As filed with the Securities Exchange
Commission on April 6, 2006

---

---

|                                  
|----------------------------------
|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, 2005
|                                            |                                                                                                 
|                                            | OR                                                                                              
|                                            |                                                                                                 
|o                                           | TRANSITION 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
ParkYoqneam 20692, Israel(Address
of principal executive offices)

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

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

Ordinary Shares, par value NIS 0.05 per share

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, 2005:

27,950,281 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 Advisers                          | 4   
|Item 2.   | Offer Statistics and Expected Timetable                                        | 4   
|Item 3.   | Key Information                                                                | 4   
|Item 4.   | Information on the Company                                                     | 17  
|Item 4A   | Unresolved Staff Comments                                                      | 39  
|Item 5.   | Operating and Financial Review and Prospects                                   | 39  
|Item 6.   | Directors, Senior Management and Employees                                     | 55  
|Item 7.   | Major Shareholders and Related Party Transactions                              | 64  
|Item 8.   | Financial Information                                                          | 72  
|Item 9.   | The Offer and Listing                                                          | 73  
|Item 10.  | Additional Information                                                         | 74  
|Item 11.  | Quantitative and Qualitative Disclosures about Market Risk                     | 86  
|Item 12.  | Description of Securities other than Equity Securities                         | 86  
|          |                                                                                |     
|PART II   |                                                                                |     
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                                | 87  
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 87  
|Item 15.  | Controls and Procedures                                                        | 87  
|Item 16.  | [Reserved]                                                                     | 88  
|Item 16A. | Audit Committee Financial Expert                                               | 88  
|Item 16B. | Code of Ethics                                                                 | 88  
|Item 16C. | Principal Accountant Fees and Services                                         | 88  
|Item 16D. | Exemptions from the Listing Standards for Audit Committees                     | 88  
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated
  Purchasers       | 88  
|          |                                                                                |     
|PART III  |                                                                                |     
|Item 17.  | Financial Statements                                                           | 89  
|Item 18.  | Financial Statements                                                           | 89  
|Item 19.  | Exhibits                                                                       | 89  

The GIVEN
logo, GIVEN, PillCam, PILLCAM, the PillCam logo, AGILE, ORDERWIN, ORDER WHEN I
NEED, RAPID, PILLCAM IMAGING CAPSULE and design, FINGERS HOLDING A CAPSULE logo
and, FINGERS HOLDING PILLCAM CAPSULE logo, are our trademarks or registered
trademarks. All other registered trademarks appearing herein are owned by their
holders.

-3-

---



PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISORS

Not
Applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not
Applicable.

ITEM 3. KEY INFORMATION

The
selected consolidated statements of operations data for the years ended
December 31, 2003, 2004 and 2005, and the selected consolidated balance sheet
data as of December 31, 2004 and 2005, 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,
2001 and 2002, and the selected consolidated balance sheet data as of December
31, 2001, 2002 and 2003, have been derived from our audited consolidated
financial statements not included in this Form 20-F, which have also 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,                         |           
|                                                                                                              |  |                                                   |           
|                                                                                                              |  | 2001                                              |            | 2002 |   | 2003       |   | 2004 |            | 2005 |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |  
|                                                                                                              |  | (in thousands, except share and per
  share data) |           
|Statements of
  Operations Data:                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Revenues                                                                                                      |  | $                                                 | 4,733      |      | $ | 28,904     |   | $    | 40,539     |      | $ | 65,020     |   | $ | 86,776     |  
|Cost of revenues                                                                                              |  |                                                   | 2,476      |      |   | 11,907     |   |      | 13,551     |      |   | 17,734     |   |   | 22,070     |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Gross profit                                                                                                  |  |                                                   | 2,257      |      |   | 16,997     |   |      | 26,988     |      |   | 47,286     |   |   | 64,706     |  
|Operating expenses:                                                                                           |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Research and development,
  gross                                                                             |  |                                                   | (6,156     | )    |   | (8,609     | ) |      | (7,037     | )    |   | (7,363     | ) |   | (8,833     | )
|Royalty-bearing participation                                                                                 |  |                                                   | 44         |      |   |           |   |      | 1,303      |      |   | 1,140      |   |   | 1,244      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Research and development, net                                                                                 |  |                                                   | (6,112     | )    |   | (8,609     | ) |      | (5,734     | )    |   | (6,223     | ) |   | (7,589     | )
|Sales and marketing                                                                                           |  |                                                   | (12,902    | )    |   | (22,681    | ) |      | (26,804    | )    |   | (33,652    | ) |   | (43,281    | )
|General and administrative                                                                                    |  |                                                   | (2,664     | )    |   | (4,749     | ) |      | (5,312     | )    |   | (6,916     | ) |   | (9,657     | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Total operating expenses                                                                                      |  |                                                   | (21,678    | )    |   | (36,039    | ) |      | (37,850    | )    |   | (46,791    | ) |   | (60,527    | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Operating profit (loss)                                                                                       |  |                                                   | (19,421    | )    |   | (19,042    | ) |      | (10,862    | )    |   | 495        |   |   | 4,179      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Financing income, net                                                                                         |  |                                                   | 764        |      |   | 1,469      |   |      | 995        |      |   | 956        |   |   | 762        |  
|Other expenses, net                                                                                           |  |                                                   |           |      |   | (711       | ) |      |           |      |   |           |   |   |           |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Profit (loss) before taxes on
  income                                                                        |  |                                                   | (18,657    | )    |   | (18,284    | ) |      | (9,867     | )    |   | 1,451      |   |   | 4,941      |  
|Taxes on income                                                                                               |  |                                                   |           |      |   |           |   |      |           |      |   | 690        |   |   | 286        |  
|Profit (loss) before minority
  share                                                                         |  |                                                   | (18,657    | )    |   | (18,284    | ) |      | (9,867     | )    |   | 2,141      |   |   | 5,227      |  
|Minority share in losses
  (profits) of subsidiary                                                            |  |                                                   |           |      |   | (26        | ) |      | 258        |      |   | 747        |   |   | 1,116      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Net profit (loss)                                                                                             |  | $                                                 | (18,657    | )    | $ | (18,310    | ) | $    | (9,609     | )    | $ | 2,888      |   | $ | 6,343      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Basic profit (loss) per
  ordinary share (1)                                                                  |  | $                                                 | (1.60      | )    | $ | (0.73      | ) | $    | (0.38      | )    | $ | 0.11       |   | $ | 0.23       |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Diluted profit (loss) per
  ordinary share (1)                                                                |  | $                                                 | (1.60      | )    | $ | (0.73      | ) | $    | (0.38      | )    | $ | 0.10       |   | $ | 0.21       |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Weighted average number of
  ordinary shares used in computing basic profit (loss) per ordinary share (1)     |  |                                                   | 12,879,369 |      |   | 25,182,563 |   |      | 25,493,073 |      |   | 26,633,964 |   |   | 27,781,223 |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  
|Weighted average number of
  ordinary shares used in computing diluted profit (loss) per ordinary share
  (1) |  |                                                   | 12,879,369 |      |   | 25,182,563 |   |      | 25,493,073 |      |   | 29,353,448 |   |   | 29,695,164 |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |      |   |            |   |   |            |  

-4-

---



|                                                |  |                      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------- |  | -------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                |  | As of
  December 31, |        
|                                                |  |                      |        
|                                                |  | 2001                 |         | 2002 |   | 2003    |   | 2004 |         | 2005 |  
|                                                |  |                      |         |      |   |         |   |      |         |      |  
|                                                |  | (in thousands)       |        
|Balance Sheet Data:                             |  |                      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Cash
  and cash equivalents                     |  | $                    | 61,230  |      | $ | 35,792  |   | $    | 25,367  |      | $ | 80,861  |   | $ | 65,356  |  
|Working
  capital                               |  |                      | 62,891  |      |   | 43,972  |   |      | 34,970  |      |   | 92,987  |   |   | 86,217  |  
|Marketable
  Securities                         |  |                      |        |      |   |        |   |      |        |      |   |        |   |   | 21,664  |  
|Total
  assets                                  |  |                      | 75,923  |      |   | 68,728  |   |      | 55,569  |      |   | 124,224 |   |   | 149,110 |  
|Long-term
  liabilities, net of current portion |  |                      | 522     |      |   | 882     |   |      | 1,192   |      |   | 10,984  |   |   | 24,246  |  
|Total
  liabilities                             |  |                      | 6,590   |      |   | 12,969  |   |      | 8,847   |      |   | 28,430  |   |   | 47,005  |  
|Accumulated
  deficit                           |  |                      | (30,716 | )    |   | (49,026 | ) |      | (58,635 | )    |   | (55,747 | ) |   | (49,404 | )
|Total
  shareholders equity                    |  |                      | 69,333  |      |   | 53,577  |   |      | 44,798  |      |   | 94,617  |   |   | 102,044 |  

|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Notes 1L and 11 of the notes to our consolidated financial
  statements for an explanation of the number of shares used in computing per
  share data.

CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

This Form
20-F contains forward-looking statements. 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;                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                      
| |  | expectations as to raising additional financing;                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                      
| |  | statements as to the potential or expected expansion in 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 payors 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 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;                                                                                                                                                                                                            

-5-

---



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Israeli tax and corporate
  legislation may have on our operations.

In
addition, statements that use the terms believe, expect, plan, intend,
estimate, anticipate and similar expressions are intended to identify
forward-looking statements.  All
forward-looking statements in this Form 20-F reflect our current views about
future events and are based on assumptions and are subject to risks and
uncertainties that could cause our actual results to differ materially from
future results expressed or implied by the forward-looking statements. Many of
these factors are beyond our ability to control or predict.  You should not put undue reliance on any
forward-looking statements. Unless we are required to do so under U.S. federal
securities laws or other applicable laws, we do not intend to update or revise
any forward-looking statements.

RISK FACTORS

If
we are unable to achieve broader penetration of the Given System among
gastroenterologists, we may not be able to maintain our current growth rate.

Our
principal product is the Given System, consisting of a line of PillCam capsules and
the related data recorder and computer workstation.  As of
December 31, 2005, we had sold over
2,860 systems worldwide.  Growth
in our installed base of Given Systems has contributed to our revenue
growth.  If we are unable to continue to
achieve broad penetration among gastroenterologists, we may be unable to
maintain our current growth rate.  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 payors responsible for providing
reimbursement coverage about the clinical and economic benefits of using the
Given System.  Second, we must broaden
the indications for which the use of the Given System is reimbursed, expand the
number of lives 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 we are unable to
achieve the foregoing, future penetration of the Given System among
gastroenterologists may not be sufficient to maintain our current growth rate.

If
we are unable to expand reimbursement coverage from third-party healthcare
payors for procedures using the Given System, or if reimbursement is
insufficient to cover the costs of purchasing or using the Given System when
compared to alternative procedures, demand for the Given System 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 payors.  In general, the process of obtaining
reimbursement coverage approvals has been slower outside of the United
States.   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.  Historically,
we have experienced higher sales in territories in which we have received
reimbursement 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.   If physicians,
hospitals and other healthcare providers are unable to obtain suffici­ent
coverage and reim­bursement from third-party payors for procedures using the
Given System, or if reimbursement is, or is perceived by our customers to be,
insufficient to cover the costs of purchasing or using our product or does not
adequately compensate physicians and health care providers compared to the
other procedures they offer, we may be unable to generate sufficient sales to
continue to grow.

-6-

---



Our future growth
depends in part on our ability to market the Given System and the PillCam SB
capsule as a first line diagnostic tool for a variety of disorders of the small
intestine.

The Given
System and the PillCam SB capsule have been cleared for marketing by the FDA
for the detection of disorders of the small intestine. To date, sales of the
Given System and 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 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. Our ability to
expand the use of the PillCam SB capsule depends substantially on
our ability to convince third party payors
to provide reimbursement coverage for the PillCam SB capsule as a primary
diagnostic tool and not only after a previous procedure, such as endoscopy or
radiology, has been performed. If we
are unable to do obtain such reimbursement coverage, sales of the PillCam SB
capsule may not grow as we expect.

Changes
in healthcare system policies may make it difficult for physicians, hospitals
and other healthcare providers to obtain adequate reimbursement for procedures
using the Given System, which could adversely affect demand for the Given
System.

Many
healthcare payors have adopted a managed care system in which they contract to
provide compre­hen­sive health­care for a fixed cost per person, irrespective
of the amount of care actually provided. Therefore, the amount of reimbursement
provided may not be sufficient to encourage physicians to purchase or utilize
the Given System. We are unable to predict what changes will be made in the
reimbursement policies of third-party payors. Sales of the Given System could
be adversely affected by changes in reim­burse­ment policies of govern­mental
or private healthcare payors to the extent any such changes affect
reimbursement amounts or methods for procedures in which the Given System is
used.

We
currently depend on sales of the PillCam SB for a substantial majority of our
revenues. If we are unable to manufacture, market or sell the PillCam SB
capsules or to increase PillCam SB
capsule usage rates among gastroenterologists, we may not be able to maintain
our current annual growth rate.

A
substantial portion of our annual revenue growth to date has resulted from
increased sales of the PillCam SB capsule. We expect that a substantial
majority of our revenues for the foreseeable future will come from sales of the
PillCam SB capsule and other PillCam capsules. Sales of the PillCam SB capsule
contributed $22.9 million, or 56.4%, in 2003, $41.6 million, or 64%, in 2004
and $62.5 million, or 72% in 2005. We believe that the usage rate of our
PillCam capsules is an important factor in growing our revenues. The usage rate
outside the United States has historically been lower than in the United
States. We are seeking to increase the usage rate by a number of methods,
including increased selling and marketing activities, more frequent contact
with our customers, attaining reimbursement coverage for broader indications
and as a first line tool, generating supporting clinical evidence 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 usage rate
of our customers is also important to attracting new customers to purchase and
use the Given System. If we are unable to increase the usage rate of the Given
System, we may not be able to achieve the revenues necessary to maintain our
growth.

-7-

---



Our
future growth also depends in part on the success of Ethicon Endo-Surgery in
marketing our new PillCam ESO video capsule, particularly in the United States.

In
May 2004, we entered into an exclusive sales representation and co-promotion
agreement with Ethicon Endo-Surgery, a Johnson & Johnson company. InScope,
a division of Ethicon Endo-Surgery established to market products to the
gastroenterology market, has exclusive rights to market our PillCam ESO capsule
in the United States. In September 2004, we launched the PillCam ESO capsule in
Europe and in November 2004 we received FDA clearance. Under the agreement, InScope
is responsible for marketing the PillCam ESO capsule and, consequently, our
future growth depends in part on the success of InScope in doing so. The
results of our cooperation with InScope since signing the agreement have not
met our expectations and we and InScope have taken a number of actions in an
effort to improve sales of the PillCam ESO capsule, including the transfer to
us of InScopes initial responsibility to obtain a dedicated CPT code for the
esophageal capsule endoscopy procedure. Sales of the PillCam ESO capsule in
2005 were lower than we expected and may continue to be lower than we expect if
InScope is not successful in marketing the PillCam ESO capsule. This may
negatively impact our revenue growth.

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 or
utilize our patent portfolio.

In October
2005, Olympus Corporation launched a competing capsule endoscopy system and began
sales in Europe and Australia. Based on publicly available information, Olympus
is also conducting clinical trials in the United States and intends to seek FDA
clearance to market its capsule endoscopy system in the United States. In
addition, in December 2003, Olympus submitted a request to the United States
Patent and Trademark Office, or USPTO, to re-examine some of the claims of one
of our patents. We submitted our response in August 2005 and are awaiting the
decision of the USPTO. Finally, other companies in Korea and China began
selling capsule endoscopy systems in these territories in 2005. If we are
unable to compete effectively in the marketplace or utilize our patent
portfolio against the Olympus capsule endoscopy system and other competing systems,
we may lose market share or experience delays in completing sales as a result
of longer decision making process among potential customers.

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.

To date,
competition for the Given System has come primarily 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, Asahi Optical Co., which
manufactures and markets cameras and other imaging equipment under the Pentax
brand, 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 will suffer.

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 that is
priced similarly to our system 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 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

-8-

---



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. In addition, once issued, patents may be chal­lenged, invalidated
or circumvented by third parties. 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. 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. 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
provide protection in the jurisdiction they are enacted. The laws and judiciary
systems of foreign countries also may not protect or enable enforcement of our
intellectual property rights to the same extent as the laws of the United
States. Even if we adequately protect our intellectual property rights,
litigation may be necessary to enforce these rights. This litigation could be
lengthy, negatively affect our earnings, require a substantial diversion of
management attention and allow our competitors to gain significant market
position in the meantime. If we do not adequately protect our intellectual
property, our competitors or other parties could use the intellectual property
that we have developed to enhance their products or make products similar to
ours and compete more efficiently with us, which could result in a decrease in
our market share.

Due to the rapid development and introduction
of improvements and upgrades to the Given System, it may be difficult for many
of our customers to utilize our latest technologies.

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 every year. Newer products or system components may not be
able to support and work with older product versions. For example, our PillCam
ESO capsule only works with RAPID 3.0 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.

We may be unable to introduce other products
for use in other parts of the gastrointestinal tract.

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 for visualizing
other parts of the gastrointestinal tract, including the stomach and the colon.
There can be no assurance of widespread market acceptance of the Given System
as superior to existing technologies for detection of abnormalities in other
parts of the gastrointestinal tract or that we will succeed in marketing and
selling capsules for use 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 the Given System in other parts of the gastrointestinal tract, we
will be required to conduct additional clinical trials to
demonstrate the diagnostic and cost-effectiveness of the Given System. If future clinical trials indicate that the Given
System is not as clinically-effective or cost-effective in these parts of the
gastrointestinal tract as current methods, or that it causes unexpected
complications or other unforeseen negative effects, we may not obtain
regulatory clearance to market and sell the Given System for use in other parts
of the gastrointestinal tract 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
results of operations.

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 $26.2 million, or 65%, of our revenues in 2003, $46.7 million, or 72%, of
our revenues in 2004 and $63.9 million, or 74%, of our revenues in 2005. Any
disruption to our market in the United States resulting from changes in
management of our U.S. subsidiary, adverse changes in reimbursement policies,
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 results of operations.

-9-

---



We
may be unable to maintain or increase our profitability.

We were
formed in 1998 and recorded our initial sales of the Given System in the third
quarter of 2001. We achieved positive cash flow in the fourth quarter of 2003
and initially became profitable in the second quarter of 2004; however, we have
significant operating expenses and must continue increasing our gross profit
from sales of the Given System and of the PillCam capsules at a higher rate than the increase in our
expenses in order to maintain and grow our profits. If we fail to do so, we may
be unable to maintain or increase our profitability.

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. 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
may be required to increase manufacturing quantities of the Given System and
could encounter manufacturing problems or delays that could result in lost
revenue.

We are
currently using two semi-automatic production lines to manufacture PillCam SB
capsules and one semi-automated production line to manufacture PillCam ESO
capsules. These production lines are installed at our manufacturing facilities
in Yoqneam, Israel. Each semi-automatic production line has the capacity to
manufacture approximately 270,000 PillCam capsules per year. We have installed
one back-up semi-automatic production line at the facilities of Pemstar, Inc.
in Ireland for the PillCam SB capsule and have purchased and plan to install a
second back-up line for the PillCam ESO capsule. We may be unable to establish
or maintain reliable, high-volume manufacturing capacity and may encounter
difficulties in scaling up production of the Given System, whether by
installing one or more fully-automated production lines, or otherwise. If
demand for the Given System exceeds our manufacturing capacity, we could
develop a substantial backlog of customer orders and our ability to generate
additional revenues will be limited and our reputation in the marketplace may
be harmed.

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.

We received
the initial clearance from the U.S. Food and Drug Administration, or FDA, to
market the Given System in the U.S. in August 2001. FDA regulations may require
us to submit for clearance improvements and modifications of the Given System,
including new PillCam capsules, before we are allowed to market them in the
United States. FDA regulations also prohibit us from promot­ing or advertising
the Given System, or any other devices that the FDA may clear in the future,
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. These
determinations can be subjective, and the FDA may disagree with our promotional
claims. 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, the marketing and sale of these products will be delayed or
cancelled, which in turn may materially adversely affect our financial
condition and results of operations. 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

-10-

---



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 has passed several audits, including a
re-certification audit, pursuant to the Medical Devices Directive of the
European Union, 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. While these
quality standards contain requirements which are generally similar to the
Quality System Regulation required by the FDA, we have never been through a
Quality System Regulation inspec­tion by the FDA and cannot assure you that we
would pass. If we fail a Quality
System Regulation inspection, 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 50 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 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.

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. We currently have clearance in the
United States and Europe based on the current system design and specifications
and expect to be in compliance with the Japanese regulations by the middle of
2006. Modifications to the Given System may require new or further regulatory
approvals before we are permitted to market and sell a modified system, and it
could take several months to obtain any necessary approvals. 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
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 payors 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 payors that
are false or fraud­ulent, or are for items or services that were not provided
as claimed.

-11-

---



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. While we
believe that we are in compliance with these laws, even an unsuccessful
government action under one of these legal authorities 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 have experienced rapid growth and our failure to manage
this growth could harm our business.

Our
revenues have grown rapidly and we face significant challenges and risks in
building and managing our sales and marketing team, including managing
geographically dispersed sales efforts and hiring and adequately training our
sales people in the use and benefits of the Given System. To succeed in the
implementation of our business strategy and maintain our growth, our management
team must diligently plan and rapidly execute our sales and marketing strategy,
while continuing our research and development, regulatory, clinical and
manufacturing activities, as well as manage our continued growth by
implementing effective long term planning. If we are unable to effectively
plan, manage and execute these efforts, our business may be harmed.

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 an initial period of approximately three
years 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 2005, we derived $12.9 million, or 15%, of our revenues from sales to local
distributors, compared to $9.8 million, or 15%, from sales to local
distributors in 2004. To date, we have changed a number of our distributors due
to a failure to meet minimum sales targets. 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. Specifically, Micron Technology, Inc., through
its Micron Imaging Group and other wholly-owned subsidiaries, is currently the
sole supplier of the imaging sensor and the packaging for the sensor, and
Zarlink Semiconductors is currently the sole supplier of the transmitter that
is inte­grated into the 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 many 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 verifica­tion 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.

-12-

---



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, our manufacturing facilities (other than our backup production lines
in Ireland), and our research and develop­ment facilities are located in
Israel. Political, economic and military conditions in Israel 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 have a negative effect on our business condition, harm our results of
operations and adversely affect the share price of publicly traded Israeli
companies such as us.

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 and scientific staff.
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 are, unless exempt,
obligated to take part in military reserve duty annually. Many of our male
employees are currently obligated to perform annual reserve duty, as are two of
our executive officers. 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 adversely affect the
develop­ment of our business and our financial condition.

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

In 2005, we
derived 77% of our revenues in U.S. dollars and 19% in Euro, with the remainder
denominated in 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 2005, in addition to our U.S. dollar and
Euro-denominated liabilities, 26% 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
margin, 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 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. In addition, as of December 31, 2005, 11% 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 between the
Yen, the Shekel, the Australian dollar and the Euro.

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.
Particularly as sales of the Given System increase, 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 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

-13-

---



operations. A product liabil­ity claim, regardless of merit or ultimate
outcome, or any product recall could result in substantial costs to us and a
substantial diversion of manage­ment attention.

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 National Market in October 2001
and on the Tel Aviv Stock Exchange in March 2004. In 2005, the closing price of
our shares has ranged from $20.39 to $36.04 per share on the Nasdaq National
Market and NIS 95.79 to NIS155.3 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
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 quarterly 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 systems until the end of the fiscal
quarter because they believe this will enable them to negotiate more favorable
terms. Therefore, revenues from system sales may be concentrated at the end of
each fiscal quarter making it difficult for us to determine the success of each
quarter until its end and resulting in lower than expected quarterly revenues
if external or other events cause a large number of 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 relating to systems 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 buying and selling. Securities class action litigation has often been
brought against companies following periods of volatility. Any securities
litigation claims brought against us could result in substantial expense and
divert managements attention from our business.

The
two largest beneficial owners of our shares, IDB Holding Corporation Ltd.,
which is controlled by four individuals, and certain funds affiliated with
OrbiMed Advisors, Inc., which we refer to as the OrbiMed investors and which
are controlled by Samuel D. Isaly, have significant influence over matters
requiring shareholder approval, which could, among other things, delay or
prevent a change of control.

The
  largest beneficial owners of our shares, four individuals in Israel through
  IDB Holding Corporation Ltd., beneficially own 36.5% of our ordinary shares,
  and the principal of the OrbiMed investors beneficially owns 13.0% of our ordinary
  shares. As a result, these share­holders, if they were to act together,
  could exercise a controlling influence over our operations and business strategy
  and have 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.

-14-

---



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

As
of December 31, 2005, we had 27.9 million ordinary shares outstanding. Approximately 50% of these shares are restricted
securities available for resale on the Nasdaq National 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. 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 our share price may be adversely
affected. In addition, the holders of approximately 13 million ordinary shares
are entitled to request that we register their ordinary shares under the
Securities Act of 1933 and have the right to request that we include their
shares in any registration statement that we file, in each case, subject to
exclusion for marketing reasons. These registration rights expire on October
10, 2006. Registration of these shares would result in them becoming freely
tradable without restriction immediately upon the effectiveness of such
registration, except for shares purchased by affiliates, which may be sold
subject to the volume limitations of Rule 144. These factors could also make it
more difficult for us to raise additional funds through future offerings of our
ordinary shares or other securities.

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 National Market and the Tel Aviv Stock
Exchange. Trading in our ordinary shares on these markets is made in different currencies
(dollars on the Nasdaq National Market, and Israeli 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, which may include having gains realized on the sale of our
ordinary shares treated as ordinary income, rather than as capital gains
income, having potentially punitive interest charges apply to those gains, and
the denial of the taxation of certain dividends paid by us at the lower rates
applicable to long-term capital gains. We believe we were not a PFIC for the
fiscal year ended December 31, 2005. 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 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 refund grants previously received
together with interest and penalties, and may be subject to criminal charges.

From 1998
through 2005, we received grants totaling $4.9 million 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. 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 transferring of our
technologies and related intellectual property rights outside of Israel. Even
if we receive approval to manufacture the Given System outside of Israel, we
would be required to pay an increased total amount of royalties, which may be
up to 300% of the grant amount plus interest, depending on the manufacturing
volume that is performed outside of Israel, as well as a possible increased
rate or royalties. This restriction may impair our ability to outsource
manufacturing, engage in change in control transactions or

-15-

---



otherwise transferring 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 Pemstars facilities in Ireland without
an increase in royalty rates and we will be required to obtain an approval
before manufacturing the PillCam ESO capsule outside of Israel. In addition, if
we fail to comply with any of the conditions imposed by the Office of the Chief
Scientist, we may be required to refund any grants previously received together
with interest and penalties, and may be subject to criminal charges. In recent
years, the government of Israel has accelerated the rate of repayment of Chief
Scientist grants and may further accelerate them in the future.

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.

It
may be difficult to enforce a U.S. judgment against us, our officers and
directors or to assert U.S. securities laws claims in Israel or serve process
on our officers and directors.

We are
incorporated in Israel. The majority of our executive officers and directors
are not residents of the United States, and the majority of our assets and the
assets of these persons are located outside the United States. Therefore, it
may be difficult for an investor, or any other person or entity, to enforce a
U.S. court judgment based upon the civil liability provisions of the U.S.
federal securities laws in an Israeli court against us or any of these persons
or to effect service of process upon these persons in the United States.
Additionally, it may be difficult for an investor, or any other person or
entity, to assert U.S. securities law claims in original actions instituted in
Israel. Israeli courts may refuse to hear a claim based on a violation of U.S.
securities laws because Israel is not the most appropriate forum to bring such
a claim. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable to the claim. If U.S.
law is found to be applicable, the content of applicable U.S. law must be
proved as a fact which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Israeli law. There is little
binding case law in Israel addressing the matters described above.

Under
current Israeli law, 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. Israeli
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.

-16-

---



ITEM
4. INFORMATION ON THE COMPANY

|   |                                       
|-- | --------------------------------------
|A. | HISTORY AND DEVELOPMENT OF THE COMPANY

We were
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 (011) 972-4-909-7777. Our agent in the United States is our subsidiary
Given Imaging, Inc. Given Imaging, Inc.s address is Oakbrook Technology
Center, 5555 Oakbrook Parkway, No. 355, Norcross, GA 30093.

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 gastroenterologists 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. In 2001, we commenced marketing the Given System, our capsule
endoscopy platform, with the M2A capsule (which we rebranded in 2004 as the
PillCam Small Bowel capsule, or PillCam SB), for detection of disorders of the
small bowel. As of December 31, 2005, we had an installed base of more than
2,860 Given Systems and had sold more than 307,000 PillCam SB capsules in over
50 countries worldwide. In November 2004, we received FDA marketing clearance
for our second PillCam capsule, the PillCam ESO capsule, for visualizing the
esophagus. We market the PillCam ESO video capsule in the United States through
a strategic marketing and sales alliance we formed in May 2004 with InScope, a
division of Ethicon Endo-Surgery, a Johnson & Johnson company. 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. We launched the AGILE Patency Capsule
and system in Europe in November 2003. Following favorable clinical trial
results for the AGILE Patency System in the United States, we submitted the AGILE
Patency System for FDA clearance in December 2005 under a 510(k) application
and we expect to receive FDA clearance to market this system in the United
States in the first half of 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 the first 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
furtherance of these objectives, in December 2005, we launched a further
advanced version of our RAPID software, RAPID 4.0, which supports and is
compatible with the entire line of PillCam capsules currently available and is
expected to significantly improve physician productivity. In addition, in 2005
we made significant progress in the development of PillCam Colon for diagnosis
of disorders in the colon and began initial clinical trials with this capsule.
If clinical trials results are positive, we intend to submit the PillCam Colon
capsule for FDA clearance and launch it in Europe during 2006. In 2005, we also
saw the first third-party payors changing their reimbursement policies to cover
PillCam SB as a first line diagnostic tool that may be administered to a
patient without first undergoing other tests, such as upper or lower endoscopy.

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:

-17-

---



Oral cavity Duodenum lleum Anal canal Jejunum Stomach Esophagus Large Intestine Small Intestine


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 digesting food. 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;                                                                                      
| |   |                                                                                                                                                                                                                                   
| |  | 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;

-18-

---



| |                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                          | gastritis, which
  is inflammation of the lining of the stomach;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                          | 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 and the
  esophagus.
| |                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                          | Small intestine disorders. According to data
  from 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 interior of the entire small intestine. As a result, we
  believe that many gastroenterologists first examine the colon or stomach
  before ordering an examination of the small intestine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                          | 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 AGA data, an estimated 61 million Americans suffer from
  heartburn at least once a month and 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. In the United States alone, according
  to the American Cancer Society, there were expected to be approximately
  14,250 new cases of esophageal cancer in 2004. 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. Esophageal varices are present in
  about 40% of patients with cirrhosis of the liver, which has been reported to
  affect 400,000 Americans based on data from the National Digestive Disease
  Information Clearinghouse. The risk of death with the first variceal bleed is
  approximately 20%25%. 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.

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                                                                                                                                   

-19-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | disorders of
  the colon. Because of the increasing awareness of colon cancer, colonoscopy
  as a screening tool for early detection of colon cancer is becoming more
  common.                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | 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 and is substantially more complicated than
  gastroscopy.

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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Certain clinical studies have
  reported that perforation rates range between 0.01% and 1.9% for
  esophagoscopy, between 0.1% and 0.7% for esophagogastroduodenoscopy, or EGD,
  and between 0.01% and 0.3% for colonoscopy. These studies report that
  mortality rates range between zero and 0.98% for esophagoscopy, between zero
  and 0.07% for esophagogastroduodenoscopy, and between 0.01 and 0.02% for
  colonoscopy. To date, there have been no reports of perforation or mortality
  attributed to the capsule endoscopy procedure.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | 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.                                                                                                                                          

-20-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and painless tool for the
  diagnosis of patients that present symptoms of suspected disorders of the
  small intestine and the esophagus. The PillCam capsule requires no sedation
  or patient preparation (other than a typical overnight fast in the case of
  the PillCam SB capsule), is easily ingested by the patient and does not use
  x-rays to produce images. We believe that this patient-friendly solution will
  increase the number of patients who undergo diagnosis for gastrointestinal
  disorders of the small intestine and the esophagus, since existing methods
  have been intimidating or uncomfortable for many potential candidates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Improved or comparable diagnostic yield. The
  PillCam SB capsule is the only test that provides direct imaging of the
  entire small intestine. By comparison, a push enteroscope accesses only
  approximately the first third of the small intestine. As a result, clinical
  trials demonstrate that the Given System has a significantly higher
  diagnostic yield in detecting disorders of the small intestine when compared
  to all other modalities, including push enteroscopy and radiological imaging.
  In addition, as demonstrated through clinical studies and on-going experience
  with the Given System, a negative finding from the Given System, unlike
  conventional 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
  diagnostic efficacy of the Given System in detecting disorders of the
  esophagus is comparable to the diagnostic efficacy of traditional endoscopy.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

-21-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 used to 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.

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. There is no need to retrieve the capsules after
passage.

-22-

---



The
RAPID software, when used with the PillCam SB capsule, creates a graphic
representation of the patients gastrointestinal tract, helping physicians
assess the location of the PillCam SB capsule within the body when an image is
captured and assisting them in directing treatment to the affected area.

We
are currently selling PillCam capsules designed for visualization of two areas
of the gastrointestinal tract, the small bowel and the esophagus:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PillCam SB  Our initial capsule for the
  Given System was PillCam SB video capsule for visualization of the small
  intestine. The PillCam SB capsule 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 returns the data recorder to the physicians
  office for review and diagnosis. The PillCam SB capsule is used with a
  variety of indications of the small intestine, including obscure bleeding,
  suspected Crohns disease, iron deficiency anemia and suspected small bowel
  tumors.                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | PillCam ESO  In November 2004, we
  received FDA clearance for our PillCam ESO capsule for visualization of the
  esophageal mucosa, which we market in the United States through our strategic
  marketing alliance with InScope, a division of Ethicon Endo-Surgery, a
  Johnson & Johnson company. The PillCam ESO capsule contains an imaging
  device and light source at both ends of the capsule and is designed to capture
  up to 14 images per second as it passes down the esophagus. The patient
  ingests the PillCam ESO capsule in a reclining position in the physicians
  office. The PillCam ESO capsule can be used only with DataRecorder 2.0 or
  newer versions and RAPID 3.0 or newer versions.                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | AGILE PatencySystem -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. We have obtained authorization to affix
  the CE mark to the AGILE Patency System, permitting us to market the AGILE
  Patency System in the member countries of the European Union, and we have
  also obtained regulatory clearance to market the AGILE Patency System in
  Australia. Following favorable clinical trial results for the AGILE Patency
  System in the United States, we submitted the AGILE Patency System for FDA
  clearance in December 2005 under a 510(k) application and we expect to
  receive FDA clearance to market this system in the United States in the first
  half of 2006.

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 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. Simultaneously with the launch of our new PillCam ESO video
capsule in November of 2004 we introduced an advanced version of our data
recorder, the DR 2.0, and in January 2006 we commenced selling of an advanced
version of the DR 2.0 with larger storage capacity. This advanced version is
now provided as standard as part of all new Given Systems we sell. This
advanced version supports PillCam SB and PillCam ESO procedures performed with
our products and will also be able to support the PillCam Colon capsule, which
is currently under development. In addition to having larger storage capacity
this advanced version is, similar to the earlier version of DR 2.0, completely
solid-state, much less susceptible to shock, enables quicker and more reliable
connection to the sensor array, weighs less and is therefore more comfortable
for the patient, can be remotely diagnosed and has a robust storage mechanism
and faster download capability compared to previous generations of our data
recorders.

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

-23-

---



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 PC, allowing the physician to review RAPID videos at
any time and place as convenient.

In
December 2005 we received FDA clearance to market RAPID 4.0, our newest version
of RAPID software, which is now provided as standard as part of all Given
Systems we sell. The introduction of RAPID 4.0 follows the introduction of
RAPID 3.0 that was launched in November 2004, simultaneously with the launch of
our PillCam ESO capsule. Similar to RAPID 3.0, RAPID 4.0 works both PillCam SB
and PillCam ESO. RAPID 4.0 introduces several new features that we believe
significantly improve physicians reading efficiency and diagnostic confidence.
These features include:

| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automatic
  Mode, which uses advanced software resulting in more efficient diagnostic
  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.

Upgrades of the Given System

We
began marketing and sales of the Given System in August 2001. Since then, we
have introduced new products or significant improvements for existing
components of the Given System every year.

In
the fourth quarter of 2004 and again during 2005, we continued to present
improvements to the Given System. First, from November 2004 through the end of
the first quarter of 2005, simultaneously with the launch of PillCam ESO, we
upgraded many of the Given Systems already installed at our customers at that time
to RAPID 3.0. At the same time, we also launched a promotional campaign in the
United States together with InScope in which we offered a significant discount
on the combined purchase price of a DR 2.0 and ten PillCam ESO capsules. This
upgrade and promotional campaign enabled participating customers to perform
procedures with the PillCam ESO capsule that is not compatible with earlier
versions of RAPID or data recorders. Second, beginning in December 2005,
following receipt of FDA clearance to market the newest version of the RAPID
software, RAPID 4.0, we began including RAPID 4.0 as standard in all systems we
now sell. At the same time, we began including a modified version of our DR 2.0
with larger storage capacity as part of those new systems.

Newer
products or system components may not be able to support and work with older
product versions. For example, our PillCam ESO capsule may only work with RAPID
3.0 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.

Warranty and Service

Our
standard warranty for PillCam SB capsules is fourteen months from the date of
manufacture and for PillCam ESO capsules is eighteen months from the date of
manufacture. Our standard warranty for other components of the Given System
normally extends for a period of one year 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 6 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.

-24-

---



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. In 2004, we
introduced a 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
service contract with us. Under this contract, the customer pays a fixed amount
per year in consideration for receiving our maintenance and support services,
as well as any software upgrades of our products, free of charge. As of
December 31, 2005, we had over 2,860 systems installed worldwide, of which
1,120 were under warranty and 288 were covered by a service contract.

Clinical Studies

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, Belgium, Canada, France, Germany, Israel,
Italy, the Netherlands, Portugal, 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 such as suspected
Crohns disease, 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 the Given
System has a significantly higher diagnostic yield in the detection of
disorders of the small intestine than comparative methods, such as push-enteroscopy,
gastroscopy and radiological examinations, such as barium follow-through,
enteroclysis, computerized tomography (CT), magnetic resonance (MR) and
angiography. Many of the investigators conducting these studies 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. As of December 31, 2005, more than 400 articles, editorials
and case reports had been published in peer reviewed journals. 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. We intend to expand our clinical trials program
to cover other potential indications for the PillCam SB capsule.

In
2003, the FDA agreed to remove the adjunctive labeling which originally
accompanied its clearance of the Given System in 2001, with the result that the
PillCam SB capsule is marketed in the United States as a standalone tool for
the detection of abnormalities of the small intestine. The FDAs decision was
based on materials we submitted showing an analysis of the results of 32
clinical studies involving 691 patients with various suspected disorders of the
small intestine. Near the end of 2004, Thomas Jefferson University published a
peer-reviewed article showing the cost-effectiveness of using the PillCam SB
capsule as a first line diagnostic tool in diagnosing Crohns disease before
any other procedure, such as endoscopy or radiology, is performed.

In
November 2004, our PillCam ESO capsule was cleared for marketing in the
United States for visualization of the esophageal mucosa. We have also
conducted clinical trials to compare the PillCam ESO capsule to traditional
endoscopy in the detection of esophageal disorders. The pivotal trial for
obtaining FDA clearance was conducted in seven hospitals in the United States,
Germany and Israel, and involved 106 patients with GERD symptoms. The patients
were examined first using the PillCam ESO capsule followed by traditional
endoscopy on the same day performed with a gastroscope. In this trial, the
PillCam ESO capsule showed comparable efficacy to conventional upper-endoscopy.
All patients ingested the PillCam ESO capsule without difficulty, no adverse
events were reported and patients preferred the PillCam ESO capsule over conventional
endoscopy in all categories. The investigators concluded that the
PillCam ESO capsule is a convenient, patient-friendly, sensitive method for
visualization of esophageal disorders and may provide an effective method to
screen patients for Barretts esophagus, a pre-cancerous complication of GERD.
In 2005, we initiated a multi-center, multi-national study clinical study evaluating
the PillCam ESO for the detection of esophageal varices. This study is expected
to be completed by the end of 2006. We expect that results of clinical trials
with PillCam ESO capsules will demonstrate its

-25-

---



clinical and
economic benefits in early detection of disorders of the esophagus, including
esophageal varices, GERD and Barretts esophagus.

In
the second half of 2005, we began performing initial clinical trials with the
PillCam Colon capsule, which is still under development. If initial results are
favorable, we intend to begin broader studies during 2006 that we will then use
to support our submission of the PillCam Colon capsule for FDA clearance.

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. To date,
there have been no reports of major complications or mortality attributed to
the PillCam capsule procedure and there have not been any reports of retention
of the PillCam ESO capsule. See Marketing and Distribution for a further
discussion of the 2005 ICCE consensus reports.

The Patency System

In
November 2003, we launched our AGILE Patency System in Europe, a simple and
prep-less procedure designed to enable physicians to confirm free passage of a
PillCam capsule in the gastrointestinal tract. 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 40 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.

We
have obtained authorization to affix the CE mark to the AGILE Patency System,
permitting us to market the AGILE Patency System in the member countries of the
European Union, and we have also obtained regulatory clearance to market the
AGILE Patency System in Australia. Following favorable clinical trial results
for the AGILE Patency System in the United States, we submitted the AGILE Patency
System for FDA clearance in December 2005 under a 510(k) application and we
expect to receive FDA clearance to market this system in the United States in
the first half of 2006. We also expect that the availability of the AGILE
Patency System will result in 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.

-26-

---



Marketing and
Distribution

We
market and sell our products through a combination of direct sales through our
marketing subsidiaries, and through independent distributors. The following
table indicates the jurisdictions in which we were marketing and selling the
Given System as of December 31, 2005, and the method used:

|                          |                                                                                                                                                                                                                                                                                                                                                                            |        |                                                          
|------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ---------------------------------------------------------
|Country or Region         |                                                                                                                                                                                                                                                                                                                                                                            | Method
|                          |                                                                                                                                                                                                                                                                                                                                                                            |       
|Africa                    |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | South Africa                                                                                                                                                                                                                                                                                                                                                               |        | Distributor                                              
|Asia                      |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | Brunei,
  China, India, Indonesia, Malaysia, Singapore,
  South Korea, Thailand, Taiwan                                                                                                                                                                                                                                                                                    |        | Distributors                                             
|Australia and New Zealand |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | Australia                                                                                                                                                                                                                                                                                                                                                                  |        | Direct sales
  (Given Imaging Pty. Ltd.) and distributors
|                          | New Zealand                                                                                                                                                                                                                                                                                                                                                                |        | Distributors                                             
|Europe                    |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | France                                                                                                                                                                                                                                                                                                                                                                     |        | Direct sales
  (Given Imaging s.a.s.)                    
|                          | Germany                                                                                                                                                                                                                                                                                                                                                                    |        | Direct sales
  (Given Imaging GmbH)                      
|                          | Austria,
  Belgium, Bulgaria, Cyprus, Czech Republic,
  Denmark, Estonia, Federal Republic of Yugoslavia,
  Serbia and Montenegro, Finland, Greece, Hungary,
  Iceland, Ireland, Italy, Latvia, Luxemburg, Macedonia,
  Malta, Netherlands, Norway, Poland, Portugal, Romania,
  Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland,
  Turkey, Ukraine, United Kingdom |        | Distributors                                             
|Middle East               |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | Israel                                                                                                                                                                                                                                                                                                                                                                     |        | Direct sales
  (Given Imaging Ltd.)                      
|North America             |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | United
  States                                                                                                                                                                                                                                                                                                                                                            |        | Direct sales
  (Given Imaging, Inc.)                     
|                          | Canada,
  Puerto Rico                                                                                                                                                                                                                                                                                                                                                      |        | Distributors                                             
|Latin America             |                                                                                                                                                                                                                                                                                                                                                                            |       
|                          | Argentina, Brazil, Chile, Costa Rica, Dominican
  Republic, Mexico, Panama, Peru, Uruguay, Venezuela                                                                                                                                                                                                                                                                       |        | Distributors                                             

Our sales
and marketing operations are organized in three geographical regions: United
States; International (including, Europe, Asia, Canada and Latin America) and
Japan. This organization enables us to focus effectively on 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 72% of our revenues in 2004
and 74% of our revenues in 2005, we market our products through
our wholly-owned subsidiary, Given Imaging, Inc., located in Norcross,
Georgia. As of December 31, 2005, we had a direct sales force in the United
States of more than 50 personnel. We have 16 sales and marketing field personnel in the other jurisdictions in
which we directly market the Given System.

Sales
to our local distributors worldwide accounted for approximately 15% of our
revenues in 2005. Under the 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. In larger territories, such as
China, we may have several regional distributors to cover the entire territory.
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. 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

-27-

---



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
May 2002, we entered into an agreement with Marubeni Corporation and Suzuken
Co., Ltd. for the purpose of investing in Given Imaging K.K., a Japanese
subsidiary established 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. Marubeni and Suzuken together invested an
aggregate of $4.3 million in Given Imaging K.K. in consideration for an
aggregate 49% interest and we retained a 51% controlling interest. In addition,
Suzuken has been appointed by Given Imaging K.K. as its exclusive distributor
in Japan. Given Imaging K.K. has conducted clinical trials and has submitted
the results to the Japanese Ministry of Health, Labor and Welfare for the
purpose of obtaining clearance to market the Given System in Japan. We expect
to receive marketing clearance for our products in Japan in 2006. However, we
do not expect to generate significant revenues from sales in Japan before our
products are also approved for reimbursement by Japanese authorities, which is
not likely to occur in 2006. Because the regulatory approval process in Japan
is taking longer then we initially anticipated, we intend to provide additional
equity financing of up to approximately $9.0 million to finance the operations
of our Japanese subsidiary during the next three years. Our portion of the
funding will be paid out of our cash reserves.

Our
marketing strategy is to drive the placement of Given Systems in order to
expand our footprint while increasing the utilization of PillCam capsules by
each account. While initially we focused primarily on expanding our market
penetration of Given Systems in gastroenterology physician offices and
gastroenterology departments within hospitals, today most of our revenues come
from sales of our PillCam capsules. Accordingly, our marketing and sales
strategy is also focused on increasing capsule utilization by our existing
installed base, which we intend to achieve by increasing the number of our
sales representatives, maintaining a closer relationship with our customers,
educating them about updated data on the clinical and economic benefits of our
products and enhancing the operating efficiencies of the Given System.

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). We view the consensus
reports as a significant tool in our marketing activities and we believe it
will help us establish capsule endoscopy as a standard practice world wide. As
a result of the success of the annual ICCE meeting in the United States, we
intend to hold two meetings during 2006. The first ICCE meeting is planned for
March 2006 in Boca Raton, Florida, and a second ICCE meeting is scheduled in
June 2006 in Paris, France.

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. In December 2005, we began marketing and selling our most
advanced RAPID software, RAPID 4.0. RAPID 4.0 introduces several new 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 and help them realize the advantages of
our newest technology.

We
also use trade shows and scientific meetings and offer workshops, courses,
videos and seminars to educate our customers. In 2005, 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 Copenhagen, the World Congress of Gastroenterology (WCOG) held in
Montreal, Canada and numerous other regional, national and local trade shows.
In 2005, more than 9,000 physicians and nurses received training in nearly 300
courses and seminars. 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.

-28-

---



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.

In
2005, we sponsored the creation and launch of a new 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 2,000
new members from more than 50 countries have already enrolled at the site.

Strategic Marketing and Sales Alliance with Ethicon
Endo-Surgery

On
May 10, 2004, we entered into an exclusive sales representation, co-promotion
and cooperation agreement with Ethicon Endo-Surgery, a Johnson & Johnson
company. InScope, a business division of Ethicon Endo-Surgery established to
market products to the gastroenterology market, has exclusive rights to market
our PillCam ESO capsule in the United States. Under the agreement, we retain
responsibility for regulatory approvals, manufacturing, supply chain
management, order invoicing and processing, collections and technical support
for the PillCam ESO capsule. We retain sole ownership of the intellectual
property associated with the Given System, the PillCam capsules and any future
innovations that we make. InScope is responsible for sales, marketing and promotion,
funding mutually agreed upon clinical trials, as well as efforts to establish
reimbursement policies for the PillCam ESO capsule. InScope also collaborates
with us to expand the installed base of the Given System, which is our platform
for the PillCam ESO capsule, the PillCam SB capsule and other capsules which we
are developing. InScope began marketing PillCam ESO capsules in the United
States in November 2004 following FDA clearance for the PillCam ESO capsule.

Under
the terms of the agreement, Ethicon Endo-Surgery committed to pay us up to $50
million, pending achievement of specified milestones by both parties. Out of
this amount, we received to date a total of $20 million and achieved a
milestone entitling us to receive additional $5.0 million on April 1, 2006.
Amounts received to date are as follows:

| |   |                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $10 million in December
  2004 following FDA clearance of the PillCam ESO capsule;                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                          
| |  | $5.0 million in February
  2005 as a result of completing the upgrade of 90% of our installed base in
  the United States to include RAPID 3.0 that our customers needed in order to
  perform capsule endoscopy procedures with the PillCam ESO capsule;
| |   |                                                                                                                                                                                                                                                          
| |  | $5.0 million in October
  2005 following the sale of the 500th workstation since the FDA
  cleared PillCam ESO in November 2004. An additional $5.0 million for the
  achievement of this milestone is scheduled to be paid to us by April 1, 2006.      

To
market and promote the PillCam ESO capsule, InScope created a sales force,
which initially more than doubled the number of sales representative promoting
our PillCam technology in the United States. During 2005, the number of InScope
sales representative promoting the PillCam ESO was reduced because of the low
volume of sales expected prior to obtaining a dedicated CPT code for the
esophageal capsule endoscopy procedure. The InScope sales force markets the
PillCam ESO and will also market other InScope products as they are launched. We
pay InScope commissions on sales in the United States at a rate of 50% on sales
of PillCam ESO capsules and 10% on sales of other parts of the Given System,
including workstations and portable data recorders. Subject to achieving
specified minimum sales targets and meeting certain conditions, the exclusive
term of the agreement will continue for up to 11 years followed by a four-year
transition period during which InScopes rights to market the PillCam ESO
capsule will be co-exclusive with ours.

Sales
of the PillCam ESO in 2005 were lower than expected, primarily due to the lack
of reimbursement. Together with InScope, we continue our efforts to obtain
reimbursement for the esophageal capsule endoscopy procedure.

-29-

---



In particular, we have
assumed responsibility for the efforts to obtain a dedicated CPT code for this
procedure, while InScope has been focusing its efforts to obtain reimbursement
from private third-party payers. In addition, we are working more closely with
InScope in managing the clinical trial activity for PillCam ESO. We believe
that this effort will result in initial reimbursement announcements by private
third-part payers during 2006. To further facilitate sales of PillCam ESO and
the Given System and increase coordination of the combined sales force, we have
conducted joint training sessions for our and InScopes sales teams and
provided InScope with a number of Given Systems for customer training and
demonstrations. Both sales teams are now promoting the entire PillCam platform
and are no longer solely focused on a single line of capsules. In addition, we
signed an amendment to our agreement with InScope permitting it to also market
the PillCam ESO capsule to emergency rooms and hepatology departments or
centers.

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 using
three semi-automated production lines. Two of these production lines are used
to manufacture the PillCam SB capsule and one to manufacture the PillCam ESO
capsule. We have constructed a fourth semi-automated production line, which we
plan to use for manufacturing the PillCam ESO capsule. We will enable this
fourth production line to become operational when demand for our PillCam ESO
capsule justifies it. Each semi-automatic production line in our Yoqneam,
Israel facility has a capacity to manufacture approximately 270,000 PillCam
capsules per year. We have also installed at Pemstars facilities in Ireland
one semi-automated production line for the PillCam SB capsule and have
purchased and plan to install a second production line for the PillCam ESO
capsule for back-up purposes. Each of these back-up production lines has a
capacity to manufacture an additional 270,000 PillCam capsules per year. We
believe we have adequate capacity to manufacture capsules needed to satisfy
estimated demand for the foreseeable future.

We
perform all supervisory, operational and maintenance functions for all
semi-automated lines we currently operate in our manufacturing facility in
Yoqneam, Israel. The technical services agreement we had with Pemstar since
2002 was terminated by mutual agreement as of September 30, 2005. Under this
agreement Pemstar provided operational and technical services to our first
production line, which we purchased from Pemstar in 2001 and is now operated
and maintained solely by us. Pemstar still performs assembly work for us of
some capsule components, leases to us the space for our two back-up production
lines and provides operational and maintenance services for these back-up lines.
We expect that the reduction in the scope of services Pemstar is providing us
will reduce the cost of goods sold and will have a positive effect on our gross
margin.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Micron
  Technology, Inc., by and through its Micron Imaging Group and other
  wholly-owned subsidiaries, 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 Micron, Micron may not offer the imaging sensor as a standard
  catalog part. In the event that Micron 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 Micron Technology. In February 2006, we signed an amendment to our
  development and manufacturing agreement with Micron and agreed with Micron
  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. We have agreed to purchase the enhanced
  sensor only from Micron and Micron has agreed to sell the sensor exclusively
  to us. The agreement permits Micron to disregard the exclusive sales
  requirement if we fail to purchase agreed-upon minimum quantities of Microns
  sensors. Pursuant to the agreement, we have also agreed with Micron to
  cooperate in our mutual efforts to market the product.

-30-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Zarlink
  Semiconductors AB, a Canadian company, supplies the transmitter that is
  integrated into the PillCam capsules. Zarlink began supplying the transmitter
  to us in the fourth quarter of 2004, replacing our previous supplier, Asicom
  Technologies. We currently expect that Zarlink Semiconductor will fulfill
  substantially all of our future needs for transmitters for the PillCam
  capsules. Under our agreement, we have agreed to purchase a minimum quantity
  of transmitters during the first 36 months following the development and
  testing phase, and if we fail to do so we must make certain payments to
  Zarlink Semiconductor in respect of the shortfall. After this initial
  36-month period, Zarlink Semiconductor may terminate the agreement on six
  months notice if we do not order a minimum quantity of transmitters in each
  subsequent 12-month period, subject to our right to submit a final purchase
  order. The agreement also includes non-compete provisions prohibiting Zarlink
  Semiconductor 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 Zarlink that it will
  develop and manufacture an enhanced version of the transmitter based on
  specifications that we provide. The minimum purchase requirements will not
  apply to this enhanced transmitter. 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.

We
believe that we would be able to arrange substitute sources of supply for these
two components in approximately a one-year period 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 Micron Technology and Zarlink
Semiconductors, is sufficient to continue sales of the Given System for all or
most of the lead-time period.

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 at Pemstars facilities in Ireland 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, and have purchased a
  second back-up line at the facilities of Pemstar, Inc. in Ireland. Each of
  these backup lines has a capacity to manufacture approximately 22,500 PillCam
  capsules per month. We believe that these lines can be operational upon 60
  days notice.
| |   |                                                                                                                                                                                                                                                                                                                                              
| |  | Our policy
  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 policy
  is to hold approximately six weeks inventory of finished products at our
  offices in Israel, Sydney, Hamburg, Paris and Norcross, Georgia.                                                                                                                                                                                     

-31-

---



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Our
quality system has passed three audits pursuant to the Medical Devices
Directive of the European Union, 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. However, we have never been through a Quality System
Regulation inspection by the FDA and cannot assure you we would pass such an
inspection.

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 36 additional issued patents in the United
States, Australia, France, Israel, South Korea and Taiwan covering different
elements of our technology. These patents expire between July 2014 and October
2022. We also hold six utility models in Japan and three utility models in
Germany. As of December 31, 2005, we also had 421 patent applications worldwide
based on approximately 120 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. In 2004 we re-branded
our line of video capsule from M2A to PillCam. The GIVEN logo, GIVEN,
PillCam, PILLCAM, the PillCam logo, ORDERWIN, ORDER WHEN I NEED, RAPID, PILLCAM
IMAGING CAPSULE and design, FINGERS HOLDING A CAPSULE logo and, FINGERS HOLDING
PILLCAM CAPSULE logo, are our trademarks or registered trademarks.

In
March 2004, the U.S. Patent and Trademark Office notified us that it
would conduct a reexamination of some of the claims in one of our U.S. patents
in the U.S. Patent and Trademark Office pursuant to a request submitted by
Olympus Corporation. In August 2005, we filed our response to an office action
issued by the U.S. Patent and Trademark Office and we are awaiting its
decision.

Competition

In
October 2005, Olympus Corporation launched a competing capsule endoscopy system
and began sales in Europe and Australia. Based on publicly available
information, Olympus is also conducting clinical trials in the United States
and intends to seek FDA clearance to market its capsule endoscopy system in the
United States. Olympus displayed its newly developed capsule endoscopy system
in several trade shows, has won some tenders published by public hospitals in
Europe, and delivered a number of its capsule endoscopy systems in Europe and
Australia. In addition to Olympus, a few other Korean and Chinese companies began
selling capsule endoscopy systems in these territories in 2005 and presented
their systems in industry trade shows outside Asia.

We
believe that we have a competitive advantage compared to Olympus and other
sellers of capsule endoscopes in the capsule endoscopy market. First, we have a
first to market advantage and have been concentrating on the development and
sale of capsule endoscopy systems longer than Olympus and other existing or
potential competitors. Second, we are selling an advanced platform enabling us
to use our line of PillCam capsules for diagnosing disorders in parts of the
gastrointestinal tract other than the small bowel, where Olympus and other
companies have only announced the launch of a small bowel capsule at this time.
Finally, we invented the field of capsule endoscopy and 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 keep them out of certain territories all
together.

-32-

---



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, Asahi Optical (which manufactures
and sells cameras and endoscopes under the Pentax brand) 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.

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.

U.S. Government
Regulation

FDA Clearance
and Regulation of the Given System

In
August 2001, we received clearance from the FDA to market the Given System
in the United States for adjunctive use in the detection of abnormalities of
the small intestine. In 2003, based on review of a meta-analysis of data from
32 studies in a total of 691 patients, the FDA approved the removal of the
adjunctive labeling, with the result that the Given System can now be marketed
in the United States as a standalone tool for the detection of abnormalities of
the small intestine. In 2003, we received two further clearances from the FDA.
First for a suspected blood indicator, a new feature of the Given System which
automatically marks images that contain the color red and which therefore
correlate with the existence of suspected bleeding, and, second, for use of the
PillCam capsule in children aged 10 through 18. In November 2004, we received
FDA marketing clearance for our PillCam ESO video capsule and for the advanced
RAPID software and data recorder. In December 2005, we received clearance to
market a more enhanced version of our RAPID software, RAPID 4.0.

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.

-33-

---



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 assure you 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.

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 us, 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 payors 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.

-34-

---



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 authorization to affix the CE mark to the
Given System in May 2001 and successfully passed the 2005 annual
re-certification for compliance with ISO 9001:2000, ISO 13485:1996 and ISO
13485:2003 and the CE mark. In September 2004, our new PillCam ESO video
capsule was added to our CE mark certification.

If
we modify the Given System, we may need to apply for permission to affix the CE
mark to it. 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 been informed that approval is not
required. Renewals or updates of the regulatory status of our products in all
these countries are done annually.

In
Japan, we comply with the extremely low power radio station category of the
Japanese Radio Law, which does not require a license. In addition, we are still
in the process of obtaining clearance to market the Given System from the
Japanese Ministry of Health, Labor and Welfare after submitting to this
ministry the results of a clinical trial conducted in Japan together with
results of clinical trials conducted in other countries. The clearance of the
Given System in Japan has taken longer than we initially expected. The revision
of the Pharmaceuticals Law of Japan in April 2005 and the resulting
reorganization of the Ministry of Health, Labor and Welfare related
organizations into an independent government body has contributed significantly
to the delay. This reorganization has not only affected our application, but
all applications under review.

Nonetheless,
we believe we are closer to obtaining regulatory clearance to sell the Given
System in Japan and have seen several important activities taking place. We
held a general meeting of our Japanese capsule endoscopy study group, or CESG,
consisting of a number of leading key industry opinion leaders. The CESG made a
number of very important decisions. First, they endorsed the ICCE 2005
consensus that was published in Endoscopy and notified their endorsement to the
Japanese Pharmaceutical and Medical Device Agency, or PMDA. Third, the CESG
completed and is publishing an economic outcomes study supporting the use of
the PillCam SB capsule in patients with suspected small bowel disease. This
will be a basic building block for our submission for reimbursement as soon as
PMDA clearance is obtained. Fourth, the CESG has completed the publication of a
Japanese capsule endoscopy atlas which will be distributed to many industry key
opinion leaders in Japan. Regulatory clearance to market the Given System in
Japan will be important, but is not likely to result in significant revenues in
Japan until reimbursement is available, which we do not expect to occur in
2006.

-35-

---



Third-Party Reimbursement

Reimbursement in the United States

In
the United States, healthcare providers that purchase medical devices generally
rely on third-party payors, 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 payors.

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. This process can be lengthy, however,
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.

For
capsule endoscopy procedures of the small bowel performed in a physicians
office, the CPT code covers a global fee for both the technical and the
professional components. In the outpatient hospital setting, claims are
submitted using the CPT code and paid by Medicare using an Ambulatory Payment
Classification, or APC, code, which covers the technical component, which
includes the cost of the facility and supplies related to the procedure. The
physician is paid separately. 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.

Under
our exclusive sales representation, co-promotion and cooperation agreement with
Ethicon Endo-Surgery, Ethicon was originally responsible to obtain a CPT code
for capsule endoscopy of the esophagus using our PillCam ESO video capsule. In
order to facilitate the receipt of reimbursement coverage, we took over that
responsibility in October 2005 and Ethicon continues to focus on obtaining
coverage from private third-party payers. We do not expect any CPT code to be
effective before January 2007. We expect that the assignment of a permanent CPT
code for capsule endoscopy of the esophagus will significantly improve the
potential for physicians to receive reimbursement for use of the Given System.
However, the assignment of this CPT code does not require either Medicare
carriers or private payors to cover capsule endoscopy of the esophagus. In July
2005, CMS determined that hospitals can use the CPT code 91110 with a -52
modifier to report the technical component of the esophageal capsule endoscopy
procedures with our PillCam ESO capsule for Medicare patients until a dedicated
code for the procedure is issued. The CMS 2006 final rule determined that
hospital claims for the technical component of the procedure, reported with the
-52 modifier, will receive only 50% of the fee normally paid for the technical
component under the CPT code for small bowel capsule endoscopy. Since neither
the existing CPT code nor the use of a reducing modifier adequately reflect the
professional component of the PillCam ESO procedure, in November 2005 the
gastroenterology professional societies in the United States submitted a
request to the AMA to issue a dedicated code for the esophageal capsule
endoscopy.

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,
payors 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
payors have substantially revised their reimbursement methodologies in an
attempt to contain their healthcare reimbursement costs.

Third-party
payors in the United States began issuing coverage policies for capsule
endoscopy in early 2002. Initially, all reimbursement policies issued 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, 2005, most
Medicare carriers and private payors, 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.

-36-

---



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 the first tool administered to
patients with suspected disorders of the small bowel and to convince third party
payors 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 first line 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 payors 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 this efforts, in 2005 several third-party payors have issued new
or updated policies that do not require endoscopy or other procedure prior to
performing small bowel capsule endoscopy. As of December 31, 2005,
approximately 11.5 million individuals in the United States now have coverage
under these new or updated policies.

As
of December 31, 2005, no third party payor had established published coverage policy for capsule
endoscopy of the esophagus using our PillCam ESO capsule. Meanwhile, numerous
payers are reimbursing this procedure on a case by case basis. While some third
party payors may provide reimbursement coverage for this procedure before a dedicated CPT code for capsule endoscopy of
the esophagus is assigned, we do not expect broad coverage for this procedure
prior to assignment of such code, which we expect to occur in late 2006, effective January 2007. We have
established a toll-free reimbursement help-line whereby reimbursement
specialists assist our customers in 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. 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 that is
known in advance to the hospital. If the treatment cost is less, the hospital
is still reimbursed for the entire fixed amount; if it costs more, the hospital
cannot bill the patient for the difference. However, the Given System is not
subject to these restrictions for hospital inpatients services because the
capsule endoscopy procedure is 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 status for the capsule endoscopy
procedure.

In
2005, the national average global fee for physicians paid by Medicare under the
CPT code for capsule endoscopy of the small bowel for a procedure in a
physicians office was $985, an increase of 5% compared to 2004. The national
average physician fee paid by Medicare when the procedure was performed in an
outpatient hospital was $185, an increase of less than 1% compared to 2004.
These payment rates are modified annually. Effective January 1, 2006, the
national average global fee paid by Medicare for a procedure in a physicians
office was increased to $987 and the physician fee for the professional
component of a hospital outpatient procedure was increased to $189 The national
average payment rate to the hospital for the technical component increased to
$538 from $496 in 2005, effective January 1, 2006 due to an increase in the APC
rate for gastrointestinal small bowel procedures classified under APC 142.

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 grew to
110 million at the end of 2005, compared to 102 million at the end of 2004.
This increase was mainly the result of obtaining additional private
reimbursement in Germany. The number of lives with reimbursement for expanded
indications as of the end of 2005 remained at approximately 87 million, the
same number as of the end of 2004. In Australia, reimbursement has been
approved for all residents in Australia who hold Australian and/or New Zealand
citizenship, providing coverage for the approximately 20 million residents. While
coverage in

-37-

---



Switzerland
and Australia is generally limited to the indication of suspected small
intestinal bleeding, the public healthcare systems in Denmark, 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.

Patency System

As
of the date of this annual report, we have not received any reimbursement approvals
for the Patency System.

C.      ORGANIZATIONAL STRUCTURE

Given
Imaging Ltd. is organized under the laws of the State of Israel and, as of
December 31, 2005, 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                |  | 100                 
|Given Imaging, Inc.     |  | United States            |  | 100                 
|Given Imaging s.a.s.    |  | France                   |  | 100                 
|Given Imaging GmbH      |  | Germany                  |  | 100                 
|Given Imaging B.V.      |  | Netherlands              |  | 100                 
|Given Imaging KK        |  | Japan                    |  | 51                  

D.      PROPERTY, PLANTS AND EQUIPMENT

In
June 2005, we relocated our corporate headquarters in Israel, including our
principal administrative and research and development activities, to a new
office space in Yoqneam, Israel, nearby our previous office space. Our
corporate headquarters in now located in the same building in which we
currently lease space for three of our production lines for the PillCam
capsules. We have a total of approximately 10,300 square meters (approximately
110,869 square feet) in Yoqneam under a lease that expires in December 31,
2015, including 1,750 square meters (18,837 square feet) in an adjacent
building that currently hosts one semi-automated production line that we use
for the manufacture of the PillCam ESO video capsule.

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 1,536 square meters (16,526 square feet) of office space
  in Norcross, Georgia pursuant to a five-year lease that expires in
  May 2006. Starting in June 2006, Given Imaging, Inc. will move to a new,
  2,318 square meters (24,919 square feet) office space in Duluth, Georgia
  under a new three-year lease;
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Given
  Imaging GmbH leases approximately 590 square meters (6,348 square feet) of
  office space in Hamburg, Germany, pursuant to a lease that may not be
  terminated by us or our landlord prior to May 2008 without the payment of a
  specified early termination fee;                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | 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 168 square meters (1,808 square feet) of office space
  in Paris, France, pursuant to a nine-year 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                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Given
  Imaging K.K. leases 103 squares meters (1,114 square feet) of office space in
  Tokyo, pursuant to a four-year lease that expires on December 31, 2007,
  subject to our right to terminate the lease at any time upon six months prior
  notice.                                                                                       

-38-

---



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 painless and noninvasive manner. 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, 2005, we had an installed base of over 2,860 Given
Systems and had sold over 307,000 PillCam SB capsules in more than 50 countries
worldwide. Since initial sales of the PillCam SB capsule began in 2001, we are
working to add additional types of PillCam capsules to our PillCam platform for
detecting disorders in other parts of the gastrointestinal tract. At the end of
November 2004, we received clearance to market our PillCam ESO capsule. We
market the PillCam ESO video capsule in the United States through a strategic
marketing and sales alliance with InScope, a division of Ethicon Endo-Surgery,
a Johnson & Johnson company. Sales of PillCam ESO were significantly lower
than expected in 2005, primarily due to lack of reimbursement coverage for the
esophageal capsule endoscopy procedure. In addition, in December 2005 we
submitted our AGILE Patency system for FDA clearance in the United States. Our
AGILE Patency system already received the European CE-Mark in 2003 which allows
it to be marketed throughout the European Union. Finally, in 2005 we made
significant progress in the development of the PillCam Colon capsule and are
now conducting initial clinical trials with the expectation of launching this
product in Europe towards the end of 2006 and in the U.S. in 2007 following FDA
clearance.

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 National 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 efforts to
developing the Given System, raising capital, recruiting personnel and
marketing the Given System and PillCam capsules. We recorded our initial sales
of the Given System in the third quarter of 2001.

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 service contracts entered into by customers
at the end of the warranty period for the computer workstation and data
recorders. As more of the systems that we sold initially approach the end of
their warranty period, we expect the amount and proportion of our revenues
derived from service contracts to increase, although we expect the proportion
to remain small. Since the fourth quarter of 2003, we have derived limited
revenues from sales of our AGILE Patency System in Europe.

Revenue
breakdown. Since we commenced sales of the Given
System, we have focused on growing our revenues both through sales of more
systems and through capsule sales. Initially, the majority of our revenues came
from sale of the Given System to new customers. However, with over 2,860
systems now installed worldwide, of which over 1,800 are in the United States,
an increasing proportion of our revenues is generated from reorders of our
PillCam 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 2003, we derived 56.4% of our revenues from sales of the PillCam
SB capsule compared to 64.0% of our revenues in 2004 and 72.1% of our revenues
in 2005. Sales of the PillCam ESO capsule, which began at the end of November
2004, represented an additional 5.0% of our revenues from capsule sales in
2005. As we have increased the installed base of Rapid workstations, the
proportion of

-39-

---



our revenues
derived from sales of PillCam capsules has increased. We expect that a
substantial majority of our revenues in the future will continue to come from
sales of our PillCam capsules, all of which are compatible with our RAPID
workstation platform.

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

|                                  |  |                |        |                      |  |        |  |      |        |      |  |       |   |  |       |   |  |       |  
|--------------------------------- |  | -------------- | ------ | -------------------- |  | ------ |  | ---- | ------ | ---- |  | ----- | - |  | ----- | - |  | ----- | -
|                                  |  | $              |        | % of annual revenues | 
|                                  |  |                |        |                      | 
|                                  |  | 2003           |        | 2004                 |  | 2005   |  | 2003 |        | 2004 |  | 2005  |  
|                                  |  |                |        |                      |  |        |  |      |        |      |  |       |  
|                                  |  | (in thousands) |        |                      |  |        |  |      |        |      |  |      
|Workstations
  and data recorders |  |                | 15,879 |                      |  | 18,669 |  |      | 16,145 |      |  | 39.2  |   |  | 28.7  |   |  | 18.6  |  
|PillCam SB
  capsule              |  |                | 22,865 |                      |  | 41,622 |  |      | 62,528 |      |  | 56.4  |   |  | 64.0  |   |  | 72.1  |  
|PillCam ESO
  capsule**           |  |                |       |                      |  | 1,829  |  |      | 4,384  |      |  |      |   |  | 2.8   |   |  | 5.1   |  
|Patency
  system and capsule      |  |                | 15     |                      |  | 188    |  |      | 174    |      |  | *     |   |  | *     |   |  | *     |  
|Service                           |  |                | 1,780  |                      |  | 2,712  |  |      | 3,545  |      |  | 4.4   |   |  | 4.2   |   |  | 4.2   |  
|                                  |  |                |        |                      |  |        |  |      |        |      |  |       |   |  |       |   |  |       |  
|Total                             |  |                | 40,539 |                      |  | 65,020 |  |      | 86,776 |      |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %

|   |                                                          
|-- | ---------------------------------------------------------
|  
|*  | Less than
  1%.                                          
|** | FDA
  clearance was received at the end of November 2004.

Workstations
and data recorders.In 2005, our revenues from the
sale of workstations and data recorders decreased compared to our revenues from
the sale of these products in 2004. We believe that a significant reason for
this decrease was our focus on increasing utilization of the PillCam SB
capsule. Accordingly, in the second quarter of 2005, we reduced the list price
of the data recorder 2.0, or DR 2.0, by approximately 50% to promote sales of
the DR 2.0 and, in turn, increased our customers capacity to perform more than
one capsule endoscopy procedure at a time. Sales of the DR 2.0 at the reduced
list price negatively impacted our revenues. In addition, with the introduction
of new products or newer versions of existing products, as part of our
promotional activities, we replaced the older equipment of many customers with
newer versions of the workstation and data recorder at a reduced price or at no
charge. Finally, the lack of reimbursement in many European countries
negatively impacted our ability to grow our installed base in this area and
generate revenues from sales of the capital equipment components of the Given
System.

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 substantially all of our
revenues from capsule sales in 2006. The primary reasons for this expected
growth are:

| |   |                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Most small
  bowel indications for which the PillCam SB capsule is used are covered by
  federal and private reimbursement policies.                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                
| |  | In 2005, we
  saw the first reimbursement policies that cover small bowel capsule endoscopy
  as a first-line tool, without the requirement to perform other diagnostic
  procedures prior to using the PillCam SB capsule. If this trend continues, we
  believe more capsule endoscopy procedures of the small bowel will be
  performed.                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                
| |  | In the first
  half of 2006, we expect to receive FDA clearance to market in the United
  States our AGILE patency system. This system is designed to enable physicians
  to confirm the absence of small bowel obstruction in patients with suspected
  strictures such as known Crohns disease patients, allowing the use of
  capsule endoscopy in this patient population.
| |   |                                                                                                                                                                                                                                                                                                                                                                                
| |  | We expect to
  receive regulatory clearance to market the PillCam SB capsule in Japan in
  2006.                                                                                                                                                                                                                                                                               

PillCam ESO. Sales
of our PillCam ESO capsule were lower than expected, primarily due to the lack
of reimbursement for the esophageal capsule endoscopy procedure. We market the
PillCam ESO in the Unites States through an
exclusive sales representation, co-promotion and cooperation agreement with
Ethicon Endo-Surgery, a Johnson & Johnson company. InScope, a business
division of Ethicon Endo-Surgery established to market products to the
gastroenterology market, has exclusive rights to market our PillCam ESO capsule.
In the first quarter of 2005, shortly after receiving FDA
marketing clearance for the PillCam ESO, we conducted a promotion in the United
States in which customers received a significant discount on the combined
purchase of 10 PillCam ESO capsules and a DR 2.0. Many of our

-40-

---



customers
purchased PillCam ESO capsules through that promotion and are equipped to
perform esophageal capsule endoscopy.

The
lack of reimbursement and difficulties in coordination between our and
InScopes sales teams resulted in lower than expected sales of PillCam ESO
capsules in 2005. To address the situation, we are working more closely with
InScope in managing clinical trials for PillCam ESO and have assumed InScopes
contractual responsibility for obtaining a dedicated CPT code for the
procedure, while InScope continues to have primary responsibility for obtaining
reimbursement coverage from private third-party payers. In addition, we
conducted joint training to our and InScopes sales teams and adjusted the
sales strategy so both sales teams now market and promote the entire PillCam
platform rather than just one line of capsules. Finally, we agreed that InScope
will also have rights to sell the PillCam ESO outside the gastroenterology
field for use in hepatology departments or centers and emergency rooms. We
believe these steps, as well as the fact that a significant portion of the
installed base in the United States is already enabled to perform the PillCam
ESO procedure, will result in a meaningful level of sales once a dedicated CPT
code is available, which we expect to occur in the beginning of 2007. However,
we do not expect significant sales of PillCam ESO capsules before that time.

Utilization.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. To generate revenues from recurring capsule sales, we must
increase utilization of existing Given Systems in the field. We believe that
increased utilization is important to sustain our growth. We seek to increase
the utilization of the Given System 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
increase in utilization is also key to attracting new customers to purchase and
use the Given System and to maintaining our growth in revenues, as more
potential customers are likely to purchase the Given System if they believe
they will utilize it more frequently.

Our
focus in the second half of 2005 and specifically in the fourth quarter has
been to increase the level of utilization in the United States. To achieve
this, we have implemented several initiatives aimed at increasing utilization
at customers with low usage rates and educating our customers on how to use the
ICCE consensus guidelines to maximize their utilization. As a result of these
initiatives, the utilization rate in the United States grew to 1.4 capsules per
system per week during the fourth quarter of 2005, a notable increase from
previous periods. The results of these initiatives made it clear to us that in
order to increase utilization and enable more patients to have the benefit of
our technology our sales force should spend more time at physicians offices.
As a result, we decided to increase the number of territory managers in the
United States from 40 to 60 and decrease the number of accounts per sales
representative.

PillCam
capsule reorders. Another indicator of the adoption of
the PillCam platform by physicians is the proportion of our revenues derived
from reorders of PillCam capsules. In 2005, 95% of PillCam capsule unit sales
resulted from reorders compared to 92.7% in 2004 and 87.7% in 2003. We believe
that reorders represent a potentially stable source of revenue provided that
capsule usage per installed system remains the same or increases.

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:

|                                                           |  |        |  |        |  |        
|---------------------------------------------------------- |  | ------ |  | ------ |  | -------
|                                                           |  | 2003   |  | 2004   |  | 2005   
|                                                           |  |        |  |        |  |        
|                                                           |  |        |  |        |  |        
|Total number
  of PillCam SB capsules sold*                |  | 51,400 |  | 90,400 |  | 135,500
|Number of
  PillCam SB capsule sales representing reorders |  | 45,100 |  | 83,850 |  | 128,760
|% of
  revenues from capsule sales that represent reorders |  | 87.7%  |  | 92.7%  |  | 95%    

-41-

---



|                                                                                                                                                                                                                         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                                                                                                                                                                                                        
|*      Sales of
  PillCam ESO began only in November 2004 and reorders in 2005 were negligible
  primarily due to the lack of reimbursement. Accordingly, reorders of PillCam
  ESO are not included in the above table.

In
the first quarter of 2005, shortly after receiving FDA marketing clearance for
the PillCam ESO, we conducted a promotion in the United States in which
customers received a significant discount on the combined purchase of 10
PillCam ESO capsules and a DR 2.0. Many customers purchased PillCam ESO
capsules through that promotion, but due to the absence of reimbursement for
the esophageal capsule endoscopy procedure, their usage was limited and they
did not have to replenish their inventory during 2005 and, consequently,
reorders of PillCam ESO capsules in 2005 were insignificant.

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 74% of our revenues in 2005 from the United States compared to 72% in
2004. The following table sets forth the geographic breakdown of our revenues
for the periods indicated:

|                |  |      |  |      |  |     
|--------------- |  | ---- |  | ---- |  | ----
|                |  | 2003 |  | 2004 |  | 2005
|                |  |      |  |      |  |     
|               
|United
  States |  | 65%  |  | 72%  |  | 74% 
|Europe          |  | 29%  |  | 21%  |  | 19% 
|Rest of
  World |  | 6%   |  | 7%   |  | 7%  

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 generally. In Japan, we experienced further delays in the regulatory
process and are expecting to obtain regulatory clearance for the PillCam SB
capsule during 2006.

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 an important key factor in a
physicians decision. We estimate that as of December 31, 2005, reimbursement
for the Given System was available worldwide to approximately 346 million
people of which approximately 207 million are located in the United States. In
general, the process of obtaining coverage approvals has been slower outside of
the United States. Prior to the
beginning of 2003, all of the policies in the United States covered capsule endoscopy
with PillCam SB capsules for suspected small intestinal bleeding. The number of
policies covering other small bowel pathologies and indications has grown
steadily since then and as of December 31, 2005 approximately 203 million
people in the United States have expanded coverage for suspected Crohns
disease, suspected small bowel tumors and other small bowel pathologies. In Europe, reimbursement for capsule
endoscopy was available for approximately 110 million people as of December 31,
2005 compared to approximately 102 million people at the end of 2004, and
reimbursement for expanded indications, such as Crohns disease and other small
bowel disorders was available for approximately 87 million people at the end of
2005, similar to the number at the end of 2004.

-42-

---



In addition
to continuing our efforts to expand reimbursement coverage, in 2005 we made
significant efforts in educating our customers regarding coverage conditions
and rates. We believe that increased customer awareness and knowledge regarding
these issues 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 as a result. We also maintain
a reimbursement support line that responds to inquiries from customers on
reimbursement issues.

In 2005, we
also continued our efforts to establish the Given System as the first tool
administered to patients with suspected disorders of the small bowel and to
convince third party payors to provide reimbursement coverage for capsule
endoscopy as a primary diagnostic tool, without the requirement to perform any
previous diagnostic procedure, by presenting to them economic and health
outcomes analyses showing the benefits of using the PillCam SB capsule as a
first line tool. 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 payors 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, during 2005 three private third-party payers
covering approximately 11 million people in the United States issued
reimbursement policies covering capsule endoscopy of the small bowel as a first
line tool.

We
do not expect to see a significant increase in sales of our PillCam ESO capsule
until a dedicated CPT code is obtained for the esophageal capsule endoscopy. We
do not expect a formal CPT code for the PillCam ESO capsule to be assigned
before late 2006, effective January 2007. Beginning in the fourth quarter of 2005, we assumed from InScope the
primary responsibility for the efforts to obtain a dedicated CPT code for
esophageal capsule endoscopy, while InScope retained the responsibility for
obtaining coverage from third-party payers.

Competition

In
October 2005, Olympus Corporation launched a competing capsule endoscopy system
and began sales in Europe and Australia. Based on publicly available
information, Olympus is also conducting clinical trials in the United States
and intends to seek FDA clearance to market its capsule endoscopy system in the
United States. Olympus displayed its capsule endoscopy system in several trade
shows, has won some tenders published by public hospitals in Europe, and delivered
a few of its capsule endoscopy systems in Europe and Australia. In addition to
Olympus, a few other companies in China and Korea began selling capsule
endoscopy systems in these territories in 2005 and presented their systems in
industry trade shows outside Asia.

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,
however, we believe that the entrance 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 have a first to market
advantage and have been concentrating on the development and sale of capsule
endoscopy systems longer than Olympus and other potential competitors. Second,
we have an advanced 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 invented the field of
capsule endoscopy and 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
keep them out of certain territories all together.

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 2005, we derived $12.9 million, or
15%, of our revenues from sales to local distributors, compared to $9.8
million, or 15% in 2004. Our direct sales revenues are derived from a large
number of individual customers and have a higher gross margin. In 2005, no
single direct sales customer accounted for more than 0.4% of our revenues and
no single distributor accounted for more than 2.7% of our

-43-

---



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 margin

Cost
of revenues consists primarily of materials, as well as manufacturing costs and
related depreciation of our produc­tion facilities, the salary and related
costs of our technical staff who assemble our products, royalties payable to
the Office of the Chief Scientist, warranty costs and product liability
insurance.

The
principal factors affecting our gross margin are related to the volume of
PillCam capsules we sell and 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
by direct sales. To date, our gross margins from sales of workstations and
portable data recorders have been higher than our gross margins from sales of
the PillCam capsules, although we expect that our gross margins from sales of
the PillCam capsule will increase due to planned cost reductions from
production efficiencies and reduced costs per capsule as we manufacture larger
volumes of the PillCam capsule and spread the fixed costs associated with
manufacturing over a larger base of sales. In addition, our gross margin in
territories in which we use our direct sales force is higher than our gross
margin in territories in which we market and sell our products through third-party
distributors.

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, salaries
and related personnel costs, 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 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. A significant portion of the increase in marketing expenses in 2005
was attributable to the commissions we paid InScope under our exclusive sales
representation, co-promotion and cooperation agreement for the marketing of the
PillCam ESO video capsule. Under this agreement, we pay InScope commissions on
sales in the United States at a rate of 50% commission on the sale of the
PillCam ESO capsule and 10% on sales of other parts of the Given System,
including workstations and data recorders. Under the terms of the agreement, as
of December 31, 2005, we received from InScope milestone payments totaling $20
million and achieved the milestone entitling us for an additional $5.0 million,
which we expect to receive by April 1, 2006. We may receive additional payments
of up to $25.0 million, contingent on achieving additional performance
milestones applicable to both parties. We record these milestone payments as a reduction of commission expenses and
will recognize them ratably over the term of the agreement, which is 15 years. Subject to achieving specified minimum sales targets
and meeting
certain conditions, the exclusive term of the agreement will continue for up to
11 years followed by a four-year transition period during which
InScopes marketing rights will be co-exclusive with our rights.

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. We expect general and
administrative expenses to increase for the foreseeable future as our
operations continue to expand.

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.
Amortization of stock-based compensation results

-44-

---



from the
granting of options to employees at below market value (calculated as the
difference between the exercise price and the trading price of our ordinary
shares) and to consultants at below fair market value (calculated using the
Black-Scholes model) per share of our ordinary shares on the dates of grant.
The stock-based compensation is being amortized to operating expenses over the
vesting periods of the individ­ual options. We incurred stock-based
compensation expense in respect of options granted to employees, consultants
and directors in an amount of $3,000 in 2005, $78,000 in 2004 and $105,000 in
2003.

In
December 2004, the Financial Accounting Standard Board, or FASB, issued a new
Financial Accounting Standard, FAS 123R, 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. FAS 123R became
effective on January 1, 2006 and it requires us to recognize such expenses as
of that date. Based upon our projection of unvested stock options at the
implementation date, we expect the adoption of FAS 123R to result in the
recognition of $5.7 million additional compensation expense in 2006 and, consequently,
it will have a material impact on our projected earnings per share. Effective
January 1, 2006, we have adopted FAS 123R using the modified prospective method
for the valuation of our equity-based compensation. Future compensation
expenses will also be impacted by various factors, including the number of
options granted and their fair value at the date of grant.

Financing
income, net. Financing income, net consists primarily
of interest earned on our cash balances and other financial investments and
foreign exchange gains or losses, net of financing expenses. Financing expenses
consist primarily of bank fees, currency fees and credit card commissions.

Taxes.
In 2005, Israeli companies were generally subject to income tax at the corporate
tax rate of 34%. This tax rate has been reduced to 31% in 2006 and 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 after we begin
to report taxable income and exhaust any net operating loss carry-forwards.
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. We recorded a deferred tax asset of $1.2 million
as of December 31, 2005. 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 we will realize the 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.

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 KK.

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 portrayal 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 observance 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 one-year period
  following the sale. The fair value of the PCS component is based on the price
  at which we sell customer

-45-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | support
  contracts separately following the expiration of the PCS component included
  in the initial sale of the Given System.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Warranty costs. Our products are usually
  covered by a one-year warranty following sale. We accrue estimated warranty costs
  at the time of shipment. Our warranty reserve is based on our best estimate
  of the amounts necessary to settle future claims on products sold as of the
  balance sheet date based on contractual warranty rights and our historical
  experience of the frequency of failures of our products which are not covered
  by warranties that our suppliers give to us. The amount of our estimated
  warranty liability is currently approximately 3.0% of the sales of such
  products and may change if the costs incurred due to product failures
  increase in the future. In 2005, our warranty costs did not exceed our
  reserve of $39,000. In the event of any future problems with our products, we
  will need to increase the amount of our reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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 product 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 our 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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 of $1.2 million as
  of December 31, 2005. Based upon our projections for future taxable
  income in our US subsidiary over the periods in which the deferred tax assets
  are deductible, we believe that we will realize the 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.                                                                                                                                                                                                                                                                                                                                                                           

-46-

---



Results of Operations

Our
consolidated statements of operations data for the years ended December 31,
2003, 2004 and 2005 are set forth below:

|                                                   |  |                         |         |      |   |         |   |   |         |  
|-------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                   |  | Year ended December 31, |        
|                                                   |  |                         |        
|                                                   |  | 2003                    |         | 2004 |   | 2005    |  
|                                                   |  |                         |         |      |   |         |  
|                                                   |  | (in thousands)          |        
|Statements of Operations Data:                     |  |                         |         |      |   |         |   |   |         |  
|Revenues                                           |  | $                       | 40,539  |      | $ | 65,020  |   | $ | 86,776  |  
|Cost of revenues                                   |  |                         | 13,551  |      |   | 17,734  |   |   | 22,070  |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Gross profit                                       |  |                         | 26,988  |      |   | 47,286  |   |   | 64,706  |  
|Operating expenses:                                |  |                         |         |      |   |         |   |   |         |  
|Research and development, gross                    |  |                         | (7,037  | )    |   | (7,363  | ) |   | (8,833  | )
|Royalty-bearing participation                      |  |                         | 1,303   |      |   | 1,140   |   |   | 1,244   |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Research and development, net                      |  |                         | (5,734  | )    |   | (6,223  | ) |   | (7,589  | )
|Sales and marketing                                |  |                         | (26,804 | )    |   | (33,652 | ) |   | (43,281 | )
|General and administrative                         |  |                         | (5,312  | )    |   | (6,916  | ) |   | (9,657  | )
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Total operating expenses                           |  |                         | (37,850 | )    |   | (46,791 | ) |   | (60,527 | )
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Operating profit (loss)                            |  |                         | (10,862 | )    |   | 495     |   |   | 4,179   |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Financing income, net                              |  |                         | 995     |      |   | 956     |   |   | 762     |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Other expenses, net                                |  |                         |        |      |   |        |   |   |        |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Profit (loss) before taxes on income               |  |                         | (9,867  | )    |   | 1,451   |   |   | 4,941   |  
|Taxes on income                                    |  |                         |        |      |   | 690     |   |   | 286     |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Profit (loss) before minority share                |  |                         | (9,867  | )    |   | 2,141   |   |   | 5,227   |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Minority share in (profits) losses of
  subsidiary |  |                         | 258     |      |   | 747     |   |   | 1,116   |  
|                                                   |  |                         |         |      |   |         |   |   |         |  
|Net profit (loss)                                  |  | $                       | (9,609  | )    | $ | 2,888   |   | $ | 6,343   |  
|                                                   |  |                         |         |      |   |         |   |   |         |  

-47-

---



Our
historical operating results as a percentage of net revenues for the years
ended December 31, 2003, 2004 and 2005 are set forth below:

|                                                   |  |                           |       |      |  |       |   |  |       |  
|-------------------------------------------------- |  | ------------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                                   |  | Year ended
  December 31, |      
|                                                   |  |                           |      
|                                                   |  | 2003                      |       | 2004 |  | 2005  |  
|                                                   |  |                           |       |      |  |       |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Statements of Operations Data:                     |  |                           |       |      |  |       |   |  |       |  
|Revenues                                           |  |                           | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                                   |  |                           | 33.4  |      |  | 27.3  |   |  | 25.4  |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Gross profit                                       |  |                           | 66.6  |      |  | 72.7  |   |  | 74.6  |  
|Operating expenses:                                |  |                           |       |      |  |       |   |  |       |  
|Research and development, gross                    |  |                           | 17.4  |      |  | 11.3  |   |  | 10.2  |  
|Royalty-bearing participation                      |  |                           | 3.2   |      |  | 1.7   |   |  | 1.4   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Research and development, net                      |  |                           | 14.2  |      |  | 9.6   |   |  | 8.8   |  
|Sales and marketing                                |  |                           | 66.1  |      |  | 51.8  |   |  | 49.9  |  
|General and administrative                         |  |                           | 13.1  |      |  | 10.6  |   |  | 11.1  |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Total operating expenses                           |  |                           | 93.4  |      |  | 72.0  |   |  | 69.8  |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Operating profit (loss)                            |  |                           | (26.8 | )    |  | 0.7   |   |  | 4.8   |  
|Financing income, net                              |  |                           | 2.5   |      |  | 1.5   |   |  | 0.9   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Other expenses, net                                |  |                           |      |      |  |      |   |  |      |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Profit (loss) before taxes on income               |  |                           | (24.3 | )    |  | 2.2   |   |  | 5.7   |  
|Taxes on income                                    |  |                           |      |      |  | 1.1   |   |  | 0.3   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Profit (loss) before minority share                |  |                           | (24.3 | )    |  | 3.3   |   |  | 6.0   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Minority share in (profits) losses of
  subsidiary |  |                           | 0.6   |      |  | 1.1   |   |  | 1.3   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  
|Net profit (loss)                                  |  |                           | (23.7 | )    |  | 4.4   |   |  | 7.3   |  
|                                                   |  |                           |       |      |  |       |   |  |       |  

Year Ended December 31, 2005 compared to Year
Ended December 31, 2004

Revenues.
Revenues increased by $21.8 million, or 33.5%, to $86.8 million in 2005 from
$65.0 million in 2004. This increase was primarily due to an increase of
$20.9 million, or 50.2%, in PillCam SB capsule sales, an increase of $2.6
million in PillCam ESO sales and an increase of $0.4 million in service
contract revenues. We estimate that all of the increase in sales of the PillCam
SB capsule was attributable to increases in capsule sales. In addition, we
estimate that 83% of the $2.6 million increase in sales of the PillCam ESO capsule
was attributable to increases in product sales and approximately 17% was
attributable to the higher average selling price of the PillCam ESO capsules
compared to 2004. These increases were partially offset by a decrease of $2.1
million, or 10.7%, in workstation and data recorder sales. We estimate that
approximately 19% of the decrease was attributable to lower product sales, and
81% of the decrease was attributable to lower average selling prices resulting
mainly from promotion activities during the year and an increase of second
systems sold to existing customers, which were sold at a significantly lower
price. These increases in sales of PillCam capsules were also partially offset
by approximately $0.1 million, or 0.7%, due to reduced selling prices resulting
from changes in exchange rates between the U.S. dollar and other currencies.

Cost
of revenues and gross margin. Cost of revenues
increased to $22.1 million in 2005 compared to $17.7 million in 2004, but was
lower in 2005 as a percentage of total revenues than in 2004. Consequently,
gross margin was 74.6% in 2005 compared to 72.7% in 2004. The improvement in
gross margin is attributable mainly to our efforts to reduce manufacturing
costs by using advanced and lower cost components, by implementing more
efficiency measures in our manufacturing process, and by terminating our
technical services agreement with Pemstar and the resulting reduction in the
scope of manufacturing and technical services Pemstar provides us and our
payments for these services. The increase in quantities of capsules
manufactured and sold during the year had an additional positive effect on
gross margin. The improvement in gross margin was partially offset by an
increase of $0.7 million in royalties payable to the Office of the Chief
Scientist, or OCS, and an increase of $1.0 million related to manufacturing
expenses, including depreciation.

Research
and development. Gross research and development
expenses increased by $1.4 million, or 20.0%, to $8.8 million in 2005 from $7.4
million in 2004. This increase was due mainly to a $0.5 million increase
related to additional

-48-

---



personnel and
employee-related expenses, an increase of $0.5 million in investments in
R&D projects and to an increase of $0.4 million in expenses related to
patent registration, maintenance and depreciation.

Research
and development expenses, net of grants received from OCS, totaled $7.6 million
in 2005, compared to $6.2 million in 2004. Grants totaling $1.2 million
were received in 2005 compared to grants totaling $1.1 million received in
2004. In both years, the grants were received for new products under
development.

Sales
and marketing. Sales and marketing expenses increased
by $9.6 million, or 28.6%, to $43.3 million in 2005 from $33.7 million in
2004. This increase, which was in line with our growth in revenues, consisted
primarily of an increase of $4.0 million related to the hiring of
additional personnel, increase in salaries and other employment-related expenses,
mainly in the United States, the initial payment of $2.2 million in commissions
to Ethicon Endo-Surgery for sales of our PillCam ESO capsule and ancillary
products, an increase of $0.3 million due to participation in trade shows and
other marketing events, an increase of $0.6 million due to clinical, regulatory
and marketing activities in Japan of our Japanese subsidiary, Given Imaging
K.K., an increase of $0.4 in legal and accounting expenses of our U.S.
subsidiary, an increase of $0.7 million in payments to outside service
providers at our subsidiaries and a $1.8 million provision, before tax effect,
for uncollectible sales tax at our U.S. subsidiary.

General
and administrative. General and administrative
expenses increased by $2.8 million, or 39.6%, to $9.7 million in 2005 from
$6.9 million in 2004. This increase was primarily due to an increase of
$0.7 million in legal and other professional expenses related to the
investigation of our failure to collect and remit sales tax in the United States
and the implementation of remedial measures, as more fully described under Item
15 below, an increase of $0.7 million in salaries and fringe benefits,
resulting mainly from turnover in management, and an increase of $0.6 million
in investments in information systems. Other general and administrative
expenses increased by $0.8 million.

Financing
income, net. Financing income, net, decreased by $0.2
million, or 20.3% to $0.8 million in 2005 from $1.0 million in 2004. Financing
income in 2005 was generated from interest income of $2.4 million from
short-term deposits and from marketable securities, offset by currency
translation losses of $0.8 million, interest on sales tax of $0.5 million and
bank expenses of $0.2 million.

Taxes
on income.We had taxes on income of $0.3 million in
2005, compared to taxes on income of $0.7 million in 2004. This taxable income
was derived primarily from the release of part of the valuation allowance on
deferred tax assets in our U.S. subsidiary due to our belief that it is more
likely than not that this benefit will be realized by this subsidiary.

Minority
share in losses of subsidiary. Minority share in
losses of a subsidiary, Given Imaging K.K, was $1.1 million in 2005 compared to
minority share in losses of subsidiary of $0.7 million in 2004. Given Imaging
K.K. did not generate any significant revenues in 2005 because the Given System
has not yet been approved for marketing by the relevant regulatory authority in
Japan.

Year Ended December 31, 2004 compared to Year
Ended December 31, 2003

Revenues.
Revenues increased by $24.5 million, or 60.4%, to $65 million in 2004 from
$40.5 million in 2003. This increase was primarily due to an increase of
$20.7 million, or 91%, in capsule sales, an increase of $2.8 million, or 17.6%,
in workstation and data recorder sales, and an increase of $0.9 million, or
52.4%, in service contract revenues. We estimate that approximately 92.6% of
the increase of $24.5 million in revenues was attributable to the increase in
product sales, approximately 6.2% of the increase was attributable to currency
gains due to the strengthening of the Euro and the Australian dollar against
the U.S. dollar, and approximately 1.1% of the increase was attributable to
higher average selling prices resulting from a higher percentage of direct
sales compared to sales through distributors and an increase in selling prices
during the year.

Cost
of revenues and gross margin. Cost of revenues
increased by $4.2 million, or 30.9%, to $17.7 million in 2004 from
$13.6 million in 2003, compared to an increase of 60.4% in revenues during
the same period. This increase occurred due to the increase in sales of the
PillCam SB capsule in 2004 and primarily resulted from an increase of $3.1 million
related to the cost of materials and components, an increase of $1.2 related to
manufacturing expenses, including depreciation, offset by a decrease of $0.1 in
royalties payable to the Office of the Chief Scientist. The smaller increase in
cost of revenues compared to revenues resulted primarily from a decrease in the
cost of components for the Given System, an increase in manufacturing volumes
from the smaller quantities we had manufactured in 2003 and an increase in
manufacturing efficiencies. Gross margin was 72.7% in 2004 compared to 66.6% in
2003.

-49-

---



Research
and development. Research and development expenses
increased by $0.4 million, or 4.6%, to $7.4 million in 2004 from $7.0 million
in 2003. This increase was primarily due to $0.3 million related to regulatory
compliance and quality assurance processes related to the launch of our new
products in 2004.

Research
and development expenses, net of grants received from the Office of the Chief
Scientist, increased by $0.5 million, or 8.5%, to $6.2 million in 2004
from $5.7 million in 2003. Grants totaling $1.1 million were received in
2004 compared to grants totaling $1.3 million received in 2003. In both years,
the grants were received for new products under development.

Sales
and marketing. Sales and marketing expenses increased
by $6.9 million, or 25.5%, to $33.7 million in 2004 from $26.8 million in
2003. This increase primarily consists of an increase of $3.0 million due
to the hiring of additional sales and marketing personnel, principally in the
United States, and an increase in commissions paid to these personnel, the
initial payment of $0.8 million paid as commission to Ethicon Endo-Surgery for
sales of our new PillCam ESO capsule, an increase of $0.7 million due to
participation in trade shows and other marketing events, an increase of $0.6
million due to clinical, regulatory and marketing activities in Japan of our
Japanese subsidiary, Given Imaging K.K. and a $0.4 million provision for the
misappropriation of funds at our U.S. subsidiary.

General
and administrative. General and administrative
expenses increased by $1.6 million, or 30.2%, to $6.9 million in 2004 from
$5.3 million in 2003. This increase was primarily due to an increase of
$0.7 million related to consultants and professional fees, $0.3 million related
to salaries and related expenses, $0.4 million related to increased D&O
insurance costs and other miscellaneous general and administrative expenses and
a $0.2 million provision for the investigation costs related to the
misappropriation of funds at our U.S. subsidiary.

Financing
income, net. Financing income, net, remained at the
same level as in 2003 at about $1.0 million. Financing income in 2004 was
derived primarily from interest income of $0.7 million and currency translation
gains of $0.4 million, offset by bank expenses of $0.2 million. Financing
income in 2003 was derived primarily from currency translation gains of $0.8
million, interest income of $0.3 million offset by bank expenses of $0.1
million.

Taxes
on income.We had taxes on income of $0.7 million in
2004, compared to no taxes on income in 2003. This taxable income was derived
primarily from the release of part of the valuation allowance on deferred tax
assets in our US subsidiary due to our belief that it is more likely than not
that this benefit will be realized by this subsidiary.

Minority
share in losses (profits) of subsidiary. Minority
share in losses of subsidiary was $0.7 million in 2004 compared to minority
share in losses of subsidiary of $0.3 million in 2003. Given Imaging K.K. did
not derive any revenues in 2004.

Misappropriation
of funds in U.S. subsidiary.In connection with the
preparation and audit of our 2004 financial statements, we discovered that a
former employee of our U.S. subsidiary had misappropriated approximately $0.4
million during the period 2002 through 2004, with the bulk of the
misappropriation taking place in 2004. We undertook an investigation, which was
completed in February 2005, with the assistance of independent legal counsel
and forensic accountants. The investigators did not uncover any evidence that
any other employee knowingly participated in the misappropriation. Our
financial statements for the year ended December 31, 2004 include a provision
of $0.6 million, which we estimated would be adequate to cover substantially
all of the misappropriated amount and the costs of investigation. Based on the
amount and nature of the misappropriation, we believe that it did not have a
material effect on our results of operations for the years ended December 31,
2002 and 2003. In March 2005, we received $0.3 million in partial restitution
of the misappropriated funds and another $0.1 million was received in June
2005.

Quarterly Results of Operations

We
believe that many of our customers delay purchasing systems until the end of
the fiscal quarter because they believe this will enable them to negotiate more
favorable terms. Therefore, revenues from system sales are frequently
concentrated at the end of each fiscal quarter making it difficult for us to
determine the revenues for each quarter until its end and resulting in lower
than expected quarterly revenues if external or other events cause a large
number of potential customers to defer their purchasing decisions even for a
short period of time. To date, revenues from sales of the PillCam capsules have
been spread more evenly throughout the quarter. In addition, we believe that demand for systems and capsules is 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

-50-

---



postpone less
urgent diagnostic procedures until later in the year. We believe that the
seasonal effect in the third quarter may become more pronounced assuming the
portion of our revenues derived from reorders continues to grow.

The tables
below set forth unaudited consolidated statement of operations data in dollars
for each of the eight conse­cutive quarters ended December 31, 2005. In
managements opinion, the unaudited consolidated financial statements have been
prepared on the same basis as our audited consolidated financial statements
contained elsewhere in this Form 20-F and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
financial information.

|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|-------------------------------------- |  | -------------------- | ------ | --------------- | - | ---------------- | - | --------------- | ------- | ---------------- | - | --------------- | - | ---------------- | ------- | --------------- | - | ------- | - | - | ------- | - | - | ------- | -
|                                       |  | Three
  months ended |       
|                                       |  |                      |       
|                                       |  | March 31, 
  2004    |        | June 30,
  2004 |   | Sept. 30,
  2004 |   | Dec. 31,
  2004 |         | March 31,
  2005 |   | June 30,
  2005 |   | Sept. 30,
  2005 |         | Dec. 31,
  2005 |  
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |  
|                                       |  | (unaudited)          |       
|                                       |  | (in thousands)       |       
|Revenue                                |  | $                    | 12,751 |                 | $ | 15,462           |   | $               | 14,594  |                  | $ | 22,213          |   | $                | 22,009  |                 | $ | 20,526  |   | $ | 19,841  |   | $ | 24,400  |  
|Cost of revenues                       |  |                      | (3,736 | )               |   | (3,782           | ) |                 | (3,636  | )                |   | (6,580          | ) |                  | (6,401  | )               |   | (5,051  | ) |   | (4,618  | ) |   | (6,000  | )
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Gross profit                           |  |                      | 9,015  |                 |   | 11,680           |   |                 | 10,958  |                  |   | 15,633          |   |                  | 15,608  |                 |   | 15,475  |   |   | 15,223  |   |   | 18,400  |  
|Operating expenses:                    |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Research and development, net          |  |                      | (1,621 | )               |   | (1,302           | ) |                 | (1,831  | )                |   | (1,469          | ) |                  | (1,903  | )               |   | (1,617  | ) |   | (1,687  | ) |   | (2,382  | )
|Sales and marketing                    |  |                      | (7,019 | )               |   | (7,864           | ) |                 | (7,705  | )                |   | (11,064         | ) |                  | (10,812 | )               |   | (11,637 | ) |   | (9,778  | ) |   | (11,054 | )
|General and administrative             |  |                      | (1,208 | )               |   | (1,758           | ) |                 | (1,678  | )                |   | (2,272          | ) |                  | (2,039  | )               |   | (2,435  | ) |   | (2,539  | ) |   | (2,644  | )
|Total operating expenses               |  |                      | (9,848 | )               |   | (10,924          | ) |                 | (11,214 | )                |   | (14,805         | ) |                  | (14,754 | )               |   | (15,689 | ) |   | (14,004 | ) |   | (16,080 | )
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Operating profit (loss)                |  |                      | (833   | )               |   | 756              |   |                 | (256    | )                |   | 828             |   |                  | 854     |                 |   | (214    | ) |   | 1,219   |   |   | 2,320   |  
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Financing income (expenses), net       |  |                      | 61     |                 |   | (124             | ) |                 | 165     |                  |   | 854             |   |                  | 51      |                 |   | (415    | ) |   | 519     |   |   | 607     |  
|Taxes on income                        |  |                      |       |                 |   |                 |   |                 |        |                  |   | 690             |   |                  | 74      |                 |   | (16     | ) |   | (53     | ) |   | 281     |  
|Minority share in losses of subsidiary |  |                      | 187    |                 |   | 289              |   |                 | 205     |                  |   | 66              |   |                  | 269     |                 |   | 281     |   |   | 253     |   |   | 313     |  
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Net profit (loss)                      |  | $                    | (585   | )               | $ | 921              |   | $               | 114     |                  | $ | 2,438           |   | $                | 1,248   |                 | $ | (364    | ) | $ | 1,938   |   | $ | 3,521   |  
|                                       |  |                      |        |                 |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  

Impact
of Currency Fluctuations

Currency
Risk. Our sales to
our customers in 2005 were denominated 76.7% in U.S. dollars, 19% in Euros and
0.2% in other currencies, depending on the location of the customer or the
distributor used to fulfill our customers orders. In 2005, 26% 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. 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 margin for sales of
the Given System. In addition, as of December 31, 2005, 11.4% 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 between the
Yen, the New Israeli Shekel, the Australian dollar and the Euro. In 2005, we
covered an expected surplus of Euros against the devaluation of the Euro
compared to the U.S. dollar by purchasing options to sell Euros and buy U.S.
dollars at a pre-determined price. In addition, 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.

Translation
Effect. The U.S.
dollar is our functional currency, and our consolidated financial statements
included elsewhere in this annual report are prepared in U.S. dollars.

|   |                                  
|-- | ---------------------------------
|B. | LIQUIDITY AND
  CAPITAL RESOURCES

Since our
inception and until we commenced sales in 2001, we financed our operations
primarily with the proceeds of sales of our equity securities. From our
inception through December 31, 2005, we raised a total of $145.6 million
through public and private sales of our equity securities. As of
December 31, 2005, we had $65.3 million in cash and cash

-51-

---



equivalents, and our working capital, which we calculate by subtracting
our current liabilities from our current assets, was $86.2 million. As of
December 31, 2005, we had an additional amount of $21.9 million invested in
marketable securities.

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
2006. We have also applied to the Office of Chief Scientist for a grant to
support our research and development activities in 2006.

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

|                                                      |  |                         |         |      |   |        |   |   |         |     
|----------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------- | ----
|                                                      |  | Year ended December 31, |        
|                                                      |  |                         |        
|                                                      |  | 2003                    |         | 2004 |   | 2005   |  
|                                                      |  |                         |         |      |   |        |  
|                                                      |  | (in thousands)          |        
|Net cash
  provided by (used in) operating activities |  | $                       | (8,548  | )    | $ | 11,868 |   | $ | 13,488  |     
|Net cash
  used in investing activities               |  |                         | (2,647  | )    |   | (3,230 | ) |   | (29,883 | )(1)
|Net cash
  provided by financing activities           |  |                         | 653     |      |   | 46,816 |   |   | 1,069   |     
|Effect of
  exchange rate changes on cash             |  |                         | 117     |      |   | 40     |   |   | (179    | )   
|                                                      |  |                         |         |      |   |        |   |   |         |     
|Increase
  (decease) in cash and cash equivalents     |  | $                       | (10,425 | )    | $ | 55,494 |   |   | (15,505 | )   
|                                                      |  |                         |         |      |   |        |   |   |         |     

(1) Includes $21.9 million invested in marketable securities.

Net cash
derived from operating activities was $13.5 million in 2005, compared to $11.9
million in 2004 and $8.5 million used in 2003. The increase
in net cash in 2005 resulted primarily from net income of $6.3 million, a $3.4
million improvement compared to the $2.9 million net income in 2004, and an
increase of $2.4 million in inventories and of $5.8 in accounts payable due to increased sales and operating expenses during the
year. The increase in net cash derived from operations in 2005 was
partially offset by an increase of $6.1 million in our accounts receivable due
to increased sales and a longer collection cycle in the United States due to
our efforts to correct our errors in sales tax collection and an increase of
$5.0 million in other accounts receivable due to accounting for the milestone achieved in 2005 but payable by Ethicon
Endo-Surgery on or before April 1, 2006. The increase of $12.6 million in deferred income during 2005 resulted
primarily from the recording of the $10.0 million milestone payment received
from Ethicon Endo-Surgery during the year. The increase in cash in 2004
compared to 2003 resulted primarily from net income of $2.9 million in 2004, a
$12.5 million improvement compared to the $9.6 million loss in 2003, the
receipt in 2004 of the $10 million milestone payment from Ethicon Endo-Surgery
following FDA clearance for our new PillCam ESO capsule, and an increase of
$7.1 million in our accounts payable, compared to a decrease in our accounts
payable of $4.7 million in 2003. The increase in net cash derived from
operations was offset by an increase of $5.6 million in inventories, compared
to a decrease in inventories of $1.9 million in 2003, and an increase of $5.3 million
in our accounts receivable. The increase in
inventories was primarily as a result of the build up of inventory to support
increased sales of our products and the launch of our PillCam ESO, DR 2.0 and
Rapid 3.0 and our increase in inventory of strategic components for our
products.

Net cash
used in investing activities was $29.9 million in 2005 compared to $3.2 million
in 2004 and $2.6 million in 2003. Investing activities in 2005 consisted
primarily of investing in marketable securities of $21.9 million and $7.9
million in capital expenditures and the capitalization of costs associated with
our patents and trademarks. Our investments in 2005 consisted primarily of $2.3
million in machinery and equipment, $2.8 million in new real property leases of
our facilities, $0.9 million in computers and software, $0.5 million in office
furniture and equipment and $0.9 million in patents. Our capital investments in 2004 consisted primarily of $1.4
million in machinery and equipment, $0.3 million in a new real property lease
of our facilities and $0.8 million in patents.
Our capital investments in 2003 consisted primarily of $1.5 million in
machinery and equipment and $0.5 million in patents. We expect to continue investing significant amounts in 2006 in order
to support our growth plans. We intend to provide additional equity financing
of approximately $9.0 million to finance operations of our Japanese subsidiary
Given Imaging K.K during the next three years. Our portion of the funding will
be paid out of our cash reserves.

Net cash
provided by financing activities was $1.1 million in 2005, compared to $46.8
million in 2004, and $0.7 million in 2003. In 2005, net cash provided by
financing activities resulted primarily from proceeds from the exercise of
employee stock options. The increase from 2003 to 2004 was primarily
attributable to the completion of our follow-on public equity offering in June
2004 in which we raised net proceeds of $44.3 million. In 2003, net cash
provided by financing activities resulted primarily from proceeds from the
exercise of employee stock options.

-52-

---



In
 2005, cash provided by operating activities, net of cash used in
investing activities and excluding the investment in marketable securities, was
approximately $5.6 million.

The
following table of our material contractual obligations as of December 31,
2005, 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                    |        | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Later
  Years | 
|                        |  |                          |        |      |   |       |  |      |       |      |   |               | 
|                        |  | (in
  thousands)         |       
|Capital
  lease(1)      |  | $                        | 41     |      | $ | 11    |  | $    | 12    |      | $ | 18            |  | $ |      |  | $ |      | 
|Operating
  leases(2)   |  |                          | 15,268 |      |   | 2,353 |  |      | 2,271 |      |   | 1,907         |  |   | 1,582 |  |   | 7,155 | 
|                        |  |                          |        |      |   |       |  |      |       |      |   |               |  |   |       |  |   |       | 
|Total                   |  | $                        | 15,309 |      | $ | 2,364 |  | $    | 2,283 |      | $ | 1,925         |  | $ | 1,582 |  | $ | 7,155 | 

|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|   
|(1) | Consists of capital lease for motor
  vehicles.                                   
|(2) | Consists of operating leases for office,
  manufacturing space and motor vehicles.

See
Note 8 to our consolidated financial statements included in this annual report
for our royalty commitments to the Office of the Chief Scientist and our
obligations in connection with our supply agreement with Zarlink Semiconductor.

Market
Risk

We invest
our excess cash in bank accounts and deposits located with a number of banks
inside and outside of Israel, principally in Europe. These instruments have
maturities of three months or less when acquired. Due to the short-term nature
of these investments, we believe that there is no material exposure to interest
rate risk arising from our investments. We invest some of the excess cash we
have in longer-term financial instruments in order to achieve a higher yield.
Based on our investment policy, such instruments are highly rated by rating
agencies and therefore we believe that there is no material exposure to the
principal amount nor to interest rate risks arising from these longer-term
investments.

Corporate
Tax

Israeli
companies were generally subject to income tax at the corporate rate of 34% in
2005. This tax rate has been reduced to 31% in 2006 and is expected to be
gradually reduced to a rate of 25% by 2010 As of December 31, 2005, our
net operating loss carry-forwards for Israeli tax purposes amounted to $14
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. 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 our approved
enterprise status in 1999. As we continue to expand our production facilities,
we have applied, and received, in 2002, an approval for the expansion of our
production facilities during the subsequent two years under the alternative
benefits track. The investments amounted to $3.5 million and were invested in
Yoqneam, Israel. The plan is subject to certain terms set forth in the approval
letter. In October 2004, we submitted an additional application in an amount of
$10.1 million for additional expansion of our production facilities in the
foreseeable future. As a result of a recent reform in the Investments Law, the
grant of tax benefits in respect of future capital investments, including the
proposed investments for which we submitted an application in October 2004, is
now under the discretion of the Israeli income tax authorities. According to
this reform, instead of filing application for tax benefits with the Investment
Center, the administrator of the Investment Law, companies are 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. 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 you that we will receive approvals in the
future for approved enterprise status or that tax benefits for approved
enterprises will continue at current levels or at all.

-53-

---



The period
of tax benefits for our approved enterprise programs has not yet commenced
because we are yet to realize taxable income. 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 product manufactured at our facility in Yoqneam, Israel.

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 freedom 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, the law permits
the authorities to cancel the tax benefits retroactively.

As of
December 31, 2005, the net operating loss carry-forwards of our
subsidiaries for tax purposes amounted to $22 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 applied and received approval for grants totaling $4.9
million from the Office of the Chief Scientist, including $1.2 million, which
was provided by the Office of Chief Scientist to support our 2005 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 and 3.5% beginning
with the fourth year. The maximum aggregate royalties paid generally cannot
exceed 100%. 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.

The
government of Israel does not own proprietary rights in technology developed
using its funding and there is no restriction on the export of products
manufactured using the technology. The technology is, however, subject to other
legal restrictions, including the obligation to manufacture the product based
on this technology in Israel and to obtain the Office of the Chief Scientists
consent to transfer the technology or product rights to a third party. These
restrictions may impair our ability to outsource manufacturing or enter into
similar arrangements for those products or technologies and they continue to
apply even after we have paid the full amount of royalties payable for the
grants. If the Office of the Chief Scientist consents to the manufacture of the
products outside Israel, the regulations allow the Office of the Chief
Scientist to require the payment of increased royalties, ranging from 120% to
300% of the amount of the grant plus interest, depending on the percentage of
foreign manufacture. 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. Following our request, the Office of
the Chief Scientist has approved the manufacture of limited quantities of the
PillCam capsules using the back-up production line that we have installed at
Pemstars facilities in Ireland without increasing royalty rates.

|   |                         
|-- | ------------------------
|C. | RESEARCH AND DEVELOPMENT

Our
research and development expenditures, excluding grants received from the
Office of the Chief Scientist, were $8.8 million for the year ended December
31, 2005, $7.4 million for the year ended
December 31, 2004 and $7.0 million for the year ended December 31, 2003.
Our research and development activities are
conducted by our research and development and regulatory affairs staff
primarily at our headquarters in Israel. As of December 31, 2005, our
research and development, clinical and regulatory and engineering staff
consisted of 61 employees. Our research and development efforts are focused
primarily on developing new capsules to be used in the detection of
abnormalities in the stomach and the colon, improvements to our existing
products and new technologies for future expansion of our product offering. In
2005, we

-54-

---



completed the development of the newest version of our RAPID software,
RAPID 4.0, and received FDA clearance to market this product in December 2005.
In December 2005 we also completed improvements to our AGILE patency system and
submitted it to the FDA for clearance. In addition, during 2005, we made
significant progress in the development of the PillCam Colon capsule for
diagnosis of disorders in the colon and began initial clinical trials with this
capsule. If clinical trials results are positive, we intend to complete the
development and submit the PillCam Colon capsule for FDA clearance and launch
it in Europe during 2006.

|   |                  
|-- | -----------------
|D. | TREND INFORMATION

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

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:             |  |     |  |                                                                      
|Gavriel D. Meron(1)(2)          |  | 53  |  | President, Chief Executive Officer and Director                      
|Kevin Rubey                     |  | 48  |  | Chief Operations Officer                                             
|Yuval Yanai                     |  | 53  |  | Chief Financial Officer                                              
|Ehud Har-Chen                   |  | 60  |  | Senior Vice President  Human Resources                              
|Christopher Rowland             |  | 43  |  | Senior Vice President  Business Development and Corporate
  Strategy
|Shoshana Friedman               |  | 52  |  | Senior Vice President  Regulatory and Clinical Affairs              
|Mark Gilreath                   |  | 40  |  | Senior Vice President  Global Marketing                             
|Manfred Gehrtz                  |  | 55  |  | President, International                                             
|Yoram Ashery (3)                |  | 40  |  | Corporate Vice President  Colon Products                            
|Sharon Koninsky (3)             |  | 34  |  | Corporate Director, Office of the CEO                                
|                                |  |     |  |                                                                      
|Directors:                      |  |     |  |                                                                      
|Doron Birger (2)(4)             |  | 54  |  | Chairman of the Board of Directors                                   
|James M. Cornelius (2)(4)(5)(6) |  | 62  |  | Director                                                             
|Michael Grobstein (2)(4)(5)(6)  |  | 63  |  | Director                                                             
|Jonathan Silverstein (4)        |  | 38  |  | Director                                                             
|Chen Barir (5)                  |  | 47  |  | Director                                                             
|Eyal Lifschitz (5)              |  | 37  |  | Director                                                             
|Prof. Anat Loewenstein          |  | 47  |  | Director                                                             




(1) Mr. Meron will cease serving as our President and Chief Executive
Officer on April 9, 2006. He will continue serving as a director and will be
appointed Executive Vice Chairman of our board of directors effective that
date. Nachum Shamir will commence serving as our President and Chief Executive
Officer, and as a director on April 9, 2006. See Change in Senior
Management.


(2) Member of our executive committee.


(3) Mr. Ashery was an executive officer until December 31, 2005 in the
position of Corporate Vice President, Business Development. Ms. Koninsky was an
executive officer until December 31, 2005 in the position of Corporate
Director, Human Resources.


(4) Member of our compensation and nominating committee.


(5) Member of our audit committee.


(6) Outside director under the Israeli Companies Law.


Gavriel
D. Meron founded us
in 1998, and has served as our President and Chief Executive Officer since that
time. He has served as a director since August 2002. Prior to founding us, from
1995 to 1997, Mr. Meron served as Chief Executive Officer of
APPLItec Ltd., an Israeli designer and manufacturer of video cameras and
systems primarily for the

-55-

---



medical endoscopy market. From 1993 to 1995, Mr. Meron was General
Manager and Chief Operating Officer of Optibase Ltd., an Israeli
manufacturer of hardware and software products that compress and playback
digital video and sound for multimedia applications. From 1988 to 1993,
Mr. Meron was Chief Financial Officer of InterPharm
Laboratories Ltd., an Israeli company formerly listed on the Nasdaq
National Market and a subsidiary of the Ares-Serono Group, a Swiss ethical
pharmaceutical company. From 1983 to 1987, Mr. Meron held various
management positions at the Tadiran Group, an Israeli telecommunications and
semiconductor manufacturer. From 1973 to 1983, Mr. Meron served as an
officer in the Israeli army overseeing the budgets of a range of military
industries. Mr. Meron holds an M.B.A. from Tel Aviv University and a B.A.
in economics and statistics from the Hebrew University, Jerusalem.

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, a
consumer and professional photographic and information imaging 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 Senior 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. Mr. Yanai
has served as a director of MA Industries 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.

Ehud
Har-Chen has served
as our Senior Vice President of Human Resources since January 1, 2006. Prior to
joining us, Mr. Har-Chen worked for over 11 years at Motorola. His most recent
role was Director of Leadership and Talent supply for Motorola Inc. in the EMEA
region (Europe, Middle East, Asia) based in the UK having responsibility for
the entire Staffing operation in all EMEA countries as well as executive
search, university relations and contingent labor. Prior to that he was the
Vice President of Human Resources at Motorola Israel. From 1982 until 1994, Mr.
Har-Chen worked at Digital Equipment Corporation in various roles amongst which
were the human resources lead at Digital Israel followed by a regional human
resources leadership role in EMEA based in Geneva. From 1969 to 1981, Mr.
Har-Chen worked at Israel Aircraft Industries in numerous Human resources
management roles at both staff and field operation. Mr. Har-Chen studied Social
Sciences at both Monash university in Melbourne Australia and Bar-Ilan
university in Israel.

Christopher
Rowland has served
as our Senior Vice President of Business Development and Corporate Strategy
since February 1, 2006. Prior to that, Mr. Rowland worked for 17 years at
Boston Scientific Corporation, a medical device company, in various sales and
marketing management positions, most recently as Vice President of Marketing
for the Endovations division, where he was responsible 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 degree in marketing
from Southern Illinois University.

Shoshana
Friedman has served
as our Corporate Vice President-Regulatory and Medical Affairs since
January 2002. Ms. Friedman served as a consultant to us and as a
member of our advisory board to our Chief Executive Officer from 1998 to
January 2002. Prior to joining us, from 1996 to 2002, Ms. Friedman
served as the Managing Director of PuSH-med Ltd., a regulatory consulting
firm that she founded, which provided consulting services to medical device and
biotechnology companies. From 1993 to 1996, Ms. Friedman was Regulatory,
Clinical and Quality Assurance Director at InStent Ltd., an Israeli
medical device company that was acquired by Medtronic, Inc. in 1996.
Ms. Friedman holds a Quality Assurance Lead Assessor certificate from
Bywater, Inc. and a Regulatory Affairs Certificate from the Regulatory Affairs
Professional Society in the United States. Ms. Friedman holds a B.Sc. in
mathematics and physics from Haifa University and an M.B.A. from the Hebrew
University, Jerusalem.

Mark
Gilreath has served
as Senior Vice President  Global Marketing since January 1, 2006, Prior to
that, from February 2003 until December 2005 he served as Corporate Vice
President  Marketing Strategy, from April 2001 until February 2003 he served
as President of Given Imaging, Inc., from September 2000 until April 2001
as our Vice President 

-56-

---



Global Business Development and from October 1999 to
September 2000 as a consultant to us. In 1999, Mr. Gilreath founded
VortexMed, Inc., a developer of internet sites for healthcare
professionals, where he served as Chief Executive Officer until
September 2000. From 1992 to 1999, Mr. Gilreath held various
management positions with PENTAX Precision Instrument Corporation including
Product Manager, Director of Marketing, Area Sales Manager and Director of
Business Development. Prior to joining PENTAX, from 1989 to 1992,
Mr. Gilreath served as an officer in the U.S. Navy. He holds a B.Sc. in
business finance from Winthrop University and a M.B.A. from the Fuqua School of
Business at Duke University.

Manfred
Gehrtz has served
as President, International since January 1, 2006. Prior to that, from January
2004 until December 31, 2005, Mr. Gehrtz served as our Corporate Vice
President, General Manager for Europe. Prior to joining us, from 1995 to
December 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 CEO 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 a 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.

Yoram
Ashery has served
as our Corporate Vice President  Colon Products since January 1, 2006. Prior
to that, since joining the Company in April 2001 until December 31, 2005, Mr.
Ashery served as Corporate Vice President - Business Development. Prior to
joining us, from 1995 to April 2001, Mr. Ashery was a corporate
attorney, practicing in the fields of technology and medical devices and
privatizations as an associate and, from January 2000, as a partner, with
the law firm of Zellermayer, Pelossof & Co.. Prior to that, Mr. Ashery
served at the Office of the Attorney General of the Government of Israel, from
1993 to 1994, during which period he also completed his internship under the
direct supervision of the Israeli Attorney General. From 1992 to 1996,
Mr. Ashery also served as a junior lecturer in Tax Law at the Buchman
Faculty of Law of the Tel-Aviv University. Mr. Ashery holds an LL.B. from
the Buchman Faculty of Law of the Tel-Aviv University and a B.A. in Economics
from the School of Social Sciences of the Tel-Aviv University.

Sharon
Koninsky, has served
as Corporate Director at the Office of the CEO since January 1, 2006. Prior to
that, from January 2002 until December 31, 2005, Ms. Koninsky served as
Corporate Director, Human Resources and prior to that as Human Resources Manager.
She has served as Executive Assistant to the President and Chief Executive
Officer since 1998. Prior to joining us, from 1997 until 1998, Ms. Koninsky
worked in the marketing department of Geotek Technologies Ltd., an Israeli
telecommunications company. In 1996 Ms. Koninsky was responsible for placing
personnel in administrative positions while employed at a manpower organization
in Haifa.Ms. Koninsky holds a
B.A. in social work and an M.A. in public administration, both from Haifa
University.

Doron
Birger has served
as Chairman of the board of directors since August 2002 and as a director since
June 2000. 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
Vice President-Finance 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. Effective November 15, 2005, Mr. Cornelius serves as the
chairman of the board of directors and chief executive officer of Guidant
Corporation, a U.S. cardiac and vascular medical device company. From 2000
until 2005, 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, a 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, and from 1978 to 1980, Mr. Cornelius was Director of
Acquisitions for Eli Lillys Medical Device and Diagnostics Division.
Mr. Cornelius currently also serves as a director of Bristol-Myers Squibb
Company, The

-57-

---



Chubb Corporation, The DIRECTV Group, Inc. and The National Bank of
Indianapolis. Mr. Cornelius holds an M.B.A. and a B.A. in accounting 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 has served as a director of Guidant
Corporation since 1999, and is currently 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.

Jonathan
Silverstein has
served as a director since September 2000. Mr. Silverstein is a General Partner
at OrbiMed Advisors LLC, a global healthcare asset management firm. Mr.
Silverstein joined OrbiMed in 1999. From 1996 to 1999, Mr. Silverstein was the
Director of Life Sciences in the Investment Banking Department at the Sumitomo
Bank Limited. From 1994 to 1996, Mr. Silverstein was an associate at Hambro
Resource Development. Mr. Silverstein serves as a director of DOV
Pharmaceuticals, Avanir Pharmaceuticals, Emphasys Medical Corporation,
Superdimension, Ltd., aDiana Inc. and Predix Pharmaceuticals and is a former
director for Auxilium Pharmaceuticals, Orthovita, Inc. and LifeCell
Corporation. Mr. Silverstein has a B.A. in economics from Denison University
and a J.D. and an M.B.A. from the University of San Diego.

Chen
Barir has served as director since August 2002. Mr.
Barir is Chairman of Berman & Co. Trading and Investments Ltd. and
subsidiaries and affiliates, a private investment company specializing in
venture investments and management focusing primarily on seed or early stage
medical device companies, investments and real estate. Mr. Barir is chairman,
vice-chairman or a director of several
privately held companies in the fields of medical device and real estate.
Mr. Barir holds an LLB from the Hebrew University of Jerusalem, an M.B.A. from
the European Institute of Business Administration (INSEAD) in Fontainebleau,
France, and a Doctorate in Law and Economics from Harvard Law School,
Cambridge, Massachusetts.

Eyal
Lifschitz has served as a director since December
2003. Since 2001, Mr. Lifschitz has served as Chief Executive Officer of
Peregrine Ventures, a venture capital fund focused on the medical device
industry. Prior to that, Mr. Lifschitz was co-founder of a number of medical
technology companies, including PharmaSys (acquired by Elan Corp. NYSE:ELN),
where he served as Director of Business Development from 1990 to 1994,
VisionCare Ophthalmic Technologies, Inc., where he served as Director of Business
Development from 1997 to 2001, BioControl, Ltd., where he served as Director of
Business Development from 1999 to 2001 and ECR Ltd.(acquired by AVX Corp.
NYSE:AVX), where he served as General Manager from 1994 to 2001. Mr. Lifschitz
serves on the board of directors of Neovasc Ltd. and of NeuroSonix Ltd., two
companies in the medical device field, and holds an LL.B degree from Shearei
Mishpat College in Israel.

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 is the
Director of the Department of Ophthalmology, Tel Aviv Medical Center, since
January 2000 and a Professor at the Sackler School of Medicine, Tel Aviv
University, 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.

Change in Senior
Management

In April
2006, we entered into an employment agreement with Nachum Shamir who
will commence serving as our President and Chief Executive Officer and a
director on April 9, 2006. Our current
President and Chief Executive Officer, Gavriel Meron, will cease serving as in
such capacities on that date. Mr. Meron will continue serving as a director and
will be appointed Executive Vice Chairman of our board of directors effective
April 9, 2006.

-58-

---



Prior
  to joining us, Mr. Shamir has 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. His prior position was with the Hong Kong based Scitex Asia
  Pacific (H.K.) Ltd. (now Creo Asia Pacific (H.K.) Ltd.) from 1993. Mr. Shamir
  holds a B.Sc from the Hebrew University of Jerusalem and an M.A. in public administration
  from Harvard University.

|   |             
|-- | ------------
|B. | COMPENSATION

The
aggregate compensation paid by us and our subsidiaries to our directors and
executive officers, including stock-based compensation, for the year ended
December 31, 2005 was $3.1 million (excluding director fees detailed
below). This amount includes approxi­mately $0.4 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.

During
2005, we paid each director, excluding Gavriel Meron, a quarterly fee of $3,750
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. We paid an additional quarterly fee of $1,250 to the
chairman of the audit committee. The total amount of these payments in 2005 was
$338,750. The directors fees for service by our director, Doron Birger, are
paid to Elron Electronics Industries, where he serves as President and Chief
Executive Officer. Directors fees for services by our director, Jonathan
Silverstein, are paid to OrbiMed Advisors LLC, where he is a General Partner.
Director fees for service by our former director, Reuben Baron, who stepped
down from our board of directors in August 2005, were paid to RDC Rafael
Development Corporation, where he served as President and Chief Executive
Officer. In addition, all of our directors were reimbursed for their expenses
for each board of directors meeting attended. In addition, in 2005, we granted
options to purchase 29,000 ordinary shares to our director and Chairman of the
Audit Committee, Michael Grobstein, 25,000 ordinary shares to each of our
directors, James Cornelius and Anat Loewenstein, options to purchase 14,000
shares to our Chairman, Doron Birger, and options to purchase 11,000 ordinary
shares to each of our directors, Jonathan Silverstein, Chen Barir and Eyal
Lifschitz. The exercise price of these options was equal to the fair market
value of our ordinary shares on the date of grant.

In 2005, we
paid Mr. Meron, our President and Chief Executive Officer an annual base salary
of $271,750. In addition, Mr. Meron received options to purchase 70,000
ordinary shares of the company at an exercise price of $36.10 per share, equal
to the closing price of our ordinary shares on the Nasdaq National Market on
the date of the grant. 25% of these options were immediately vested and another
25% will vest in each of the subsequent three years. Mr. Meron was also awarded
a bonus of $300,000 in respect of 2005.

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 Gavriel Meron, our President and
Chief Executive Officer, and Nahum Shamir, our President and Chief Executive
Officer elect, which are subject to shareholder approval.

|   |               
|-- | --------------
|C. | BOARD PRACTICE

Board of Directors
and Officers

Our
articles of association provide that we may have up to 12 directors, each of
whom 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. 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 elected in December 2001 for an initial three-year
term and were reelected for one additional three year term in May 2004, which
will expire in December 31, 2007. Other than Gavriel Meron, our President and
Chief Executive Officer, none of our directors are our employees or are party
to a service contract with us. In April 2006, we entered into an employment
agreement with Nachum Shamir, our President and Chief Executive Officer elect.
In August 2005, Prof. Anat Loewenstein was elected to our board of directors to
replace Dr. Dalia Megiddo, who resigned from the board. Mr. Reuben Baron also
left our board of directors in August 2005.

-59-

---



A simple
majority of our shareholders at a general meeting may remove any of our
directors from office 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
general meeting of our shareholders.

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. Zvi Ben-David, our former Chief Financial Officer,
resigned his position effective July 2005 and was replaced by Yuval Yanai.
Nancy Sousa, the former President of our U.S. subsidiary resigned her position
effective June 2005. A search for her replacement is still ongoing. Mr. Meron,
our President and Chief Executive Officer, was also serving as acting President
of our U.S. subsidiary during part of 2005.
Effective January 1, 2006, Mr. Ehud Har-Chen was appointed to the position of
Senior Vice President of Human Resources and effective February 1, 2006,
Christopher Rowland was appointed as our Senior Vice President of Business
Development and Corporate Strategy.

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 National
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 and he or she
may be reelected to one additional term of three years by a majority vote at a
shareholders meeting, subject to the conditions described above for election
of outside directors. 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.

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, such as us, 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 will
be required to comply with these requirements upon the next appointment of our
outside directors currently expected in 2007. In addition, this amendment
requires Israeli companies to determine no later than April 19, 2006, 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, both Doron Birger and Gavriel Meron
qualify as a financial and accounting expert, as defined in the applicable
regulations.

In
addition to the requirements of the Companies Law, we must comply with the
Nasdaq National 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 National Market. Our board of directors has determined that all
of our directors, except Mr. Gavriel Meron, qualify as independent directors in
accordance with the applicable rules.

-60-

---



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 National 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 National Market and 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. Our board of directors has determined that the
current members of our audit committee, Michael Grobstein, James Cornelius,
Chen Barir and Eyal Lifschitz, each meet 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.

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 National 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 accountant, 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 a 5% or greater
shareholder, 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. In 2005, we appointed the
Israeli member firm of Deloitte Touche Tohmatsu to serve as our internal
auditor following the resignation of our former internal auditor in order to
preserve the independence of his accounting firm that is engaged as the
independent auditor of one of our affiliates.

Compensation and Nominating Committee

Our
compensation and nominating committee consists of our directors, James
Cornelius, Doron Birger, Michael Grobstein and Jonathan Silverstein. In
accordance with the rules of the Nasdaq National 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 National
Markets independent director requirements.

Executive Committee

In
April 2006, we formed an executive committee which is governed by a written
charter adopted by our board of directors. The charter specifies, among other
things, that:

|  |                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 National Market

-61-

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 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.                                    

The executive committee
currently consists of our directors, Gavriel Meron (Chairman), Doron Birger,
James Cornelius and Michael Grobstein.

|   |          
|-- | ---------
|D. | EMPLOYEES

As
of December 31, 2005, we and our subsidiaries had 339 employees of whom
183 were based in Israel, 107 in the United States, 37 in Europe, nine in Japan
and three in Australia. This reflects a 20% increase in the number of employees
since December 31, 2004. This increase is mainly in research and development
employees in Israel and sales personnel in our U.S. subsidiary. In December
2005, we implemented an internal reorganization of our sales, marketing and
product management teams. We implemented this change in order to enable us to
focus more effectively on particular markets, clinical indications and technology
for each type of PillCam capsule and each part of the gastrointestinal tract.
The reorganization is intended to realign our activities along product lines
and to allow us to address more efficiently the development, marketing and sale
of multiple products and the accumulation and circulation of clinical
information related to multiple gastrointestinal tract organs. As a result of
the reorganization and the expected continued growth of our business, we expect
our headcount to increase in 2006, primarily in research and development,
clinical and regulatory affairs and sales and marketing.

Under
Israeli law, we and our employees are subject to protective labor provisions,
including restrictions on working hours, minimum wages, minimum vacation,
minimal 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 Gavriel Meron, our
President and Chief Executive Officer, see
Item 7 Major Shareholders and Related Party Transactions.

-62-

---



Stock Option Plans

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
initially reserved a total of 1,500,000 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 expire without exercise. As of December 31, 2005, we had outstanding
options to purchase 244,078 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% to become exercisable on each of the third and fourth
anniversaries of the date of the grant. However, in cases
of subsequent grants plans, 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 exercising 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 expiry. 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 expire.

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 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 following the date of the grant. 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 capital gains tax of 25%. 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.

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, 2005, we had outstanding options to purchase 998,745 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

-63-

---



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 and 25% 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 expire.

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, 2005, we had outstanding options to purchase 2,790,337 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 and 25% 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 expire.

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 February 28, 2006 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 the date of this annual report. 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.

-64-

---



|                                                                                                                                            |  |                                                             |  |                                                        |      |   | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------------------ | ---- | - | 
|Name and Address                                                                                                                            |  | Number
        of Shares
        Beneficially
        Owned |  | Percentage
        of
        SharesBeneficially Owned |     
|                                                                                                                                            |  |                                                             |  |                                                        |     
|                                                                                                                                            |  |                                                             |  |                                                        |      |   | 
|Principal
        shareholders:                                                                                                             |  |                                                             |  |                                                        |      |   | 
|IDB
        Holding Corporation Ltd. (1)                                                                                                    |  | 10,207,533                                                  |  |                                                        | 36.5 | % | 
|OrbiMed
        Advisors LLC, OrbiMed Capital LLC and Samuel D. Isaly (2)                                                                   |  | 3,638,904                                                   |  |                                                        | 13.0 |   | 
|AXA Assurances I.A.R.D. Mutuelle,
        AXA Assurances Vie Mutuelle,
        AXA Courtage Assurance Mutuelle, AXA, AXA Financial, Inc.(3) |  | 2,319,302                                                   |  |                                                        | 8.3  |   | 
|Directors
        and executive officers:                                                                                                   |  |                                                             |  |                                                        |      |   | 
|Gavriel
        D. Meron (4)                                                                                                                |  | 926,709                                                     |  |                                                        | 3.2  |   | 
|Yuval
        Yanai                                                                                                                         |  |                                                            |  |                                                        |     |   | 
|Ehud
        Har-Chen                                                                                                                       |  |                                                            |  |                                                        | 3⁄4    |   | 
|Kevin
        Rubey (5)                                                                                                                     |  | 208,750                                                     |  |                                                        | *    |   | 
|Christopher
        Rowland                                                                                                                 |  |                                                            |  |                                                        | 3⁄4    |   | 
|Shoshana
        Friedman (6)                                                                                                               |  | 111,526                                                     |  |                                                        | *    |   | 
|Mark
        Gilreath (7)                                                                                                                   |  | 151,250                                                     |  |                                                        | *    |   | 
|Manfred
        Gehrtz (8)                                                                                                                  |  | 21,000                                                      |  |                                                        | *    |   | 
|Doron
        Birger (9)                                                                                                                    |  | 6,746,592                                                   |  |                                                        | 24.1 |   | 
|James
        M. Cornelius (10)                                                                                                             |  | 223,500                                                     |  |                                                        | *    |   | 
|Michael
        Grobstein (11)                                                                                                              |  | 143,500                                                     |  |                                                        | *    |   | 
|Jonathan
        Silverstein (12)                                                                                                           |  | 3,711,926                                                   |  |                                                        | 13.3 |   | 
|Chen
        Barir (13)                                                                                                                     |  | 41,000                                                      |  |                                                        | *    |   | 
|Eyal
        Lifschitz (14)                                                                                                                 |  | 25,000                                                      |  |                                                        |     |   | 
|Anat
        Loewenstein                                                                                                                    |  |                                                            |  |                                                        | 3⁄4    |   | 
|All
        directors and executive officers as a group (15)                                                                                |  | 15,754,194                                                  |  |                                                        | 53.2 | % | 

|  |               
|- | --------------
| 
|* | Less
  than 1%

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on a
  Schedule 13D/A filed on November 4, 2004 and on information provided to us
  supplementally, this number consists of 4,082,982 ordinary shares owned by
  Elron Electronic Industries Ltd., or Elron, 3,462,441 ordinary shares owned
  by Discount Investment Corporation Ltd., or DIC, and 2,662,110 ordinary
  shares owned by RDC Rafael Development Corporation Ltd., or RDC. 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 February 28, 2006, DIC owned approximately 47.5% 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. The
  address of DIC 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. As of February 28, 2006, IDB
  Holding Corporation, or IDBH, owned approximately 71.8% of the outstanding
  shares of IDB Development Corporation Ltd., or IDBD, which, in turn, owned
  approximately 73.3% of the outstanding shares of DIC. As a result, IDBH may
  be deemed to be the beneficial owner of the ordinary shares owned by DIC, RDC
  and Elron. The address of each of IDBH and
  IDBD is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023,
  Israel. IDBH is a public company traded on the Tel Aviv Stock Exchange.
  Approximately 51.7% of the outstanding share capital of IDBH is owned by a
  group comprised of (i) Ganden Investments I.D.B. Ltd. (Ganden Investments),
  a wholly owned Israeli subsidiary of Ganden Holdings Ltd. (Ganden
  Holdings), a private Israeli company controlled by Nochi Dankner and his
  sister, Shelly Bergman, which holds approximately 31.02% of the equity of and
  voting power in IDBH; (ii) Manor Investments-IDB Ltd. (Manor Investments), a
  majority owned Israeli subsidiary of Manor Holdings B.A. Ltd. (Manor
  Holdings), a private Israeli company controlled by Ruth Manor, which holds
  approximately 10.34% of the equity of and voting power in IDBH; and (iii)
  Avraham Livnat Investments (2002) Ltd. (Livnat Investments), a wholly owned
  Israeli subsidiary of Avraham Livnat Ltd. (Livnat Ltd.), a private Israeli
  company controlled by Avraham Livnat, which holds approximately 10.34% of the
  equity of and voting power in IDBH. Ganden Investments, Manor Investments and
  Livnat Investments entered into a Shareholders Agreement relating, among
  other things, to their joint control of IDBH, the term of which is until May
  19, 2023.

-65-

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | In addition to the above-mentioned holdings
        of shares of IDBH, as of February 28, 2006, (a) Ganden Holdings held approximately
        10.58% of the equity and voting power of IDBH; (b) Ganden Investments
        held approximately 6.7% of the equity and voting power of IDBH; (c) Shelly
        Bergman held, through a private Israeli company wholly owned by her, approximately
        7.2% of the equity and voting power in IDBH; (d) Manor Holdings held approximately
        0.03% of the equity and voting power in IDBH and (e) Livnat Ltd. held
        approximately 0.04% of the equity and voting power in IDBH. These additional
        holdings of shares of IDBH are not subject to the Shareholders Agreement
        referred to above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Nochi Dankner is Chairman of IDBH, IDBD and
        DIC. Isaac Manor (the husband of Ruth 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,
        Afeka, Tel Aviv, Israel. The address of Ruth Manor is 26 Hagderot Street,
        Savyon, Israel. The address of Avraham Livnat is Taavura Junction, Ramle,
        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 13D/A filed on September
        29, 2004 and on information provided to us supplementally, consists of
        2,250,733 ordinary shares and options to purchase 2,157 ordinary shares
        owned by Caduceus Private Investments L.P., or Caduceus; 485,000 ordinary
        shares and options to purchase 771 ordinary shares owned by Eaton Vance
        Worldwide Health Sciences Portfolio, or Eaton Vance; 485,000 ordinary
        shares and options to purchase 771 ordinary shares owned by Finsbury Worldwide
        Pharmaceutical Trust, or Finsbury; 330,000 ordinary shares owned by UBS
        Juniper Crossover Fund LLC, or Juniper; 82,171 ordinary shares and options
        to purchase 144 ordinary shares owned by OrbiMed Associates LLC, or OrbiMed
        Associates; 2,157 options to purchase ordinary shares owned by OrbiMed
        Advisors LLC, or OrbiMed Advisors. OrbiMed Capital GPI LLC is the general
        partner of Caduceus, OrbiMed Capital LLC acts as managing member of OrbiMed
        Associates, OrbiMed Advisors acts as investment manager of Juniper, OrbiMed
        Capital LLC acts as investment advisor to Finsbury and OrbiMed Advisors
        LLC acts as investment adviser to Eaton Vance. As a result, OrbiMed Advisors,
        OrbiMed Capital and OrbiMed Capital GPI LLC have discretionary investment
        management authority with respect to the assets of Caduceus, Eaton Vance,
        Finsbury, OrbiMed Associates and Juniper. Samual D. Isaly owns a controlling
        interest in OrbiMed Advisors LLC and OrbiMed Capital. Samuel D. Isaly,
        Sven Borho, Michael Sheffery Carl L. Gordon and Jonathan Silverstein,
        share ownership and control of OrbiMed Capital GPI LLC, OrbiMed Capital
        and OrbiMed Advisors LLC. The address of OrbiMed Advisors LLC, OrbiMed
        Capital, OrbiMed Capital GPI LLC, Samuel D. Isaly, Sven Borho, Michael
        Sheffery, Carl L. Gordon and Jonathan Silverstein is 767 Third Avenue,
        30th Floor, New York, NY 10017. These individuals each disclaim beneficial
        ownership of the shares owned by the foregoing entities except to the
        extent of his pecuniary interest therein.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | Based on a Schedule 13G filed on February 14,
      2006, consists of 2,188,242 ordinary shares owned by Alliance Capital Management
      L.P., or Alliance, and 131,060 ordinary shares owned by AXA Equitable Life
      Insurance Company, or AXA Equitable. Based on information contained in the
      Schedule 13G, 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, AXA Equitable and Frontier Trust Company, FSB (Advest
      Trust). Each of Alliance and AXA Equitable operates under independent management
      and makes independent decisions. AXA owns AXA Financial, Inc. AXA Assurances
      I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance
      Mutuelle (collectively, the "Mutuelles AXA"), as a group, control AXA. 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, and AXA expressly disclaims beneficial ownership of any
      securities owned by the foregoing entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | Consists of 111,416 ordinary shares and options
        to purchase 815,293 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5) | Consist of options to purchase 208,750 ordinary
        shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6) | Consists of 19,026 ordinary shares owned by
        Ms. Friedman and options to purchase 92,500 ordinary shares owned by Ms.
        Friedman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(7) | Consists of options to purchase 151,250 ordinary
        shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(8) | Consists of 1,000 ordinary shares and options
        to purchase 20,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(9) | Consists of 1,500 ordinary shares owned by
        Mr. Birger personally, 2,662,110 ordinary shares owned by RDC Rafael Development
        Corporation and 4,082,982 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

-66-

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 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.                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(10) | Consists of 135,000
  ordinary shares and options to purchase 88,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(11) | Consists of 30,000
  ordinary shares and options to purchase 113,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(12) | Consists of 522 ordinary
  shares and options to purchase 78,500 ordinary shares owned by Mr.
  Silverstein and 3,638,904 ordinary shares beneficially owned by the OrbiMed
  investors. Mr. Silverstein is a principal of OrbiMed Advisors LLC and by
  virtue of his position may be deemed to have voting and investment power, and
  thus beneficial owner­ship with respect to the shares which the OrbiMed
  investors owns or over which they exercise voting and investment power. Mr.
  Silverstein disclaims such beneficial ownership except to the extent of his
  pecuniary interest therein.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(13) | Consists of options to
  purchase 41,000 ordinary shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(14) | Consists of options to
  purchase 25,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(15) | Includes 10,207,533 ordinary
  shares beneficially owned by IDB Holding Corporation and 3,636,747 ordinary shares beneficially
  owned by the OrbiMed entities, as well as ordinary shares and options to
  purchase ordinary shares 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.                                                                                                             

|   |                           
|-- | --------------------------
|B. | RELATED PARTY TRANSACTIONS

Agreement with Rafael

In
January 1998, we entered into a technology purchase and license agreement with
Rafael Armament Development Authority, or Rafael, which is a division of the
Israeli Ministry of Defense. Rafael beneficially owns 47.8% of the outstanding
shares of our shareholder, RDC Rafael Development Corporation. Pursuant to this
agreement, we purchased from Rafael, for $30,000 in cash, all of Rafaels
rights to the technology associated with an in vivo video camera and an
autonomous video endoscope, including a swallowable capsule with a camera and
an optical system, a transmitter and a reception system, which was then being
developed by Rafael, which we refer to as the PillCam capsule and system.
Rafael transferred to us the patents that it had been issued in connection with
the PillCam capsule and system technology. Rafael also granted us an exclusive,
perpetual, worldwide, royalty-free license to use other technology and know-how
of Rafael which was used at Rafael for the development of the PillCam capsule
and system, provided that we use this technology and know-how solely for
commercial exploitation of the PillCam capsule and system. We are permitted to
transfer or sublicense this other technology to third parties in connection
with the commercial exploitation of the PillCam capsule and system provided
that we receive Rafaels consent which is not to be unreasonably withheld. We
have not received any technology from Rafael pursuant to this license. In
connection with our commercial exploitation of the PillCam capsule and system,
Rafael agreed to provide us with technical support in the form of equipment and
use of its laboratories, subject to their availability, and access to its
existing documentation. We agreed to pay to Rafael its costs plus 10% for any
of Rafaels manpower that we use. Rafael also agreed to provide us with
research and development and prototype manufacturing services in connection
with the PillCam capsule and system at customary commercial rates. Rafael has
the right to provide such services to us if it is competitive in terms of
quality, quantity, timing and price. In connection with this technical support,
we paid an aggregate amount to Rafael of $12,000 in 1998 only.

In
connection with our acquisition of this technology, we granted to Rafael an
exclusive, perpetual, worldwide, royalty-free license to use all technology
that we acquired from Rafael solely in the military and security fields. Rafael
has the exclusive right to file patent applications for inventions developed by
Rafael in connection with the use of the PillCam capsule and system in these
fields. We are required to assist Rafael in connection with these patent
applications. Rafael has granted to us an exclusive, perpetual, worldwide,
royalty-free license to use outside of the military and security fields any
technology covered by these patents. We and Rafael have also agreed to notify
each other if either of us develops any improvements to the PillCam capsule and
system technology provided that doing so does not breach any

-67-

---



confidentiality
undertaking to a third party, or in the case of Rafael, security requirements.
We have each agreed to grant to the other exclusive rights to use any
improvement in our case in the commercial field and in Rafaels case in the
military and security fields, in consideration for payment of royalties in an
amount to be agreed upon.

Registration Rights

Demand Registration
Rights

Pursuant to
an investor rights agreement, at the request of one or more of our former
Series A preferred shareholders that hold at least 20% of our then
outstanding ordinary shares held by our former Series A preferred
shareholders, we must use our best efforts to register any or all of these
shareholders ordinary shares. We must also give notice of the registration to
our other former Series A preferred shareholders and to some of our
ordinary shareholders, including Discount Investment Corporation and its
affiliates, and Elron Electronic Industries, and include in the registration
any ordinary shares that they request to include. We are also permitted to
include our shares in the registration. The minimum aggregate offering price of
the shares to be registered is $5.0 million. We may only be requested to
carry out two of these demand registrations.

In addition
to the registrations described above that may be requested by our former
Series A preferred shareholders, at the request of some of our ordinary
shareholders, including Discount Investment Corporation and its affiliates,
Elron Electronic Industries and PW Juniper Crossover Fund, holding at least 20%
of our ordinary shares then outstanding, we must use our best efforts to
register any or all of these shareholders ordinary shares. We must also give
notice of the registration to all other shareholders to whom we have granted
registration rights and include in the registration any ordinary shares that
they request to include. We are also permitted to include our shares in the
registration. The minimum aggregate offering price of the shares to be registered
is $5.0 million. We may only be requested to carry out three of these
demand registrations.

In
connection with each of the above registrations, 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 and
second, any shares to be registered by our directors and officers. Thereafter,
the shares to be registered by our former Series A preferred shareholders
or ordinary shareholders would be reduced pro rata among the shareholders
requesting inclusion of their shares according to the number of shares held by
each shareholder.

Piggyback
Registration Rights

Our former
Series A preferred shareholders also have the right to request that we
include their ordinary shares which were issued upon conversion of our
Series A preferred shares in any registration statements filed by us in
the future for the purposes of a public offering, subject to specified
limitations. Some of our ordinary shareholders, including Discount Investment
Corporation and its affiliates, Elron Electronic Industries and PW Juniper
Crossover Fund, have similar rights with respect to the ordinary shares they
currently hold. 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 our 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 some of our shareholders
including Discount Investment Corporation and its affiliates, Elron Electronic
Industries and PW Juniper Crossover Fund, or any of our former Series A
preferred shareholders, we must register such shareholders ordinary shares on
Form F-3. We must also give notice of the registration to our other
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 shareholder requesting registration was entitled to
include its shares. The minimum aggregate offering price of the shares to be
registered is $5.0 million. 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.

-68-

---



Termination

All
registration rights will expire on October 10, 2006. 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 of the
Securities Act.

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.

In 2005, we
engaged Diesenhaus to provide us with travel-related services. Diesenhaus is a
provider of travel services in Israel and is controlled by IDB Holding
Corporation Ltd., which is also a controlling shareholders of our company. The
terms of our engagement with Diesenhaus are similar to the terms we have with
other providers of travel services to us. In 2005, we paid Diesenhaus a total
of $61,500, or 5.5% 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 is also a controlling shareholder of our company. Under the
agreement, Cellcom will be the sole provider of mobile communication to us
during the term of the agreement. The prices we pay Cellcom are lower than the
prices we paid our previous provider of mobile communication services, which
was a non-affiliated party. This agreement was approved by our audit committee
and Board of Directors in accordance with Israeli law.

Directors Fees

We pay
directors fees in respect of service by our directors (other than our President
and Chief Executive Officer, Gavriel Meron). See Item 6 Directors, Senior
Management and Employees 3⁄4 Compensation.

Agreements with
Directors and Officers

Employment
Agreements

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.

The
terms of our employment agreements with Gavriel Meron, our President and Chief
Executive Officer, and Nachum Shamir, our President and Chief Executive Officer
elect, are described below. Since Messrs. Shamir and Meron are directors, under
Israeli law their employment agreements and terms are subject to approval by
our shareholders at our next annual shareholders meeting.

Gavriel
Meron.

In
April 2006, we amended and restated Mr. Merons employment agreement. The
employment agreement contains provisions standard for a firm in our industry
regarding non-competition, confidentiality of information and assignment of
inventions.

For
the fiscal year 2006, Mr. Meron is
entitled to receive (1) an annual base salary of $330,000 for the fiscal year
2006, (2) a cash bonus of up to 200% of Mr. Meron annual 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 60,000 ordinary shares, the exercise price of which will be equal
to the closing price of the ordinary shares on the Nasdaq National Market on
the date the shareholders approve the grant, vesting in four equal installments
beginning on

-69-

---



the first anniversary of the grant. Mr. Meron is also entitled to other
fringe benefits, such as the use of a company car and contributions for study,
disability and severance funds.

Mr.
Merons employment may be terminated by us without cause upon three months
prior written notice, in which case Mr. Meron is entitled to receive his base
salary and benefits payable during the three months following such notice of
termination and continued vesting of options during such period. In addition,
Mr. Meron is entitled to receive a cash payment equal to 12 times his average
monthly base salary during the three months prior to the notice of termination
and to accelerated vesting with respect to those options that would have vested
during the 12 months following the notice of termination. Mr. Merons
employment may be terminated by us immediately for cause. Mr. Meron may
terminate his employment with us upon three months prior written notice in
which event, Mr. Meron is entitled to receive his base salary and benefits
payable during the 3 months following such notice of termination and continued
vesting with respect to those options that would have vested during such three
months period. In the event that Mr. Meron terminates his employment after
April 15, 2007, he is entitled to the same benefits as we would have paid him
had we terminated his employment without cause.

Mr.
Merons employment may be terminated following a change of control event (as
defined in the employment agreement) by us or our successor upon three months
prior written notice. In the event of such termination, Mr. Meron is entitled
to receive a cash payment equal to 24 times his average monthly base salary
during the three months prior to the notice of termination and to accelerated
vesting with respect to those options and shares of restricted stock that would
have vested during the 24 months following the notice of termination.

Nachum
Shamir.

In
April 2006, we signed an employment agreement with Mr. Shamir. The employment
agreement contains provisions standard for a firm in our industry regarding
non-competition, confidentiality of information and assignment of inventions.

For
the fiscal year 2006, Mr. Shamir is entitled to receive (1) an annual base
salary of $330,000, pro rated for the number of complete calendar months during
which Mr. Shamir is employed by us in 2006, (2) a cash bonus of up to 200% of Mr. Shamirs annual salary, pro rated for
the number of complete calendar months during which Mr. Shamir is employed by
us in 2006, subject to meeting certain personal and company performance targets
determined from time to time at the discretion of the board of directors,
(3) a grant of options to purchase 300,000 of our ordinary shares, the exercise
price of which will be equal to the closing price of the ordinary shares on the
Nasdaq National Market on the date the shareholders approve the grant, vesting
in four equal installments beginning on the first anniversary of the date of
commencement of Mr. Shamirs employment, and (4) a grant 100,000 restricted
shares, vesting in four equal installments beginning on the first anniversary
of the date of commencement of Mr. Shamirs employment. We have also agreed to
pay Mr. Shamir a relocation bonus of $50,000. Mr. Shamir is also entitled to
other standard benefits, such as a car allowance, insurance benefits and
reimbursement of expenses.

Mr.
Shamirs employment may be terminated by us without cause upon three months
prior written notice, in which case Mr. Shamir is entitled to receive his base
salary and benefits payable during the 12 months following such notice of
termination and accelerated vesting with respect to those options and shares of
restricted stock that would have vested during such period. Mr. Shamirs
employment may be terminated by us immediately for cause. Mr. Shamir may
terminate his employment with us upon three months prior written notice or
immediately if such termination is 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. In the event
of such termination, Mr. Shamir is entitled to receive his base salary and
benefits payable during the three months following notice of such termination
(twelve months in the event Mr. Shamir terminates his employment for good
reason) and accelerated vesting with respect to those options and shares of
restricted stock that would have vested during the applicable period.

If
we terminate Mr. Shamirs employment following a change of control event (as
defined in the employment agreement) or if Mr. Shamir terminates his employment
for good reason following a change of control event, Mr. Shamir is entitled to
receive (1) all remuneration, including any earned but unpaid bonus, and
benefits payable during the 24-month period following notice of termination,
and (2) accelerated vesting with respect to those options and shares of
restricted stock that would have vested during the 24-month period following
the effective date of such termination.

-70-

---



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
  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, 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.

-71-

---



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.

|   |                                 
|-- | --------------------------------
|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. The majority 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

In March
2004, the U.S. Patent and Trademark Office notified us that it
would conduct a reexamination of some of the claims in one of our U.S. patents
in the U.S. Patent and Trademark Office pursuant to a request submitted by
Olympus Corporation. In August 2005, we filed our response to an office action
issued by the U.S. Patent and Trademark Office and we are awaiting its
decision. We do not believe that the outcome of this reexamination proceeding
will affect our ability to market and sell the Given System.

On
August 9, 2004, a former employee of our U.S. subsidiary filed a complaint in
California against the U.S. subsidiary and two other individual defendants for,
among other things, wrongful termination, and alleged discrimination and
harassment based on age. The former employee claims he is entitled to damages,
in an unstated amount, as well as interest and attorneys fees. The court
assigned the case to mediation, which resulted in us paying the former employee
$185,000 in full settlement of his claims, including attorneys fees, without
admitting any wrongdoing.

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 may 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, 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, 2005.

-72-

---



ITEM 9. THE OFFER AND LISTING

A.      OFFER
AND LISTING DETAILS

Nasdaq
National 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 National Market:

|                      |  |      |       |     |   |       | 
|--------------------- |  | ---- | ----- | --- | - | ----- | 
|Annual Highs and Lows |  | High |       | Low |  
|                      |  |      |       |     |  
|                      |  |      |       |     |  
|2005                  |  | $    | 36.04 |     | $ | 20.39 | 
|2004                  |  | $    | 44.08 |     | $ | 17.87 | 
|2003                  |  | $    | 18.80 |     | $ | 6.65  | 
|2002                  |  | $    | 18.05 |     | $ | 6.91  | 

|                         |  |      |       |     |   |       | 
|------------------------ |  | ---- | ----- | --- | - | ----- | 
|Quarterly Highs and Lows |  | High |       | Low |  
|                         |  |      |       |     |  
|                         |  |      |       |     |  
|1st quarter 2006         |  | $    | 28.37 |     | $ | 21.65 | 
|                        
|1st quarter 2005         |  | $    | 36.04 |     | $ | 29.53 | 
|2nd quarter 2005         |  | $    | 29.66 |     | $ | 22.51 | 
|3rd quarter 2005         |  | $    | 26.41 |     | $ | 20.92 | 
|4th quarter 2005         |  | $    | 27.46 |     | $ | 20.39 | 
|                         |  |      |       |     |   |       | 
|1st quarter 2004         |  | $    | 34.25 |     | $ | 17.87 | 
|2nd quarter 2004         |  | $    | 38.51 |     | $ | 30.30 | 
|3rd quarter 2004         |  | $    | 39.35 |     | $ | 31.35 | 
|4th quarter 2004         |  | $    | 44.08 |     | $ | 27.10 | 

|                         |  |      |       |     |   |       | 
|------------------------ |  | ---- | ----- | --- | - | ----- | 
|Most
  Recent Six Months |  | High |       | Low |  
|                         |  |      |       |     |  
|                         |  |      |       |     |   |       | 
|March 2006               |  | $    | 23.76 |     | $ | 21.65 | 
|February
  2006          |  | $    | 26.61 |     | $ | 23.04 | 
|January 2006             |  | $    | 28.37 |     | $ | 26.53 | 
|December
  2005          |  | $    | 27.46 |     | $ | 23.59 | 
|November
  2005          |  | $    | 25.24 |     | $ | 22.26 | 
|October 2005             |  | $    | 23.96 |     | $ | 20.39 | 

On
March 15, 2006, the closing price of our ordinary shares on the Nasdaq National
Market was $22.91 per share.  According
to our transfer agent, as of March 15, 2006, there were approximately 137
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 | 
|                      |  |      |           |     | 
|                      |  |      |           |     | 
|2005                  |  |      | NIS155.30 |     |  | NIS95.79  | 
|2004                  |  |      | NIS194.60 |     |  | NIS123.90 | 

-73-

---



|                         |  |  |           |  |  |           | 
|------------------------ |  |  | --------- |  |  | --------- | 
|Quarterly Highs and Lows |  |  | High      |  |  | Low       | 
|                         |  |  |           |  |  |           | 
|                        
|1st quarter 2006         |  |  | NIS132.60 |  |  | NIS101.60 | 
|                        
|1st quarter 2005         |  |  | NIS155.30 |  |  | NIS129.20 | 
|2nd quarter 2005         |  |  | NIS129.30 |  |  | NIS102.90 | 
|3rd quarter 2005         |  |  | NIS118.50 |  |  | NIS95.99  | 
|4th quarter 2005         |  |  | NIS126.00 |  |  | NIS95.79  | 
|                        
|1st quarter 2004         |  |  | NIS155.90 |  |  | NIS140.40 | 
|2nd quarter 2004         |  |  | NIS181.00 |  |  | NIS140.30 | 
|3rd quarter 2004         |  |  | NIS175.40 |  |  | NIS141.10 | 
|4th quarter 2004         |  |  | NIS194.60 |  |  | NIS123.90 | 

|                         |  |  |           |  |  |           | 
|------------------------ |  |  | --------- |  |  | --------- | 
|Most
  Recent Six Months |  |  | High      |  |  | Low       | 
|                         |  |  |           |  |  |           | 
|                         |  |  |           |  |  |           | 
|March 2006               |  |  | NIS110.90 |  |  | NIS101.60 | 
|February
  2006          |  |  | NIS124.30 |  |  | NIS109.40 | 
|January 2006             |  |  | NIS132.60 |  |  | NIS122.20 | 
|December
  2005          |  |  | NIS126.00 |  |  | NIS110.20 | 
|November
  2005          |  |  | NIS117.70 |  |  | NIS104.10 | 
|October 2005             |  |  | NIS109.70 |  |  | NIS95.79  | 

The
average exchange ratio of NIS to U.S. dollar in 2005 was NIS 4.4878 to $1.0.

B.      PLAN OF
DISTRIBUTION

Not
applicable.

C.
      MARKETS

Our
ordinary shares have traded publicly on the Nasdaq National 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 National 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

-74-

---



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.

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, as of the end of the most recent fiscal
year or as accrued over a period of two years, 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 directors designated by the board
presides over our general meetings. 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 331¤3%
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 required to call the meeting as described under
Shareholder Meetings.

-75-

---



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. Any voting
agreement is also subject to observance of these duties.

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 written ballot,
and voting on the resolution.

Under the
Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require a simple majority.
A resolution for the voluntary winding up of the company requires the approval
by holders of 75% of the voting rights represented at the meeting, in person,
by proxy or by written ballot 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 which are listed 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 dissent­ing shareholders 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 the purchaser would become a 25% or greater shareholder
of the company. 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

-76-

---



tender offer if as a result of the acquisition the purchaser would
become a 45% or greater shareholder of the company, if 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 called on at
least 21 days prior notice. 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 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. If the
transaction would have been approved but for the exclusion of the votes of
certain shareholders as provided above, 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 parties to the
merger. 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.

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 the following material contracts are included in this Form 20-F in the places
indicated:

|                                                  |  |                                                                                                     
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Material Contract                                 |  | Location                                                                                            
|                                                  |  |                                                                                                     
|Agreements
  with Micron Technology, Inc.         |  | Item 4.B:
  Information on the Company  Part B: Business Overview  Manufacturing.               
|Agreement
  with Zarlink Semiconductors AB        |  | Item 4.B:
  Information on the Company  Part B: Business Overview  Manufacturing.               
|Agreement
  with Ethicon Endo-Surgery Inc.        |  | Item 4.B:
  Information on the Company  Part B: Business Overview  Marketing and
  Distribution.
|Agreement
  Rafael Armament Development Authority |  | Item 7:
  Major Shareholder and Related Party Transactions.                                       
|Investor
  Rights Agreement                       |  | Item 7:
  Major Shareholder and Related Party Transactions.                                       

-77-

---



D.      EXCHANGE CONTROLS

In
1998, Israeli currency control regulations were liberalized significantly, so that
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

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

General
Corporate Tax Structure. In 2005, Israeli companies were subject to corporate tax at the rate of
34% of taxable income. This tax rate was reduced to 31% in 2006 and 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.

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

-78-

---



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 of the amount 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 is 10% to 25%, depending on the percentage of the
companys shares held by foreign share­holders. The recipient of dividend
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
the 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 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. The
period of tax benefits for our approved enterprise programs has not yet
commenced, because we have yet to realize taxable income. 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

-79-

---



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.

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:

|                                         |  |                                   
|---------------------------------------- |  | ----------------------------------
|                                         |  | Royalties to the
  Chief Scientist
|Manufacturing
  Volume Outside of Israel |  | as a Percentage of
  Grant        
|                                         |  |                                   
|                                         |  |                                   
|less than 50%                            |  | 120%                              
|between 50% and less than 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 at Pemstars
facilities 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

-80-

---



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:

| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | deduction of purchases of know-how and patents over an eight-year
  period for tax purposes; and
| |   |                                                                                                 
| |  | claiming of stock exchange issuance expenses over three years.                                  

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

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 2005 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.

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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 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 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.

Dealers in
securities in Israel are taxed at regular tax rates applicable to business
income.

Under the
convention between the United States and Israel concerning taxes on income,
Israeli capital gains tax will not apply to the sale, exchange or disposition
of ordinary shares by a person:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | 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.        

-81-

---



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 specified conditions. 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, a
U.S. resident generally would 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.

For
residents of other countries, the purchaser of shares may be required to
withhold 25% capital gains tax on all amounts received for the sale of our
ordinary shares, for so long as 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.

Under
new legislation, which became effective on January 1, 2003, 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 National 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,
and (B) the shares were acquired by the foreign resident after the companys
shares had been listed for trading on the foreign exchange. In addition,
capital gains from the sale of our ordinary shares by non-Israeli residents who
purchased or will have purchase 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 National 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 sale of the shares would
be subject to a 20% tax, 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. We believe that
in 2005 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%
unless an exemption or other lower tax rate applies in accordance with a tax
treaty between Israel and the shareholders country of residence.

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.

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 National
Market, subject to the provisions of any applicable double taxation treaty.

Stamp Duty

Until
December 31, 2005, stamp duty applied in Israel to various types of documents
at various rates, depending primarily on the type of the document and the
amount specified, or not, therein. In June 2003, the Israeli statute imposing
the stamp duty was amended in a manner believed by many to significantly expand
the tax basis. Following this amendment, the Israeli Tax Authority has
increased enforcement of this statute. To date, we have not received a demand
for payment of stamp duty following this amendment. We currently do not believe
that any stamp duty that may be imposed on us as a result of this amendment
would materially adversely affect our financial condition. The Israeli
legislator has cancelled the stamp duty for any documents or transactions,
effective January 1, 2006.

United States Federal Income Taxation

The
following is a description of the material United States 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

-82-

---



hold the
ordinary shares as capital assets. This summary does not address tax
considerations applicable to holders who may be subject to special tax rules,
including:

| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dealers or
  traders in securities or currencies;                                                                                                                                    
| |   |                                                                                                                                                                                      
| |  | tax-exempt
  entities;                                                                                                                                                               
| |   |                                                                                                                                                                                      
| |  | banks,
  financial institutions or insurance companies;                                                                                                                              
| |   |                                                                                                                                                                                      
| |  | real estate
  investment trusts, regulated investment companies or grantor trusts;                                                                                                   
| |   |                                                                                                                                                                                      
| |  | persons who
  received our ordinary shares as compensation for the performance of services;                                                                                          
| |   |                                                                                                                                                                                      
| |  | holders who
  own, or are deemed to own, at least 10% or more, by voting power or value, of
  our shares;                                                                            
| |   |                                                                                                                                                                                      
| |  | certain
  former citizens or residents of the United States;                                                                                                                         
| |   |                                                                                                                                                                                      
| |  | investors
  whose functional currency is not the United States dollar; or                                                                                                            
| |   |                                                                                                                                                                                      
| |  | holders who
  hold our ordinary shares as part of a position in a straddle or as part of
  a hedging or conversion transaction for United States federal income tax
  purposes.

Further,
this description does not address any United States 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
description is based on the Internal Revenue Code of 1986, as amended, United
States Treasury Regulations and judicial and administrative interpretations
thereof, in each case as in effect and available on the date of this annual
report. The United States tax laws and the interpretation thereof are subject
to change, which change could apply retroactively and could affect the tax
consequences described below.

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

For
purposes of this description, a U.S. Holder is a beneficial owner of ordinary
shares that, for United States federal income tax purposes, is:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | citizen or
  resident of the United States;                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | a
  corporation or partnership created or organized in or under the laws of the
  United States or any state thereof, including the District of Columbia;                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | an estate if
  its income is subject to United States federal income taxation regardless of
  its source; or                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | a trust if
  such trust validly has elected to be treated as a United States person for
  United States federal income tax purposes or if a United States court can
  exercise primary supervision over its administration and one or more United
  States persons have the authority to control all of its substantial
  decisions.

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.

-83-

---



Shareholders
should consult their own tax advisors with respect to the United States
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 United States 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, 2008 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 be
included in your gross income as ordinary income and will not be eligible for
the dividends received deduction generally allowed to corporate United States
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
United Stated 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 NIS, any such dividend or distribution
will be included in your gross income in an amount equal to the U.S. dollar
value of NIS on the date of receipt. You will have a tax basis for United
States federal income tax purposes in the NIS received equal to that dollar
value, and any subsequent gain or loss in respect of the NIS 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 United States 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, financial services income. U.S. Holders should note, however,
that the financial services income category will be eliminated for taxable
years beginning after December 31, 2006. Under the recently enacted
legislation, the foreign tax credit limitation categories are limited to
passive category income and 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 United States 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 United States 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 United States federal income tax rate applicable to such gain will be
lower than the maximum marginal United States 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
United States source income or loss for United States foreign tax credit
purposes. The deductibility of capital losses is subject to limitations.

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 United States 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

-84-

---



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-United States corporation will be classified as a passive foreign
investment company or a PFIC, for United States 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, 2005. 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. If we were
a PFIC, you generally would be subject to imputed interest charges and other
disadvantageous tax treatment (including the denial of the taxation of such
dividends at the lower rates applicable to long-term capital gains, as
discussed above under Distributions) with respect to any gain from the sale
or exchange of, and excess distributions with respect to, the ordinary shares.

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 United States
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.

In
the case of such payments made within the United States, or by a U.S. payor or
U.S. middleman, to a foreign simple trust, foreign grantor trust or foreign
partnership, other than payments to a foreign simple trust, foreign grantor
trust or foreign partnership that qualifies as a withholding foreign trust or
a withholding foreign partnership within the meaning of the applicable United
States Treasury Regulations and payments to a foreign simple trust, foreign
grantor trust or foreign partnership that are effectively connected with the
conduct of a trade or business in the United States, the beneficiaries of the
foreign simple trust, the person treated as the owner of the foreign grantor
trust or the partners of the foreign partnership, as the case may be, will be
required to provide the certification discussed above in order to establish an
exemption from backup withholding tax and information reporting requirements.
Moreover, a payor may rely on a certification provided by a payee that is not a
United States person only if such payor does not have actual knowledge or a
reason to know that any information or certification stated in such certificate
is incorrect.

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.

-85-

---



|   |                            
|-- | ---------------------------
|F. | DIVIDENDS AND PAYING AGENTS
|   |                            
|   | Not applicable.            
|   |                            
|G. | STATEMENTS BY EXPERTS      
|   |                            
|   | Not
  applicable.          
|   |                            
|H. | DOCUMENTS ON DISPLAY       

We
are currently subject to the information and periodic reporting requirements of
the U.S. Securities Exchange Act of 1934, as amended (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 will be 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

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.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. 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. In
addition, the lower value of the U.S. dollar compared to the NIS increases the
operating expenses reported in our financial statements. Our interest income is
sensitive to changes in the general level of interest rates in the United
States and Israel since the majority of our investments are in short-term
instruments that are tied to the interest rates in these countries. Due to the
nature of our short-term investments, we do not believe that there is any
material market risk exposure. Therefore, we believe that no quantitative
tabular disclosures are required.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES

| |                  
| | -----------------
| | Not
  applicable.

-86-

---



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

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.

In
connection with the preparation and audit of our 2004 financial statements, we
discovered that a former employee of our U.S. subsidiary had misappropriated
approximately $0.4 million during the period 2002 through 2004, with the bulk
of the misappropriation taking place in 2004. See Part A Operating Results
under Item 5 Operating and Financial Review and Prospectus. We undertook an
investigation, which was completed in February 2005, with the assistance of
independent legal counsel and forensic accountants. The investigators concluded
that insufficient supervision and a lack of segregation of duties regarding
cash and cash processing at our U.S. subsidiary may have facilitated the
misappropriation. Between March and September 2005, we recovered an aggregate
of $0.4 million from this former employee.

We
have taken a number of remedial actions to address the internal control
deficiencies that contributed to the misappropriation. First, we have replaced
the entire financial management team of our U.S. subsidiary. Second, we have
instituted a whistleblower policy, in accordance with legal requirements that
became applicable to us in July 2005, to enable employees to report anonymously
and confidentially any accounting, financial and other events of which they
believe management should be aware. Third, we implemented new signature rights
policy requiring dual signatures on all company checks. Finally, we have
instituted a policy of conducting background checks on employees engaged in
financial, accounting and other specified positions.

In
June 2005, the financial management team of our U.S. subsidiary advised us that
our U.S. subsidiary has not collected state sales tax on its sales since sales
in the United States began in the fourth quarter of 2001. We believe the
failure to collect and remit sales tax was a result of a good faith error that
sales are exempt since most of the initial sales by our U.S. subsidiary were to
non-profit hospitals, which are exempt from sales tax in most states. Following
our discovery of the matter we contacted our customers in order to collect the
required sales tax and remit it to the relevant states. In addition, we
immediately took remedial measures to ensure that all invoices are issued with
the applicable sales tax. We also included in our financial statements for the
year ended December 31, 2005 a provision of $1.8 million, before tax effect,
for possible uncollectible sales tax due from our customers related to all
affected periods (2001 through the second quarter of 2005) plus interest and
penalties. We believe this provision is adequate to cover any obligations we
may have as a result of this matter.

-87-

---



Other
than as described above, during the period covered by this annual report, there
have not been any changes in our internal control over financial reporting that
have materially affected, or that are reasonably likely to materially affect,
our internal control over financial reporting.

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 National Marketing 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.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The
following table sets forth the total remuneration that was paid by us and our
subsidiaries to our independent accountants, KPMG, in each of our previous two
fiscal years:

| |                                |  |                  |     |      |   |     | 
| | ------------------------------ |  | ---------------- | --- | ---- | - | --- | 
| |                                |  | 2004             |     | 2005 |  
| |                                |  |                  |     |      |  
| |                                |  | (in
  thousands) |    
| |                                |  |                  |     |      |   |     | 
| | Audit and audit-related
  fees |  | $                | 249 |      | $ | 710 | 
| | Tax fees                       |  |                  | 64  |      |   | 114 | 
| | All other fees                 |  |                  | 146 |      |   | 92  | 
| |                                |  |                  |     |      |   |     | 
| | Total                          |  | $                | 459 |      | $ | 916 | 

| |     |                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Audit-related
  fees includes fees related to our audit procedures and the audit procedures
  of all of our subsidiaries.                                                  
| |     |                                                                                                                                                                              
| | (2) | Tax fees
  includes fees for professional services rendered by our auditors for tax
  compliance and tax advice on actual or contemplated transactions.                    
| |     |                                                                                                                                                                              
| | (3) | All other
  fees includes fees related to advice on international transfer prices,
  compliance with Sarbanes-Oxley Act requirements and advice regarding U.S.
  sales tax.

Our
audit committee pre-approved all audit and non-audit services provided to us
and to our subsidiaries during the periods listed above.

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

None.

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

None.

-88-

---



PART III

ITEM 17. FINANCIAL STATEMENTS

Not
applicable.

ITEM 18. FINANCIAL STATEMENTS

See
  pages F-2 to F-29.

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     |  | Investor
  Rights Agreement, dated as of September 15, 2000, by and among the Registrant
  and the parties thereto, incorporated by reference to Exhibit 10.10 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.2     |  | Amendment
  No. 1 to Investor Rights Agreement, dated as of July 16, 2001, by and among
  the Registrant and the parties thereto, incorporated by reference to Exhibit
  10.17 of the Registration Statement on Form F-1 (File No. 333-68142) filed
  with the Commission on August 22, 2001.                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.3     |  | 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.                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.4     |  | Technology
  Purchase and License Agreement, dated as of January 29, 1998, by and between
  Rafael Armament Development Authority of the Israeli Ministry of Defense and
  the Registrant, incorporated by reference to Exhibit 10.12 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.5     |  | 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.                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.6     |  | Lease
  Agreement, dated as of December 15, 1999, by and between B. A. T. M. Lands
  Ltd. and the Registrant, incorporated by reference to Exhibit 10.16 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.7     |  | Purchase and
  Sale Contract, dated as of August 25, 2001, by and between Pemstar, Inc. and
  the Registrant, incorporated by reference to Exhibit 10.18 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.8     |  | Form of
  Standard Distribution Agreement of the Registration, incorporated by
  reference to Exhibit 10.19 of the Registration Statement on Form F-1 (File
  No. 333-81514) filed with the Commission on February 1, 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.9     |  | 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.                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.10    |  | 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                                                                                                                               
|        | 

-89-

---



|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | Annual
  Report on Form 20-F for the year ended December 31, 2002, filed with the
  Commission on April 10, 2003.                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.11 |  | 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.                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.12 |  | Addendum to
  Development and Supply Agreement, dated July 2005, by and between Zarlink
  Semiconductor AB and the Registrant.                                                                                                                                                                                                                                                    
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.13 |  | 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.                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.14 |  | 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.      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.15 |  | 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.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.16 |  | 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.                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.17 |  | 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.                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.18 |  | 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.                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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.                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|9.1  |  | Consent of
  KPMG Somekh Chaikin, independent registered public accountants.                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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.*                                                                                                                                                                                                                                                         

-90-

---





---

|  |                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of
  this exhibit were omitted and have been filed separately with the Secretary
  of the Securities and 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.                                                                                                                                                        

-91-

---



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/ Gavriel D. Meron                    | 
| |  |                                                |  |  | 
| |  | Name:
  Gavriel D. Meron                       | 
| |  | Title:
  President and Chief Executive Officer | 
| |  |                                                | 
| |  | By:    /s/ Yuval Yanai                         | 
| |  |                                                |  |  | 
| |  | Name: Yuval
  Yanai                            | 
| |  | Title: Chief
  Financial Officer               | 

Date: April 6,
2006

---



ANNUAL REPORT ON FORM 20-F

INDEX OF EXIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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     |  | Investor
  Rights Agreement, dated as of September 15, 2000, by and among the Registrant
  and the parties thereto, incorporated by reference to Exhibit 10.10 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.2     |  | Amendment
  No. 1 to Investor Rights Agreement, dated as of July 16, 2001, by and among
  the Registrant and the parties thereto, incorporated by reference to Exhibit
  10.17 of the Registration Statement on Form F-1 (File No. 333-68142) filed
  with the Commission on August 22, 2001.                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.3     |  | 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.                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.4     |  | Technology
  Purchase and License Agreement, dated as of January 29, 1998, by and between
  Rafael Armament Development Authority of the Israeli Ministry of Defense and
  the Registrant, incorporated by reference to Exhibit 10.12 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.5     |  | 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.                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.6     |  | Lease
  Agreement, dated as of December 15, 1999, by and between B. A. T. M. Lands
  Ltd. and the Registrant, incorporated by reference to Exhibit 10.16 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.7     |  | Purchase and
  Sale Contract, dated as of August 25, 2001, by and between Pemstar, Inc. and
  the Registrant, incorporated by reference to Exhibit 10.18 of the
  Registration Statement on Form F-1 (File No. 333-68142) filed with the
  Commission on August 22, 2001.                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.8     |  | Form of
  Standard Distribution Agreement of the Registration, incorporated by
  reference to Exhibit 10.19 of the Registration Statement on Form F-1 (File
  No. 333-81514) filed with the Commission on February 1, 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.9     |  | 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.                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.10    |  | 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.             
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.11    |  | 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.                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.12    |  | Addendum to
  Development and Supply Agreement, dated July 2005, by and between Zarlink
  Semiconductor AB and the Registrant.                                                                                                                                                                                                                       

---



|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.13 |  | 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.                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.14 |  | 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.      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.15 |  | 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.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.16 |  | 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.                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.17 |  | 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.                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.18 |  | 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.                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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.                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|9.1  |  | Consent of
  KPMG Somekh Chaikin, independent registered public accountants.                                                                                                                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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.*                                                                                                                                                                                                                                                         



---

|  |                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of
  this exhibit were omitted and have been filed separately with the Secretary
  of the Securities and 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 Consolidated
Subsidiaries

Index to Consolidated Financial Statements

|                                                           |     
|---------------------------------------------------------- | ----
|                                                           | Page
|                                                           |     
|Report of Independent Registered Public Accounting Firm    | F-2 
|                                                           |     
|Consolidated Balance Sheets                                | F-3 
|                                                           |     
|Consolidated Statements of Operations                      | F-5 
|                                                           |     
|Consolidated Statements of Changes in Shareholders Equity | F-6 
|                                                           |     
|Consolidated Statements of Cash Flows                      | F-7 
|                                                           |     
|Notes to the Consolidated Financial Statements             | F-8 

F-1

---



Report of Independent
Registered Public Accounting Firm

The Board of Directors and ShareholdersGiven Imaging Ltd.

We have
audited the accompanying consolidated balance sheets of Given Imaging Ltd. and
its subsidiaries (the Company) as of December 31, 2005 and 2004, 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, 2005. These consolidated financial statements are the responsibility of the
Companys Board of Directors and of its management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004, and the consolidated results of its operations and
cash flows for each of the years in the three year period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles.

Somekh Chaikin
Certified Public Accountants (Israel)
Member Firm of KPMG International

Tel - Aviv,
Israel
February 7, 2006

F-2

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Consolidated
Balance Sheets
(In thousands except share data)

|                                                                                                              |  |         |  |             |         |      |   |         | 
|------------------------------------------------------------------------------------------------------------- |  | ------- |  | ----------- | ------- | ---- | - | ------- | 
|                                                                                                              |  |         |  | December 31 |        
|                                                                                                              |  |         |  |             |        
|                                                                                                              |  | Note    |  | 2004        |         | 2005 |  
|                                                                                                              |  |         |  |             |         |      |  
|                                                                                                             
|Assets                                                                                                        |  |         |  |             |         |      |   |         | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Current assets                                                                                                |  |         |  |             |         |      |   |         | 
|Cash and cash equivalents                                                                                     |  | 1D; 2   |  | $           | 80,861  |      | $ | 65,356  | 
|Accounts receivable:                                                                                          |  |         |  |             |         |      |   |         | 
|Trade (net of provision for doubtful
  debts of $115 and $431 as of December 31, 2004 and 2005, respectively) |  | 1E      |  |             | 12,261  |      |   | 18,325  | 
|Other                                                                                                         |  | 3       |  |             | 1,271   |      |   | 6,552   | 
|Inventories                                                                                                   |  | 1F; 4   |  |             | 13,794  |      |   | 16,172  | 
|Advances to suppliers                                                                                         |  |         |  |             | 555     |      |   | 332     | 
|Deferred taxes                                                                                                |  | 1P; 14C |  |             | 737     |      |   | 1,219   | 
|Prepaid expenses                                                                                              |  |         |  |             | 954     |      |   | 1,020   | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Total current assets                                                                                          |  |         |  |             | 110,433 |      |   | 108,976 | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Assets held for employee severance payments                                                                   |  | 1G; 10  |  |             | 1,339   |      |   | 1,690   | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Marketable securities                                                                                         |  | 1H; 5   |  |             |        |      |   | 21,664  | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Fixed assets, at cost, less accumulated
  depreciation                                                        |  | 1I; 6   |  |             | 9,862   |      |   | 13,862  | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Other assets, at cost, less accumulated
  amortization                                                        |  | 1J; 7   |  |             | 2,590   |      |   | 2,918   | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|                                                                                                              |  |         |  |             |         |      |   |         | 
|Total Assets                                                                                                  |  |         |  | $           | 124,224 |      | $ | 149,110 | 
|                                                                                                              |  |         |  |             |         |      |   |         | 

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

F-3

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Consolidated Balance Sheets
  (In thousands except share data)

|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | ----------- | ------- | ---- | - | ------- | -
|                                                                                                                                                                                                                    |  |          |  | December 31 |        
|                                                                                                                                                                                                                    |  |          |  |             |        
|                                                                                                                                                                                                                    |  | Note     |  | 2004        |         | 2005 |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |  
|                                                                                                                                                                                                                   
|Liabilities and shareholders equity                                                                                                                                                                                |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Current liabilities                                                                                                                                                                                                 |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Current installments of
  obligation under capital lease                                                                                                                                                            |  | 8B       |  | $           | 11      |      | $ | 11      |  
|Accounts payable:                                                                                                                                                                                                   |  |          |  |             |         |      |   |         |  
|Trade                                                                                                                                                                                                               |  |          |  |             | 5,147   |      |   | 5,529   |  
|Other                                                                                                                                                                                                               |  | 9        |  |             | 8,678   |      |   | 13,886  |  
|Deferred income                                                                                                                                                                                                     |  | 1N;
  8C |  |             | 3,610   |      |   | 3,333   |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Total current liabilities                                                                                                                                                                                           |  |          |  |             | 17,446  |      |   | 22,759  |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Long-term
  liabilities                                                                                                                                                                                             |  |          |  |             |         |      |   |         |  
|Deferred income                                                                                                                                                                                                     |  | 8C       |  |             | 9,340   |      |   | 22,172  |  
|Obligation under capital
  lease                                                                                                                                                                                    |  | 8B       |  |             | 48      |      |   | 34      |  
|Liability in respect of
  employee severance payments                                                                                                                                                               |  | 10       |  |             | 1,596   |      |   | 2,040   |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Total
  long-term liabilities                                                                                                                                                                                       |  |          |  |             | 10,984  |      |   | 24,246  |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Total
  liabilities                                                                                                                                                                                                 |  |          |  |             | 28,430  |      |   | 47,005  |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Commitments
  and contingencies                                                                                                                                                                                     |  | 8        |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Minority
  interest                                                                                                                                                                                                 |  |          |  |             | 1,177   |      |   | 61      |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Shareholders
  equity                                                                                                                                                                                              |  |          |  |             |         |      |   |         |  
|Share
  capital:                                                                                                                                                                                                    |  | 11       |  |             |         |      |   |         |  
|Ordinary Shares, NIS 0.05 par value each (90,000,000 shares
  authorized as of December 31, 2004 and 2005, 27,621,386 and 27,950,281 shares
  issued and fully paid as of December 31, 2004 and 2005, respectively) |  |          |  |             | 323     |      |   | 327     |  
|Additional paid-in capital                                                                                                                                                                                          |  |          |  |             | 147,878 |      |   | 148,955 |  
|Capital reserve                                                                                                                                                                                                     |  |          |  |             | 2,166   |      |   | 2,166   |  
|Unearned compensation                                                                                                                                                                                               |  |          |  |             | (3      | )    |   |        |  
|Accumulated deficit                                                                                                                                                                                                 |  |          |  |             | (55,747 | )    |   | (49,404 | )
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Total shareholders equity                                                                                                                                                                                          |  |          |  | $           | 94,617  |      |   | 102,044 |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  
|Total
  liabilities and shareholders equity                                                                                                                                                                        |  |          |  | $           | 124,224 |      |   | 149,110 |  
|                                                                                                                                                                                                                    |  |          |  |             |         |      |   |         |  

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

F-4

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Consolidated
Statements of Operations
  (In thousands except share and per share data)

|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|----------------------------------------------------------------------------------------------------- |  | -------- |  | ------------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                                      |  |          |  | Year
  ended December 31, |           
|                                                                                                      |  |          |  |                           |           
|                                                                                                      |  | Note     |  | 2003                      |            | 2004 |   | 2005       |  
|                                                                                                      |  |          |  |                           |            |      |   |            |  
|                                                                                                     
|Revenues                                                                                              |  | 1N;
  12 |  | $                         | 40,539     |      | $ | 65,020     |   | $ | 86,776     |  
|Cost of revenues                                                                                      |  |          |  |                           | 13,551     |      |   | 17,734     |   |   | 22,070     |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Gross profit                                                                                          |  |          |  |                           | 26,988     |      |   | 47,286     |   |   | 64,706     |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Operating expenses                                                                                    |  |          |  |                           |            |      |   |            |   |   |            |  
|Research and development, gross                                                                       |  | 1Q       |  |                           | (7,037     | )    |   | (7,363     | ) |   | (8,833     | )
|Royalty bearing participation                                                                         |  | 1O       |  |                           | 1,303      |      |   | 1,140      |   |   | 1,244      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Research and development, net                                                                         |  |          |  |                           | (5,734     | )    |   | (6,223     | ) |   | (7,589     | )
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Sales and marketing                                                                                   |  |          |  |                           | (26,804    | )    |   | (33,652    | ) |   | (43,281    | )
|General and administrative                                                                            |  |          |  |                           | (5,312     | )    |   | (6,916     | ) |   | (9,657     | )
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Total operating expenses                                                                              |  |          |  |                           | (37,850    | )    |   | (46,791    | ) |   | (60,527    | )
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Operating profit (loss)                                                                               |  |          |  |                           | (10,862    | )    |   | 495        |   |   | 4,179      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Financing income, net                                                                                 |  | 13       |  |                           | 995        |      |   | 956        |   |   | 762        |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Profit (loss) before taxes on income                                                                  |  |          |  |                           | (9,867     | )    |   | 1,451      |   |   | 4,941      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Taxes on income                                                                                       |  | 1P, 14   |  |                           |           |      |   | 690        |   |   | 286        |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Profit (loss) before minority share                                                                   |  |          |  |                           | (9,867     | )    |   | 2,141      |   |   | 5,227      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Minority share in losses of
  subsidiary                                                              |  |          |  |                           | 258        |      |   | 747        |   |   | 1,116      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Net profit (loss)                                                                                     |  |          |  | $                         | (9,609     | )    | $ | 2,888      |   | $ | 6,343      |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Profit (loss) per share                                                                               |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Basic profit (loss) per Ordinary Share                                                                |  | 1L       |  | $                         | (0.38      | )    | $ | 0.11       |   | $ | 0.23       |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Diluted profit (loss) per Ordinary Share                                                              |  |          |  | $                         | (0.38      | )    | $ | 0.10       |   | $ | 0.21       |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Weighted average number of Ordinary Shares
  used to compute basic profit (loss) per Ordinary Share   |  | 1L       |  |                           | 25,493,073 |      |   | 26,633,964 |   |   | 27,781,223 |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  
|Weighted average number of Ordinary Shares
  used to compute diluted profit (loss) per Ordinary Share |  | 1L       |  |                           | 25,493,073 |      |   | 29,353,448 |   |   | 29,695,164 |  
|                                                                                                      |  |          |  |                           |            |      |   |            |   |   |            |  

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

F-5

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Consolidated
Statements of Changes in Shareholders Equity
  (In thousands except share data)

|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|------------------------------------- |  | --------------- | ---------- | ---------- | - | ------- |  | ------------ | ------- | ----------- | - | ----- |  | - | ---- | - | - | ------- | - | - | ------- | -
|                                      |  |                 |            | Additional |   |         |  |              |         |             |   |       | 
|                                      |  |                 |            | Paid-In    |   | Capital |  | Unearned     |         | Accumulated |   |       | 
|                                      |  | Ordinary shares |            | Capital    |   | Reserve |  | Compensation |         | Deficit     |   | Total | 
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       | 
|                                      |  | Shares          |            | Amount     |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |  
|                                     
|Balance as of December 31, 2002       |  |                 | 25,373,513 |            | $ | 298     |  | $            | 100,262 |             | $ | 2,166 |  | $ | (123 | ) | $ | (49,026 | ) | $ | 53,577  |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Changes during the year 2003:         |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Exercise of stock options             |  |                 | 275,675    |            |   | 3       |  |              | 722     |             |   |      |  |   |     |   |   |        |   |   | 725     |  
|Forfeiture of stock options           |  |                 |           |            |   |        |  |              | (78     | )           |   |      |  |   | 78   |   |   |        |   |   |        |  
|Acceleration of vesting               |  |                 |           |            |   |        |  |              | 31      |             |   |      |  |   |     |   |   |        |   |   | 31      |  
|Non-employees stock options          |  |                 |           |            |   |        |  |              | 59      |             |   |      |  |   |     |   |   |        |   |   | 59      |  
|Amortization of unearned compensation |  |                 |           |            |   |        |  |              |        |             |   |      |  |   | 15   |   |   |        |   |   | 15      |  
|Net loss                              |  |                 |           |            |   |        |  |              |        |             |   |      |  |   |     |   |   | (9,609  | ) |   | (9,609  | )
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Balance as of December 31, 2003       |  |                 | 25,649,188 |            | $ | 301     |  | $            | 100,996 |             | $ | 2,166 |  | $ | (30  | ) | $ | (58,635 | ) | $ | 44,798  |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Changes during the year 2004:         |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Ordinary shares issued                |  |                 | 1,500,000  |            |   | 17      |  |              | 44,250  |             |   |      |  |   |     |   |   |        |   |   | 44,267  |  
|Exercise of stock options             |  |                 | 472,198    |            |   | 5       |  |              | 2,581   |             |   |      |  |   |     |   |   |        |   |   | 2,586   |  
|Forfeiture of stock options           |  |                 |           |            |   |        |  |              | (11     | )           |   |      |  |   | 3    |   |   |        |   |   | (8      | )
|Non-employees stock options          |  |                 |           |            |   |        |  |              | 62      |             |   |      |  |   |     |   |   |        |   |   | 62      |  
|Amortization of unearned compensation |  |                 |           |            |   |        |  |              |        |             |   |      |  |   | 24   |   |   |        |   |   | 24      |  
|Net profit                            |  |                 |           |            |   |        |  |              |        |             |   |      |  |   |     |   |   | 2,888   |   |   | 2,888   |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|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   |             |   |      |  |   |     |   |   |        |   |   | 1,081   |  
|Amortization of unearned compensation |  |                 |           |            |   |        |  |              |        |             |   |      |  |   | 3    |   |   |        |   |   | 3       |  
|Net profit                            |  |                 |           |            |   |        |  |              |        |             |   |      |  |   |     |   |   | 6,343   |   |   | 6,343   |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  
|Balance as of December 31, 2005       |  |                 | 27,950,281 |            | $ | 327     |  | $            | 148,955 |             | $ | 2,166 |  | $ |     |   | $ | (49,404 | ) | $ | 102,044 |  
|                                      |  |                 |            |            |   |         |  |              |         |             |   |       |  |   |      |   |   |         |   |   |         |  

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

F-6

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Consolidated
Statements of Cash Flows
  (In thousands)

|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------ | - | - | ------- | -
|                                                                                                              |  | Year ended December 31, |        
|                                                                                                              |  |                         |        
|                                                                                                              |  | 2003                    |         | 2004 |   | 2005   |  
|                                                                                                              |  |                         |         |      |   |        |  
|                                                                                                             
|Cash flows from operating activities:                                                                         |  |                         |         |      |   |        |   |   |         |  
|Net profit (loss)                                                                                             |  | $                       | (9,609  | )    | $ | 2,888  |   | $ | 6,343   |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Adjustments required to reconcile net profit (loss)
  to net cash provided by (used in) operating activities: |  |                         |         |      |   |        |   |   |         |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Minority share in losses of subsidiary                                                                        |  |                         | (258    | )    |   | (747   | ) |   | (1,116  | )
|Depreciation and amortization                                                                                 |  |                         | 3,030   |      |   | 3,147  |   |   | 3,596   |  
|Deferred taxes                                                                                                |  |                         |        |      |   | (737   | ) |   | (482    | )
|Employees stock option compensation                                                                          |  |                         | 46      |      |   | 16     |   |   | 3       |  
|Non-employees stock option compensation                                                                      |  |                         | 59      |      |   | 62     |   |   |        |  
|Other                                                                                                         |  |                         | 9       |      |   | 48     |   |   | 98      |  
|Increase in accounts receivable  trade                                                                       |  |                         | (80     | )    |   | (5,316 | ) |   | (6,064  | )
|Decrease (increase) in other accounts receivable                                                              |  |                         | 1,018   |      |   | (804   | ) |   | (4,993  | )
|Decrease (increase) in prepaid expenses                                                                       |  |                         | (80     | )    |   | 360    |   |   | (66     | )
|Decrease (increase) in advances to suppliers                                                                  |  |                         | (23     | )    |   | (508   | ) |   | 223     |  
|Decrease (increase) in inventories                                                                            |  |                         | 1,860   |      |   | (5,648 | ) |   | (2,378  | )
|Increase (decrease) in accounts payable                                                                       |  |                         | (4,708  | )    |   | 7,107  |   |   | 5,769   |  
|Increase in deferred income                                                                                   |  |                         | 223     |      |   | 12,000 |   |   | 12,555  |  
|Decrease in payable to related parties                                                                        |  |                         | (35     | )    |   |       |   |   |        |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Net cash provided by (used in) operating activities                                                           |  | $                       | (8,548  | )    | $ | 11,868 |   | $ | 13,488  |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Cash flows from investing activities:                                                                         |  |                         |         |      |   |        |   |   |         |  
|Purchase of fixed assets and other assets                                                                     |  | $                       | (2,550  | )    | $ | (3,245 | ) | $ | (7,948  | )
|Proceeds from sales of fixed assets                                                                           |  |                         | 60      |      |   | 57     |   |   |        |  
|Deposits, net                                                                                                 |  |                         | (157    | )    |   | (42    | ) |   | (16     | )
|Acquisition of marketable securities                                                                          |  |                         |        |      |   |       |   |   | (21,919 | )
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Net cash used in investing activities                                                                         |  | $                       | (2,647  | )    | $ | (3,230 | ) | $ | (29,883 | )
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Cash flows from financing activities:                                                                         |  |                         |         |      |   |        |   |   |         |  
|Principal payments on capital lease obligation                                                                |  | $                       | (72     | )    | $ | (37    | ) | $ | (12     | )
|Proceeds from the issuance of Ordinary Shares                                                                 |  |                         | 725     |      |   | 46,853 |   |   | 1,081   |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Net cash provided by financing activities                                                                     |  | $                       | 653     |      | $ | 46,816 |   | $ | 1,069   |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Effect of exchange rate changes on cash                                                                       |  | $                       | 117     |      | $ | 40     |   | $ | (179    | )
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                                              |  | $                       | (10,425 | )    | $ | 55,494 |   | $ | (15,505 | )
|Cash and cash equivalents at beginning of year                                                                |  |                         | 35,792  |      |   | 25,367 |   |   | 80,861  |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  
|Cash and cash equivalents at end of year                                                                      |  | $                       | 25,367  |      | $ | 80,861 |   | $ | 65,356  |  
|                                                                                                              |  |                         |         |      |   |        |   |   |         |  

Supplementary cash flow information

|                    |  |                         |    |      |   |      |  |   |     | 
|------------------- |  | ----------------------- | -- | ---- | - | ---- |  | - | --- | 
|                    |  | Year ended December 31, |   
|                    |  |                         |   
|                    |  | 2003                    |    | 2004 |   | 2005 | 
|                    |  |                         |    |      |   |      | 
|Interest
  paid     |  | $                       | 3  |      | $ |     |  | $ |    | 
|Income taxes
  paid |  | $                       | 68 |      | $ | 107  |  | $ | 163 | 
|                    |  |                         |    |      |   |      |  |   |     | 

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

F-7

---



Given Imaging Ltd. and its Consolidated
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 PillCam capsule, that 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 U.S. 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.  The Company markets the PillCam ESO
  capsule through a strategic marketing alliance with Inscope, a division of
  Ethicon Endo-Surgery, a Johnson & Johnson company (see Note 8C).  As of December 31, 2005, the Company had
  an installed base of more than 2,860 Given Systems and had sold approximately
  307,000 PillCam SB capsules in over 50 countries worldwide.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 the technological quality,
  regulatory approvals and sufficient reimbursement for its products.                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Basis of presentation                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                      
| | The
  accompanying consolidated financial statements include the accounts of the
  Company and its wholly-owned subsidiaries in the USA, Germany, France, the
  Netherlands and Australia and its 51% owned subsidiary in Japan.  The accounts of its subsidiaries are
  consolidated from the date of their inception.  All intercompany balances and transactions have been eliminated
  in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | All the
  subsidiaries were established for the purpose of marketing and selling the
  Given System.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-8

---



Given Imaging Ltd. and its Consolidated
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
  accounting records of the Company are maintained in New Israeli Shekels
  (NIS) and U.S. dollars.  The
  Companys functional and reporting currency is the U.S. dollar.                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Transactions
  denominated in foreign currencies other than the U.S. dollar are translated
  into the reporting currency using current exchange rates.  Gains and losses from the translation of
  foreign currency balances are recorded in the statement of operations.                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Provision for doubtful debts     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                  
| | The
  provision for doubtful debts is calculated on the basis of specific
  identification of balances, the collection of which, in managements opinion,
  is doubtful and a general provision based on the Companys experience. In
  determining the adequacy of the provision, management bases its opinion,
  inter alia, 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 change
  in the provision during the year:                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                             |  |                         |     |      |   |     | 
| | --------------------------- |  | ----------------------- | --- | ---- | - | --- | 
| |                             |  | Year ended December 31, |    
| |                             |  |                         |    
| |                             |  | 2004                    |     | 2005 |  
| |                             |  |                         |     |      |  
| |                             |  |                         |     |      |   |     | 
| | Opening
  balance           |  | $                       | 115 |      | $ | 115 | 
| | Additions
  during the year |  |                         |    |      |   | 316 | 
| |                             |  |                         |     |      |   |     | 
| |                             |  |                         |     |      |   |     | 
| | Closing
  balance           |  | $                       | 115 |      | $ | 431 | 
| |                             |  |                         |     |      |   |     | 

| |                                                                                                                                                                                                                        |                                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------
| | F.                                                                                                                                                                                                                     | Inventories                       
|
| | Inventories
  are stated at lower of cost or market.
  Cost is determined using the average cost method for raw materials and
  finished goods, and on the basis of actual manufacturing costs for work in
  progress.
| |                                                                                                                                                                                                                       
| | G.                                                                                                                                                                                                                     | Assets held for severance benefits
| |                                                                                                                                                                                                                        |                                   
| | Assets held
  for employee severance benefits represent contributions to severance pay
  funds and cash surrender value of life insurance policies that are recorded
  at their current redemption value.             

F-9

---



Given Imaging Ltd. and its Consolidated
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 No. 115 Accounting for Certain Investments in Debt and Equity
  Securities (Statement 115). Marketable
  securities consist of U.S. Government Bonds which the Company classified,
  under the guidance of Statement 115, held-to-maturity.
| |                                                                                                                                                                                                                                                                                                                                                      
| | Held-to-maturity debt securities are securities in which the Company
        has the ability and intent to hold the security until maturity.                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                      
| | Held-to-maturity
  debt securities 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.                               
| |                                                                                                                                                                                                                                                                                                                                                      
| | 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:                                                                                                                                                                               

| |                                                                                      |  |         |  | 
| | ------------------------------------------------------------------------------------ |  | ------- |  | 
| |                                                                                      |  | %       | 
| |                                                                                      |  |         | 
| |                                                                                      |  |         |  | 
| | Office furniture, leasehold improvements, laboratory equipment and
  other equipment |  | 6 - 15  |  | 
| | Computers, software and related equipment                                            |  | 20 - 33 |  | 
| | Machinery
  and equipment                                                            |  | 15      |  | 
| | Motor
  vehicles                                                                     |  | 15      |  | 

| |                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Motor
  vehicles purchased under capital lease arrangements are recorded at the
  present value of the minimum lease payments. Such assets and leasehold
  improvements are amortized using the straight-line method over the shorter of
  the lease term or estimated useful life of the asset.
| |                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | J.                                                                                                                                                                                                                                                                                               | Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 1.                                                                                                                                                                                                                                                                                               | The Company
  developed proprietary software for its computer workstations that permits
  downloading and viewing recorded data from the portable data recorder.  The costs of developing this software were
  capitalized in accordance with Statement of Financial Accounting Standards
  No. 86, Accounting for Costs of Computer Software to be Sold, Leased or
  Otherwise Marketed (Statement 86).
  As such, capitalization of software development costs begins upon the
  establishment of technological feasibility as defined in Statement 86 and
  continues up to the time the software is available for general release to
  customers, at which time capitalized software costs are amortized on a
  straight-line basis over the expected life of the related product, which is
  generally three years.
| |                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2.                                                                                                                                                                                                                                                                                               | Legal expenses related to patent and trademark registration have been
  capitalized and depreciated over the remaining life of the asset, which is generally eight years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-10

---



Given Imaging Ltd. and its Consolidated
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Other assets (contd)                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                               
| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Technology
  and content costs are generally expensed as incurred, except for certain
  costs relating to the development of the Companys web site that are
  capitalized and amortized over their estimated useful lives, which are
  generally three years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                               
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Stock compensation plans                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                               
| | Employees and directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company has adopted Financial Accounting Standards Boards
  Statement No. 123, Accounting for Stock-Based Compensation (Statement
  123) which permits 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 allows
  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
  pro forma earnings per share disclosures for employee stock option grants as
  if the fair-value based method defined in Statement 123 had been applied.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company has 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 Statement 123,
  as amended by Statement 148, Accounting for Stock-Based Compensation -
  Transition and Disclosure, an amendment of Statement No. 123.                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | As such, the Company computes and records compensation expense for
  grants whose terms are fixed with respect to the number of shares and option
  price only if the market price on the date of grant exceeds the exercise
  price of the stock option.  The
  compensation cost for the fixed plans is recorded over the period the
  employee performs the service to which the stock compensation relates.                                                                                                                                                                                                                                                                                                                   

F-11

---



Given Imaging Ltd. and its Consolidated
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)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                  
| | Non-Employees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company applies the fair value-based method of accounting set
  forth in Statement 123 and EITF Issue No. 96-18, Accounting
  for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
  or in Conjunction with Selling, Goods or Services to account for stock based compensation to non-employees.  Using the fair
value method, the total
  compensation expense is computed based on the fair value of the options on
  the date the options are granted to the non-employees since the options are
  fully vested.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
  following table shows the effect on net profit (loss) and profit (loss) per
  Ordinary Share if the Company had applied the fair value recognition
  provisions of Statement 123:                                                                                                                                                                                                                                                                                                                                                           

| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |         |  
| | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------- | --------- | ------ | - | ------- | ------- | - | --------- | ------- | -
| |                                                                                                         |                                                                                       | Year ended December 31, |          
| |                                                                                                         |                                                                                       |                         |          
| |                                                                                                         |                                                                                       | 2003                    |           | 2004   |   | 2005    |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |        
| | Net profit (loss) as reported                                                                           |                                                                                       | $                       | (9,609    | )      | $ | 2,888   |         | $ | 6,343     |        
| | -                                                                                                       | Compensation expenses according to APB 25
  included in  reported net profit
  (loss) |                         |           | 46     |   |         | 16      |   |           | 3       |  
| | -                                                                                                       | Compensation expenses according to Statement 123                                      |                         |           | (7,012 | ) |         | (13,432 | ) |           | (10,327 | )
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Pro forma net loss                                                                                      |                                                                                       | $                       | (16,575   | )      | $ | (10,528 | )       | $ | (3,981    | )      
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Basic profit (loss) per Ordinary Share:                                                                 |                                                                                       |                         |           |        |   |         |         |   |           |        
| | As reported                                                                                             |                                                                                       | $                       | (0.38     | )      | $ | 0.11    |         | $ | 0.23      |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Pro forma                                                                                               |                                                                                       | $                       | (0.65     | )      | $ | (0.39   | )       | $ | (0.14     | )      
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Diluted profit (loss) per ordinary share:                                                               |                                                                                       |                         |           |        |   |         |         |   |           |        
| | As reported                                                                                             |                                                                                       | $                       | (0.38     | )      | $ | 0.10    |         | $ | 0.21      |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Pro forma                                                                                               |                                                                                       | $                       | (0.65     | )      | $ | (0.39   | )       | $ | (0.14     | )      
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        
| | Number of options excluded from diluted
  earning per share calculation because of anti-dilutive effect |                                                                                       |                         | 3,881,396 |        |   | 165,500 |         |   | 2,448,114 |        
| |                                                                                                         |                                                                                       |                         |           |        |   |         |         |   |           |        

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------
| | L.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Profit (loss) per Ordinary Share
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                 
| | Basic and diluted profit (loss) per Ordinary Share is presented in
  conformity with Statement of Financial Accounting Standard No. 128, Earnings
  Per Share, for all years presented.  Basic profit (loss) per Ordinary Share is calculated by dividing
  the net profit (loss) attributable to Ordinary Shares, by the weighted
  average number of Ordinary Shares outstanding.  Diluted profit (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 such
  as options had been exercised.

F-12

---



Given Imaging Ltd. and its Consolidated
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.                                                                                                                                                       | Profit (loss) per Ordinary Share (contd)
| |                                                                                                                                                          |                                          
| | The
  following table summarizes information related to the computation of basic
  and diluted profit (loss) per Ordinary Share for the years indicated.

| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | ----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | 
| |                                                                                                                         |  | Year ended December 31, |           
| |                                                                                                                         |  |                         |           
| |                                                                                                                         |  | 2003                    |            | 2004 |   | 2005       | 
| |                                                                                                                         |  |                         |            |      |   |            | 
| |                                                                                                                         |  |                         |            |      |   |            | 
| | Net profit (loss) attributable to Ordinary
  Shares                                                                     |  | $                       | (9,609     | )    | $ | 2,888      |  | $ | 6,343      | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | Weighted average number of
  Ordinary Shares outstanding used in basic profit (loss) per
  Ordinary Share calculation   |  |                         | 25,493,073 |      |   | 26,633,964 |  |   | 27,781,223 | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | Add assumed exercise of outstanding
  dilutive potential Ordinary Shares                                                |  |                         |           |      |   | 2,719,484  |  |   | 1,913,941  | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | Weighted average number of
  Ordinary Shares outstanding used in diluted profit (loss) per
  Ordinary Share calculation |  |                         | 25,493,073 |      |   | 29,353,448 |  |   | 29,695,164 | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | Basic profit (loss) per Ordinary Share                                                                                  |  | $                       | (0.38      | )    | $ | 0.11       |  | $ | 0.23       | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 
| | Diluted profit (loss) per Ordinary Share                                                                                |  | $                       | (0.38      | )    | $ | 0.10       |  | $ | 0.21       | 
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            | 

| |                                                                                                                                                                                                                                                                                                                                                                                                     |                                              
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------
| | M.                                                                                                                                                                                                                                                                                                                                                                                                  | Use of estimates                             
| |                                                                                                                                                                                                                                                                                                                                                                                                     |                                              
| | Management
  of the Company has made a number of estimates and assumptions relating to the
  reporting of assets and liabilities and the disclosure of contingent assets
  and liabilities to prepare these consolidated financial statements in
  accordance with accounting principles generally accepted in the United States
  of America.  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 probable, 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 from PCS 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.                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                    
| | 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 classified as cost of revenues.                                                                                                                                                                                                                                                                                                                                     

F-13

---



Given Imaging Ltd. and its Consolidated
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                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 
| | The Company accounts for income taxes under Statement of Financial
  Accounting Standards 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 losses and other deductions which may be deductible for tax purposes in
  future years, based on enacted statutory tax rates applicable to the periods
  in which such deferred taxes will be realized.  Valuation allowances are established when necessary to reduce
  deferred tax assets to the amount expected to be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Research and development costs  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 
| | Research and development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | R.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Concentration of credit risk    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 
| | Financial instruments that may subject the Company to significant
  concentrations of credit risk consist principally of cash and cash
  equivalents and trade accounts receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Cash and cash equivalents are deposited with major financial institutions
  in Europe, the United States, Japan 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 on sales to
  distributors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | Recent accounting pronouncements
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 
| | The Company examined the recently issued accounting standards
  Statement No. 151, Statement No. 152, Statement No. 153, Statement No. 154
  and EITF 03-1 and believes that the adoption of these standards will not have
  a significant impact on the Companys financial position or results of
  operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based
  Payment (Statement 123R), which requires all companies to measure
  compensation cost for all share-based payments (including employee stock
  options) at fair value. Statement 123R provides two alternative adoption
  methods. The first method is a modified prospective transition method whereby
  a company would recognize share-based employee costs from the beginning of
  the fiscal period in which the recognition provisions are first applied as if
  the fair-value-based accounting method had been used to account for all
  employee awards granted, modified, or settled after the effective date and to
  any awards that were not fully vested as of the effective date. Measurement
  and attribution of compensation cost for awards that are unvested as of the
  effective date of Statement 123R would be based on the same estimate of the
  grant-date fair value and the same attribution method used previously under Statement
  123. The second adoption method is a modified retrospective transition method
  whereby a company would

F-14

---



Given Imaging Ltd. and its Consolidated
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)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------
| | S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Recent accounting pronouncements (contd)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                          
| | recognize employee compensation cost for periods presented prior to
  the adoption of Statement 123R in accordance with the original provisions of
  Statement 123; that is, an entity would recognize employee compensation costs
  in the amounts reported in the pro forma disclosures provided in accordance
  with Statement 123. A company would not be permitted to make any changes to
  those amounts upon adoption of Statement 123R unless those changes represent
  a correction of an error. For periods after the date of adoption of Statement
  123R, the modified prospective transition method described above would be
  applied.                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Statement
  123R does not change the accounting guidance for share-based payment
  transaction with parties other than employees provided in Statement 123 as
  originally issued and EITF Issue No. 96-18, Accounting for Equity
  Instruments That Are Issued to Other Than Employees for Acquiring, or in
  Conjunction with Selling, Goods or Services.                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                          
| | Statement
  123R is effective for public entities that do not file as small business
  issuers as of the beginning of the first annual reporting period that begins
  after June 15, 2005. Accordingly, the company is required to adopt Statement
  123R on January 1, 2006. The Company currently expects to adopt Statement
  123R in the quarter ending March 31, 2006, using the modified prospective
  method. Based upon its projection of unvested stock options at the
  implementation date, the adoption
  of Statement 123R will result in the
  recognition of $5.7 million additional compensation expense in 2006. Future
  compensation expenses will also be impacted by various factors, including the
  number of options granted and their related fair value at the date of grant.

Note 2 - Cash and Cash Equivalents

| |                                      |  |                                     |             |             |   |        |  |   |        | 
| | ------------------------------------ |  | ----------------------------------- | ----------- | ----------- | - | ------ |  | - | ------ | 
| |                                      |  | Interest rate
  as of
  December 31 |             | December 31 |  
| |                                      |  |                                     |             |             |  
| |                                      |  | 2005                                |             | 2004        |   | 2005   | 
| |                                      |  |                                     |             |             |   |        | 
| |                                      |  | %                                   |             |             |   |        | 
| |                                      |  |                                     |             |             |   |        | 
| |                                      |  |                                     |             |             |   |        | 
| | Denominated in U.S. dollars          |  |                                     | 4.2 - 4.27  |             | $ | 72,650 |  | $ | 57,912 | 
| | Denominated
  in New Israeli Shekels |  |                                     | 4.23 - 4.28 |             |   | 2,538  |  |   | 2,855  | 
| | Denominated
  in Euro                |  |                                     | 2.12        |             |   | 2,508  |  |   | 3,396  | 
| | Denominated
  in Australian dollars  |  |                                     |             |             |   | 648    |  |   | 732    | 
| | Denominated
  in Japanese Yen        |  |                                     |             |             |   | 2,517  |  |   | 461    | 
| |                                      |  |                                     |             |             |   |        |  |   |        | 
| |                                      |  |                                     |             |             |   |        |  |   |        | 
| |                                      |  |                                     |             |             | $ | 80,861 |  | $ | 65,356 | 
| |                                      |  |                                     |             |             |   |        |  |   |        | 

F-15

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Notes To The Consolidated Financial
Statements
  (In thousands except share and per share data)

Note 3 - Accounts Receivable - Other

| |                                               |  |             |       |      |   |       | 
| | --------------------------------------------- |  | ----------- | ----- | ---- | - | ----- | 
| |                                               |  | December 31 |      
| |                                               |  |             |      
| |                                               |  | 2004        |       | 2005 |  
| |                                               |  |             |       |      |  
| |                                               |  |             |       |      |  
| | Government
  institutions                     |  | $           | 1,204 |      | $ | 921   | 
| | InScope
  (Note 8C)                           |  |             |      |      |   | 5,000 | 
| | Current
  maturities of marketable securities |  |             |      |      |   | 288   | 
| | Other                                         |  |             | 67    |      |   | 343   | 
| |                                               |  |             |       |      |   |       | 
|
| |                                               |  | $           | 1,271 |      | $ | 6,552 | 
| |                                               |  |             |       |      |   |       | 

Note 4 - Inventories

| |                                |  |             |        |      |   |        | 
| | ------------------------------ |  | ----------- | ------ | ---- | - | ------ | 
| |                                |  | December 31 |       
| |                                |  |             |       
| |                                |  | 2004        |        | 2005 |  
| |                                |  |             |        |      |  
| |                                |  |             |        |      |  
| | Raw
  materials and components |  | $           | 5,058  |      | $ | 7,399  | 
| | Work in
  progress             |  |             | 3,891  |      |   | 3,251  | 
| | Finished
  goods               |  |             | 4,845  |      |   | 5,522  | 
| |                                |  |             |        |      |   |        | 
|
| |                                |  | $           | 13,794 |      | $ | 16,172 | 
| |                                |  |             |        |      |   |        | 

Note 5 - Marketable Securities

| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2005, marketable securities consist of U.S. Government Bonds
  which the Company classified as held-to-maturity (hereinafter  the Bonds).
| |                                                                                                                                                                  
| | The
  amortized cost, gross unrealized gains, gross unrealized losses and fair
  value of the Bonds by major interest type were as follows:                      

| |                 |  |                     |        |                                     |   |              |   |   |        | 
| | --------------- |  | ------------------- | ------ | ----------------------------------- | - | ------------ | - | - | ------ | 
| |                 |  | December
  31, 2005 |       
| |                 |  |                     |       
| |                 |  | Amortized
  cost    |        | Gross
  unrealized
  holding losses |   | Fair
  value |  
| |                 |  |                     |        |                                     |   |              |  
| |                 |  |                     |        |                                     |   |              |  
| | 3.375% -
  4.3% |  | $                   | 17,697 |                                     | $ | (198         | ) | $ | 17,499 | 
| | 5.9% - 6%       |  |                     | 4,255  |                                     |   | (86          | ) |   | 4,169  | 
| |                 |  |                     |        |                                     |   |              |   |   |        | 
| |                 |  |                     |        |                                     |   |              |   |   |        | 
| |                 |  | $                   | 21,952 |                                     | $ | (284         | ) | $ | 21,668 | 
| |                 |  |                     |        |                                     |   |              |   |   |        | 

Maturities
of the Bonds were as follows at December 31, 2005

| |                                         |  |                |        |            |   |        | 
| | --------------------------------------- |  | -------------- | ------ | ---------- | - | ------ | 
| |                                         |  | Amortized cost |        | Fair value |  
| |                                         |  |                |        |            |  
| |                                         |  | 2005           |        | 2005       |  
| |                                         |  |                |        |            |  
|
| | Current
  maturities                    |  | $              | 288    |            | $ | 284    | 
| | Due after
  one year through five years |  |                | 21,664 |            |   | 21,384 | 
| |                                         |  |                |        |            |   |        | 
|
| |                                         |  | $              | 21,952 |            | $ | 21,668 | 
| |                                         |  |                |        |            |   |        | 

F-16

---



Given Imaging Ltd. and its Consolidated
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 |       
| |                                              |  |             |       
| |                                              |  | 2004        |        | 2005 |  
| |                                              |  |             |        |      |  
| |                                              |  |             |        |      |  
| | Computers
  and software                     |  | $           | 3,988  |      | $ | 4,942   |  
| | Instruments
  and laboratory equipment       |  |             | 587    |      |   | 682     |  
| | Leasehold
  improvements                     |  |             | 1,554  |      |   | 3,847   |  
| | Motor
  vehicles                             |  |             | 55     |      |   | 55      |  
| | Machinery
  and equipment                    |  |             | 10,167 |      |   | 12,702  |  
| | Communication
  equipment                    |  |             | 375    |      |   | 388     |  
| | Office
  furniture and equipment             |  |             | 927    |      |   | 1,273   |  
| |                                              |  |             |        |      |   |         |  
| |                                              |  |             |        |      |   |         |  
| | Fixed assets                                 |  |             | 17,653 |      |   | 23,889  |  
| |                                              |  |             |        |      |   |         |  
| | Accumulated
  depreciation                   |  |             | (7,791 | )    |   | (10,027 | )
| |                                              |  |             |        |      |   |         |  
|
| | Fixed assets
  less accumulated depreciation |  | $           | 9,862  |      | $ | 13,862  |  
| |                                              |  |             |        |      |   |         |  

| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Depreciation expense for the years ended December 31, 2003, 2004
        and 2005 are $2,475, $2,561 and $2,936, respectively.

Note 7 - Other Assets, at Cost, Less
Accumulated Amortization

| |                                           |  |             |        |      |   |        |  
| | ----------------------------------------- |  | ----------- | ------ | ---- | - | ------ | -
| |                                           |  | December 31 |       
| |                                           |  |             |       
| |                                           |  | 2004        |        | 2005 |  
| |                                           |  |             |        |      |  
| |                                           |  |             |        |      |  
| | Software development costs                |  | $           | 647    |      | $ | 647    |  
| | Patents and
  trademarks                  |  |             | 2,485  |      |   | 3,425  |  
| | Web site
  application and infrastructure |  |             | 823    |      |   | 895    |  
| | Deposits                                  |  |             | 425    |      |   | 401    |  
| |                                           |  |             |        |      |   |        |  
| |                                           |  |             |        |      |   |        |  
| | Other assets                              |  |             | 4,380  |      |   | 5,368  |  
| |                                           |  |             |        |      |   |        |  
| | Accumulated
  amortization                |  |             | (1,790 | )    |   | (2,450 | )
| |                                           |  |             |        |      |   |        |  
| |                                           |  |             |        |      |   |        |  
| | Other
  assets, net                       |  | $           | 2,590  |      | $ | 2,918  |  
| |                                           |  |             |        |      |   |        |  

| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Amortization
  expense for the years ended December 31, 2003, 2004 and 2005 are $555, $586
  and $660, respectively.

F-17

---



Given Imaging Ltd. and its Consolidated
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
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                     
| | The Companys
  research and development efforts have 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 is committed to pay royalties to the
  Israeli Government at the rate of 3% for each of the first three years and,
  from the fourth year onwards, at the rate of 3.5% of the sales of its
  product, up to 100% of the amount of the grants received.  The grants are deducted from research and
  development expenses.  The Company is
  entitled to the grants only upon incurring research and development
  expenditures.  There are no future
  performance obligations related to the grants received from the OCS.  However, under certain limited
  circumstances, the OCS may withdraw its approval of a research program or
  amend the terms of its approval. Upon withdrawal of approval, the grant
  recipient may be required to refund the grant, in whole or in part, with or
  without interest, as the OCS determines. The Company received from the OCS
  office a total cumulative amount of $4,884 of which it already repaid $2,102.
  The total outstanding obligation for royalties, based on royalty-bearing
  government participation totaled approximately $2,782 as of December 31,
  2005.  Royalties payable to the OCS
  are classified in cost of revenues.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Leases                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                     
| | 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 & development and
  manufacturing facilities.  Under this
  lease agreement, the Company will pay approximately $1.2 million 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 $700 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 $154 to guarantee their performance under the
  terms of the lease agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-18

---



Given Imaging Ltd. and its Consolidated
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)
| |                                                                                            |                
| | Future
  minimum capital lease payments and future minimum operating lease payments
  are:

|                      |  |                     |    |                  |   |        | 
|--------------------- |  | ------------------- | -- | ---------------- | - | ------ | 
|                      |  | December
  31, 2005 |   
|                      |  |                     |   
|                      |  | Capital
  lease     |    | Operating leases |  
|                      |  |                     |    |                  |  
|2006                  |  | $                   | 11 |                  | $ | 2,353  | 
|2007                  |  |                     | 12 |                  |   | 2,271  | 
|2008                  |  |                     | 18 |                  |   | 1,907  | 
|2009                  |  |                     |   |                  |   | 1,582  | 
|2010 and
  thereafter |  |                     |   |                  |   | 7,155  | 
|                      |  |                     |    |                  |   |        | 
|                      |  | $                   | 41 |                  | $ | 15,268 | 
|                      |  |                     |    |                  |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------
| | Office and
  manufacturing rental expense under the lease agreements for the years ended
  December 31, 2003, 2004 and 2005 are $1,140, $1,999 and $2,353 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Agreement with Ethicon Endo-Surgery
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                    
| | On May 10,
  2004, the Company entered into an exclusive sales representation,
  co-promotion and cooperation agreement with InScope, a division of Ethicon
  Endo-Surgery, a Johnson & Johnson company. InScope has exclusive rights
  to market the Companys PillCam ESO capsule for visualization of the
  esophagus in the United States.  Under
  the terms of the agreement, Inscope is committed to pay the Company up to
  $50  million, pending achievement of
  specified milestones by both parties.
  Out of this amount, the Company received, as of December 31, 2005,
  milestone payments of $20 million and an additional amount of $5 million for
  the achievement of a milestone is scheduled to be paid by April 1, 2006
  (recorded in receivables). The Company pays InScope a commission of 50% on
  sales of PillCam ESO capsules and a 10% commission on sales of other parts of
  the Given System, such as workstations and portable data recorders.  Subject to achieving specified minimum
  sales targets and meeting certain conditions, the exclusive term of the
  agreement will continue for up to 11 years followed by a four-year
  co-exclusive transition period with the Company.  InScope began marketing PillCam ESO in the United States in
  November 2004 following FDA clearance for the PillCam ESO capsule.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | All
  milestone payments are being deferred and systematically recognized by the
  Company as a reduction of commission expense over the 15 years term of the
  agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Milestone
  payments are included in deferred income in the Consolidated Balance Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-19

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Notes To The Consolidated Financial
Statements
  (In thousands except share and per share data)

Note 8 - Commitments and Contingencies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Agreement with a Canadian supplier
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                   
| | The Company
  entered into an agreement with a Canadian company (hereinafter  the
  supplier) that supplies the transmitter that is integrated into the PillCam
  capsules.  The supplier began
  supplying the transmitter to the Company in the fourth quarter of 2004,
  replacing its previous supplier.
  Under the agreement, the Company has agreed to purchase a minimum
  quantity of transmitters during the first 36 months following the development
  and testing phase, and if it fails to do so it must make certain payments to
  the supplier in respect of the shortfall. After this initial 36-month period,
  the supplier may terminate the agreement on six months notice if the Company
  does not order a minimum quantity of transmitters in each subsequent 12-month
  period, subject to the right of the Company to submit a final purchase order.
  The agreement also includes non-compete provisions prohibiting the 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 the Companys
  market. The initial term of the agreement expires in April 2007, subject to
  earlier termination in specified circumstances, with the option to extend
  annually thereafter for up to five years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In July
  2005, the Company agreed with the supplier that it will develop and
  manufacture an enhanced version of the transmitter based on specifications
  that the Company provides, which it expects will replace the existing
  transmitter in 2007.  The minimum
  purchase requirements will not apply to this enhanced transmitter.  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Patent reexamination              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                   
| | On December
  30, 2003, a Japanese corporation filed a request for ex parte reexamination
  of some claims in one of the Companys U.S. patents in the United States
  Patent and Trademark Office (USPTO).
  The USPTO issued an office action in the reexamination, to which the
  Company responded on August 17, 2005.
  In its reply, the Company defended the validity of the claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company
  is not accused of infringing a third partys patent and its ability to sell
  its products is not contested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Provision for Sales Tax           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                   
| | The financial statements contain a provision of $1.8 million,
        before tax effect, 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. Under most state laws and the terms of its
        customer agreements, the Company has a right to collect the tax from its
        customers. This provision represents the Companys estimation regarding
        the amounts it may not be able to collect from its customers and remit
        to the different jurisdictions, and any interest and penalties the Company
        may have to pay these jurisdictions for failure to timely remit the sales
        tax.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-20

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Notes To The Consolidated Financial
Statements
  (In thousands except share and per share data)

Note 9 - Accounts Payable - Other

|                                  |  |      |               |      |   |        | 
|--------------------------------- |  | ---- | ------------- | ---- | - | ------ | 
|                                  |  |      | December
  31 |     
|                                  |  |      |               |     
|                                  |  | 2004 |               | 2005 |  
|                                  |  |      |               |      |  
|                                  |  |      |               |      |  
|Government institutions           |  | $    | 861           |      | $ | 3,693  | 
|Liabilities
  regarding employees |  |      | 3,795         |      |   | 4,700  | 
|Advances
  from customers         |  |      | 35            |      |   | 39     | 
|Warranty                          |  |      | 39            |      |   | 71     | 
|Royalties to
  the OCS            |  |      | 246           |      |   | 306    | 
|Commissions                       |  |      | 1,923         |      |   | 2,161  | 
|Accrued
  expenses                |  |      | 1,779         |      |   | 2,916  | 
|                                  |  |      |               |      |   |        | 
|                                  |  | $    | 8,678         |      | $ | 13,886 | 
|                                  |  |      |               |      |   |        | 

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 payment 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 provision for employee severance payment included in the balance
  sheet represents the total liability for such severance payment, while the
  assets held for severance benefits included in the balance sheet represents
  the Companys contributions to severance pay funds and to insurance
  policies.  The Company may make
  withdrawals from the funds only upon complying with the Israeli severance pay
  law or labor agreements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The U.S. subsidiary has a defined contribution retirement plan for
  its employees.  Employees are allowed
  to contribute a percentage of their salary in any one year, subject to a
  regulatory limit.  The Company makes
  matching contributions of up to 3% of an employees salary.  Employees are immediately vested in the
  Companys contributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Expenses
  recorded in respect of provision for employee severance payments for the
  years ended December 31, 2003, 2004 and 2005 are $489, $525 and $664,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Note 11 - Share Capital

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Ordinary shares
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                
| | All of the
  issued and outstanding Ordinary Shares of the Company are duly authorized,
  validly 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 of association, its 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.

F-21

---



Given Imaging Ltd. and its Consolidated
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
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                            
| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As of
  December 31, 2005, 4,502,695 Ordinary Shares of the Company, of a par value
  of NIS 0.05 each, are reserved for the exercise of options under the Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Options
  granted to Israeli optionees are designated as Section 102 options or Section
  3(i) options within the meaning of the Israeli Income Tax Ordinance and
  related regulations as amended under the tax reform and are held in trust on
  behalf of the Israeli employees, as required by such legislation.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Options
  granted to non-Israeli optionees may or may not contain such terms that will
  qualify such options as Incentive Stock Options (ISOs) within the meaning
  of Section 422(b) of the United States Internal Revenue Code of 1986, as
  amended (the Code). Options that do not contain terms that will qualify
  them as ISOs are referred to herein as Non-Qualified Stock Options. Each
  option agreement is required to state whether such option will or will not be
  treated as an ISO. No ISO is granted unless such option, when granted,
  qualifies as an incentive stock option under Section 422 of the Code.                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Compensation
  expense related to options issued has been calculated based on the difference
  between the market price of the underlying shares and the options exercise
  price.  Prior to the IPO date (October
  4, 2001), the market price of the underlying shares was estimated on the
  basis of the price that was paid by various third parties, as well as
  increases in value attributable to the achievement of milestones in the
  Companys business plan.  The share
  price paid by third parties has been adjusted upwards between the dates of
  the various private offerings.
  Following the IPO date, the market price represents the underlying
  listing price on the Nasdaq National Market.                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The Company
  applies APB Opinion No. 25 in respect of options granted to employees and
  directors, and recorded compensation expense of $46, $16 and $3 in the years
  ended December 31, 2003, 2004 and 2005, respectively, according to the
  intrinsic value of the above options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The Company
  applies Statement 123 in respect of options granted to consultants and
  recorded compensation expense of $59, $62 and $0 in the years ended December
  31, 2003, 2004 and 2005, respectively, related to the above options according
  to the Black-Scholes model.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-22

---



Given Imaging Ltd. and its Consolidated
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 illustrates the effect on net profit (loss) and profit (loss) per
  Ordinary Share if the Company had applied the fair value recognition
  provisions of Statement 123:

| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | ----------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
| |                                                                                     |  | Year ended December 31, |        
| |                                                                                     |  |                         |        
| |                                                                                     |  | 2003                    |         | 2004 |   | 2005    |  
| |                                                                                     |  |                         |         |      |   |         |  
|
| | Net profit (loss) as reported                                                       |  | $                       | (9,609  | )    | $ | 2,888   |   | $ | 6,343   |  
| | -     Compensation
  expenses according to APB 25 included in the reported net loss |  |                         | 46      |      |   | 16      |   |   | 3       |  
| | -     Compensation
  expenses according to Statement 123                            |  |                         | (7,012  | )    |   | (13,432 | ) |   | (10,327 | )
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | Pro forma net loss                                                                  |  | $                       | (16,575 | )    | $ | (10,528 | ) | $ | (3,981  | )
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | Basic profit (loss) per Ordinary Share                                              |  |                         |         |      |   |         |   |   |         |  
| | As reported                                                                         |  | $                       | (0.38   | )    | $ | 0.11    |   | $ | 0.23    |  
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | Pro forma                                                                           |  | $                       | (0.65   | )    | $ | (0.39   | ) | $ | (0.14   | )
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | Diluted profit (loss) per Ordinary Share                                            |  |                         |         |      |   |         |   |   |         |  
| | As reported                                                                         |  | $                       | (0.38   | )    | $ | 0.10    |   | $ | 0.21    |  
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  
| | Pro forma                                                                           |  | $                       | (0.65   | )    | $ | (0.39   | ) | $ | (0.14   | )
| |                                                                                     |  |                         |         |      |   |         |   |   |         |  

| |                                                                                                                                             |                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
| | The fair
  value of each option granted is estimated on the date of grant, using the
  Black-Scholes model using the following assumptions:
| |                                                                                                                                             |                                            
| | 1.                                                                                                                                          | Dividend
  yield of zero percent.          
| |                                                                                                                                             |                                            
| | 2.                                                                                                                                          | Risk-free average interest rate as follows:

| |                         |  |  |         |  | 
| | ----------------------- |  |  | ------- |  | 
| | Year ended December 31, |  |  | %       | 
| |                         |  |  |         | 
|
| | 2003                    |  |  | 1.5     | 
| | 2004                    |  |  | 1.0-2.5 | 
| | 2005                    |  |  | 3.0-4.3 | 

| |    |                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Estimated
  expected lives of seven years as of the date of grant in regard to options
  granted until the end of 2003. Options granted in 2004 and 2005 have
  estimated expected lives of five years.                                                               
| |    |                                                                                                                                                                                                                                                                       
| | 4. | Expected
  average volatility of 81%, 74% and 62%, for the years ended December 31,
  2003, 2004 and 2005, respectively, which represents a weighted average
  standard deviation rate for the price of the Companys Ordinary Shares on the
  NASDAQ National Market.

F-23

---



Given Imaging Ltd. and its Consolidated
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 stock options for Ordinary
  Shares outstanding as of the years indicated:

| |                |  |                                           |           |                                                           |                     |                                           |                     |  |           | 
| | -------------- |  | ----------------------------------------- | --------- | --------------------------------------------------------- | ------------------- | ----------------------------------------- | ------------------- |  | --------- | 
| |                |  |                                           |           |                                                           | Options
outstanding |                                           | Options
exercisable | 
| |                |  |                                           |           |                                                           |                    
| | Exercise price |  | Number outstanding at
  December 31, 2005 |           | Weighted average remaining 
  contractual life (in years) |                     | Number exercisable at
  December 31, 2005 |                    
| |                |  |                                           |           |                                                           |                     |                                           |                    
| |                |  |                                           |           |                                                           |                     |                                           |                    
| | NIS 0.05       |  |                                           | 159,578   |                                                           |                     | 2.50                                      |                     |  | 159,578   | 
| | $1 - $10       |  |                                           | 1,250,600 |                                                           |                     | 5.83                                      |                     |  | 1,166,225 | 
| | $10.01-$20     |  |                                           | 1,527,450 |                                                           |                     | 6.86                                      |                     |  | 1,159,075 | 
| | $20.01-$30     |  |                                           | 453,275   |                                                           |                     | 9.29                                      |                     |  | 94,575    | 
| | $30.01-$40     |  |                                           | 642,257   |                                                           |                     | 8.83                                      |                     |  | 273,807   | 
| |                |  |                                           |           |                                                           |                     |                                           |                     |  |           | 
| |                |  |                                           | 4,033,160 |                                                           |                     |                                           |                     |  | 2,853,260 | 
| |                |  |                                           |           |                                                           |                     |                                           |                     |  |           | 

The option
allotments are as follows:

| |                              |  |                  |           |                                   |  |                                         |  |  |       | 
| | ---------------------------- |  | ---------------- | --------- | --------------------------------- |  | --------------------------------------- |  |  | ----- | 
| |                              |  | Number of shares |           | Weighted average
  exercise price |  | Weighted average
  grant datefair value | 
| |                              |  |                  |           |                                   |  |                                         | 
| | Balance at January 1, 2003   |  |                  | 2,977,463 |                                   |  |                                         |  |  |       | 
| | Granted                      |  |                  | 1,331,500 |                                   |  | 13.78                                   |  |  | 9.89  | 
| | Forfeited                    |  |                  | (151,892  | )                                 |  | 9.08                                    |  |  | 8.92  | 
| | Exercised                    |  |                  | (275,675  | )                                 |  | 2.63                                    |  |  | 3.34  | 
| |                              |  |                  |           |                                   |  |                                         |  |  |       | 
| | Balance at December 31, 2003 |  |                  | 3,881,396 |                                   |  |                                         |  |  |       | 
| | Granted                      |  |                  | 1,011,340 |                                   |  | 34.09                                   |  |  | 23.31 | 
| | Forfeited                    |  |                  | (119,000  | )                                 |  | 14.84                                   |  |  | 10.36 | 
| | Exercised                    |  |                  | (472,198  | )                                 |  | 5.44                                    |  |  | 4.11  | 
| |                              |  |                  |           |                                   |  |                                         |  |  |       | 
| | Balance at December 31, 2004 |  |                  | 4,301,538 |                                   |  |                                         |  |  |       | 
| | Granted                      |  |                  | 266,000   |                                   |  | 25.06                                   |  |  | 13.93 | 
| | Forfeited                    |  |                  | (205,483  | )                                 |  | 26.96                                   |  |  | 16.78 | 
| | Exercised                    |  |                  | (328,895  | )                                 |  | 3.29                                    |  |  | 2.78  | 
| |                              |  |                  |           |                                   |  |                                         |  |  |       | 
| | Balance at December 31, 2005 |  |                  | 4,033,160 |                                   |  |                                         |  |  |       | 
| |                              |  |                  |           |                                   |  |                                         |  |  |       | 

| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  following summarizes the departmental allocation of the stock-based
  compensation charge for both employees and non-employee stock option grants:

| |                                       |  |                         |     |      |   |      |  |   |   | 
| | ------------------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | - | 
| |                                       |  | Year ended December 31, |    
| |                                       |  |                         |    
| |                                       |  | 2003                    |     | 2004 |   | 2005 | 
| |                                       |  |                         |     |      |   |      | 
|
| | Research and
  development costs      |  | $                       | (18 | )    | $ | 63   |  | $ |  | 
| | Selling and
  marketing expenses      |  |                         | 94  |      |   | 1    |  |   |  | 
| | General and
  administrative expenses |  |                         | 29  |      |   | 14   |  |   | 3 | 
| |                                       |  |                         |     |      |   |      |  |   |   | 
| |                                       |  |                         |     |      |   |      |  |   |   | 
| |                                       |  | $                       | 105 |      | $ | 78   |  | $ | 3 | 
| |                                       |  |                         |     |      |   |      |  |   |   | 

F-24

---



Given Imaging Ltd. and its Consolidated
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, |       
| |                                 |  |                         |       
| |                                 |  | 2003                    |        | 2004 |   | 2005   | 
| |                                 |  |                         |        |      |   |        | 
|
| | Workstations
  and recorders    |  | $                       | 15,879 |      | $ | 18,669 |  | $ | 16,145 | 
| | PillCam SB
  capsule            |  |                         | 22,865 |      |   | 41,622 |  |   | 62,528 | 
| | PillCam ESO
  capsule           |  |                         |       |      |   | 1,829  |  |   | 4,384  | 
| | Patency
  capsules and scanners |  |                         | 15     |      |   | 188    |  |   | 174    | 
| | Service                         |  |                         | 1,780  |      |   | 2,712  |  |   | 3,545  | 
| |                                 |  |                         |        |      |   |        |  |   |        | 
| |                                 |  |                         |        |      |   |        |  |   |        | 
| |                                 |  | $                       | 40,539 |      | $ | 65,020 |  | $ | 86,776 | 
| |                                 |  |                         |        |      |   |        |  |   |        | 

| |    |                             
| | -- | ----------------------------
| | B. | Revenues by geographic areas

| |                     |  |                         |        |      |   |        |  |   |        | 
| | ------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
| |                     |  | Year ended December 31, |       
| |                     |  |                         |       
| |                     |  | 2003                    |        | 2004 |   | 2005   | 
| |                     |  |                         |        |      |   |        | 
|
| | United
  States     |  | $                       | 26,162 |      | $ | 46,694 |  | $ | 63,896 | 
| | Europe              |  |                         | 11,838 |      |   | 13,447 |  |   | 16,765 | 
| | Rest of the
  world |  |                         | 2,539  |      |   | 4,879  |  |   | 6,115  | 
| |                     |  |                         |        |      |   |        |  |   |        | 
| |                     |  |                         |        |      |   |        |  |   |        | 
| |                     |  | $                       | 40,539 |      | $ | 65,020 |  | $ | 86,776 | 
| |                     |  |                         |        |      |   |        |  |   |        | 

Note 13 - Financial Income, net

| |                                     |  |                         |      |      |   |      |   |   |       |  
| | ----------------------------------- |  | ----------------------- | ---- | ---- | - | ---- | - | - | ----- | -
| |                                     |  | Year ended December 31, |     
| |                                     |  |                         |     
| |                                     |  | 2003                    |      | 2004 |   | 2005 |  
| |                                     |  |                         |      |      |   |      |  
|
| | Currency
  gains (losses)           |  | $                       | 840  |      | $ | 444  |   | $ | (837  | )
| | Interest
  income                   |  |                         | 272  |      |   | 685  |   |   | 1,963 |  
| | Income from
  marketable securities |  |                         |     |      |   |     |   |   | 422   |  
| | Other                               |  |                         | (117 | )    |   | (173 | ) |   | (786  | )
| |                                     |  |                         |      |      |   |      |   |   |       |  
| |                                     |  |                         |      |      |   |      |   |   |       |  
| |                                     |  | $                       | 995  |      | $ | 956  |   | $ | 762   |  
| |                                     |  |                         |      |      |   |      |   |   |       |  

F-25

---



Given Imaging Ltd. and its Consolidated
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 nominal 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 Israeli tax law, the Company was awarded Approved Enterprise status
  under the government alternative benefits track. 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.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | 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 (2014, for the first program)). As of December
  31, 2005, the benefit term had not commenced.                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Dividend
  distributions originating from the income of the 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).                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | On March 30,
  2005, the Knesset approved a reform of the Encouragement of Capital
  Investments Law - 1959 (hereinafter - the reform), which allows companies
  that meet the criteria of the alternative tax benefits track, to receive
  these benefits, subject to certain conditions, without prior approval and
  with no requirement to file reports with the Investment Center. Audits will
  take place via the Income Tax Authorities as part of the tax audits.                                                                        

F-26

---



Given Imaging Ltd. and its Consolidated
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 reform does not retroactively apply for investment programs
        having an approved enterprise approval certificate from the Investment
        Center issued up to December 31, 2004 and should not impact an existing
        approved enterprise, which received written approval. The reform 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 $14 million
  as of December 31, 2005. 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)                                                                                                                                                                                                                                                                                                        | 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 (hereinafter - the Amendment).                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                            | The
  Amendment provides for a gradual reduction in corporate tax rates 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%.                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                            | This change
  has no effect on the financial statements of the Company.                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | B.                                                                                                                                                                                                                                                                                                         | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Because of operating losses, the Companys subsidiaries incurred
        no income tax expense for the period from inception through December 31,
        2005. At December 31, 2005, the subsidiaries had local, federal and state
        net operating loss carryforwards of approximately $22 million.

F-27

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Notes To The Consolidated Financial
Statements
  (In thousands except share and per share data)

Note 14 - Taxes on Income (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 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. 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, 2005. 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 are:                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                          |  |               |         |      |   |         |  
| | ------------------------------------------------------------------------ |  | ------------- | ------- | ---- | - | ------- | -
| |                                                                          |  | December
  31 |        
| |                                                                          |  |               |        
| |                                                                          |  | 2004          |         | 2005 |  
| |                                                                          |  |               |         |      |  
|
| | Net operating tax assets regarding
  carryforward losses of subsidiaries |  | $             | 8,349   |      | $ | 9,960   |  
| | Other timing differences                                                 |  |               | 5,484   |      |   | 1,576   |  
| |                                                                          |  |               |         |      |   |         |  
| |                                                                          |  |               |         |      |   |         |  
| | Deferred tax asset                                                       |  |               | 13,833  |      |   | 11,536  |  
| | Valuation allowance                                                      |  |               | (13,096 | )    |   | (10,317 | )
| |                                                                          |  |               |         |      |   |         |  
| |                                                                          |  |               |         |      |   |         |  
| |                                                                          |  | $             | 737     |      | $ | 1,219   |  
| |                                                                          |  |               |         |      |   |         |  

| |                                                                                                      |                                                                                  
| | ---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------
| | The net
  change in the total valuation allowance for the year ended December 31, 2005
  was $2,779.
| |                                                                                                     
| | D.                                                                                                   | Reconciliation of the statutory tax expense (benefit) to actual taxes
  on income

| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | ----------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ----- | - | - | ----- | -
| |                                                                                                 |  | Year ended
  December 31, |       
| |                                                                                                 |  |                           |       
| |                                                                                                 |  | 2003                      |        | 2004 |   | 2005  |  
| |                                                                                                 |  |                           |        |      |   |       |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | Profit (loss) before taxes on income as
  reported in the consolidated statements of operations |  | $                         | (9,867 | )    | $ | 2,141 |   | $ | 5,227 |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | Tax rate                                                                                        |  |                           | 0      | %    |   | 0     | % |   | 0     | %
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | Statutory income tax on the above amount                                                        |  |                           |       |      |   |      |   |   |      |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | Tax benefits in subsidiaries                                                                    |  |                           |       |      |   | (690  | ) |   | (286  | )
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| | Taxes on income                                                                                 |  | $                         |       |      | $ | (690  | ) | $ | (286  | )
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  
| |                                                                                                 |  |                           |        |      |   |       |   |   |       |  

F-28

---



Given Imaging Ltd. and its Consolidated
Subsidiaries

Notes To The Consolidated Financial
Statements
  (In thousands except share and per share data)

Note 15 - Related Parties Transactions and
Balances

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Agreement
with Rafael                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On January
  29, 1998, the Company entered into a technology purchase and license
  agreement (the Technology Purchase Agreement) with Rafael Armament Development
  Authority (Rafael) which is a division of the Israeli Ministry of Defense.                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Rafael is a
  related party because it beneficially owns approximately 49% of the
  outstanding shares of RDC Rafael Development Corporation, and they both hold
  approximately 10% of the Companys shares.                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Pursuant to
  the Technology Purchase Agreement, the Company purchased from Rafael for $30
  all of Rafaels rights to the technology associated with and the patent
  issued in connection with the prototype PillCam capsule and system. Rafael
  and the Company each granted each other certain rights in connection with the
  know-how and technology associated with the PillCam capsule and system, in
  the case of Rafael, solely for use in the military and security fields and,
  in the case of the Company, solely for commercial exploitation of the PillCam
  capsule.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In
  consideration for payment of royalties in an amount to be agreed upon, the
  Company and Rafael have agreed to grant to the other the exclusive right to
  use any improvements to the PillCam capsule and system technology developed
  by the other party in these fields.                                                                                                                                                                                                                                                                                                      
|
| | None of the
  parties has exercised these certain rights to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Note 16 - 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. The carrying amounts of these financial
  instruments approximate fair value.

F-29

---