ranges from 10% to 25%,
      depending on the percentage of the company’s shares held by foreign
      shareholders. The recipient of dividends distributed from such income is taxed
      at the rate applicable to dividends from approved enterprises which is 15%,
      or
      less under certain anti double-taxation treaties, if the dividend is distributed
      during the tax benefit period or within 12 years after the period and there
      is no time limit with respect to dividend distributed from an exempt income
      of
      foreign investors’ company. The company must withhold this tax at source.




Subject
      to applicable provisions concerning income under the alternative package of
      benefits, all dividends are considered to be attributable to the entire
      enterprise and their effective tax rate is the result of a weighted average
      of
      the various applicable tax rates. Under the Investment Law, a company that
      has
      elected the alternative package of benefits is not obliged to distribute exempt
      retained profits, and may generally decide from which year’s profits to declare
      dividends. We currently intend to reinvest any income derived from our approved
      enterprise programs and not to distribute the income as a dividend.




The
      Investment Center bases its decision whether or not to approve an application
      on
      the criteria in the Investment Law and regulations, the then prevailing policy
      of the Investment Center and the specific objectives and financial criteria
      of
      the applicant. In addition, the benefits available to an approved enterprise
      are
      conditional upon the fulfillment of conditions stipulated in the Investment
      Law
      and its regulations and the criteria in the specific certificate of approval,
      as
      described above. If a company does not meet these conditions, it would be
      required to refund the amount of tax benefits, with the addition of a consumer
      price index linkage adjustment and interest. There can be no assurance that
      any
      future approved enterprises that we may be awarded will be entitled to the
      same
      package of benefits as we currently have.




The
      Investment Center of the Ministry of Industry and Trade granted our
      manufacturing facility approved enterprise status under the Investment Law
      for
      investments beginning in 1999. We have elected the alternative package of
      benefits under these approved enterprise programs. Since our manufacturing
      facility is located in a “Zone A”, the portion of our income derived from this
      approved enterprise program will be exempt from tax for a period of ten years,
      commencing when we begin to realize net income from these programs, but such
      period may not extend beyond the later of 14 years from the year in which
      approval was granted or 12 years from the year in which operations or
      production by the enterprise began. We expect to derive a substantial portion
      of
      our income from our approved enterprise program. The benefits available to
      an
      approved enterprise program are dependent upon the fulfillment of conditions
      stipulated in applicable law and in the certificate of approval.




The
      Investment Law and the criteria for receiving an “approved enterprise” status
      may be amended from time to time and there is no assurance that we will be
      able
      to obtain additional benefits under the Investment Law when we apply for such
      benefits.




A
      reform in the Investment Law was made in March 2005. According to this reform,
      instead of filing application for tax benefits with the Investment Center,
      companies are now allowed to claim the tax benefits on their corporate tax
      returns subject to fulfilling certain conditions, without prior approval and
      without submitting any reports to the Investment Center. Audit of any claim
      for
      tax benefits will take place by the Israeli income tax authority as part of
      general tax audits it may perform from time to time.




*Grants
      Under the Law for the Encouragement of Industrial Research and Development,
      1984.* Under
      the Law for the Encouragement of Industrial Research and Development, 1984,
      commonly referred to as the Research Law, research and development programs
      which meet specified criteria and are approved by a governmental committee
      of
      the Office of the Chief Scientist are eligible for grants of up to 50% of the
      project’s expenditure, as determined by the research committee, in exchange for
      the payment of royalties from the sale of products developed under the program.
      Regulations under the Research Law generally provide for the payment of
      royalties to the Chief Scientist of 3.0% to 3.5% on sales of products and
      services derived from our technology developed using these grants until 100%
      of
      the dollar-linked grant is repaid, together with interest equal to the
      12 month London Interbank Offered Rate applicable to dollar deposits that
      is published on the first business day of each calendar year. Following the
      full
      repayment of the grant, there is no further liability for repayment.




68




The
      terms of the Israeli government participation also require that the manufacture
      of products developed with government grants be performed in Israel. However,
      under the regulations of the Research Law, if any of the manufacturing is
      performed outside Israel by any entity other than us, assuming we receive
      approval from the Chief Scientist for the foreign manufacturing, we may be
      required to pay increased royalties. The increase in royalties depends upon
      the
      manufacturing volume that is performed outside of Israel follows:




**Manufacturing
                  Volume Outside of Israel**
              
              **Royalties to the Chief Scientist**
                **as
                  a Percentage of Grant**Less
                  than 10%
              
              
              100
              %Between
                  10% and 50%
              
              
              120
              %between
                  50% and 90%
              
              
              150
              %90%
                  and more
              
              
              300
              %




If
      the manufacturing is performed outside of Israel by us, the rate of royalties
      payable by us on revenues from the sale of products manufactured outside of
      Israel will increase by 1% over the regular rates. If the manufacturing is
      performed outside of Israel by a third party, the rate of royalties payable
      by
      us on those revenues will be a percentage equal to the percentage of our total
      investment in the Given System that was funded by grants. In addition, in recent
      years the government of Israel has accelerated the repayment of Chief Scientist
      grants, and may further accelerate them in the future. Following our request,
      the Office of the Chief Scientist has approved the manufacture of limited
      quantities of the PillCam capsule using the back-up production line that we
      have
      established in Ireland without increasing royalty rates.




The
      technology developed with Chief Scientist grants may not be transferred to
      third
      parties without the prior approval of a governmental committee under the
      Research Law, and may not be transferred to non-residents of Israel. The
      approval, however, is not required for the export of any products developed
      using the grants. Approval of the transfer of technology to residents of Israel
      may be granted in specific circumstances, only if the recipient abides by the
      provisions of the Research Law and related regulations, including the
      restrictions on the transfer of know-how and the obligation to pay royalties
      in
      an amount that may be increased. We cannot provide any assurance that any
      consent, if requested, will be granted.




The
      funds available for grants from the Chief Scientist depend on several criteria
      and prevailing government policy and budget, and may be reduced or eliminated
      in
      the future. Even if these grants are maintained, there is no assurance that
      we
      will receive Chief Scientist grants in the future. In addition, each application
      to the Chief Scientist is reviewed separately, and grants are based on the
      program approved by the research committee. Expenditures supported under other
      incentive programs of the State of Israel are not eligible for grants from
      the
      Chief Scientist. We cannot provide any assurance that applications to the Chief
      Scientist will be approved and, until approved, the amounts of any grants are
      not determinable.




*Tax
      Benefits and Grants for Research and Development.* Israeli
      tax law allows, under specific conditions, a tax deduction in the year incurred
      for expenditures that were paid in cash, including capital expenditures,
      relating to scientific research and development projects, if:




•
              The
                  expenditures are approved by the relevant Israeli government ministry,
                  determined by the field of research;•
              The
                  research and development is for the promotion of the company; and•
              The
                  research and development is carried out by or on behalf of the
                  company
                  seeking the deduction.




Expenditures
      not so approved are deductible over a three-year period. However, the amounts
      of
      any government grant made available to us are subtracted from the amount of
      the
      deductible expenses according to Israeli law.




*Tax
      Benefits Under the Law for the Encouragement of Industry (Taxes),
      1969.* According to the Law for the Encouragement of Industry (Taxes), 1969, generally
      referred to as the Industry Encouragement Law, an industrial company is a
      company resident in Israel, at least 90% of the income of which, in a given
      tax
      year, determined in Israeli currency exclusive of income from specified
      government loans, capital gains, interest and dividends which are not classified
      for such company as business income, is derived from an industrial enterprise
      owned by it. An industrial enterprise is defined as an enterprise whose major
      activity in a given tax year is industrial production activity.




Under
      the Industry Encouragement Law, industrial companies are entitled to certain
      preferred corporate tax benefits, including the following:




69




•
              deduction
                  of purchases of know-how and patents over an eight-year period
                  for tax
                  purposes;•
              claiming
                  expenses in connection with the issuance and listing of shares
                  on the Tel
                  Aviv Stock Exchange or, on or after January 1, 2003, on a recognized
                  stock
                  market outside of Israel, over a period of three years; and•
              Accelerated
                  depreciation rates on equipment and
                  buildings.




Eligibility
      for benefits under the Industry Encouragement Law is not subject to receipt
      of
      prior approval from any governmental authority.




We
      believe that in 2007 we qualified as an Industrial Company under the Law for
      Encouragement of Industry (Taxes) 1969. We cannot provide any assurance that
      the
      Israeli tax authorities will agree with the determination that we qualified
      as
      an industrial company in the past or that we will maintain this qualification
      or
      our status as an industrial company. If we are delisted, gains from the sale
      of
      our ordinary shares will be subject to capital gains tax at a rate of 20%,
      or
      25% if the seller holds 10% or more of the “means of control” of our company, as
      such term is defined by the law, unless an exemption or other lower tax rate
      applies in accordance with a tax treaty between Israel and the shareholder’s
      country of residence.




If
      we qualify as an industrial company within the definition of the Industry
      Encouragement Law, we are entitled to the benefits described above. We believe
      that in 2007 we qualified as an Industrial Company under the Industry
      Encouragement Law. We cannot provide any assurance that the Israeli tax
      authorities will agree with the determination that we qualified as an industrial
      company in the past or that we will maintain this qualification or our status
      as
      an industrial company.




*Special
      Provisions Relating to Taxation Under Inflationary Conditions.* The
      Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the
      Inflationary Adjustments Law, represents an attempt to overcome the problems
      presented to a traditional tax system by an economy undergoing rapid inflation.
      The Inflationary Adjustments Law is highly complex. Its features which are
      material to us can generally be described as follows:




•
              Where
                  a company’s equity, as calculated under the Inflationary Adjustments Law,
                  exceeds the depreciated cost of fixed assets, a deduction from
                  taxable
                  income is permitted equal to the excess multiplied by the applicable
                  annual rate of inflation. The maximum deduction permitted in any
                  single
                  tax year is 70% of taxable income, with the unused portion permitted
                  to be
                  carried forward linked to the Israeli consumer price index. The
                  unused
                  portion that was carried forward may be deducted in full in the
                  following
                  year.•
              Where
                  a company’s depreciated cost of fixed assets exceeds its equity, then the
                  excess multiplied by the applicable annual rate of inflation is
                  added to
                  taxable income.•
              Depreciation
                  deductions on fixed assets and losses carried forward are adjusted
                  for
                  inflation based on the increase in the consumer price index.•
              Gains
                  on traded securities are taxable at the regular corporate tax rate
                  in
                  specified circumstances.




*Taxation
      of Our Shareholders*




*Capital
      Gains on Sales of Our Ordinary Shares.* Israeli
      law imposes a capital gains tax on the sale of capital assets. The law
      distinguishes between real gain and inflationary surplus. The inflationary
      surplus is the portion of the total capital gain that is equivalent to the
      increase of the relevant asset’s purchase price which is attributable to the
      increase in the Israeli consumer price index between the date of purchase and
      the date of sale. Foreign residents who purchased an asset in foreign currency
      may request that the inflationary surplus be computed on the basis of the
      devaluation of the Shekel against such foreign currency. The real gain is the
      excess of the total capital gain over the inflationary surplus. The inflationary
      surplus accumulated from and after December 31, 1993, is exempt from any
      capital gains tax in Israel while the real gain is taxed at the applicable
      rate
      discussed below. Under an amendment to the Inflationary Adjustments Law,
      non-Israeli corporations might be subject to Israeli taxes on the sale of shares
      in an Israeli company which are traded on certain stock markets, including
      The
      Nasdaq Global Market, subject to the provisions of any applicable double
      taxation treaty.




Individual
      and corporate shareholders dealing in securities in Israel are taxed at the
      tax
      rates applicable to business income. In 2007, these regular tax rates were
      29%
      for corporations and up to 48% for individuals.




70




*Non-Israeli
      residents* .
      Under  Israeli
      law, the capital gain from the sale of shares by non Israeli residents is tax
      exempt in Israel as long as our shares are listed on the Nasdaq Global Market
      or
      any other stock exchange recognized by the Israeli Ministry of Finance, and
      provided certain other conditions are met, the most relevant of which are:
      (A)
      the capital gain is not attributed to the foreign resident’s permanent
      establishment in Israel, (B) the shares were acquired by the foreign resident
      after the company’s shares had been listed for trading on the foreign exchange,
      and (C) if the seller is a corporation, less than 25% of its means of control
      are held by Israeli residents. In addition, capital gains from the sale of
      our
      ordinary shares by non-Israeli residents who purchased or will have purchased
      the shares between July 1, 2005 and December 31, 2008 and whose state of
      residence has a double tax treaty with Israel will generally be tax exempt
      irrespective of whether our shares are listed on any stock exchange. If the
      shares were sold by Israeli residents, then (A) for the period ending December
      31, 2002, their sale would be tax exempt so long as (1) the shares are listed
      on
      a stock exchange, such as the Nasdaq Global Market, which is recognized by
      the
      Israeli Ministry of Finance, and (2) we qualified as an industrial company
      or
      industrial holding company under the Law for Encouragement of Industry (Taxes)
      1969 **,** and (B)
      for the period commencing January 1, 2003, the capital gain accrued by
      individuals on the sale of shares will be taxed at the rate of 20%. However,
      if
      the individual shareholder is a "Controlling Shareholder,” namely, a person who
      holds, directly or indirectly, alone or together with other, 10% or more of
      one
      of the Israeli resident company's means of control at the time of distribution
      or at any time during the preceding 12 month period, such gain will be taxed
      at
      the rate of 25%. In addition, capital gain derived by an individual claiming
      deduction of financing expenses in respect of such gain will be taxed at the
      rate of 25%. The real capital gain derived by corporations will be generally
      subject to tax at the rate of 25%. However, the real capital gain derived from
      sale of securities, as defined in Section 6 of the Inflationary Adjustment
      Law,
      by a corporation, which was subject upon December 31, 2005 to the provisions
      of
      Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate
      tax
      rate.




In
      addition, under the Convention between the Government of the United States
      of
      America and the Government of Israel with Respect to Taxes on Income, as
      amended, or the U.S.-Israel Tax Treaty, Israeli capital gains tax will not
      apply
      to the sale, exchange or disposition of ordinary shares by a person:




•
            who
                holds such shares as a capital
                asset;




•
            who
                qualifies as a resident of the United States within the meaning of
                the
                U.S.-Israel tax treaty; and




•
            who
                is entitled to claim the benefits available to the person by the
                U.S.-Israel Tax Treaty.




However,
      this exemption does not apply, among other cases, if the gain is attributable
      to
      a permanent establishment of such person in Israel, or if the holder is a
      resident of the United States within the meaning of the U.S.-Israeli Tax Treaty
      who holds, directly or indirectly, shares representing 10% or more of our voting
      power during any part of the 12-month period preceding the sale, exchange or
      disposition, subject to certain conditions, or the capital gains can be
      allocated to a permanent establishment of such U.S. resident in Israel. Under
      these circumstances, the sale, exchange or disposition would be subject to
      Israeli tax, to the extent applicable. However, under the U.S.-Israel Tax
      Treaty, such U.S. resident generally will be permitted to claim a credit for
      the
      Israeli taxes paid against the U.S. federal income tax imposed on the sale,
      exchange or disposition, subject to the limitations under U.S. law applicable
      to
      foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state
      or
      local taxes.




*Dividends* .
      A
      distribution of dividends from income attributed to an “approved enterprise” is
      subject to tax in Israel at the rate of 15%, subject to a reduced rate under
      any
      applicable double tax treaty. A distribution of dividend from income, which
      is
      not attributed to an “approved enterprise,” to an Israeli resident individual,
      will generally be subject to income tax at a rate of 20%. However, a 25% tax
      rate will apply if the dividend recipient is a “Controlling Shareholder,”
namely, a person who holds, directly or indirectly, alone or together with
      other, 10% or more of one of the Israeli resident company's means of control
      at
      the time of distribution or at any time during the preceding 12 month period.
      If
      the recipient of the dividend is an Israeli resident corporation, such dividend
      will be exempt from income tax provided the income from which such dividend
      is
      distributed was derived or accrued within Israel.




A
      distribution of dividends which is not attributed to an “approved enterprise” to
      a non-Israeli resident is generally subject to an Israeli income tax on the
      receipt of dividends at the rate of 20%, or 25% if the dividend recipient is
      a
“Controlling Shareholder,” as defined above. Those rates may be subject to a
      reduced tax rate under an applicable double tax treaty.




Under
      the
      U.S.-Israel Tax Treaty, the tax rate in respect of dividends distributed by
      an
      Israeli resident company to a U.S. resident corporation may be 12.5%, 15% or
      25%, depending on the percentage of holding in the resident company and the
      resident company's type of income distributed. Dividends distributed to a U.S.
      individual resident are taxed at a rate of 20%, or 25% if this individual is
      considered to be a “controlling shareholder.”




Upon
      the
      distribution of a dividend attributed to an Approved Enterprise's income, an
      Israeli resident company whose shares are listed on a stock exchange is
      obligated to withhold tax from the amount distributed at the rate of 15%,
      subject to a reduced tax rate under an applicable double tax treaty If the
      dividend is distributed from income not attributed to the approved enterprise,
      the following withholding tax rates will apply: (i) Israeli resident
      corporation – 0%, (ii) Israeli resident individual – 20%, and (iii)
      non-Israeli resident – 20%, subject to a reduced tax rate under an
      applicable double tax treaty.





*Israeli
      Withholding Tax* .
      Non-residents of Israel are subject to tax on income accrued or derived from
      sources in Israel. These sources of income include passive income such as
      dividends, royalties and interest, as well as non-passive income, such as income
      received for services rendered in Israel. We are required to withhold income
      tax
      at the rate of 25% with respect to passive income (or 15% for dividends
      distributed from income generated by an approved enterprise) unless a different
      rate or an exemption is provided in a tax treaty between Israel and the
      shareholder’s country of residence. For residents of countries other than the
      United States, the purchaser of shares may be required to withhold 25% capital
      gains tax on all amounts received upon the sale of our ordinary shares, provided
      the capital gain from such a sale is not exempt from Israeli capital gains
      tax,
      and unless a different rate is provided in a treaty between Israel and the
      seller’s country of residence.


71




The
      foregoing discussion is intended only as a summary and does not purport to
      be a
      complete analysis or listing of all potential Israeli tax effects of holding
      our
      shares. We recommend that shareholders consult their tax advisors concerning
      the
      Israeli and non-Israeli tax consequences to them of holding our shares.




**Certain
      Material U.S. Federal Income Tax Considerations**




*U.S.
      Shareholders* .
      The
      following is a description of the material U.S. federal income tax consequences
      of the ownership of our ordinary shares. This description does not purport
      to
      address all of the tax considerations that may be relevant to a decision to
      purchase, own or dispose of our ordinary shares. This description assumes that
      holders of our ordinary shares will hold the ordinary shares as capital assets
      within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986,
      as
      amended, referred to as the Code. This discussion does not address all of the
      tax considerations that may be relevant to shareholders in light of their
      particular circumstances or certain types of shareholders subject to special
      tax
      treatment, including, without limitation:




·
            regulated
                investment companies;




·
            broker-dealers
                (including in securities or foreign currency) or insurance
                companies;




·
            persons
                who have elected to apply a mark-to-market method of
                accounting;




·
            tax-exempt
                organizations or retirement plans;




·
            certain
                former citizens or former long-term residents of the U.S.;




·
            persons
                subject to the alternative minimum tax;




·
            banks
                and other financial institutions;




·
            persons
                who hold their shares as part of a position in a “straddle” or as part of
                a “hedging,” “conversion,” “constructive sale,” synthetic security, or
                other integrated investment;




·
            holders
                who received their shares through the exercise of employee stock
                options
                or otherwise as compensation;




·
            partnerships
                or other pass-through entities or persons who hold their shares through
                partnerships or other pass-through
                entities;




·
            holders
                who own directly, indirectly or by attribution at least 10.0% of
                the
                voting power of our shares or holders who within the past five year
                period
                owned at least 10.0% of the voting power of our shares;
                and




·
            persons
                whose functional currency is not the U.S.
                dollar.




Further,
      this description does not address any U.S. federal estate and gift or
      alternative minimum tax consequences, nor any state, local, or foreign tax
      consequences relating to the acquisition, ownership and disposition of our
      ordinary shares.




This
      discussion is based on current provisions of the Code, current and proposed
      Treasury regulations promulgated under the Code, administrative pronouncements
      and judicial decisions and interpretations as of the date hereof, all of which
      are subject to differing interpretations or change, which change may apply
      retroactively and could materially affect the continued validity of this summary
      and the tax considerations described herein. Subject to the discussion set
      forth
      below under the heading entitled “Passive Foreign Investment Company
      Considerations,” this discussion assumes that the Company is not and has never
      been a “passive foreign investment company,” “controlled foreign corporation,”
“foreign investment company” or “foreign personal holding company” for U.S.
      federal income tax purposes.




Unless
      specifically noted below, the following description applies only to owners
      of
      our ordinary shares that are U.S. Holders, as defined below, for U.S. federal
      income tax purposes.




For
      purposes of this description, a “U.S. Holder” is a beneficial owner of ordinary
      shares that, for U.S. federal income tax purposes, is:




72


•
              citizen
                  or resident of the United States;•
              a
                  corporation or other entity taxable as a corporation for U.S. federal
                  income tax purposes created or organized in or under the laws of
                  the
                  United States or any state thereof, or the District of Columbia;•
              an
                  estate if its income is subject to U.S. federal income taxation
                  regardless
                  of its source; or•
              a
                  trust (A) if a court within the United States is able to exercise
                  primary
                  jurisdiction over its administration and one or more U.S. persons
                  have
                  authority to control all of its substantial decisions, or (B) if,
                  in
                  general, it was in existence on August 20, 1996, was created as
                  a U.S.
                  person under the Code on the previous day and made a valid election
                  to
                  continue to be so treated.




A
      non-U.S. Holder is a beneficial owner of ordinary shares that is not a U.S.
      Holder.




If
      a partnership (or any other entity treated as a partnership for U.S. federal
      income tax purposes) holds our ordinary shares, the tax treatment of the
      partnership and a partner in such partnership generally will depend on the
      status of the partner and the activities of the partnership. Such a partner
      or
      partnership should consult its own tax advisor as to its
      consequences.




Shareholders
      should consult their tax advisors with respect to the U.S. federal, state,
      local
      and foreign tax consequences of acquiring, owning or disposing of our ordinary
      shares.




*Distributions*




Subject
      to the discussion below under “Passive Foreign Investment Company
      Considerations”, the entire amount of any distribution made to you with respect
      to ordinary shares, other than any distributions of our ordinary shares made
      to
      all our shareholders, will constitute dividends to the extent of our current
      or
      accumulated earnings and profits as determined under U.S. federal income tax
      principles. For these purposes, the amount of the distribution will not be
      reduced by the amount of any Israeli tax withheld from the distribution. Subject
      to the discussion below under “Passive Foreign Investment Company
      Considerations”, non-corporate U.S. Holders may be taxed on the dividend
      distributions made in taxable years beginning on or before December 31, 2010
      at
      the lower rates applicable to long-term capital gains (i.e., gains with respect
      to capital assets held for more than one year), provided that certain conditions
      are met, including certain holding period requirements and the absence of
      certain risk reduction transactions. In addition, the dividends will not be
      eligible for the dividends received deduction generally allowed to corporate
      U.S. holders. Subject to the discussion below under “Passive Foreign Investment
      Company Considerations”, if distributions with respect to our ordinary shares
      exceed our current and accumulated earnings and profits  as
      determined under U.S. federal income tax principles, the excess distributed
      with
      respect to any ordinary share would be treated first as a tax-free return of
      capital to the extent of your adjusted basis in that ordinary share and
      thereafter as capital gain. We do not maintain calculations of our earnings
      and
      profits under U.S. federal income tax principles.




If
      we pay a dividend or distribution in Shekels, any such dividend or distribution
      will be included in your gross income in an amount equal to the U.S. dollar
      value of Shekels on the date of receipt. You will have a tax basis for U.S.
      federal income tax purposes in the Shekels received equal to that dollar value,
      and any subsequent gain or loss in respect of the Shekels arising from exchange
      rate fluctuations will generally be taxable as U.S. source ordinary income
      or
      loss.




Dividends
      received by you with respect to your ordinary shares generally will be treated
      as foreign source income, which may be relevant in calculating your foreign
      tax
      credit limitation. You may generally elect to claim the Israeli income tax
      withheld from dividends and distributions you receive with respect to your
      ordinary shares as a foreign tax credit against your U.S. federal income tax
      liability, subject to a number of limitations. Among the limitations, the
      foreign tax credits allowable with respect to specific classes of income cannot
      exceed the U.S. federal income tax payable with respect to each such class.
      Dividends we pay generally will be included in the “passive income” class for
      these purposes, or, in the case of certain financial services entity holders,
      “general category income.”




Subject
      to the discussion below under “Backup Withholding and Information Reporting,” if
      you are a non-U.S. Holder of our ordinary shares, you generally will not be
      subject to U.S. federal income or withholding tax on dividends you receive
      on
      your ordinary shares, unless the dividends are effectively connected with your
      conduct of a trade or business in the United States.




*Sale
      or Exchange of Our Ordinary Shares*




Subject
      to the discussion below under “Passive Foreign Investment Company
      Considerations”, if you are a U.S. Holder, you generally will recognize capital
      gain or loss for U.S. federal income tax purposes when you sell, exchange or
      otherwise dispose of our ordinary shares equal to the difference between your
      adjusted tax basis in the ordinary shares and the amount realized on their
      disposition. If you are a non-corporate U.S. Holder, the maximum marginal U.S.
      federal income tax rate applicable to such gain will be lower than the maximum
      marginal U.S. federal income tax rate applicable to ordinary income (other
      than
      certain dividends) if your holding period for our ordinary shares exceeds one
      year ( *i.e.* ,
      such
      gain is long-term capital gain). Any gain or loss recognized by you generally
      will be treated as U.S. source income or loss for U.S. foreign tax credit
      purposes. The deductibility of capital losses is subject to
      limitations.




73




Subject
      to the discussion below under “Backup Withholding and Information Reporting,” if
      you are a non-U.S. Holder of our ordinary shares, you generally will not be
      subject to U.S. federal income or withholding tax on gain realized on the sale
      or exchange of such ordinary shares unless (1) such gain is effectively
      connected with your conduct of a trade or business in the United States, or
      (2) in the case of gain realized by an individual non-United States holder,
      you are present in the United States for 183 days or more in the taxable
      year of the sale or exchange and certain other conditions are met.




*Passive
      Foreign Investment Company Considerations*




A
      non-U.S. corporation will be classified as a “passive foreign investment
      company” or a PFIC, for U.S. federal income tax purposes in any taxable year in
      which, after applying applicable look-through rules, either (1) at least
      75% of its gross income is “passive income,” or (2) at least 50% of the
      value of its gross assets is attributable to assets that produce passive income
      or are held for the production of passive income. Passive income for this
      purpose includes items such as dividends, interest, royalties, rents and gains
      from commodities and securities transactions.




Based
      on our estimated gross income, the average value of our gross assets (determined
      by reference to the market value of our shares and valuing our intangible assets
      using the methods prescribed for publicly traded corporations) and the nature
      of
      our business, we believe that we will not be classified as a PFIC for the
      taxable year ended December 31, 2007. Our status in future years will depend
      on
      our assets and activities in those years, although you will be treated as
      continuing to  own
      an
      interest in a PFIC if we are a PFIC in any year while you own your shares unless
      you make certain elections. We have no reason to believe that our assets or
      activities will change in a manner that would cause us to be classified as
      a
      PFIC, but because the market price of our ordinary shares is likely to
      fluctuate, we cannot assure you that we will not be considered a PFIC for any
      taxable year.  In
      general, if we were characterized as a PFIC for any taxable year, any gain
      recognized by a U.S. Holder who sells our ordinary shares would be treated
      as
      ordinary income and would be subject to tax as if the gain had been realized
      ratably over the holding period of such ordinary shares. The amount allocated
      to
      the current taxable year and any taxable year with respect to which were not
      a
      PFIC would be taxed as ordinary income (rather than capital gain) earned in
      the
      current taxable year. The amount allocated to other taxable years would be
      taxed
      at the highest marginal rates applicable to ordinary income for such taxable
      years, and the U.S. Holder also would be liable for an additional tax equal
      to
      the interest on such tax liability for such years.




If
      we were a PFIC, you could make a variety of elections that may alleviate the
      tax
      consequences referred to above, and one of these elections may be made
      retroactively. However, it is expected that the conditions necessary for making
      certain of such elections will not apply in the case of our ordinary shares.
      You
      should consult your own tax advisor regarding our potential status as a PFIC
      and
      the tax consequences that would arise if we were treated as a PFIC.




*Backup
      Withholding and Information Reporting*




United
      States backup withholding taxes and information reporting requirements generally
      apply to certain payments to certain non-corporate holders of stock. Information
      reporting requirements will, and a backup withholding tax may, apply to payments
      of dividends on, and to proceeds from the sale, exchange or redemption of,
      our
      ordinary shares made within the United States, or by a U.S. payor or U.S.
      middleman, to a holder of our ordinary shares, other than an exempt recipient,
      including a corporation, a payee that is not a U.S. person that provides an
      appropriate certification and certain other persons. Backup withholding is
      not
      an additional tax and may be claimed as a credit against your U.S. federal
      income tax liability, and you may obtain a refund of any excess amounts withheld
      under the backup withholding rules by filing an appropriate claim for refund
      with the IRS and furnishing any required information. The backup withholding
      tax
      rate is 28% for years through 2010.




The
      above description is not intended to constitute a complete analysis of all
      tax
      consequences relating to the acquisition, ownership or disposition of our
      ordinary shares. Shareholders should consult their own tax advisors concerning
      the tax consequences of your particular situation, as well as any tax
      consequences that may arise under the laws of any state, local, foreign or
      other
      taxing jurisdiction.




**F.**  **DIVIDENDS
        AND PAYING AGENTS**
 
 Not
        applicable.
 
 **G.**  **STATEMENTS
        BY EXPERTS**
 
 Not
        applicable.


74




**H.**  **DOCUMENTS
        ON DISPLAY**


We
      are
      currently subject to the information and periodic reporting requirements of
      the
      Exchange Act, and file periodic reports and other information with the
      Securities and Exchange Commission through its electronic data gathering,
      analysis and retrieval (EDGAR) system. Our securities filings, including this
      Annual Report and the exhibits thereto, are available for inspection and copying
      at the public reference facilities of the Securities and Exchange Commission
      located at 1580 100 F Street, N.E., Washington, D.C. 20549. You may also obtain
      copies of the documents at prescribed rates by  writing
      to the Public Reference Section of the Securities and Exchange Commission at 100
      F Street, N.E., Washington, DC 20549. Please call the Securities and Exchange
      Commission at 1-800-SEC-0330 for further information on the public reference
      room. The Commission also maintains a website at http://www.sec.gov from which
      certain filings may be accessed.




As
      a
      foreign private issuer, we are exempt from the rules under the Exchange Act
      relating to the furnishing and content of proxy statements, and our officers,
      directors and principal shareholders are exempt from the reporting and
      short-swing profit recovery provisions contained in Section 16 of the Exchange
      Act. In addition, we are not required under the Exchange Act to file periodic
      reports and financial statements with the Securities and Exchange Commission
      as
      frequently or as promptly as United States companies whose securities are
      registered under the Exchange Act.




**I.**  **SUBSIDIARY
        INFORMATION**
 
 Not
        applicable.




**ITEM
      11.****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




*Currency
      fluctuations* .
      Our
      sales in 2007 were denominated 67.5% in U.S. dollars, 23.3% in Euros and 9.2%
      in
      other currencies, depending on the location of the customer or the distributor
      used to fulfill our customers’ orders. As most of our sales are made in U.S.
      dollars, a strengthening of the U.S. dollar could make our products less
      competitive in foreign markets and could cause our non-U.S. customers to cancel
      or decrease orders or default on payment.




We
      develop and manufacture products primarily in Israel and sell the majority
      of
      the products in the United States, and to a lesser extent in other countries.
      If
      the value of a currency in which our revenues are denominated weakens against
      the value of a currency in which our expenses are denominated, there will be
      a
      negative impact on the profit margins for sales of our products. In 2007, 49%
      of
      our expenses were denominated in U.S. dollars and 31% of our expenses were
      denominated in Shekels, principally consisting of salaries and related personnel
      expenses. We expect this level of Shekel expenses to continue for the
      foreseeable future. During 2007, the U.S. dollar weakened against the Shekel
      by
      approximately 9.0%. We estimate that a change of 1% in the exchange rate between
      the Shekel and the U.S. dollar has an impact of approximately $170,000 on our
      operating expenses. In addition, 13% of our expenses were denominated in Euros
      and 7.0% were denominated in Yen or other currencies. However, since we also
      generate revenues in these currencies the net effect on our business of exchange
      rate fluctuations of these currencies against the U.S. dollars is not material.




As
      of
      December 31, 2007, 38% of our cash and cash equivalents were denominated in
      currencies other than the U.S. dollar and we are therefore subject to the risk
      of exchange rate fluctuations among the U.S. dollar, Yen, Shekel, Australian
      dollar and Euro. In 2007, we have used a variety of hedging tools to seek to
      minimize the effect of currency fluctuations on our income.




*Interest
      rate fluctuations* .
      We
      invest some of our cash in bank accounts and deposits with maturities of three
      months or less located with a number of highly-rated banks inside and outside
      of
      Israel. We invest the majority of our cash in longer-term financial instruments
      in order to seek to achieve a higher yield. As of December 31, 2007,
      approximately 50% of our investments were subject to the risk of changes in
      interest rates. We estimate that a change of 1% in interest rates would have
      an
      impact of up to approximately $500,000 on our finance income.




*General
      market risks* .
      As of
      December 31, 2007, approximately two thirds of our cash balances were invested
      in securities issued by the United States government or its agencies and in
      AAA
      money market funds. The remainder was held in corporate bonds and commercial
      paper that were highly-rated by rating agencies at the time of investment.
      Nonetheless, these investments are subject to general credit, liquidity and
      market risks, which may be exacerbated by the dislocation that has affected
      various sectors of the financial markets since the middle of 2007 and caused
      credit and liquidity issues for a number of reputable financial
      institutions.




**ITEM
      12.****DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
        applicable.


75




**PART
      II**




**ITEM
      13.****DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES**




None.


**ITEM
      14.****MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS**




Not
        applicable.




**ITEM
      15.****CONTROLS
      AND PROCEDURES******




*Disclosure
      Controls and Procedures.* We
      maintain disclosure controls and procedures that are designed to provide
      reasonable assurance that information required to be disclosed in our periodic
      filings with the SEC is recorded, processed, summarized and reported within
      the
      time periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to our management, including our Chief Executive
      Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely
      decisions regarding required disclosure. In designing and evaluating the
      disclosure controls and procedures, management recognized that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives. Furthermore,
      management necessarily was required to use its judgment in evaluating the cost
      to benefit relationship of possible disclosure controls and
      procedures.




As
      of the end of the period covered by this report, we performed an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures. The evaluation was performed with the participation of senior
      management of each business segment and key corporate functions, and under
      the
      supervision of our CEO and CFO. Based on the evaluation, our management,
      including the CEO and CFO, concluded that our disclosure controls and procedures
      were effective at the reasonable assurance level.




*Management’s
      Annual Report on Internal Control Over Financial Reporting.* Management
      of the company is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is
      defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process
      designed by, or under the supervision of, the company’s principal executive and
      principal financial officers and effected by the company’s board of directors,
      management and other personnel to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with generally accepted accounting
      principles and includes those policies and procedures that:




•
              pertain
                  to the maintenance of records that in reasonable detail accurately
                  and
                  fairly reflect the transactions and dispositions of the assets
                  of the
                  company;•
              provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  preparation of financial statements in accordance with generally
                  accepted
                  accounting principles, and that receipts and expenditures of the
                  company
                  are being made only in accordance with authorizations of management
                  and
                  directors of the company; and•
              provide
                  reasonable assurance regarding prevention or timely detection of
                  unauthorized acquisition, use or disposition of the company’s assets that
                  could have a material effect on the financial
                  statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risks that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.




Management
      assessed the effectiveness of the company’s internal control over financial
      reporting as of December 31, 2007. In making this assessment, management used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO) in *Internal
      Control-Integrated Framework* .
      Based
      on our assessment, management believes that, as of December 31, 2007, the
      company’s internal control over financial reporting is effective.




*Auditors’
      Attestation Report* .
      Our
      independent auditor, Somekh Chaikin, a member firm of KPMG has issued a combined
      report on  the company's consolidated financial statements and management’s
      assessment of the company’s internal control over financial reporting. This
      report is contained in Item 18 – Financial Statements, on page
      F-2.




*Changes
      in Internal Controls Over Financial Reporting.* There
      were no changes to our internal control over financial reporting that occurred
      during the period covered by this Form 20-F that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.




76




**ITEM
      16.****[RESERVED]**




**ITEM
        16A.****AUDIT
        COMMITTEE FINANCIAL EXPERT.**




The
      board of directors has determined that Michael Grobstein is the financial expert
      serving on its audit committee and that Mr. Grobstein is independent as that
      term is defined under the Nasdaq Global Market listing
      requirements.




**ITEM
      16B.****CODE
      OF ETHICS.**




We
      have adopted a code of ethics applicable to our chief executive officer, chief
      financial officer, controller and persons performing similar functions. The
      code
      of ethics was filed with the SEC as Exhibit 11.1 to our Annual Report on Form
      20-F for the fiscal year ended December 31, 2003 and is also available on our
      website, www.givenimaging.com .
      A hard
      copy of our code of ethics may be obtained by sending an e-mail request to info@givenimaging.com or by a
      written request to the corporate secretary at 2 Hacarmel Street, 20692, Yoqneam,
      Israel.




**ITEM
      16C.****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




The
      following table sets forth fees for professional audit services rendered by
      Somekh Chaikin, a member firm of KPMG International, for the audit of our
      financial statements for the years ended December 31, 2006 and 2007, and fees
      billed for other services rendered by Somekh Chaikin, including through other
      offices of KPMG worldwide:




**2006**
              
              **2007****(in
                  thousands)**Audit
                  fees
              
              $
              316
              
              $
              465Audit-related
                  fees
              
              
              24
              
              
              283Tax
                  fees
              
              
              67
              
              
              233All
                  other fees
              
              
              162
              
              
              3Total
              
              $
              569
              
              $
              984




(1)
              “Audit-related
                  fees” in 2006 are related principally to advice regarding U.S. sales
                  tax
                  and fees in 2007 are related principally to analysis of U.S. income
                  tax.(2)
              “Tax
                  fees” includes fees for professional services rendered by our auditors
                  for
                  tax compliance and tax advice on actual or contemplated transactions.
                  Tax
                  fees in 2007 are related principally to work regarding transfer
                  prices.(3)
              “All
                  other fees” in 2006 included fees related to advice on compliance with
                  Sarbanes-Oxley Act
                  requirements.




In
      accordance with our pre-approval policy, our audit committee pre-approved all
      audit and non-audit services provided to us and to our subsidiaries during
      the
      periods listed above. Audit services must be pre-approved by the full audit
      committee. The authority to pre-approve non-audit services has been delegated
      to
      the Chairman of the audit committee. Any services pre-approved by the Chairman
      are reported to the full committee at its next scheduled meeting.




**ITEM
      16D.****EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.**




None.




**ITEM
      16E.****PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS**




None.




77




**PART
      III**




**ITEM
      17.****FINANCIAL
      STATEMENTS**




Not
      applicable.




**ITEM
      18.****FINANCIAL
      STATEMENTS**




See
      pages F-1 to F-37.




**ITEM
      19.****EXHIBITS**




**Exhibit**
              
              **Description**1.1
              
              Articles
                  of Association, incorporated by reference to Exhibit 3.2 of the
                  Registration Statement on Form F-1 (File No. 333-68142) filed with
                  the
                  Commission on August 22, 2001.4.1
              
              Production
                  Development, Manufacturing and Sales Agreement, dated as of November
                  26,
                  2002, by and between Micron Technology, Inc. and the Registrant,
                  incorporated by reference to Exhibit 4.3 of the Annual Report on
                  Form 20-F
                  for the year ended December 31, 2003, filed with the Commission
                  on March
                  17, 2004.†4.2
              
              Addendum,
                  dated as of June 10, 2005, to Production Development, Manufacturing
                  and
                  Sales Agreement, dated as of November 26, 2002, by and between
                  Micron
                  Technology, Inc. and the Registrant. †4.3
              
              Form
                  of Indemnification Agreement between directors and officers of
                  the
                  Registrant and the Registrant, incorporated by reference to Exhibit
                  10.15
                  of the Registration Statement on Form F-1 (File No. 333-68142)
                  filed with
                  the Commission on August 22, 2001.4.4
              
              Lease
                  Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam
                  L.P. and the Registrant, incorporated by reference to Exhibit 10.20
                  of the
                  Registration Statement on Form F-1 (File No. 333-81514) filed with
                  the
                  Commission on February 1, 2002.4.5
              
              Summary
                  of Material Terms of Addendum, dated December 2002, to Lease Agreement,
                  dated as of November 26, 2001, by and between Sha’ar Yoqneam and the
                  Registrant, incorporated by reference to Exhibit 4.11 of the Annual
                  Report
                  on Form 20-F for the year ended December 31, 2002, filed with the
                  Commission on April 10, 2003.4.6
              
              Second
                  Addendum, dated July 5, 2004, to the Lease Agreement, dated as
                  of November
                  26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant,
                  incorporated by reference to Exhibit 4.15 of the Annual Report
                  on Form
                  20-F for the year ended December 31, 2004, filed with the Commission
                  on
                  March 25, 2005.4.7
              
              Development
                  and Supply Agreement, dated April 8, 2002, by and between Zarlink
                  Semiconductor AB and the Registrant, incorporated by reference
                  to Exhibit
                  4.11 of the Annual Report on Form 20-F for the year ended December
                  31,
                  2004, filed with the Commission on March 25, 2005.†4.8
              
              Addendum
                  to Development and Supply Agreement, dated July 2005, by and between
                  Zarlink Semiconductor AB and the Registrant, incorporated by reference
                  to
                  Exhibit 4.12 of the Annual Report on Form 20-F for the year ended
                  December
                  31, 2005, filed with the Commission on April 7, 2006.†4.9
              
              Exclusive
                  Sales, Representation, Co-Promotion and Cooperation Agreement,
                  dated May
                  10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant,
                  incorporated by reference to Exhibit 4.12 of the Annual Report
                  on Form
                  20-F for the year ended December 31, 2004, filed with the Commission
                  on
                  March 25, 2005.†4.10
              
              Amendment
                  No. 1, dated June 2004, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.13 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2004, filed with the Commission on March 25,
                  2005.†4.11
              
              Amendment
                  No. 2, dated October 4, 2004, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.14 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2004, filed with the Commission on March 25,
                  2005.†4.12
              
              Amendment
                  No. 3, dated October 27, 2005, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.16 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2005, filed with the Commission on April 7, 2006.




78




4.13
              Amendment
                  No. 4, dated November 14, 2005, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.17 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2005, filed with the Commission on April 7, 2006.4.14
              Amendment
                  No. 5, dated September 6, 2006, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.19 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2006, filed with the Commission on May 16, 2007.
                  †4.15
              Amendment
                  No. 6, dated February 16, 2007, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.20 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2006, filed with the Commission on May 16,
                  2007.4.16
              Termination
                  Agreement, dated as of December 18, 2007, by and between Ethicon
                  Endo-Surgery, Inc. and the Registrant.4.17
              Registration
                  Rights Agreement, dated as of July 18, 2007, by and among the Registrant
                  and Discount Investment Corporation Ltd., Elron Electronic Industries
                  Ltd.
                  and RDC Rafael Development Corporation Ltd.4.18
              Distribution
                  Agreement, dated May 9, 2002, by and between Given Imaging K.K.
                  and
                  Suzuken Co., Ltd. †8.1
              List
                  of subsidiaries of the Registrant, incorporated by reference to
                  Exhibit
                  8.1 of the Annual Report on Form 20-F for the year ended December
                  31,
                  2004, filed with the Commission on March 25, 2005.11.1
              Code
                  of Ethics adopted on December 9, 2003, incorporated by reference
                  to
                  Exhibit 11.1 of the Annual Report on Form 20-F for the year ended
                  December
                  31, 2003, filed with the Commission on March 17, 2004.12.1
              Certification
                  of Chief Executive Officer of the Registrant pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.12.2
              Certification
                  of Chief Financial Officer of the Registrant pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.13.1
              Certification
                  of Chief Executive Officer of the Registrant pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.*13.2
              Certification
                  of Chief Financial Officer of the Registrant pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.*15.1
              Consent
                  of Somekh Chaikin, a member firm of KPMG International, independent
                  registered public accountants.
  
 †
              Portions
                  of this exhibit were omitted and have been filed separately with
                  the
                  Secretary of the Securities and Exchange Commission pursuant to
                  an
                  application requesting confidential treatment under Rule 24b-2
                  of the
                  Securities Exchange Act of 1934.*
              This
                  document is being furnished in accordance with SEC Release Nos.
                  33-8212
                  and 34-47551.




79




**SIGNATURES**




Pursuant
      to the requirements of Section 12 of the Securities Exchange Act of 1934, the
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.




GIVEN
                  IMAGING LTD.By:
              /s/
                  Nachum ShamirName:
                  Nachum ShamirTitle:
                  President and Chief Executive OfficerBy:
              /s/
                  Yuval YanaiName:
                  Yuval YanaiTitle:
                  Chief Financial OfficerDate:
                  March 31, 2008









**ANNUAL
      REPORT ON FORM 20-F**




**INDEX
      OF EXHIBITS**




**Exhibit**
              
              **Description**1.1
              
              Articles
                  of Association, incorporated by reference to Exhibit 3.2 of the
                  Registration Statement on Form F-1 (File No. 333-68142) filed with
                  the
                       Commission on August 22, 2001.4.1
              
              Production
                  Development, Manufacturing and Sales Agreement, dated as of November
                  26,
                  2002, by and between Micron Technology, Inc. and the Registrant,
                  incorporated by reference to Exhibit 4.3 of the Annual Report on
                  Form 20-F
                  for the year ended December 31, 2003, filed with the Commission
                  on March
                  17, 2004.†4.2
              
              Addendum,
                  dated as of June 10, 2005, to Production Development, Manufacturing
                  and
                  Sales Agreement, dated as of November 26, 2002, by and between
                  Micron
                  Technology, Inc. and the Registrant. †4.3
              
              Form
                  of Indemnification Agreement between directors and officers of
                  the
                  Registrant and the Registrant, incorporated by reference to Exhibit
                  10.15
                  of the Registration Statement on Form F-1 (File No. 333-68142)
                  filed with
                  the Commission on August 22, 2001.4.4
              
              Lease
                  Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam
                  L.P. and the Registrant, incorporated by reference to Exhibit 10.20
                  of the
                  Registration Statement on Form F-1 (File No. 333-81514) filed with
                  the
                  Commission on February 1, 2002.4.5
              
              Summary
                  of Material Terms of Addendum, dated December 2002, to Lease Agreement,
                  dated as of November 26, 2001, by and between Sha’ar Yoqneam and the
                  Registrant, incorporated by reference to Exhibit 4.11 of the Annual
                  Report
                  on Form 20-F for the year ended December 31, 2002, filed with the
                  Commission on April 10, 2003.4.6
              
              Second
                  Addendum, dated July 5, 2004, to the Lease Agreement, dated as
                  of November
                  26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant,
                  incorporated by reference to Exhibit 4.15 of the Annual Report
                  on Form
                  20-F for the year ended December 31, 2004, filed with the Commission
                  on
                  March 25, 2005.4.7
              
              Development
                  and Supply Agreement, dated April 8, 2002, by and between Zarlink
                  Semiconductor AB and the Registrant, incorporated by reference
                  to Exhibit
                  4.11 of the Annual Report on Form 20-F for the year ended December
                  31,
                  2004, filed with the Commission on March 25, 2005.†4.8
              
              Addendum
                  to Development and Supply Agreement, dated July 2005, by and between
                  Zarlink Semiconductor AB and the Registrant, incorporated by reference
                  to
                  Exhibit 4.12 of the Annual Report on Form 20-F for the year ended
                  December
                  31, 2005, filed with the Commission on April 7, 2006.†4.9
              
              Exclusive
                  Sales, Representation, Co-Promotion and Cooperation Agreement,
                  dated May
                  10, 2004, by and between Ethicon Endo-Surgery, Inc. and the Registrant,
                  incorporated by reference to Exhibit 4.12 of the Annual Report
                  on Form
                  20-F for the year ended December 31, 2004, filed with the Commission
                  on
                  March 25, 2005.†4.10
              
              Amendment
                  No. 1, dated June 2004, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.13 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2004, filed with the Commission on March 25,
                  2005.†4.11
              
              Amendment
                  No. 2, dated October 4, 2004, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.14 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2004, filed with the Commission on March 25,
                  2005.†4.12
              
              Amendment
                  No. 3, dated October 27, 2005, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.16 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2005, filed with the Commission on April 7, 2006.4.13
              
              Amendment
                  No. 4, dated November 14, 2005, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.17 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2005, filed with the Commission on April 7, 2006.









4.14
              
              Amendment
                  No. 5, dated September 6, 2006, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.19 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2006, filed with the Commission on May 16, 2007.
                  †4.15
              
              Amendment
                  No. 6, dated February 16, 2007, to the Exclusive Sales, Representation,
                  Co-Promotion and Cooperation Agreement, dated May 10, 2004, by
                  and between
                  Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
                  reference
                  to Exhibit 4.20 of the Annual Report on Form 20-F for the year
                  ended
                  December 31, 2006, filed with the Commission on May 16,
                  2007.4.16
              
              Termination
                  Agreement, dated as of December 18, 2007, by and between Ethicon
                  Endo-Surgery, Inc. and the Registrant.4.17
              
              Registration
                  Rights Agreement, dated as of July 18, 2007, by and among the Registrant
                  and Discount Investment Corporation Ltd., Elron Electronic Industries
                  Ltd.
                  and RDC Rafael Development Corporation Ltd.4.18
              
              Distribution
                  Agreement, dated May 9, 2002, by and between Given Imaging K.K.
                  and
                  Suzuken Co., Ltd. †8.1
              
              List
                  of subsidiaries of the Registrant, incorporated by reference to
                  Exhibit
                  8.1 of the Annual Report on Form 20-F for the year ended December
                  31,
                  2004, filed with the Commission on March 25, 2005.11.1
              
              Code
                  of Ethics adopted on December 9, 2003, incorporated by reference
                  to
                  Exhibit 11.1 of the Annual Report on Form 20-F for the year ended
                  December
                  31, 2003, filed with the Commission on March 17, 2004.12.1
              
              Certification
                  of Chief Executive Officer of the Registrant pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.12.2
              
              Certification
                  of Chief Financial Officer of the Registrant pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.13.1
              
              Certification
                  of Chief Executive Officer of the Registrant pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.*13.2
              
              Certification
                  of Chief Financial Officer of the Registrant pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.*15.1
              
              Consent
                  of Somekh Chaikin, a member of KPMG International, independent
                  registered
                  public accountants.
  
 †
              Portions
                  of this exhibit were omitted and have been filed separately with
                  the
                  Secretary of the Securities and Exchange Commission pursuant to
                  an
                  application requesting confidential treatment under Rule 24b-2
                  of the
                  Securities Exchange Act of 1934.*
              This
                  document is being furnished in accordance with SEC Release Nos.
                  33-8212
                  and 34-47551.









**Given
      Imaging Ltd.**


**and
      its Subsidiaries**





**Consolidated**


**Financial
      Statements**





**As
      of and for the**


**Year
      Ended December 31, 2007**







**Given
      Imaging Ltd. and its subsidiaries**





**Index
      to Consolidated Financial Statements**




**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets
            F-4Consolidated
                Statements of Operations
            F-6Consolidated
                Statements of Changes in Shareholders’ Equity
            F-7Consolidated
                Statements of Cash Flows
            F-8Notes
                to the Consolidated Financial Statements
            F-9


F-1


**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Shareholders of


Given
      Imaging Ltd:





We
      have
      audited the accompanying consolidated ** balance
      sheets of Given Imaging Ltd. as of December 31, 2007 and 2006, and the related
      consolidated statements of operations, changes in shareholders' equity, and cash
      flows for each of the years in the three-year period ended December 31, 2007.
      We
      also have audited Given Imaging Ltd’s internal control over financial reporting
      as of December 31, 2007, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) *"* .
      Given
      Imaging Ltd's management is responsible for these consolidated financial
      statements, for maintaining effective internal control over financial reporting,
      and for its assessment of the effectiveness of internal control over financial
      reporting, included in the accompanying *Management’s
      Annual Report on Internal Control Over Financial Reporting* appearing
      under Item15 of Part II of this Form .20-F
      Our
      responsibility is to express an opinion on these consolidated financial
      statements and an opinion on the Company's internal control over financial
      reporting based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement and whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audits of the consolidated financial statements included
      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. Our audit of internal control over financial reporting
      included obtaining an understanding of internal control over financial
      reporting, assessing the risk that a material weakness exists, and testing
      and
      evaluating the design and operating effectiveness of internal control based
      on
      the assessed risk. Our audits also included performing such other procedures
      as
      we considered necessary in the circumstances. We believe that our audits provide
      a reasonable basis for our opinions.




A
      company's internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company's
      assets that could have a material effect on the financial
      statements.




F-2


Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Given Imaging Ltd. as of
      December 31, 2007 and 2006, and the results of its operations and its cash
      flows
      for each of the years in the three-year period ended December 31, 2007, in
      conformity with accounting principles generally accepted in the United States
      of
      America. Also in our opinion, Given Imaging Ltd. maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2007, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway
      Commission .”





As
      discussed in Note 1K to the consolidated financial statements, effective January
      1, 2006, the Company has adopted Statement of Financial Accounting Standard
      No.
      123 (revised 2004), “Share-Based Payment.”





As
      discussed in Note 1P to the consolidated financial statements, effective January
      1, 2007, the Company has adopted FASB Interpretation No. 48, “Accounting
      for Uncertainty in Income Taxes.”




/s/
      Somekh Chaikin


Somekh
      Chaikin


Certified
      Public Accountants (Israel)


Member
      Firm of KPMG International





Tel
      -
      Aviv, Israel


March
      31,
      2008




F-3


**Given
      Imaging Ltd. and its subsidiaries**





**Consolidated
      Balance Sheets**


**(In
      thousands except per share data)**




**December
                31****Note**
            
            **2006**
            
            **2007****Assets**Current
                assetsCash
                and cash equivalents
            
            
            1D;
                2
            
            $
            44,510
            
            $
            37,103Short-term
                investments
            
            
            1H;
                5
            
            
            17,245
            
            
            23,191Accounts
                receivable:Trade,
                net
            
            
            1E
            
            
            18,887
            
            
            23,315Other
            
            
            3
            
            
            1,463
            
            
            10,385Inventories
            
            
            1F;
                4
            
            
            18,168
            
            
            15,960Advances
                to suppliers
            
            
            
            
            
            82
            
            
            190Deferred
                tax assets
            
            
            1P;
                14D
            
            
            1,374
            
            
            1,350Prepaid
                expenses
            
            
            
            
            
            1,340
            
            
            1,289Total
                current assets
            
            
            
            
            
            103,069
            
            
            112,783**Deposits**
            
            
            
            
            
            469
            
            
            892**Assets
                held for employees’ severance payments**
            
            
            1G;
                10
            
            
            1,984
            
            
            3,007**Marketable
                securities**
            
            
            1H;
                5
            
            
            34,769
            
            
            41,629**Fixed
                assets, at cost, less accumulated depreciation**
            
            
            1I;
                6
            
            
            14,811
            
            
            15,422**Intangible
                assets, at cost, less accumulated amortization**
            
            
            1J;
                7
            
            
            3,075
            
            
            3,583**Total
                Assets**
            
            
            
            
            $
            158,177
            
            $
            177,316






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


F-4


**Given
      Imaging Ltd. and its subsidiaries**





**Consolidated
      Balance Sheets**


**(In
      thousands except share data)**




**December
                31****Note**
            
            **2006**
            
            **2007****Liabilities
                and shareholders' equity**Current
                liabilitiesCurrent
                installments of obligation under capital lease
            
            
            8B
            
            $
            13
            
            $
            121Accounts
                payable:Trade
            
            
            
            
            
            5,550
            
            
            7,275Other
            
            
            9
            
            
            14,620
            
            
            21,012Deferred
                income
            
            
            1N;
                8C
            
            
            3,871
            
            
            9,379Total
                current liabilities
            
            
            
            
            
            24,054
            
            
            37,787**Long-term
                liabilities**Deferred
                income
            
            
            8C
            
            
            20,411
            
            
            -Obligation
                under capital lease
            
            
            8B
            
            
            20
            
            
            448Liability
                in respect of employees’ severance payments
            
            
            10
            
            
            2,407
            
            
            3,490**Total
                long-term liabilities**
            
            
            
            
            
            22,838
            
            
            3,938**Total
                liabilities**
            
            
            
            
            
            46,892
            
            
            41,725**Commitments
                and contingencies**
            
            
            8**Minority
                interest**
            
            
            
            
            
            3,499
            
            
            1,996**Shareholders’
                equity****Share
                capital:**
            
            
            11Ordinary
                Shares, NIS 0.05 par value each (90,000,000 shares authorized as
                of
                December 31, 2006 and 2007, 28,641,291 and 29,241,785 shares issued
                and
                fully paid as of December 31, 2006 and 2007, respectively)
            
            
            
            
            
            335
            
            
            343Additional
                paid-in capital
            
            
            
            
            
            156,197
            
            
            166,813Capital
                reserve
            
            
            
            
            
            2,166
            
            
            2,166Accumulated
                deficit
            
            
            
            
            
            (50,912
            )
            
            (35,727
            )Total
                shareholders' equity
            
            
            
            
            
            107,786
            
            
            133,595**Total
                liabilities and shareholders' equity**
            
            
            
            
            $
            158,177
            
            $
            177,316




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


F-5


**Given
      Imaging Ltd. and its subsidiaries**





**Consolidated
      Statements of Operations**


**(In
      thousands except share and per share data)**





**Year
                ended December 31,****Note**
            
            **2005**
            
            **2006**
            
            **2007****Revenues**
            
            
            1N;
                12
            
            $
            86,776
            
            $
            95,029
            
            $
            112,868Cost
                of revenues
            
            
            
            
            
            (22,070
            )
            
            (24,154
            )
            
            (29,721
            )Early
                repayment of royalty bearing government grants
            
            
            10;
                8A
            
            
            -
            
            
            -
            
            
            (4,843
            )**Gross
                profit**
            
            
            
            
            
            64,706
            
            
            70,875
            
            
            78,304**Operating
                expenses**Research
                and development, gross
            
            
            1Q
            
            
            (8,833
            )
            
            (12,678
            )
            
            (12,847
            )Royalty
                bearing government grants
            
            
            1O;
                8A
            
            
            1,244
            
            
            1,867
            
            
            1,242Research
                and development, net
            
            
            
            
            
            (7,589
            )
            
            (10,811
            )
            
            (11,605
            )Sales
                and marketing
            
            
            
            
            
            (43,281
            )
            
            (50,732
            )
            
            (55,446
            )General
                and administrative
            
            
            
            
            
            (9,657
            )
            
            (16,027
            )
            
            (20,981
            )Termination
                of marketing agreement
            
            
            8C
            
            
            -
            
            
            -
            
            
            22,860Other
            
            
            6,
                7
            
            
            -
            
            
            -
            
            
            (422
            )**Total
                operating expenses**
            
            
            
            
            
            (60,527
            )
            
            (77,570
            )
            
            (65,594
            )**Operating
                profit (loss)**
            
            
            
            
            
            4,179
            
            
            (6,695
            )
            
            12,710Financial
                income, net
            
            
            13
            
            
            762
            
            
            3,980
            
            
            5,520**Profit
                (loss) before taxes on income and minority share**
            
            
            
            
            
            4,941
            
            
            (2,715
            )
            
            18,230Income
                tax benefit (expense)
            
            
            1P,
                14
            
            
            286
            
            
            (127
            )
            
            (4,548
            )**Profit
                (loss) before minority share**
            
            
            
            
            
            5,227
            
            
            (2,842
            )
            
            13,682Minority
                share in losses of subsidiary
            
            
            
            
            
            1,116
            
            
            1,334
            
            
            1,503**Net
                profit (loss)**
            
            
            
            
            $
            6,343
            
            $
            (1,508
            )
            $
            15,185**Earnings
                (loss) per share**Basic
                Earnings (loss) per Ordinary Share
            
            
            1L
            
            $
            0.23
            
            $
            (0.05
            )
            $
            0.52Diluted
                Earnings (loss) per Ordinary Share
            
            
            
            
            $
            0.21
            
            $
            (0.05
            )
            $
            0.49Weighted
                average number of Ordinary Shares used to compute basic profit (loss)
                per
                Ordinary Share
            
            
            1L
            
            
            27,781,223
            
            
            28,053,849
            
            
            28,961,968Weighted
                average number of Ordinary Shares used to compute diluted Earnings
                (loss)
                per Ordinary Share
            
            
            1L
            
            
            29,695,164
            
            
            28,053,849
            
            
            31,030,458




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


F-6


**Given
      Imaging Ltd. and its subsidiaries**





**Consolidated
      Statements of Changes in Shareholders' Equity**


**(In
      thousands except share data)**





**Additional****Ordinary
                shares**
            
            **Paid-In**
              **Capital**
            
            **Capital**Reserve
            
            **Unearned**Compensation
            
            **Accumulated**Deficit
            
            **Total****Shares**
            
            **Amount****Balance
                as of December 31,2004**
            
            
            27,621,386
            
            $
            323
            
            $
            147,878
            
            $
            2,166
            
            $
            (3
            )
            $
            (55,747
            )
            $
            94,617**Changes
                during the year 2005:**Exercise
                of stock options
            
            
            328,895
            
            
            4
            
            
            1,077
            
            
            -
            
            
            -
            
            
            -
            
            
            1,081Amortization
                of unearnedcompensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3
            
            
            -
            
            
            3Net
                profit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,343
            
            
            6,343**Balance
                as of December 31, 2005**
            
            
            27,950,281
            
            
            327
            
            
            148,955
            
            
            2,166
            
            
            -
            
            
            (49,404
            )
            
            102,044**Changes
                during the year 2006:**Exercise
                of stock options
            
            
            591,010
            
            
            7
            
            
            2,029
            
            
            -
            
            
            -
            
            
            -
            
            
            2,036Restricted
                shares issued
            
            
            100,000
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1Stock
                based compensation
            
            
            -
            
            
            -
            
            
            5,213
            
            
            -
            
            
            -
            
            
            -
            
            
            5,213Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,508
            )
            
            (1,508
            )**Balance
                as of December 31, 2006**
            
            
            28,641,291
            
            
            335
            
            
            156,197
            
            
            2,166
            
            
            -
            
            
            (50,912
            )
            
            107,786**Changes
                during the year 2007:**Exercise
                of stock options
            
            
            589,262
            
            
            8
            
            
            4,272
            
            
            -
            
            
            -
            
            
            -
            
            
            4,280Excess
                tax benefits related to stock based compensation
            
            
            -
            
            
            -
            
            
            693
            
            
            -
            
            
            -
            
            
            -
            
            
            693Exercise
                of warrants
            
            
            5,232
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Restricted
                shares issued
            
            
            6,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                based compensation
            
            
            -
            
            
            -
            
            
            5,651
            
            
            -
            
            
            -
            
            
            -
            
            
            5,651Net
                profit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15,185
            
            
            15,185**Balance
                as of December 31, 2007**
            
            
            29,241,785
            
            $
            343
            
            $
            166,813
            
            $
            2,166
            
            
            -
            
            $
            (35,727
            )
            $
            133,595





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


F-7


**Given
      Imaging Ltd. and its subsidiaries**





**Consolidated
      Statements of Cash Flows**


**(In
      thousands)**




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007****Cash
                flows from operating activities:**Net
                profit (loss)
            
            $
            6,343
            
            $
            (1,508
            )
            $
            15,185**Adjustments
                  required to reconcile net profit (loss) to net cashprovided
                  by operating activities:**Minority
                share in losses of subsidiary
            
            
            (1,116
            )
            
            (1,334
            )
            
            (1,503
            )Depreciation
                and amortization
            
            
            3,596
            
            
            4,237
            
            
            4,771Deferred
                tax assets
            
            
            (482
            )
            
            (155
            )
            
            24Stock
                based compensation
            
            
            3
            
            
            5,213
            
            
            5,651Excess
                tax benefits related to stock based compensation
            
            
            -
            
            
            -
            
            
            (693
            )Other
            
            
            98
            
            
            18
            
            
            380Net
                decrease (increase) in trading securities
            
            
            -
            
            
            (5,060
            )
            
            5,092Increase
                in accounts receivable - trade
            
            
            (6,064
            )
            
            (562
            )
            
            (4,428
            )Decrease
                (increase) in other accounts receivable
            
            
            (4,993
            )
            
            4,801
            
            
            (8,922
            )Decrease
                (increase) in prepaid expenses
            
            
            (66
            )
            
            (320
            )
            
            51Decrease
                (increase) in advances to suppliers
            
            
            223
            
            
            250
            
            
            (108
            )Decrease
                (increase) in inventories
            
            
            (2,378
            )
            
            (1,996
            )
            
            2,208Increase
                in accounts payable
            
            
            5,769
            
            
            500
            
            
            8,570Increase
                (decrease) in deferred income
            
            
            12,555
            
            
            (1,223
            )
            
            (14,903
            )**Net
                cash provided by operating activities**
            
            
            13,488
            
            
            2,861
            
            
            11,375**Cash
                flows from investing activities:**Purchase
                of fixed assets and intangible assets
            
            
            (7,948
            )
            
            (5,876
            )
            
            (5,772
            )Deposits
            
            
            (16
            )
            
            (41
            )
            
            (355
            )Proceeds
                from sale of marketable securities
            
            
            -
            
            
            13,120
            
            
            18,753Investments
                in marketable securities
            
            
            (21,919
            )
            
            (37,960
            )
            
            (36,584
            )**Net
                cash used in investing activities**
            
            
            (29,883
            )
            
            (30,757
            )
            
            (23,958
            )**Cash
                flows from financing activities:**Principal
                payments on capital lease obligation
            
            
            (12
            )
            
            (14
            )
            
            (37
            )Proceeds
                from the issuance of Ordinary Shares
            
            
            1,081
            
            
            2,037
            
            
            4,280Excess
                tax benefits related to stock based compensation
            
            
            -
            
            
            -
            
            
            693Issuance
                of shares by consolidated company
            
            
            -
            
            
            4,772
            
            
            -**Net
                cash provided by financing activities**
            
            
            1,069
            
            
            6,795
            
            
            4,936**Effect
                of exchange rate changes on cash**
            
            
            (179
            )
            
            255
            
            
            240**Decrease
                in cash and cash equivalents**
            
            
            (15,505
            )
            
            (20,846
            )
            
            (7,407
            )**Cash
                and cash equivalents at beginning of year**
            
            
            80,861
            
            
            65,356
            
            
            44,510**Cash
                and cash equivalents at end of year**
            
            
            65,356
            
            
            44,510
            
            
            37,103





**Supplementary
      cash flow information**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Income
                taxes paid
            
            $
            163
            
            $
            300
            
            $
            1,098Assets
                acquired under capital lease
            
            
            -
            
            
            -
            
            $
            569




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


F-8


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting
      Policies**





**A.**  **General**





Given
      Imaging Ltd. (the "Company") was incorporated in Israel in January 1998.





The
      Company has developed the Given System, a proprietary wireless imaging system
      that represents a new approach to visual examination of the gastrointestinal
      tract. The system uses a miniaturized video camera contained in a capsule,
      referred to as the PillCamTM capsule, which is ingested by the patient and
      delivers high quality color images in a painless and noninvasive manner.





The
      Given
      System consists of three principal components:





•
            a
                single-use, disposable PillCam color-imaging capsule that is ingested
                by
                the patient;





•
            a
                portable data recorder and array of sensors that are worn by the
                patient;
                and





•
            a
                computer workstation with a proprietary RAPID software for downloading,
                processing and analyzing recorded
                data.





After
      receiving marketing clearance from the United States Food and Drug
      Administration (“FDA”) in August of 2001, the Company commenced the marketing of
      the Given System with its first video capsule, the PillCam Small Bowel Capsule,
      or PillCam SB, for detection of disorders of the small bowel. In November 2004,
      following receipt of FDA marketing clearance, the Company began marketing and
      sales of its second video capsule, PillCam ESO, for detection of disorders
      in
      the esophagus. I n
      late
      2006, the Company completed the development of its third video capsule, PillCam
      Colon, for visual examination of the colon and received the regulatory clearance
      that permits the Company to market and sell this capsule in Europe. In April
      2007, the Company received marketing clearance for the PillCam SB capsule from
      the Ministry of Health, Labor and Welfare in Japan.





The
      medical device industry in which the Company is involved is characterized by
      the
      risks of regulatory barriers and reimbursement issues. Penetration into the
      world market requires the investment of considerable resources and continuous
      development efforts. The Company’s future success is dependent upon several
      factors including technological quality, regulatory approvals, sufficient
      reimbursement for its products and the cost and diagnostic-effectiveness of
      its
      products compared to other methods for the examination of the gastrointestinal
      tract.





**B.**  **Basis
      of presentation**





The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      and include the accounts of the Company and its wholly-owned subsidiaries in
      the
      United States, Germany, France, the Netherlands, Singapore and Australia and
      its
      51% owned subsidiary in Japan. The accounts of its subsidiaries are consolidated
      from the date of their inception. All the subsidiaries were established for
      the
      purpose of marketing and selling the Given System. All intercompany balances
      and
      transactions have been eliminated in consolidation. The Company considers that
      it operates in only one segment.




Prior
      periods’ financial statement presentations in note 12A and 12B have been
      conformed to the current period’s presentation.




F-9


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**




**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**C.**  **Functional
      and reporting currency**





The
      Company and all its subsidiaries’ functional and reporting currency is the U.S.
      dollar.





Transactions
      denominated in foreign currencies other than the U.S. dollar are translated
      into
      the functional currency using the prevailing exchange rates at the date of
      the
      transactions. Gains and losses from the translation of foreign currency
      transactions are recorded in other income or expenses.





**D.**  **Cash
      and cash equivalents**





All
      highly-liquid investments with original maturity of three months or less from
      the date of deposit are considered to be cash equivalents.





**E.**  **Allowance
      for doubtful accounts receivable - trade**





The
      allowance for doubtful accounts receivable is calculated on the basis of
      specific identification of balances, the collection of which, in management's
      opinion, is doubtful. In determining the adequacy of the allowance, management
      bases its opinion on the estimated risk, in reliance on available information
      with respect to the debtor's financial position and an evaluation of the
      collateral received.





The
      activity in the allowance for doubtful accounts for the three years ended
      December 31, 2007 is as follows:




**Year
                  ended December 31,****2005**
              
              **2006**
              
              **2007**Opening
                  balance
              
              $
              115
              
              $
              431
              
              $
              787Provision
              
              
              316
              
              
              356
              
              
              (79
              )Write-offs
              
              
              -
              
              
              -
              
              
              (379
              )Closing
                  balance
              
              $
              431
              
              $
              787
              
              $
              329




**F.**  **Inventories**





Inventories
      are stated at lower of cost or market. Cost is determined using the average
      cost
      method for raw materials, components and finished goods and on the basis of
      actual manufacturing costs for work in progress.




**G.**  **Assets
      held for employees’ severance payments**





Assets
      held for employees’ severance payments represent contributions to insurance
      policies that are recorded at their current redemption value.




F-10


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**H.** **Marketable
          securities**





The
      Company accounts for marketable securities under Statement of Financial
      Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt
      and Equity Securities (“SFAS 115”). Marketable securities consist of U.S.
      government bonds and corporate bonds, which the Company classified as “held to
      maturity” as of December 31, 2007 and 2006. As of December 31, 2006, the Company
      also held auction rate securities and money market funds, which the Company
      classified as “trading.”





Held-to-maturity
      debt securities are securities that the Company has the ability and intent
      to
      hold until maturity and are recorded at amortized cost, adjusted for the
      amortization or accretion of premiums or discounts. Premiums and discounts
      are
      amortized or accreted over the life of the related held-to-maturity security
      as
      an adjustment to yield using the effective-interest method.





Trading
      securities are bought and held principally for the purpose of selling them
      in
      the near term. Trading securities are recorded at fair value and changes in
      the
      fair value, based on closing market prices of the securities at the balance
      sheet date, represent unrealized gains and losses which are included in
      earnings.





Decline
      in the market value of any “held-to-maturity” security below cost, that is
      deemed to be other than temporary, results a reduction in the carrying amount
      to
      fair value and a corresponding impairment. The impairment is charged to earnings
      and a new cost basis for the security is established. During 2006 and 2007
      no
      impairment charge was recognized.





**I.**  **Fixed
      assets**





Fixed
      assets are stated at cost. Depreciation is computed by the straight-line method
      over the estimated useful lives of the assets at the following annual
      rates:





**%**Computers
                and software
            
            
            33Instruments
                and laboratory equipment
            
            
            15Leasehold
                improvements
            
            
            10Motor
                vehicles
            
            
            15Machinery
                and equipment
            
            
            15Communication
                equipment
            
            
            15Office
                furniture and equipment
            
            
            10-15





Motor
      vehicles purchased under capital lease arrangements are recorded at the present
      value of the minimum lease payments at lease inception. Such assets and
      leasehold improvements are depreciated and amortized respectively, using the
      straight-line method over the shorter of the lease term or estimated useful
      life
      of the asset.





The
      Company evaluates long-lived assets and certain intangible assets for impairment
      in accordance with the provisions of SFAS No. 144, “Accounting for the
      Impairment of or Disposal of Long-Lived Assets” (“Statement 144”). This
      Statement requires that long-lived assets and certain identifiable intangible
      assets be reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable.
      Recoverability of assets to be held and used is measured by a comparison of
      the
      carrying amount of an asset to undiscounted future net cash flows expected
      to be
      generated by the asset. If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the carrying
      amount of the assets exceeds the fair value of the assets.


F-11


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**J.**  **Intangible
      assets**





a.
            Legal
                expenses related to patents and trademarks registration have been
                capitalized and amortized over the remaining life of the assets,
                which isgenerallyeight years, and are evaluated for recoverability whenever events
                or
                changes in circumstances indicate that the carrying amount may not
                be
                recoverable.





b.
            Technology
                and content costs are generally expensed as incurred, except for
                certain
                costs relating to the development of the Company’s website that are
                capitalized and amortized in accordance with EITF 00-2*“Accounting
                for website development costs”*over their estimated useful life which is generally three
                years.





**K.** **Stock
          compensation plans**





*Employees
      and Directors*





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This
      Statement requires compensation expense relating to share-based payments to
      be
      recognized in net income using a fair-value measurement method. Under the fair
      value method, the estimated fair value of awards is charged to income on a
      straight-line basis over the requisite service period, which is generally the
      vesting period. The Company elected the modified-prospective method and
      therefore prior periods were not restated. Under the modified-prospective
      method, compensation costs recognized in 2006 include also compensation costs
      for all share-based payments granted prior to, but not yet vested, as of
      December 31, 2005.





Stock-based
      compensation recognized in the consolidated statements of operations for the
      years ended December 31, 2007 and 2006 is based on awards ultimately expected
      to
      vest. As a result the expense has been reduced for estimated forfeitures. SFAS
      No. 123R required forfeitures to be estimated at the time of grant and revised,
      if necessary, in subsequent periods if actual forfeitures differ from those
      estimates. In the Company’s pro forma information required under SFAS
      No.
      123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) for the
      periods prior to fiscal 2006, the Company accounted for forfeitures as they
      occurred.





For
      the
      year ended December 31, 2006, the effect of the implementation of SFAS No.
      123R
      was to increase expenses by $ 5,213 which changed the (loss) before taxes and
      net (loss) by the same amounts. Consequently, the basic and diluted loss per
      share for the year ended December 31, 2006 was further reduced by $0.19
      .





Prior
      to
      January 1, 2006, the Company has followed SFAS No. 123, which permitted entities
      to recognize as an expense over the vesting period, the fair value on the date
      of grant of all stock-based awards. Alternatively, Statement 123 allowed
      entities to continue to apply the provisions of Accounting Principles Board
      Opinion No.25, “Accounting for Stock Issued to Employees and related
      interpretations” (“APB Opinion No.25”) and provide pro forma net income and
      proforma earnings per share disclosures for employee stock option grants as
      if
      the fair-value based method defined in Statement 123 had been
      applied.


F-12





**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**




**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**K.** **Stock
          compensation plans (cont’d)**





The
      Company elected to apply the intrinsic value-based method prescribed in APB
      Opinion No. 25 for its stock compensation to employees and directors and provide
      the pro forma disclosure provisions of SFAS No. 123, as amended by SFAS No.
      148,
“Accounting for Stock-Based Compensation - Transition and Disclosure, an
      amendment of SFAS No. 123.”





As
      such,
      the Company computed and recorded compensation expense for grants whose terms
      were fixed with respect to the number of shares and option price only if the
      market price on the date of grant exceeded the exercise price of the stock
      option. The compensation cost for the fixed plans was recorded over the period
      the employee performs the service to which the stock compensation relates.





The
      following table shows the effect on net profit and earnings per Ordinary Share
      if the Company had applied the fair value recognition provisions of Statement
      123 for the year ended December 31, 2005.








Net
                profit as reported
            
            $
            6,343-Compensation
                expenses according toAPB
                  25
                  included in thereported net profit
            
            
            3-Application
                of compensation expensesaccording to SFAS 123
            
            
            (10,327
            )Pro
                forma net loss
            
            $
            (3,981
            )Basic
                earnings (loss) per Ordinary Share:As
                reported
            
            $
            0.23Pro
                forma
            
            $
            (0.14
            )Diluted
                earnings (loss) per ordinary share:As
                reported
            
            $
            0.21Pro
                forma
            
            $
            (0.14
            )




F-13


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**




**L.**  **Earnings
      (loss) per Ordinary Share**





Basic
      and
      diluted Earnings (loss) per Ordinary Share is presented in conformity with
      SFAS
      No. 128, “Earnings Per Share”, for all years presented. Basic Earnings (loss)
      per Ordinary Share is calculated by dividing the net Earnings (loss)
      attributable to Ordinary Shares, by the weighted average number of Ordinary
      Shares outstanding. Diluted Earnings (loss) per Ordinary share calculation
      is
      similar to Basic Earnings Per Share except that the weighed average of common
      shares outstanding is increased to include the number of additional common
      shares that would have been outstanding if the dilutive potential common shares
      from options had been exercised.





The
      following table summarizes information related to the computation of basic
      and
      diluted Earnings (loss) per Ordinary Share for the years indicated.




**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Net
                profit (loss) attributable to Ordinary Shares
            
            $
            6,343
            
            $
            (1,508
            )
            $
            15,185Weighted
                average number of Ordinary Shares outstandingused in basic
                Earnings (loss) per Ordinary Share calculation
            
            
            27,781,223
            
            
            28,053,849
            
            
            28,962,968Add
                assumed exercise of outstanding dilutive potential Ordinary
                Shares1,913,941
            
            
            -
            
            
            2,068,491Weighted
                average number of Ordinary Shares outstanding used
                in diluted Earnings (loss) per Ordinary Share
                calculation29,695,164
            
            
            28,053,849
            
            
            31,030,459Basic
                Earnings (loss) per Ordinary Share
            
            $
            0.23
            
            $
            (0.05
            )
            $
            0.52Diluted
                Earnings (loss) per Ordinary Share
            
            $
            0.21
            
            $
            (0.05
            )
            $
            0.49Number
                  of options excluded from the diluted Earnings per share calculation
                  because of anti-dilutive effect
            
            
            2,448,114
            
            
            4,114,604
            
            
            1,881,033




F-14





**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**M.**  **Use
      of estimates**





The
      preparation of the consolidated financial statements requires management of
      the
      Company to make a number of estimates and assumptions relating to the reported
      amounts of assets and liabilities and the disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the period. Actual results
      could differ from these estimates.





**N.**  **Revenue
      recognition**





Revenues
      from sales of products are recognized upon delivery provided that the collection
      of the resulting receivable is reasonably assured, there is persuasive evidence
      of an arrangement, no significant obligations in respect of installation remain
      and the price is fixed or determinable.





For
      sales
      contracts, which include a Post Contract Customer Support ( “ PCS”)
      component, revenues allocated to PCS in accordance with EITF 00-21 “Revenue
      Arrangements with Multiple Deliverables”, are deferred and recognized ratably
      over the term of the support period, which is generally one year.





The
      Company accrues estimated warranty costs at time of shipment based on
      contractual rights and historical experience. The Company's policy is not to
      grant return rights.





Taxes
      collected from customers and remitted to Governmental Authorities are presented
      in the financial statements on a net basis.





The
      Company routinely evaluates its products for inclusion of any embedded software
      that is more than incidental thereby requiring consideration of AICPA Statement
      of Position 97-2, “Software Revenue Recognition”. Based on such evaluation, the
      Company has concluded that none of its products have such embedded
      software.





**O.** **Government-Sponsored
          Research and Development**





The
      Company records grants received from the Office of the Chief Scientist of the
      Israeli Ministry of Industry and Trade (the “ OCS”)
      as
      a reduction of research and development expenses.


Royalties
      payable to OCS are recognized pursuant to sale of related products and are
      classified under cost of revenues. (See also Note 8 a.).





**P.**  **Taxes
      on income**





The
      Company accounts for income taxes under SFAS No. 109 “Accounting for Income
      Taxes” (“Statement 109 ”) .
      Under
      Statement 109, deferred tax assets or liabilities are recognized in respect
      of
      temporary differences between the tax bases of assets and liabilities and their
      financial reporting amounts as well as in respect of tax loss and credit
      carryforwards, based on enacted statutory tax rates applicable to the periods
      in
      which such deferred taxes will be realized. The tax effect resulting from a
      change in tax rates is recognized in the period that includes the enactment
      date. Valuation allowances are established when necessary to reduce deferred
      tax
      assets to the amount that is more likely than not to be realized.




F-15


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**P.**  **Taxes
      on income**





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes” ** (“FIN 48”),
      which prescribes a recognition threshold and measurement process for recording
      in the financial statements uncertain tax positions taken or expected to be
      taken in a tax return. FIN 48 also provides guidance on de-recognition of tax
      benefits, classification on the balance sheet, interest and penalties,
      accounting in interim periods, disclosure and transition. The accounting
      provisions of FIN 48 became effective for the Company beginning
      January 1, 2007.  The effect of adoption on the Company’s
      consolidated results of operations, financial position and cash flows based
      on
      Company management's evaluation is presented in note 14 F.





The
      Company’s accounting policy is to accrue interest related to unrecognized tax
      benefits as a component of interest expense while penalties as a part of general
      and administrative expenses in the consolidated statements of
      operations.





**Q.**  **Research
      and development costs**





Research
      and development costs are expensed as incurred.





**R.**  **Allowance
      for product warranty**





It
      is the
      Company's policy to grant a warranty for certain products. The balance sheet
      provision for warranties is determined based upon the Company’s experience
      regarding the relationship between sales and warranty expenses.





**S.**  **Concentration
      of credit risk**





Financial
      instruments that may subject the Company to significant concentrations of credit
      risk consist principally of cash and cash equivalents, trade accounts receivable
      and marketable securities.


Cash
      and
      cash equivalents are deposited with major financial institutions in Europe,
      the
      United States, Japan, Australia, Singapore and Israel.





The
      Company performs ongoing credit evaluations of the financial condition of its
      customers. The risk of collection associated with trade receivables is reduced
      by the large number and geographical dispersion of the Company's customer base
      and the Company's policy of requiring collateral or security with respect to
      receivables due from distributors.





**T.** **Other
          Comprehensive Income**





For
      the
      years ended December 31, 2005, 2006 and 2007, other comprehensive income (loss)
      equals net profit (loss).


F-16


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      1 - Organization and Summary of Significant Accounting Policies
      (cont'd)**





**U.** **Recent
          accounting pronouncements**




In
      September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurement"
      (Statement 157). Statement 157 defines fair value, establishes a framework
      for
      the measurement of fair value, and enhances disclosures about fair value
      measurements. The statement does not require any new fair value measures. The
      statement is effective for fair value
      measures already required or permitted by other standards for fiscal years
      beginning after November 15, 2007. The Company is required to adopt Statement
      157 beginning on January 1, 2008.
      Statement 157 is required to be applied prospectively, except for certain
      financial instruments. Any transition adjustment will be recognized as an
      adjustment to opening retained earnings in the year of adoption. The FASB
      announced a one- year deferral of Statement 157's fair- value measurement
      requirements for non-financial assets and liabilities that are not required
      or
      permitted to be measured at fair value on a recurring basis. The Company
      believes that the adoption of Statement 157 will not have a material impact
      on
      the Company's financial condition, results of operations and cash
      flows.





In
      February 2007, the FASB issued FASB Statement No. 159, "The Fair Value Option
      for Financial Assets and Financial Liabilities- including an amendment of FASB
      No. 115" (Statement 159). Statement 159 gives the Company the irrevocable option
      to carry most financial assets and liabilities at fair value that are not
      currently required to be measured at fair value. If the fair value is elected,
      changes in fair value would be recorded in earnings at each subsequent reporting
      date. SFAS 159 is effective for the Company's 2008 fiscal year. The Company
      believes that the adoption of Statement 159 will not have a material impact
      on
      the Company's financial condition, results of operations and cash
      flow.





In
      December 2007, the FASB issued FASB Statement No. 141R, "Business Combinations"
      (Statement 141R) and FASB Statement No. 160, "Non-controlling Interests in
      Consolidated Financial Statements- an amendment to ARB No. 51" (Statement 160).
      Statements 141R and 160 require most identifiable assets, liabilities,
      non-controlling interests, and goodwill acquired in a business combination
      to be
      recorded at "full fair value" and require non-controlling interests (previously
      referred to as minority interests) to be reported as a component of equity,
      which changes the accounting for transactions with non-controlling interest
      holders. Both Statements are effective for periods beginning on or after
      December 15, 2008, and earlier adoption is prohibited. Statement 141R will
      be
      applied to business combinations occurring after the effective date. Statement
      160 will be applied prospectively to all non-controlling interests, including
      any that arose before the effective date. The Company is currently evaluating
      the impact of adopting statement 141R and 160 on its results of operations
      and
      financial position.




F-17


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note-2
      - Cash and Cash Equivalents**





**Interest
                rate****as
                of****December
                31**
            
            **December
                31****2007**
            
            **2006**
            
            **2007****%**Denominated
                in U.S. dollars
            
            
            4.2-5.11
            
            $
            25,794
            
            $
            22,877Denominated
                in New Israeli Shekels
            
            
            3.4-3.6
            
            
            3,099
            
            
            2,022Denominated
                in Euros
            
            
            3.8-3.9
            
            
            7,766
            
            
            6,642Denominated
                in Australian dollars
            
            
            
            
            
            469
            
            
            1,102Denominated
                in Singapore dollars
            
            
            
            
            
            -
            
            
            168Denominated
                in Japanese Yen
            
            
            
            
            
            7,382
            
            
            4,292$
            44,510
            
            $
            37,103




**Note
      3 - Accounts Receivable - Other**





**December
                31****2006**
            
            **2007**Government
                institutions
            
            $
            1,389
            
            $
            2,118InScope
                (Note 8C)
            
            
            -
            
            
            7,620Other
            
            
            74
            
            
            647$
            1,463
            
            $
            10,385




**Note
      4 - Inventories**




**December
                  31****2006**
              
              **2007**Raw
                  materials and components
              
              $
              7,721
              
              $
              7,733Work
                  in progress
              
              
              3,533
              
              
              2,941Finished
                  goods
              
              
              6,914
              
              
              5,286$
              18,168
              
              $
              15,960




**Note
      5 - Marketable Securities**





As
      of
      December 31, 2007 and 2006, marketable securities consist U.S. government bonds
      and corporate bonds, which the Company classified as “held-to-maturity” (“the
      Bonds”). As of December 31, 2006, marketable securities also included auction
      rate securities and money market funds, which are classified as
“trading”.




F-18


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      5 - Marketable Securities (cont’d)**





The
      amortized cost, gross unrealized losses and fair value of the “held-to-maturity”
bonds by major interest type were as follows:




**December
                31, 2007****Amortized**
            
            **Gross
                unrealized**
            
            **Fair****cost**
            
            **holding
                losses**
            
            **Value**Up
                to 5%
            
            $
            43,015
            
            $
            (553
            )
            $
            42,4625.1%
                - 6%, 8.125%
            
            
            21,805
            
            
            (249
            )
            
            21,556$
            64,820
            
            $
            (802
            )
            $
            64,018





**December
                31, 2006****Amortized**
            
            **Gross
                unrealized**
            
            **Fair****cost**
            
            **holding
                losses**
            
            **Value**Up
                to 5%
            
            $
            33,574
            
            $
            (601
            )
            $
            32,9735.1%
                - 6%, 8.125%
            
            
            13,380
            
            
            (212
            )
            
            13,168$
            46,954
            
            $
            (813
            )
            $
            46,141





Maturities
      of the “held-to-maturity” bonds were as follows at December 31, 2007 and
      2006:




**Amortized cost**
            
            **Fair
                value****2007**
            
            **2007**Current
                maturities
            
            $
            23,191
            
            $
            22,290Due
                after one year through five years
            
            
            41,629
            
            
            41,728$
            64,820
            
            $
            64,018




**Amortized cost**
            
            **Fair
                value****2006**
            
            **2006**Current
                maturities
            
            $
            12,185
            
            $
            12,063Due
                after one year through five years
            
            
            34,769
            
            
            34,078$
            46,954
            
            $
            46,141





As
      of
      December 31, 2006, marketable securities also included $5,060 in bonds
      classified as “trading” ($0 as of December 31, 2007). These investments are
      subject to price volatility associated with any interest-bearing instrument.
      Net
      realized gains and net unrealized losses on trading securities during the year
      ended December 31, 2006 were $133 and $15 respectively, and net realized gains
      during the year ended December 31, 2007 were $32 and are included in financial
      income, net.





Short-term
      investments are comprised of:




**December
                31****2006**
            
            **2007**Current
                  maturities of “held-to-maturity”securities
            
            $
            12,185
            
            $
            23,191Trading
                securities
            
            
            5,060
            
            
            -$
            17,245
            
            $
            23,191


F-19




**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      6 - Fixed Assets, at Cost, Less Accumulated Depreciation**





**December
                31****2006**
            
            **2007**Computers
                and software
            
            $
            6,234
            
            $
            6,957Instruments
                and laboratory equipment
            
            
            791
            
            
            1,077Leasehold
                improvements
            
            
            4,259
            
            
            4,600Motor
                vehicles
            
            
            155
            
            
            186Machinery
                and equipment
            
            
            14,952
            
            
            16,060Communication
                equipment
            
            
            418
            
            
            492Office
                furniture and equipment
            
            
            1,248
            
            
            1,797Fixed
                assets, at cost
            
            
            28,057
            
            
            31,169Accumulated
                depreciation
            
            
            (13,246
            )
            
            (15,747
            )Fixed
                assets at cost, less accumulated depreciation
            
            $
            14,811
            
            $
            15,422








Depreciation
      expenses for the years ended December 31, 2005, 2006 and 2007 were $2,936,
      $3,599, and $4,055, respectively. During 2007, the Company wrote off
      manufacturing equipment which was no longer in use. This resulted in a charge
      of
      $365 recorded in operating expenses- other on the consolidated statement of
      operations.





As
      of
      December 31 2006 and 2007, the cost of fixed assets under capital lease was
      $55
      and $571 respectively, and the accumulated depreciation was $24 and $49
      respectively.





**Note
      7 - Intangible Assets, at Cost, Less Accumulated
      Amortization**




**December
                31****2006**
            
            **2007**Patents
                and trademarks
            
            $
            4,594
            
            $
            5,545Web
                site application
            
            
            922
            
            
            1,165Intangible
                assets at cost
            
            
            5,516
            
            
            6,710Accumulated
                amortization
            
            
            (2,441
            )
            
            (3,127
            )Intangible
                assets, at cost, less accumulated amortization
            
            $
            3,075
            
            $
            3,583





Amortization
      expenses for the years ended December 31, 2005, 2006 and 2007 were $660, $638
      and 716, respectively. Estimated amortization expenses for the next five years
      are: $719 in 2008, $669 in 2009, $557 in 2010, $449 in 2011, and $369 in 2012.
      During 2007, the Company wrote off patent and trademarks which are no longer
      expected to be used. This resulted in a charge of $57 recorded in operating
      expenses - other on the consolidated statement of operations.


F-20


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      8 - Commitments and Contingencies**





**A.**
            **Office
                of the Chief Scientist
                Grants**





Until
      December 2007, the Company’s research and development efforts had been partially
      financed through grants from the Office of the Chief Scientist of the Israeli
      Ministry of Industry and Trade (the “OCS”). In return for the OCS’s
      participation, the Company was committed to pay royalties to the Israeli
      Government at the rate of 3% of the sales of its products for each of the first
      three years of the launch of the related product and, from the fourth year
      onwards, at the rate of 3.5% up to 100% of the amount of the grants received,
      plus LIBOR interest. The Company was entitled to the grants only upon incurring
      research and development expenditure. There were no future performance
      obligations related to the grants received from the OCS.





During
      December 2007, the Company made an early repayment of all its outstanding
      royalty obligation and accrued interest of $4,843 to the OCS. This repayment
      resulted in a one-time charge of $4,843 million presented as an early repayment
      of royalty bearing government grants in the Company’s consolidated statement of
      operations.





The
      Company continues to participate in other non-royalty bearing programs of the
      OCS.





**B.**  **Leases**





**Capital
      lease of equipment**





During
      the year ended December 31, 2007 the Company’s subsidiary in Japan entered into
      a lease agreement for certain equipment. The obligation under this capital
      lease
      is to be repaid in five years and bears interest of 1.97%.





**Operating
      leases**





The
      Company and its subsidiaries currently lease office space and manufacturing
      space for periods of up to 15 years (including options to extend the terms
      of
      the leases). The current lease for the Company’s headquarters is in Yoqneam,
      Israel. This facility houses the Company’s corporate headquarters, research and
      development and manufacturing facilities. Under this lease agreement, the
      Company will pay approximately $1,500 a year in rent and management fee. These
      payments are subject to adjustments based on changes in the Israeli Consumer
      Price Index. In addition, to secure its obligations under the lease, the Company
      provided a bank guaranty in the amount of approximately $750 in favor of the
      lessor. The lease expires on December 31, 2015. The Company has an option to
      extend the lease until December 31, 2020.





The
      Company and its subsidiaries signed several motor vehicle lease agreements.
      The
      companies deposited a total amount of $ 193 to guarantee their performance
      under
      the terms of the lease agreements.





F-21


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      8 - Commitments and Contingencies (cont’d)**





**B.**  **Leases
      (cont’d)**





The
      Company is committed to minimum annual payments over the next five years as
      follows:





**Capital
                leases**
            
            **Operating
                leases**2008
            
            $
            121
            
            $
            3,5802009
            
            
            101
            
            
            3,0212010
            
            
            103
            
            
            2,2682011
            
            
            105
            
            
            1,7312012
                and thereafter
            
            
            139
            
            
            6,231$
            569
            
            $
            16,831





Depreciation
      of vehicles and equipment under capital lease for the years ended December
      31,
      2005, 2006 and 2007 was $ 9, $ 9 and $ 25, respectively.





Rental
      expenses under the lease agreements for the years ended December 31, 2005,
      2006
      and 2007 were $2,353, $2,914 and $3,484, respectively.





**C.**  **Agreement
      with InScope**





On
      May
      10, 2004, the Company entered into an exclusive sales representation,
      co-promotion and cooperation Agreement (the “Agreement”) with InScope, a
      division of Ethicon Endo-Surgery, a Johnson & Johnson company, providing
      InScope with the exclusive rights to market the Company’s PillCam ESO capsule
      for visual examination of the esophagus in the United States. Under the terms
      of
      the Agreement, the Company received milestone payments totaling $25,000 in
      2004
      and 2005 and was paying InScope a commission of 50% on sales of PillCam ESO
      capsules and a 10% commission on sales of capital equipment parts of the Given
      System, such as workstations and portable data recorders. Milestone payments
      received were deferred and were being systematically recognized, on a
      straight-line basis, by the Company as a reduction of sales and marketing
      expenses over the 15 year term of the Agreement.





In
      November 2007 InScope advised the Company that it had decided to terminate
      the
      Agreement. Under the terms of termination agreed to between the parties in
      December 2007, InScope agreed to pay the Company an amount of $8,820, comprising
      of the following:





Termination
                payments
            
            $
            7,620Reimbursement
                for certain clinical trials
            
            
            1,200$
            8,820





The
      Agreement and each party’s rights and obligations thereunder terminated in
      January, 2008.





The
      termination payments of $7,620 were recognized in the Company’s consolidated
      financial statements for the year ended December 31, 2007.


F-22





**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      8 - Commitments and Contingencies (cont’d)**





**C.**  **Agreement
      with InScope (cont’d)**





The
      reimbursement for certain clinical trials relate to 2008, and will be recorded
      in such year.





Pursuant
      to the early termination and the change in the remaining life of the Agreement,
      the Company is amortizing the remaining deferred income balance at the date
      of
      termination of $20,683 over the remaining term of the Agreement of two months.
      Accordingly, the Company has recognized a one time income of $22,860 in its
      consolidated statement of operations for the year ended December 31, 2007 under
      “Termination of marketing agreement” comprised of additional accelerated
      amortization of $15,240 of previously received milestones, and $7,620 in
      termination payments.





InScope
      paid $1,200 during December 2007, and the remaining $7,620 was paid during
      January 2008.





As
      of
      December 31, 2007, deferred income includes the following unamortized amounts
      relating to the Agreement:





Original
                and additional milestone payments
            
            $
            5,443Reimbursement
                for certain clinical trials
            
            
            1,200$
            6,643





**D.**  **Agreements
      with key single - source suppliers and commitments to
      suppliers**





(1)
            In
                2002, the Company entered into an agreement with a Canadian company
                (“Canadian Company”) that supplies a component that is integrated into the
                PillCam capsules. The agreement also includes non-compete provisions
                prohibiting the Canadian company from selling the component to other
                parties and, for a certain period of time following termination of
                the
                agreement, from transferring any of the intellectual property and
                design
                specifications associated with the development of the component to
                any
                potential competitors in the Company’s market.





In
      July
      2005, the Company agreed with the Canadian Company that it will develop and
      manufacture an additional version of the component. In addition, the initial
      term of the agreement was extended until April 2012, subject to earlier
      termination in specified circumstances, with the option to extend annually
      thereafter for up to five years.





The
      Company is a party to a development, manufacturing and supply agreement with
      another supplier (“Supplier”), under which the Supplier has developed a
      component, that is integrated into the PillCam capsules and is also
      manufacturing and supplying this component exclusively for the Company. Under
      this contract, the Supplier may not offer the component as a standard catalog
      part. In the event that the Supplier ceases operations or enters into
      liquidation, the Company is entitled to receive all information necessary to
      manufacture the component upon the payment of reasonable royalties to be agreed
      upon with the Supplier. The Company has agreed to purchase the enhanced
      component only from the Supplier and the Supplier has agreed to sell the
      component exclusively to the Company. The agreement permits the Supplier to
      disregard the exclusive sales requirement if the Company materially breaches
      the
      agreement and fails to cure such breach within a specified
      time.


F-23





**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      8 - Commitments and Contingencies (cont’d)**





**D.**  **Agreements
      with key single - source suppliers and commitments to suppliers
      (cont’d)**





In
      February 2006, the Company signed an amendment to this agreement and agreed
      that
      the Supplier will develop and manufacture an enhanced version of the component.
      This amendment also extended the initial term of the agreement until November
      2012, with an option to extend that term by mutual agreement, thereafter. Under
      this amendment, the Company has agreed to specified minimum purchase
      commitments, which the Company may terminate if the supplier fails to satisfy
      agreed-upon performance criteria.








(3)
            The
                Company’s annual commitments under agreements with these two suppliers for
                the next 5 years are as follows:






2008
            
            $
            6,5102009
            
            
            1,5002010
            
            
            2,2502011
            
            
            2,2502012
            
            
            5,130$
            17,640





Payments
      under such agreements with these two suppliers for the years ended December
      31,
      2005, 2006 and 2007 were $8,568, $8,875 and $6,042, respectively.





**E.**  **Patent
      Litigation**





On
      May
      19, 2006, Olympus Corporation, Olympus Medical Systems Corp. and Olympus America
      Inc., collectively referred to in this section as “Olympus”, filed a complaint
      against the Company in the District Court for the Eastern District of
      Pennsylvania. In the complaint, Olympus alleged that the Company’s capsule
      endoscopes infringe a patent acquired by Olympus from The Boeing Company (the
      “Boeing Patent”). The Boeing Patent will expire in December 2008. In addition,
      Olympus sought a declaratory judgment that a capsule endoscope product for
      which
      it was then seeking FDA clearance would not infringe the Company’s’ first U.S.
      Patent, known as the 531 patent, and that the 531 patent is invalid. Olympus
      also requested an injunction preventing the Company from selling in the United
      States any product that infringes the Boeing Patent, as well as damages in
      an
      unspecified amount.





The
      Company filed its answer and counterclaim on October 20, 2006. In this answer
      and counterclaim the Company denied infringement of the Boeing Patent and
      asserted that the Boeing Patent is invalid. In addition, the Company alleged
      that the 531 patent is valid and will be infringed by Olympus once it begins
      offering to sell and selling its capsule endoscopy product in the United States.
      The Company also alleged that the Olympus product will infringe three other
      Company patents. The Company also requested an injunction to prevent Olympus
      from selling in the United States any product that infringes any of the
      Company’s patents. The Company also stated that, if Olympus sells its capsule
      endoscopy system in the United States, the Company may request the assessment
      of
      damages.


F-24


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      8 - Commitments and Contingencies (cont’d)**





**E.**  **Patent
      Litigation (cont’d)**





On
      March
      30, 2007 Olympus filed an amended complaint asserting that the Company’s capsule
      endoscopes infringe three additional patents owned by Olympus.  The
      Company filed an answer to the amended complaint in April 2007 denying
      infringement of these patents and alleging their invalidity.





Olympus
      has recently received FDA clearance to market its competing capsule endoscope
      system in the United States and has commenced selling activities. As a result,
      Given has amended its pleadings to add a request for damages in an unspecified
      amount. In the ongoing litigation, fact discovery ended in January 2008 and
      expert discovery commenced in February 2008. Trial is set for November
      2008.





The
      outcome of this litigation is uncertain and the Company can not express any
      opinion as to the outcome at this time. The cost of the ongoing litigation
      may
      have a material adverse effect on results of operations, and an unfavorable
      outcome of this litigation will have a material adverse effect on the Company’s
      financial position and results of operations.





**F.**
            **Investment
                in the Japanese Subsidiary**





In
      2006,
      the Company and its Japanese partners completed additional equity financing
      of
      approximately $9,600 to finance the operations of Given Imaging K.K., the
      Company’s Japanese subsidiary, until it starts generating enough cash to finance
      its operations.  The Company’s portion of the funding of approximately
      $4,900 was paid out of its cash reserves.  Following completion of this
      additional equity financing, the Company continues to have a controlling
      interest of 51% of its Japanese subsidiary. Suzuken Co. Ltd., one of Japan’s
      largest pharmaceutical and medical device distributors and a 15% shareholder
      of
      Given Imaging K.K., has exclusive rights to distribute the Company's products
      in
      Japan.





**G.**  **Provision
      for Sales Tax**





During
      the year ended December 31, 2005, the Company made a provision of $1,800 for
      potential uncollectible sales tax, interest and penalties resulting from the
      failure of the Company’s U.S. subsidiary to appropriately collect and remit
      sales tax on sales in the U.S. since the fourth quarter of 2001. The provision
      represented the Company’s estimate of the amounts it might not collect from its
      customers for remittance to the different jurisdictions, and any interest and
      penalties the Company may have to pay for failure to timely remit the sales
      tax.
      During 2005, 2006 and 2007 the Company has filed all required sales and use
      tax
      returns and collected tax amounts from its customers. As of December 31, 2006,
      and 2007 accounts payable included $702 and $456, respectively, representing
      sales and use taxes, interest and penalties remaining to be
      resolved.





**H.**  **Registration
      Rights Agreement**




In
      July
      2007, the Company's shareholders approved a Registration Rights Agreement
      between the Company and its major shareholders holding together an aggregate
      of
      43.9% of the Company's ordinary shares (“affiliated shareholders”). This
      Registration Rights Agreement has replaced earlier registration rights, which
      expired in October 2006, granted by the Company in connection with a private
      placement completed in September 2000, before the Company's initial public
      offering.


F-25


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**




**Note
      8 - Commitments and Contingencies (cont’d)**





**H.**  **Registration
      Rights Agreement**




Under
      this agreement, at the request of one or more of the affiliated shareholders
      holding at least 5% of the Company's then outstanding ordinary shares, the
      Company must use its best efforts to register any or all of these shareholders’
ordinary shares to the extent that the aggregate offering price of the shares
      to
      be registered is at least $15 million.   In addition, the affiliated
      shareholders also have the right to request that the Company includes their
      ordinary shares in any registration statements filed by the Company in the
      future for the purposes of a public offering, subject to specified
      limitations.  All registration rights will expire on the fifth anniversary
      of the agreement. With respect to any shareholder, registration rights will
      expire if that shareholder can sell all of its ordinary shares within a 90
      day
      period under Rule 144 under the United States Securities Act of 1933, as
      amended.   Generally, the Company is obligated to pay all expenses
      incurred in carrying out the above registrations, as well as the fees and
      expenses of one legal counsel for the selling shareholders in each
      registration.




**Note
      9 - Accounts Payable - Other**





**December
                31****2006**
            
            **2007**Government
                institutions
            
            $
            2,137
            
            $
            4,766Liabilities
                relating to employees
            
            
            6,863
            
            
            8,348Advances
                from customers
            
            
            58
            
            
            21Warranty
            
            
            102
            
            
            338Royalties
                to the OCS
            
            
            214
            
            
            0Commissions
            
            
            2,057
            
            
            1,659Accrued
                expenses
            
            
            3,189
            
            
            5,880$
            14,620
            
            $
            21,012





**Note
      10 - Liability in Respect of Employee Severance Payments**





Under
      Israeli law and labor agreements the Company is required to pay severance
      payments to each employee who was employed by the Company for over one year
      and
      has been terminated by the Company or resigned under certain specified
      circumstances. The Company's liability for severance payments is covered mainly
      by deposits with insurance companies in the name of the employee and/or by
      purchase of insurance policies. The liability is calculated on the basis of
      the
      latest salary of the employee multiplied by the number of years of employment
      as
      of the balance sheet date. The liability for employee severance payments
      included in the balance sheet represents the total amount due for such severance
      payment, while the assets held for severance benefits included in the balance
      sheet represents the Company’s contributions to insurance policies. The Company
      may make withdrawals from the funds only upon complying with the Israeli
      severance pay law or labor agreements.





Expenses
      recorded in respect of employee severance payments for the years ended December
      31, 2005, 2006 and 2007 are $664, $862 and $ 806, respectively.





The
      U.S.
      subsidiary has a defined contribution retirement plan for its employees.
      Employees are allowed to contribute up to 18% of their salary in any one year,
      subject to a regulatory limit.


F-26


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      10 - Liability in Respect of Employee Severance Payments
      (cont’d)**





The
      Company contributes 3% of an employee's salary subject to regulatory limits.
      Employees are vested in the Company's contributions after 30 days of employment.





Expenses
      recorded in respect of the defined
      contribution retirement plan in the
      U.S for the years ended December 31, 2005, 2006 and 2007 are $356 , $603 and
      $604, respectively.





**Note
      11 - Share Capital**





**A.**  **Ordinary
      shares**





All
      of
      the issued and outstanding Ordinary Shares of the Company are authorized,
      issued, fully paid and non-assessable. The Ordinary Shares of the Company are
      not redeemable and have no preemptive rights. The ownership or voting of
      Ordinary Shares by non-residents of Israel is not restricted in any way by
      the
      Company’s memorandum or articles of association or the laws of the State of
      Israel, except that citizens of countries which are, or have been, in a state
      of
      war with Israel may not be recognized as owners of Ordinary Shares.





**B.**
            **Employees’
                and non employees’ stock
                options**





In
      2003,
      the Company adopted a stock option plan for directors, employees and
      consultants. The 2003 Plan replaced and superseded previous option plans adopted
      by the Company in 1998 and 2000. Under these plans, the Board of Directors
      (or a
      compensation committee appointed by the board) (the “Board”) has the authority
      to grant options to employees of the Company and its subsidiaries, directors
      or
      consultants. Each option entitles the holder to purchase one Ordinary Share
      of
      par value of NIS 0.05 and expires after 10 years from the date of grant. The
      company has reserved for issuance a total of 2,500,000 ordinary shares under
      the
      plan. As of December 31, 2007, 367,345 options out of this plan had not been
      granted.





The
      purchase price of each share pursuant to the options granted under the 2003
      Plan
      shall be the fair market value on the date the Board approves the grant of
      the
      option or as otherwise determined by the Board.





Unless
      otherwise determined by the Board, where a grant of options under the 2003
      Plan
      is the first grant of options made to a person, 50% of the options vest and
      become exercisable on the second anniversary of the date of grant. An additional
      25% of the options vest and become exercisable on each of the third and fourth
      anniversaries of the date of the grant. If, however, a grant under the 2003
      Plan
      is made to a person who previously received stock options under the 2003 Plan
      or
      a previous plan of the Company, 25% of the options granted are immediately
      vested and exercisable and an additional 25% of the options vest and become
      exercisable on each of the first, second and third anniversaries of the date
      of
      the grant.





In
      2006,
      the Company adopted the 2006 Equity Incentive Plan (“the Plan”) permitting the
      grant of equity awards, including options and restricted stock of the Company,
      to eligible employees, directors and consultants of the Company and its
      subsidiaries. The Plan is administered by the Company’s Board of Directors and
      Compensation and Nominating Committee. The Plan contains provisions concerning
      the vesting, price, exercise and other terms of awards; however, the
      Compensation and Nominating Committee has authority to grant awards under
      different terms at its discretion. The Company has reserved for issuance a
      total
      of 4,000,000 Ordinary Shares under the Plan. As of December 31, 2007 there
      were
      1,968,392 options outstanding under this plan, and 106,000 shares of restricted
      stock has been issued.


F-27


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      11 - Share Capital (cont’d)**





**B.**
            **Employees’
                and non employees’ stock options
                (cont’d)**





Equity
      awards under this plan must be granted at no less than the fair market value
      of
      the Company’s ordinary shares on the date of the grant and the term of the
      awards may not exceed ten years. The Company’s current policy is that options
      granted under the Plan expire five years following the date of the grant.





Generally,
      where a grant of an award under the plan is the first grant of equity to an
      employee or consultant, 50% of the award is exercisable on the second
      anniversary of the date of grant, and 25% becomes exercisable on each of the
      third and fourth anniversaries of the date of the grant. In cases of subsequent
      grants, awards vest in four equal installments beginning with the first
      anniversary of the grant. To the extent the awards have vested, they may be
      exercised in whole or in part from time to time until their expiration.





In
      case
      of participating employees and consultants, all unvested awards are cancelled
      upon the termination of their employment or service. All vested awards may
      be
      exercised within 180 days following termination. All vested awards not exercised
      within this period are automatically forfeited and cancelled. Unvested awards
      to
      non-employee directors whose service is terminated or discontinued for any
      reason other than for cause after more than five years of service on the
      Company’s board of directors, will automatically vest and become exercisable
      immediately prior to termination or discontinuation of service. These vested
      awards may be exercised within 180 days following termination or discontinuation
      of service, except in cases where termination or discontinuation of service
      is a
      result of statutory requirements, death, disability or other circumstances
      of
      forced cessation of service, in which case awards may be exercised at any time
      until their expiration date. In a case of termination for cause of a plan
      participant, all awards, whether vested or unvested, are automatically forfeited
      and cancelled.





Under
      this plan, in the event of an acquisition or merger in which the Company is
      not
      the surviving entity and the acquiring entity does not agree to assume the
      awards, all outstanding, but unvested, awards will be accelerated and
      exercisable, ten days prior to the acquisition or merger. In addition, if the
      employment of a holder of outstanding awards is terminated in anticipation
      of or
      during the 12 month period following an acquisition or merger, all awards that
      are scheduled to vest within two years of such acquisition or merger, will
      be
      automatically accelerated and exercisable, subject to certain adjustments and
      exceptions.


F-28


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      11 - Share Capital (cont’d)**





**B.**
            **Employees’
                and non employees’ stock options
                (cont’d)**





Awards
      granted under the 2006 equity plan to Israeli residents may be granted under
      Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards
      or
      the Ordinary Shares issued upon their exercise must be deposited with a trustee
      for at least two years following the date of the grant. Under Section 102,
      any
      tax payable by an employee from the grant or exercise of the awards is deferred
      until the transfer of the awards or ordinary shares by the trustee to the
      employee or upon the sale of the awards or ordinary shares. Gains on awards
      granted under the plan are subject to capital gains tax of 25% and the Company
      is not entitled to a tax deduction. Options granted under the plan to U.S.
      residents may also qualify as incentive stock options (ISO) within the meaning
      of Section 422 of the U.S. Internal Revenue Code of 1986. Options that do not
      contain terms that will qualify them as ISOs are treated as Non-Qualified Stock
      Options.





For
      the
      year ended December 31, 2005, the fair value of options granted is estimated
      on
      the date of grant, using the Black-Scholes model with the following
      assumptions:





1.
            Dividend
                yield of zero percent.





2.
            Risk-free
                average interest rate of 3% - 4.3% which represents the risk free
                rate of
                US$ zero - coupon Government Bonds.





3.
            Estimated
                expected life of five years as of the date of
                grant.





4.
            Expected
                average volatility of 62%, which represents a weighted average standard
                deviation rate for the price of the Company’s Ordinary Shares on the
                NASDAQ National Market.





The
      fair
      value of options granted during the years ended December 31, 2006 and 2007
      was
      estimated on the date of grant using the Black - Scholes model, with the
      following assumptions:





1.
            Dividend
                yield of zero percent.





2.
            Risk
                free average interest rate of 4.89% and 4.75/% for the years ended
                December 31, 2006 and 2007, respectively, which represents the risk
                free
                rate of US$ zero - coupon Government
                Bonds.





3.
            Weighted
                average expected life of 3.69 and 3.75 years for the years ended
                December
                31, 2006 and 2007, respectively, which represents the period for
                which the
                options granted are expected to be outstanding.


F-29


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      11 - Share Capital (cont’d)**





**B.**
            **Employees’
                and non employees’ stock options
                (cont’d)**





The
                expected life of the options granted to employees and directors,
                is
                calculated based on the Simplified Method as allowed under Staff
                Accounting Bulletin No. 107 (SAB 107), giving consideration to the
                contractual term of the options and their vesting
                schedules.





4.
            Expected
                average volatility of 53.17% and 43.17% for the years ended December
                31,
                2006 and 2007 respectively, which represents a weighted average standard
                deviation rate for the price of the Company's Ordinary Shares in
                the
                NASDAQ National Market.





The
      following table summarizes information relating to stock options for Ordinary
      Shares outstanding and exercisable, as of December 31, 2007 and
      2006:





**Options
                outstanding****Exercise
                price**
            
            **Number outstanding at**
            
            **Weighted average remaining****December 31, 2007**
            
            **contractual life****(in years)**$1
                - $10
            
            
            438,217
            
            
            3.73$10.01-$20
            
            
            1,687,900
            
            
            4.64$20.01-$30
            
            
            2,308,687
            
            
            4.81$30.01-$40
            
            
            499,066
            
            
            6.904,933,870





**Options
                outstanding****Exercise
                price**
            
            **Number
                outstanding at**
            
            **Weighted
                average remaining****December
                31, 2006**
            
            **contractual
                life****(in
                years)**$1
                - $10
            
            
            855,368
            
            
            4.86$10.01-$20
            
            
            1,862,025
            
            
            5.65$20.01-$30
            
            
            889,920
            
            
            6.45$30.01-$40
            
            
            507,291
            
            
            7.904,114,604





The
      stock
      option activity under the Plans is as follows:





**Weighted average**
            
            **Weighted average****Number of shares**
            
            **exercise price**
            
            **grant date****fair value****Balance
                at December 31, 2005**
            
            
            4,033,160Granted
            
            
            1,077,070
            
            $
            18.75
            
            $
            10.21Forfeited
            
            
            (404,616
            )
            
            25.87
            
            
            15.29Exercised
            
            
            (591,010
            )
            
            3.45
            
            
            2.95**Balance
                at December 31, 2006**
            
            
            4,114,604**Balance
                at December 31, 2006**
            
            
            4,114,604Granted
            
            
            1,453,392
            
            
            26.08
            
            
            10.22Forfeited
            
            
            (44,864
            )
            
            24.40
            
            
            12.26Exercised
            
            
            (589,262
            )
            
            7.26
            
            
            5.12**Balance
                at December 31, 2007**
            
            
            4,933,870


F-30


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      11 - Share Capital (cont’d)**





**B.**  **Employees’
      and non employees’ stock options (cont’d)**





The
      following table summarizes information relating to non-vested stock options
      for
      Ordinary Shares as of December 31, 2007 and related changes during the year
      ended December 31, 2007:


**Non-vested
        options**


**Weighted average grant****Number of Shares**
            
            **Date fair value****Balance
                at January 1, 2007**
            
            
            1,328,787
            
            $
            10.68Granted
            
            
            1,453,392
            
            
            10.22Vested
            
            
            (534,849
            )
            
            12.69Forfeited
            
            
            (44,864
            )
            
            12.26**Balance
                at December 31, 2007**
            
            
            2,202,466
            
            $
            9.81





As
      of
      December 31, 2007, unrecognized compensation costs related to non-vested options
      aggregated $16,200 to be recognized over a weighted average period of
      1.93  years.





The
      aggregate intrinsic value of options outstanding as of December 31, 2007 and
      2006 is $22,442 and $19,673, respectively. The aggregate intrinsic value of
      options excisable as of December 31, 2007 and 2006, is $19,293 and $18,778,
      respectively.


The
      total
      intrinsic value of options exercised during the year ended December 31, 2007
      and
      2006, is $11,039 and $10,610, respectively.





On
      May
      30, 2006, the Company issued 100,000 restricted shares to its CEO. The
      restricted shares will vest in four installments over a period of four years,
      beginning on May 30, 2007. On June 15, 2007 the Company issued 6,000 restricted
      shares to another one of its officers. These restricted shares will vest in
      three installments over a period of four years, beginning on June 15, 2009.
      The
      fair value of the restricted shares as of the date of issue is being amortized
      over the vesting period. Unrecognized compensation costs related to the
      restricted shares, as of December 31, 2006 and 2007, to be recognized over
      3.4
      years, were $1,516 and $1,211 respectively, and compensation expenses of $262
      and $466 were recognized for the years ended December, 31 2006 and 2007,
      respectively.





The
      following table summarizes the allocation of the stock-based compensation charge
      for both employee and non-employee stock option grants:





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Research
                and development costs
            
            $
            -
            
            $
            569
            
            $
            406Selling
                and marketing expenses
            
            
            -
            
            
            1,839
            
            
            1,889General
                and administrative expenses
            
            
            3
            
            
            2,805
            
            
            3,356$
            3
            
            $
            5,213
            
            $
            5,651


F-31





**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      12 - Revenues**





**A.**  **Revenues
      by activities**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Workstations
                and recorders
            
            $
            17,831
            
            $
            14,104
            
            $
            15,267PillCam
                SB capsule
            
            
            62,528
            
            
            76,360
            
            
            90,614PillCam
                ESO capsule
            
            
            4,384
            
            
            1,438
            
            
            1,012PillCam
                Colon capsule
            
            
            -
            
            
            -
            
            
            1,106Patency
                capsules and scanners
            
            
            174
            
            
            353
            
            
            523Service
            
            
            1,859
            
            
            2,774
            
            
            4,346$
            86,776
            
            $
            95,029
            
            $
            112,868





**B.**  **Revenues
      by geographic areas**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Americas
            
            $
            64,876
            
            $
            67,648
            
            $
            73,849Europe,
                Middle East and Asia
            
            
            16,874
            
            
            21,642
            
            
            27,299Asia
                Pacific
            
            
            5,026
            
            
            5,739
            
            
            11,720$
            86,776
            
            $
            95,029
            
            $
            112,868





**Note
      13 - Financial Income, net**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Currency
                gains (losses)
            
            $
            (837
            )
            $
            778
            
            $
            1,456Interest
                income
            
            
            1,963
            
            
            1,639
            
            
            1,069Income
                from marketable securities
            
            
            422
            
            
            1,849
            
            
            3,109Other
            
            
            (786
            )
            
            (286
            )
            
            (114
            )$
            762
            
            $
            3,980
            
            $
            5,520


F-32


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**


**Note
      14 - Taxes on Income**





**A.**  **Company**





(1)
            Israeli
                income tax is computed on the basis of the Company’s results in New
                Israeli Shekels (“NIS”) determined for statutory purposes. The Company is
                assessed for tax purposes under the Income Tax Law (Inflationary
                Adjustments 1985), the purpose of which is to prevent taxation on
                inflationary profits.





Pursuant
      to the Encouragement Capital Investments Law -1959 (the “law”), the Company was
      awarded “Approved Enterprise” status under the government alternative benefits
      track beginning in 1999. The program is for investments in the development
      of
      infrastructure and for investments in locally produced and imported equipment.
      The main benefits to which the Company will be entitled, if it implements all
      the terms of an approved program, are the exemption from tax on income deriving
      from an Approved Enterprise, and reduced tax rates on dividends originating
      from
      this income.





Under
      the
      alternative benefits track, the income derived from an Approved Enterprise
      will
      be exempt from tax for a ten-year period, commencing on the date that taxable
      income is first generated by the Approved Enterprise (limited to the earlier
      of
      a maximum period of 12 years from the year of commencement of operations or
      14
      years from the year the approval letter was received).





Dividend
      distributions originating from income of an Approved Enterprise will be subject
      to tax at the rate of 15%, provided that the dividend is distributed during
      the
      period stipulated under Israeli law.





In
      the
      event of a dividend distribution (including withdrawals and charges that are
      deemed to be dividends) out of the income originating from the Approved
      Enterprise, and on which the Company received a tax exemption, the distribution
      is subject to corporate taxes at rates varying from 10% - 25% depending on
      the
      percentage of foreign investment holding in the Company as defined by the
      Law.





If
      the
      Company derives income from sources other than the Approved Enterprise during
      the relevant period of benefits, such income will be taxable at regular
      corporate tax rates (see (4) below).


F-33


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      14 - Taxes on Income (cont'd)**





**A.**  **Company
      (cont'd)**





On
      March
      30, 2005, the Knesset approved a reform of the Encouragement of Capital
      Investments Law - 1959. The primary changes are as follows:





a.
            Companies
                that meet the criteria of the Alternate Path of tax benefits will
                receive
                those benefits without prior approval. In addition, there will be
                no
                requirement to file reports with the Investment Center. Companies
                will be
                required to notify the Israeli Income Tax Authorities regarding the
                implementation of the Alternative Path. Audit will take place via
                the
                Income Tax Authorities as part of the tax audits. Request for pre-ruling
                is possible.





b.
            Tax
                benefits of the Alternate Path include lower tax rates or zero tax
                depending on the investment zone and the path chosen, lower tax rates
                on
                dividends and accelerated
                depreciation.





c.
            In
                order to receive benefits in the Grant Path or the Alternate Path,
                the
                Industrial Enterprise must contribute to the economic independence
                of
                Israel’s economy in one of the following
                ways:





1.
            Its
                primary activity is in the Biotechnology or Nanotechnology fields
                and
                pre-approval is received from the head of research and development
                at the
                Office of the Chief Scientist;





2.
            Its
                revenue from a specific country is not greater than 75% of its total
                revenues that year;





3.
            25%
                or more of its revenues are derived from a specific foreign market
                of at
                least 12 million residents.





The
      amendments to the Law do not retroactively apply for investment programs having
      an Approved Enterprise approval certificate from the Investment Center issued
      up
      to December 31, 2004 (even when investments under these programs are conducted
      after January 1, 2005). Consequently, the amendments should not impact an
      existing Approved Enterprise, which received prior written approval. The new
      tax
      regime shall apply for a new Approved Enterprise and for an Approved Enterprise
      expansion for which the first year of benefits may be as early as
      2004.





(2)
            The
                Company has net operating loss carryforwards in Israel of approximately
                $
                4,000 as of December 31, 2007. These net operating loss carryforwards
                are
                linked to the Israeli Consumer Price Index and are available to offset
                future taxable income, if any, indefinitely.





(3)
            As
                explained above, the Israeli Company is exempt from tax for a ten-year
                period. Therefore, the Israeli Company has not recorded deferred
                tax
                assets and liabilities.





(4)
            On
                July 25, 2005, the Knesset passed the Law for the Amendment of the
                Income
                Tax Ordinance (No. 147 and Temporary Order) - 2005 (“the Amendment”).





F-34


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      14 - Taxes on Income (cont’d)**





**A.**
            **Company
                (cont’d)**





The
      Amendment provides for a gradual reduction in corporate tax rate in the
      following manner: in 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and
      from 2010 onward 25%. Furthermore, as from 2010, upon reduction of the corporate
      tax rate to 25%, capital gains will be subject to tax of 25%.





**B.**
            **Foreign
                subsidiaries**





At
      December 31, 2007, the subsidiaries had local, federal and state net operating
      losses carryforwards of approximately $31,144 Federal and state tax loss
      carryforwards in the U.S subsidiary, totaling $ 10,197 will expire through
      2023.
      Operating loss carryforwards in the Japanese subsidiary, totaling $9,709 will
      also expire through 2014. Operating loss carryforwards in the German, French
      and
      Australian subsidiaries amounted to $5,297, $4,868 and $1,073, respectively,
      can
      be carried forward indefinitely.





**C.**
            **Profit
                (loss) before tax and income tax benefit (expense) included in the
                consolidated statements of
                operations**





**Year
                ended December 31****2005**
            
            **2006**
            
            **2007**Profit
                (loss) before taxes on incomeand
                minority share:Israel
            
            $
            5,011
            
            $
            3,459
            
            $
            13,438Foreign
                jurisdiction
            
            
            (70
            )
            
            (6,174
            )
            
            4,792$
            4,941
            
            $
            (2,715
            )
            $
            18,230Current
                taxes:Israel
            
            $
            -
            
            $
            (200
            )
            $
            (3,669
            )Foreign
                jurisdiction
            
            
            (196
            )
            
            (82
            )
            
            (855
            )$
            (196
            )
            $
            (282
            )
            $
            (4,524
            )Deferred
                taxes:Israel
            
            $
            -
            
            $
            -
            
            $
            -Foreign
                jurisdiction
            
            
            482
            
            
            155
            
            
            (24
            )$
            482
            
            $
            155
            
            $
            (24
            )Income
                tax benefit (expense)
            
            $
            286
            
            $
            (127
            )
            $
            (4,548
            )





**D.**  **Deferred
      taxes**





In
      assessing the realizability of deferred tax assets, management considers whether
      it is more likely than not that some portion or all of the deferred tax assets
      will not be realized. The ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during the periods in
      which those temporary differences become deductible.


F-35


**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**




**Note
      14 - Taxes on Income (cont’d)**





**D.**  **Deferred
      taxes (cont’d)**





Management
      considers projected future taxable income and tax planning strategies in making
      this assessment.





Based
      upon projections for future taxable income over the periods in which the
      deferred tax assets are deductible, management believes it is more likely than
      not that the Company will realize the benefits of these deductible differences,
      net of the existing valuation allowances at December 31, 2007. The amount of
      the
      deferred tax asset considered realizable, however, could be reduced in the
      near
      term if estimates of future taxable income during the carryforward period are
      reduced.





The
      tax
      effects of significant items comprising the Company’s deferred
      taxes:





**December
                31****2006**
            
            **2007**Tax
                loss carryforwards of subsidiaries
            
            $
            10,137
            
            $
            11,506Other
                timing differences
            
            
            2,343
            
            
            2,397Total
                gross deferred tax assets
            
            
            12,480
            
            
            13,903Valuation
                allowance
            
            
            (11,106
            )
            
            (12,553
            )Net
                deferred tax asset
            
            $
            1,374
            
            $
            1,350





The
      net
      changes in the total valuation allowance for the years ended December 31, 2005,
      2006 and 2007 are ($2,779), $789 and $1,446, respectively.





**E.**  **Reconciliation
      of the statutory tax benefit (expense) to actual income tax benefit
      (expense)**





**Year
                ended December 31,****2005**
            
            **2006**
            
            **2007**Profit
                (loss) before taxes on income and minority share
            
            $
            4,941
            
            $
            (2,715
            )
            $
            18,230Tax
                rate
            
            
            0
            %
            
            0
            %
            
            0
            %Computed
                expected tax
            
            
            -
            
            
            -
            
            
            -Increase
                in unrecognized tax benefits associated with current year
                positions
            
            
            -
            
            
            -
            
            
            (2,901
            )Differences
                between the definition ofcapital
                and assets for tax purposes and other
            
            
            -
            
            
            (200
            )
            
            1,256Change
                in valuation allowance
            
            
            2,779
            
            
            (789
            )
            
            (1,446
            )Foreign
                tax rate differential
            
            
            (2,493
            )
            
            862
            
            
            (1,457
            )Income
                tax benefit (expense)
            
            $
            286
            
            $
            (127
            )
            $
            (4,548
            )




F-36




**Given
      Imaging Ltd. and its subsidiaries**





**Notes
      To The Consolidated Financial Statements**


**(In
      thousands except share and per share data)**





**Note
      14 - Taxes on Income (cont’d)**




**F.**  **Accounting
      for income tax uncertainties**




The
      Company and its subsidiaries file income tax returns in Israel, the U.S and
      other foreign jurisdictions. The U.S. subsidiary files income tax returns in
      federal jurisdictions, and various states within the U.S. With few exceptions,
      the Company is no longer subject to Israeli, U.S. federal, state and local,
      or
      non-U.S. income tax examinations by tax authorities for years before 2003.
      The
      German tax authorities commenced an examination of the Company's subsidiary
      income tax returns in Germany for the years 2001 through 2004 that is
      anticipated to be completed by the end of 2008 with no material tax
      adjustments.




The
      Company adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes,* on
      January 1, 2007. A reconciliation of the beginning and ending amount of
      unrecognized tax benefits is as follows:




Balance
                at January 1, 2007
            
            $
            -Additions
                based on tax positions related to the current year
            
            
            2,901Additions
                for tax positions of prior years
            
            
            -Reductions
                for tax positions of prior years
            
            
            -Settlements
            
            
            -Balance
                at December 31, 2007
            
            $
            2,901




T he
      unrecognized tax benefits in the amount of $2,901, if recognized, would affect
      the effective tax rate of the Company.




During
      the year ended December 31, 2007, the Company recorded approximately $99 in
      interest relating to unrecognized tax benefits in the consolidated statements
      of
      operations and accrued the same amount in the balance sheet as of December
      31,
      2007. ******





**Note
      15 - Fair Value of Financial Instruments**





The
      Company's financial instruments include cash and cash equivalents, accounts
      receivable, deposits, assets held for severance benefits, marketable securities
      and accounts payable. Except for marketable securities considering the short
      term nature of these financial instruments, their carrying amounts approximate
      fair value. The fair value of the Company’s marketable securities is disclosed
      in Note 5.


F-37