As
filed with the Securities Exchange Commission on March 31, 2009







UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
20-F




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




OR




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




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008




OR




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




OR




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





Commission
File Number:  000-33133







GIVEN
IMAGING LTD.


(Exact
name of Registrant as specified in its charter)




Israel


(Jurisdiction
of incorporation or organization)




Hermon
Building, New Industrial Park


Yoqneam
20692, Israel


(Address
of principal executive offices)





Ido
Warshavski, Adv.


Tel:  +
972 (4) 909-7777


E-mail:  Ido.Warshavski@givenimaging.com


Fax:  +972
(4) 959 2466


Hermon
Building, New Industrial Park


Yoqneam
20692, Israel


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)




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




Title
      of each class
            
            Name
      of each exchange on which registeredOrdinary
      Shares, par value NIS 0.05 per share
            
            Nasdaq
      Global Market





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




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




The
number of outstanding shares of each of the issuer’s classes of capital or
common stock as of December 31, 2008:




29,257,785
Ordinary Shares, par value NIS 0.05 per share







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




Yes o  No x




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




Yes o  No x




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





Yes x  No o




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




Large accelerated filer o
                Accelerated filer x
                Non accelerated filer o


2


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:





U.S. GAAP
xInternational
Financial Reporting Standards as issued oOther o


by the
International Accounting Standards Board




If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.




Item 17
o Item 18
o




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







3





TABLE
OF CONTENTS




PagePART IItem
      1.
                    Identity
      of Directors, Senior Management and Advisors
                    7Item
      2.
                    Offer
      Statistics and Expected Timetable
                    7Item
      3.
                    Key
      Information
                    7Item
      4.
                    Information
      on the Company
                    21Item
      4A.
                    Unresolved
      Staff Comments
                    49Item
      5.
                    Operating
      and Financial Review and Prospects
                    49Item
      6.
                    Directors,
      Senior Management and Employees
                    74Item
      7.
                    Major
      Shareholders and Related Party Transactions
                    87Item
      8.
                    Financial
      Information
                    96Item
      9.
                    The
      Offer and Listing
                    97Item
      10.
                    Additional
      Information
                    99Item
      11.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    114Item
      12.
                    Description
      of Securities Other Than Equity Securities
                    115PART IIItem
      13.
                    Defaults,
      Dividend Arrearages and Delinquencies
                    115Item
      14.
                    Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
                    115Item
      15.
                    Controls
      and Procedures
                    115Item
      16.
                    [Reserved]
                    116Item
      16A.
                    Audit
      Committee Financial Expert.
                    116Item
      16B.
                    Code
      of Ethics.
                    117Item
      16C.
                    Principal
      Accountant Fees and Services
                    117Item
      16D.
                    Exemptions
      From the Listing Standards for Audit Committees.
                    117Item
      16E.
                    Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                    117Item
      16F.
                    Changes
      in Registrant’s Certifying Accountants
                    117Item
      16G.
                    Corporate
      Governance
                    118PART IIIItem
      17.
                    Financial
      Statements
                    118Item
      18.
                    Financial
      Statements
                    118Item
      19.
                    Exhibits
                    118


4


TRADEMARK
DISCLAIMER





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





CERTAIN
DEFINITIONS





As used
in this Annual Report, unless the context otherwise requires:  the
terms “Given,” the “Company,” “we,” “us,” “our” and “our company” refer to Given
Imaging Ltd. and its subsidiaries; the terms “U.S. dollars,” “dollars” or “$”
refer to United States dollars; the terms “Shekel” or “NIS” refer to the New
Israeli Shekel, the legal tender currency of the State of Israel.





CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS




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




•
            the
      adequacy of our cash balances and cash flow from operations to support our
      operations or future growth, in general or for specified periods of
      time;•
            statements
      as to the potential or expected acceptance of our current and future
      products by the medical community, particularly
      gastroenterologists;•
            statements
      as to expected increases in sales, operating results and certain expenses,
      including research and development and sales and marketing
      expenses;•
            statements
      as to anticipated reimbursement from U.S. and non-U.S. third-party 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 our products, including capsule
      endoscopes and the Bravo pH monitoring system, as well as our ability to
      take advantage of those opportunities;•
            expectations
      as to the timing, results and content of future clinical studies and
      publications;•
            statements
      as to the expected outcome of legal and patent proceedings in which we are
      involved;•
            statements
      as to the expectation for the content of future publications regarding our
      products;




•
            expectations
      as to the receipt and timing of regulatory clearances and approvals, and
      the anticipated timing of sales of our products in new markets or for new
      indications;





5





•
            estimates
      of the impact of changes in currency exchange rates on our operating
      results;•
            expectations
      as to the adequacy of our inventory of critical components and finished
      products;•
            expectations
      as to the adequacy of our manufacturing facilities; and•
            statements
      as to our expected treatment under Israeli and U.S. federal tax
      legislation and the impact that new tax and corporate legislation may have
      on our operations.




In
addition, forward-looking statements may be, but are not necessarily, identified
by the use of forward-looking terminology such as “may,” “anticipates,”
“estimates,” “expects,” “intends,” “plans,” “believes,” and words and terms of
similar substance. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual events, results,
performance, circumstances or achievements of the Company to be materially
different from any future events, results, performance, circumstances or
achievements expressed or implied by such forward-looking statements. Factors
that could cause actual events, results, performance, circumstances or
achievements to differ from such forward-looking statements include, but are not
limited to, the following: (1) our ability to obtain regulatory clearance for
our products in one or more countries and adverse changes in regulatory
environment, (2) our ability to have successful clinical trials and to provide
evidence of the clinical and economic effectiveness of our products, (3) our
success in implementing our sales, marketing, research and development and
manufacturing plans, (4) continuous supply of certain product or system
components by third party suppliers, (5) protection and validity of patents and
other intellectual property rights, (6) the impact of currency exchange rates,
(7) the effect of competition by other companies, (8) the outcome of future
litigation, (9) the reimbursement policies for our product from third-party
payors, (10) quarterly variations in operating results, (11) the possibility of
armed conflict or civil or military unrest in Israel, (12) the impact of macro
economic and market conditions in our main markets, and (13) other risks and
factors disclosed in our filings with the U.S. Securities and Exchange
Commission, including, but not limited to, risks and factors identified under
such headings as “Risk Factors”, “Cautionary Language Regarding Forward-Looking
Statements” and “Operating and Financial Review and Prospects” in this Annual
Report on Form 20-F for the year ended December 31, 2008. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this Annual Report. Except for the Company’s ongoing obligations
to disclose material information under the applicable securities laws, it
undertakes no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events.


6


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, 2006, 2007 and 2008, and the selected consolidated balance sheet data as of
December 31, 2007 and 2008, 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, 2004 and 2005, and the
selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006,
have been derived from our audited consolidated financial statements not
included in this Form 20-F, which have been prepared in accordance with
generally accepted accounting principles in the United States of America. You
should read the selected consolidated financial information set forth below in
conjunction with our audited 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 31,2004
                                                    
                                                    
                                                    2005
                                                    
                                                    
                                                    2006 (1)
                                                    
                                                    
                                                    2007(1)
                                                    
                                                    
                                                    2008(1)(in
      thousands, except share and per share data)Statements
      of Operations Data:Revenues
                                                    
                                                    $
                                                    65,020
                                                    
                                                    
                                                    $
                                                    86,776
                                                    
                                                    
                                                    $
                                                    95,029
                                                    
                                                    
                                                    $
                                                    112,868
                                                    
                                                    
                                                    $
                                                    125,108Cost
      of revenues
                                                    
                                                    
                                                    (17,734
                                                    )
                                                    
                                                    
                                                    (22,070
                                                    )
                                                    
                                                    
                                                    (24,154
                                                    )
                                                    
                                                    
                                                    (29,721
                                                    )
                                                    
                                                    
                                                    (33,001
                                                    )Early
      repayment of royalty bearing government grants
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (4,843
                                                    )
                                                    
                                                    
                                                    —Gross
      profit
                                                    
                                                    
                                                    47,286
                                                    
                                                    
                                                    
                                                    64,706
                                                    
                                                    
                                                    
                                                    70,875
                                                    
                                                    
                                                    
                                                    78,304
                                                    
                                                    
                                                    
                                                    92,107Operating
      expenses:Research
      and development, gross
                                                    
                                                    
                                                    (7,363
                                                    )
                                                    
                                                    
                                                    (8,833
                                                    )
                                                    
                                                    
                                                    (12,678
                                                    )
                                                    
                                                    
                                                    (12,847
                                                    )
                                                    
                                                    
                                                    (15,126
                                                    )In-process
      research and development acquired in a business
combination
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (4,700
                                                    )Royalty-bearing
      government grants
                                                    
                                                    
                                                    1,140
                                                    
                                                    
                                                    
                                                    1,244
                                                    
                                                    
                                                    
                                                    1,867
                                                    
                                                    
                                                    
                                                    1,242
                                                    
                                                    
                                                    
                                                    1,530Research
      and development, net
                                                    
                                                    
                                                    (6,223
                                                    )
                                                    
                                                    
                                                    (7,589
                                                    )
                                                    
                                                    
                                                    (10,811
                                                    )
                                                    
                                                    
                                                    (11,605
                                                    )
                                                    
                                                    
                                                    (18,298
                                                    )Sales
      and marketing
                                                    
                                                    
                                                    (33,652
                                                    )
                                                    
                                                    
                                                    (43,281
                                                    )
                                                    
                                                    
                                                    (50,732
                                                    )
                                                    
                                                    
                                                    (55,446
                                                    )
                                                    
                                                    
                                                    (60,902
                                                    )General
      and administrative
                                                    
                                                    
                                                    (6,916
                                                    )
                                                    
                                                    
                                                    (9,657
                                                    )
                                                    
                                                    
                                                    (16,027
                                                    )
                                                    
                                                    
                                                    (20,981
                                                    )
                                                    
                                                    
                                                    (19,320
                                                    )Termination
      of marketing agreement
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    22,860
                                                    
                                                    
                                                    
                                                    5,443Other
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (422
                                                    )
                                                    
                                                    
                                                    (867
                                                    )Total
      operating expenses
                                                    
                                                    
                                                    (46,791
                                                    )
                                                    
                                                    
                                                    (60,527
                                                    )
                                                    
                                                    
                                                    (77,570
                                                    )
                                                    
                                                    
                                                    (65,594
                                                    )
                                                    
                                                    
                                                    (93,942
                                                    )Operating
      profit (loss)
                                                    
                                                    
                                                    495
                                                    
                                                    
                                                    
                                                    4,179
                                                    
                                                    
                                                    
                                                    (6,695
                                                    )
                                                    
                                                    
                                                    12,710
                                                    
                                                    
                                                    
                                                    (1,835
                                                    )Financial
      income, net
                                                    
                                                    
                                                    956
                                                    
                                                    
                                                    
                                                    762
                                                    
                                                    
                                                    
                                                    3,980
                                                    
                                                    
                                                    
                                                    5,520
                                                    
                                                    
                                                    
                                                    4,004Profit
      (loss) before taxes on income and minority share
                                                    
                                                    
                                                    1,451
                                                    
                                                    
                                                    
                                                    4,941
                                                    
                                                    
                                                    
                                                    (2,715
                                                    )
                                                    
                                                    
                                                    18,230
                                                    
                                                    
                                                    
                                                    2,169Income
      tax benefit (expense)
                                                    
                                                    
                                                    690
                                                    
                                                    
                                                    
                                                    286
                                                    
                                                    
                                                    
                                                    (127
                                                    )
                                                    
                                                    
                                                    (4,548
                                                    )
                                                    
                                                    
                                                    (250
                                                    )Profit
      (loss) before minority share
                                                    
                                                    
                                                    2,141
                                                    
                                                    
                                                    
                                                    5,227
                                                    
                                                    
                                                    
                                                    (2,842
                                                    )
                                                    
                                                    
                                                    13,682
                                                    
                                                    
                                                    
                                                    1,919Minority
      share in losses of subsidiary
                                                    
                                                    
                                                    747
                                                    
                                                    
                                                    
                                                    1,116
                                                    
                                                    
                                                    
                                                    1,334
                                                    
                                                    
                                                    
                                                    1,503
                                                    
                                                    
                                                    
                                                    2,087Net
      profit (loss)
                                                    
                                                    $
                                                    2,888
                                                    
                                                    
                                                    $
                                                    6,343
                                                    
                                                    
                                                    $
                                                    (1,508
                                                    )
                                                    
                                                    $
                                                    15,185
                                                    
                                                    
                                                    $
                                                    4,006Basic
      earnings (loss) per ordinary share (2)
                                                    
                                                    $
                                                    0.11
                                                    
                                                    
                                                    $
                                                    0.23
                                                    
                                                    
                                                    $
                                                    (0.05
                                                    )
                                                    
                                                    $
                                                    0.52
                                                    
                                                    
                                                    $
                                                    0.14Diluted
      earnings (loss) per ordinary share (2)
                                                    
                                                    $
                                                    0.10
                                                    
                                                    
                                                    $
                                                    0.21
                                                    
                                                    
                                                    $
                                                    (0.05
                                                    )
                                                    
                                                    $
                                                    0.49
                                                    
                                                    
                                                    $
                                                    0.13Weighted
      average number of ordinary shares used in computing basic earnings (loss)
      per ordinary share (2)
                                                    
                                                    
                                                    26,633,964
                                                    
                                                    
                                                    
                                                    27,781,223
                                                    
                                                    
                                                    
                                                    28,053,849
                                                    
                                                    
                                                    
                                                    28,961,968
                                                    
                                                    
                                                    
                                                    29,454,035Weighted
      average number of ordinary shares used in computing diluted earnings
      (loss) per ordinary share (2)
                                                    
                                                    
                                                    29,353,448
                                                    
                                                    
                                                    
                                                    29,695,164
                                                    
                                                    
                                                    
                                                    28,053,849
                                                    
                                                    
                                                    
                                                    31,030,458
                                                    
                                                    
                                                    
                                                    30,798,360


7




As
      of December 31,2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008(in
      thousands)Balance Sheet
      Data:Cash
      and cash equivalents
                    
                    $
                    80,861
                    
                    
                    $
                    65,356
                    
                    
                    $
                    44,510
                    
                    
                    $
                    37,103
                    
                    
                    $
                    31,697Short
      term investments
                    
                    
                    —
                    
                    
                    
                    288
                    
                    
                    
                    17,245
                    
                    
                    
                    23,191
                    
                    
                    
                    28,509Working
      capital
                    
                    
                    92,987
                    
                    
                    
                    86,217
                    
                    
                    
                    79,015
                    
                    
                    
                    74,996
                    
                    
                    
                    85,154Marketable
      securities
                    
                    
                    —
                    
                    
                    
                    21,664
                    
                    
                    
                    34,769
                    
                    
                    
                    41,629
                    
                    
                    
                    30,063Total
      assets
                    
                    
                    124,224
                    
                    
                    
                    149,110
                    
                    
                    
                    158,177
                    
                    
                    
                    177,316
                    
                    
                    
                    177,915Long-term
      liabilities
                    
                    
                    10,984
                    
                    
                    
                    24,246
                    
                    
                    
                    22,838
                    
                    
                    
                    3,938
                    
                    
                    
                    5,084Total
      liabilities
                    
                    
                    28,430
                    
                    
                    
                    47,005
                    
                    
                    
                    46,892
                    
                    
                    
                    41,725
                    
                    
                    
                    31,751Accumulated
      deficit
                    
                    
                    (55,747
                    )
                    
                    
                    (49,404
                    )
                    
                    
                    (50,912
                    )
                    
                    
                    (35,727
                    )
                    
                    
                    (31,721
                    )Total
      shareholders’ equity
                    
                    
                    94,617
                    
                    
                    
                    102,044
                    
                    
                    
                    107,786
                    
                    
                    
                    133,595
                    
                    
                    
                    144,171





(1)
            Effective
      January 1, 2006, we have adopted SFAS 123(R), which requires us to
      recognize as an expense the grant-date fair value of stock options and
      other equity-based compensation to employees, over their respective
      vesting period. Accordingly, our operating expenses in 2006, 2007and 2008
      include a total of $5.2 million, $5.7 million and $6.9 million,
      respectively, of additional compensation expense allocated among research
      and development expenses, marketing expenses and general and
      administrative expenses based on the division in which the recipient of
      the option grant is employed. For more information on the adoption of SFAS
      123(R), see Note 1L of the notes to our consolidated financial
      statements.(2)
            See
      Note 1N of the notes to our consolidated financial statements for an
      explanation of the number of shares used in computing earning (loss) per
      share data.




RISK
FACTORS




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


8


A
substantial portion of our revenues and our annual revenue growth to date has
resulted from sales of the PillCam SB capsule. We expect that a substantial
majority of our revenues for the foreseeable future will continue to come from
sales of the PillCam SB capsule. Sales of the PillCam SB capsule contributed
$76.4 million, or 80%, of our revenues in 2006, $90.6 million, or 80%, in 2007
and $103 million, or 82%, in 2008. In addition, we expect sales of other PillCam
capsules, such as PillCam ESO and PillCam COLON, to increasingly contribute to
our revenues in the future. If we are unable to manufacture, market or sell the
PillCam capsules, and PillCam SB in particular, for any reason, including, for
example, product recall, natural disaster, unavailability of components, war in
Israel or as a result of a legal action against us, our revenues may decline
significantly or we may not be able to maintain our expected annual growth rate.
For discussion on our disaster preparedeness, see Item 4 – “Information on the
Company - Manufacturing - Manufacturing Facilities and
Disaster-Preparedness.”




Our
future growth depends in part on our ability to market the PillCam SB capsule
for additional indications other than obscure gastrointestinal
bleeding.




The
PillCam SB capsule has been cleared for marketing by the FDA for the detection
of disorders of the small intestine. In recent years, sales of PillCam SB
capsules have accounted for the significant majority of our revenues. To date,
the PillCam SB capsule has been used primarily for diagnosis of obscure
gastrointestinal bleeding, or OGIB.  Our ability to expand the use of
the PillCam SB capsule for the diagnosis of additional small bowel indications,
such as Crohn’s disease, depends substantially on our ability to provide
clinical evidence and economic analysis supporting such expanded use, our
ability to educate and train our customers on these expanded use opportunities
and our ability to obtain favorable and effective reimbursement coverage for the
PillCam SB capsule for small bowel indications beyond OGIB. If we are unable to
expand the use of the PillCam SB capsule beyond OGIB, sales of the PillCam SB
capsule may decline or not increase as we expect.





If
we are unable to expand reimbursement coverage from third-party payors for
procedures using our products, or if reimbursement is insufficient to create an
economic benefit for purchasing or using our products when compared to
alternative procedures, demand for our products may not grow at the rate we
expect.




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





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




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


9


If
we are unable to market and sell our PillCam COLON capsule, particularly in the
United States, we may miss a significant market opportunity and may not grow as
we expect.




We
have had limited sales of our PillCam COLON capsule in Europe since
2007.  In February 2008, the United States Food and Drug
Administration , or FDA, determined that, based on currently available clinical
data, the PillCam COLON capsule is not substantially equivalent to any marketed
device in the United States for visualization of the colon and, therefore,
cannot be cleared for marketing in the United States, our biggest market,
through the relatively quick 510(k) process. There can be no assurance that we
will be able to receive FDA clearance for this capsule in the foreseeable future
or at all or that the PillCam COLON will be accepted as comparable or superior
to existing technologies for visualization of the colon. Our ability to market
and sell the PillCam COLON successfully depends on one or more of the
following:





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




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





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


10


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





If
our estimates regarding the Bravo pH monitoring business are materially
incorrect, we may not be able to grow our revenues and profitability as we
expect.





In
December 2008, we acquired the Bravo pH monitoring business from Medtronic, Inc,
or Medtronic.  This is our first acquisition since our
inception.  At Medtronic, this business was not organized as a
separate operating entity and was not otherwise considered a material business
for Medtronic.  As a result, audited or reviewed financial statements
were not available for the Bravo business and our decision to acquire this
business and our business expectations are based on our own due diligence and
unaudited financial information and projections we received from
Medtronic.  As a result, our estimates of future financial performance
may be materially incorrect and this business may not positively impact our
financial results or grow as we expect.





If
we are unable to transition and integrate the Bravo pH monitoring business
successfully, our revenues may not grow as we expect, our gross margins may
suffer and we may lose market share to our competitors in the pH monitoring
market.





During
2009, in connection with our acquisition of the Bravo pH monitoring business, we
plan to transfer to our possession and control the business know-how and
third-party supplier relationships, transfer the manufacturing line of the Bravo
capsules and delivery system to Israel, complete or advance significantly the
development of some new components of the Bravo system and otherwise integrate
the Bravo pH monitoring business into our company.  During this
transition period, we will depend significantly on Medtronic to ensure
uninterrupted supply of the Bravo system and in transferring the necessary
manufacturing knowledge to us successfully to allow us to begin our own
manufacturing operations by the end of 2009, as planned.  If we are
unable to complete our transition, research and development or integration plans
successfully or on schedule, our revenues may not grow as a result of this
acquisition as we expect, our gross margins and expected profitability may
suffer or we may lose market share to our competitors in the pH monitoring
market.





If
we are unable to develop new software for the Bravo system and qualify it for
use with an appropriate computer workstation by early 2010, we may not be able
to continue to sell the Bravo system or may be forced to incur significant costs
to outsource the development of new software to a third-party or to obtain
complete access to the know-how related to the existing software.





We intend
to develop, with Medtronic’s assistance, a new software application that allows
physicians to read and interpret the result of the Bravo
procedure.  The current software is complex and the know-how related
to it is no longer under the complete control of Medtronic.  Upon
completion, the new software will eliminate the dependency on Medtronic and
simplify the user interface and related technical elements.  We
currently have a limited number of workstations loaded with the existing
software, which we expect will be sufficient to meet demand for the Bravo system
until early in 2010.  If we are not successful in our efforts to
develop new software during that time, or if demand is much higher than we
expect, we may not be able to continue to sell the Bravo system or may be forced
to incur significant costs to outsource the development of new software to a
third party or to seek to obtain complete access to the know-how related to the
existing software to allow us to continue to use such software on new hardware
not currently qualified for use with the Bravo system.


11




We
may lose market share and our revenues and gross margins may be negatively
affected due to increasing competitive pressure from other capsule endoscopy
manufacturers.




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




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




Competition
for our capsule endoscopy products also comes from traditional technologies for
detecting gastrointestinal disorders and diseases, such as traditional endoscopy
and radiological imaging. The principal manufacturers of gastrointestinal
endoscopes are Olympus, Hoya, and Fuji Film. 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. 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 our capsule
endoscopy products over the current technologies marketed by our competitors,
our results of operations may suffer. For details regarding our cooperation
agreement with Fuji Film, see Item 4 – “Business Overview –
Competition.”




In
addition to competition from products performing similar clinical functions to
our capsule endoscopy product, there is also competition for the limited capital
expenditure budgets of customers. Another capital equipment item for
gastroenterology may compete with our system for the same capital budget, which
is typically limited, and therefore the potential purchaser may be required to
choose between the two items of capital equipment. If we are unable to market
our capsule endoscopy products more effectively than other products which could
be purchased using the same budget, 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 in terms of duration, geographic scope or otherwise, and may
not adequately protect our rights or permit us to gain or keep any competitive
advantage. Currently, many of our patent applications are still pending and we
will be able to use them to protect our technology against potential competitors
only after they are issued. The process of issuing a patent may sometimes be
lengthy and may not always result in issued patents in a form that will be
advantageous to us or at all. Our patents and applications cover particular
aspects of our products and technology and may be challenged, invalidated or
circumvented by third parties. There may be other effective technologies,
designs or methods relating to capsule endoscopy. If other effective methods are
not covered by our patents or applications and our competitors are able to
commercialize products using these methods, it could have an adverse effect on
our sales. In addition, our competitors may obtain patents that will prevent us
from using technologies, designs or methods we would like to integrate into our
products. We may not be able to prevent the unauthorized disclosure or use of
our technical knowledge or other trade secrets by former employees. The laws and
judicial systems of foreign countries may not protect or enable enforcement of
our intellectual property rights to the same extent as the laws of the United
States or at all. If we do not adequately protect our intellectual property, our
competitors or other parties could make products similar to ours and compete
more efficiently with us, which could result in a decrease in our market
share.


12





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. In June 2008, we settled our
patent litigation in the United States against Olympus Corporation and its
affiliates. For a detailed description, see Item 8 – “Financial
Information – Legal Proceedings.”




Whether
a product infringes a patent involves complex legal and factual issues, the
determination of which is often uncertain. While we have attempted to ensure
that our products do 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.





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




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




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




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


13




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




Most
of our revenues since our inception have been generated from sales in the United
States. Sales in the United States accounted for $66.4 million, or 70%, of our
revenues in 2006, $72.3 million, or 64%, of our revenues in 2007, and $74
million, or 59%, of our revenues in 2008. Any disruption to our operations or
market in the United States resulting from changes in management or the sales
team of our U.S. subsidiary, adverse changes in reimbursement policies, new
regulatory requirements, macro-economic changes and other events, many of which
are outside our control, may result in a material reduction in our revenues and
negatively affect our operating results.




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




In
2007 and 2008, we sold our capsule endoscopy products in Japan exclusively
through Suzuken Co. Ltd., a large Japanese pharmaceutical wholeseller. Suzuken
also owns 16.5% of our Japanese subsidiary. Our sales in Japan in 2008 were
lower than we expected.  Consequently, we agreed with Suzuken that it
will become a non-exclusive distributor and we appointed Fuji Medical Systems
Co., Ltd., or Fuji Medical, an affiliate of Fuji Film Corporation, as a second
non-exclusive distributor in this market.  Our future growth in the
Japanese market depends significantly on the success of our distributors and our
ability to manage two non-exclusive distributors in the same
territory.  In addition, marketing our other products in Japan will
require additional, product-specific regulatory clearances. Generally, the
process for obtaining marketing clearance for medical devices in Japan could
range from twelve months, in the case of products with only very minor
modifications from previous cleared product versions, to a few years, in the
case of a completely new device. There is no assurance that we will receive
regulatory clearances in Japan for any of our additional products. Finally, our
main competitor in the field of capsule endoscopy is based in Japan and
competition may be intense. If we are unable to successfully market and sell our
products in Japan for any of the foregoing or other reasons, one of our
significant potential growth opportunities will be materially and adversely
affected.




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




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


14




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




In
addition to the United States, Germany, France, Australia and Israel, where we
market and sell our products directly with our own direct sales and marketing
organizations, we sell our products in over 60 other countries through local
distributors or representatives. To be able to market and sell our products 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 part or all of our products or
only require notification, others require that we or our distributors obtain the
approval of a specified regulatory body. These regulations, including the
requirements for approvals, and the time required for regulatory review vary
from country to country. Obtaining regulatory approvals is expensive and
time-consuming, and we cannot be certain that we or our distributors will
receive regulatory approvals for all of our products in each country or region
in which we plan to market our products. If we modify our products, we or our
distributors may need to apply for new regulatory approvals before we are
permitted to sell them. 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 and 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 our
capsule endoscopy products in that country or region.




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


15




Certain
U.S. federal and state laws, including but not limited to the federal
anti-kickback statute, prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of healthcare items or services reimbursable by a federal or state health care
program such as Medicare or Medicaid. While the federal anti-kickback statute
applies only to products or services for which payment may be made in whole or
in part by a federal or state health care program, state laws often also apply
to private third-party 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.




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




We
rely on local distributors to market and distribute our products in most of the
territories in which we sell them.




With
the exception of Australia, France, Germany, Israel and the United States, we
rely on distributors for the marketing and distribution of our products. Under
most of our agreements with local distributors, a distributor is granted the
right to market our products for a specified period in a particular country or
region, subject to the attainment of minimum sales targets. The distributor is
required to prepare and submit to us for our approval a sales plan and to obtain
the requisite regulatory and reimbursement approvals for our products. 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 2008, we derived $30.8 million, or 24.6 %, of our revenues from
sales to local distributors, compared to $24.7 million, or 21.8%, in 2007. To
date, we have replaced a number of our distributors due to a failure to meet
minimum sales targets and for other reasons. If a distributor is terminated by
us or goes out of business, it may take us a period of time to locate an
alternative distributor and to train its personnel to market our products and
our ability to sell our products 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
our products in a timely manner or within budget.




We
depend on single source suppliers for some of the components necessary for the
production of our capsule endoscopy and Bravo pH monitoring products. For
example, we have sole suppliers for the imaging sensor and transmitter of our
PillCam capsules and the data recorder unit of the Bravo system. If the supply
of these components is disrupted or terminated, or if these suppliers are unable
to supply the quantities of components that we require, we may not be able to
find alternative sources for these key components. Although we maintain a
strategic inventory of key components, the inventory may not be sufficient to
satisfy the demand for our products if supply is interrupted, and is subject to
risk of loss due to catastrophic events such as fire at a storage facility. As a
result, we may be unable to meet demand for our products, which could harm our
ability to generate revenues, lead to customer dissatisfaction and damage our
reputation. If we are required to change the manufacturer of any of these key
components, 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 identification of a new manufacturer could delay
our ability to manufacture our products 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 our products in a timely manner or within
budget.


16




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




Our
corporate offices, manufacturing facilities (other than our PillCam SB backup
production line in Ireland), and research and development facilities are located
in Israel. Economic conditions and military conflicts in Israel may directly
affect our operations. Armed conflicts between Israel and its neighboring
countries and territories occur periodically and a protracted state of
hostility, varying in degree and intensity over time, has in the past led to
security and economic difficulties for Israel. These hostilities, any escalation
thereof or any future armed conflict or violence in the region, could prevent us
from using our corporate offices and primary manufacturing facility in Israel,
and therefore harm our ability to manufacture and sell our
products.




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




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




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




In
general, most male and some female citizens and permanent residents of Israel
between the ages of 21and 45 are obligated, unless exempt, to take part in
annual military reserve duty. Approximately 51% of our employees reside in
Israel and many of our male employees are currently obligated to perform annual
reserve duty. Additionally, all Israeli residents who perform reserve duty are
subject to being called to active duty at any time under emergency
circumstances. Our operations could be disrupted by the absence for a
significant period of one or more of our officers or employees due to military
service. Any such disruption to our operations could adversely impact our
business operations.




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




In
2008, we derived 63% of our revenues in U.S. dollars, 28% in Euro and 5% in
Japanese Yen, 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 2008, in
addition to our U.S. dollar and Euro-denominated liabilities, 29% of our
expenses were denominated in New Israeli Shekels, or Shekels. Our
Shekel-denominated liabilities consist principally of salaries and related
personnel expenses. We anticipate that for the foreseeable future a material
portion of our liabilities will continue to be denominated in Shekels. If the
value of a currency in which our receivables are denominated devalues against
the value of a currency in which our liabilities are denominated, there will be
a negative impact on our operating margins, as well as on our net income. Our
revenues and expenses may not always be fully hedged against our currency
exposure through financial instruments. In addition, if we wish to maintain the
dollar-denominated value of our products in non-U.S. markets, devaluation in the
local currencies of our customers relative to the U.S. dollar could cause our
customers to cancel or decrease orders or default on payment, or alternatively,
we may experience pressure to reduce prices in these markets. In addition, as of
December 31, 2008, 42% of our cash and cash equivalents were denominated in
currencies other than the U.S. dollar and we are therefore subject to the risk
of exchange rate fluctuations among the U.S. dollar, the Yen, the Shekel, the
Australian dollar and the Euro.


17




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




As of
December 31, 2008, we had $31.7 million in cash and cash equivalents, which were
held in bank accounts and deposits with maturities of three months or less
located with a number of high rated banks inside and outside of Israel. In
addition, as of December 31, 2008, we had $30 million invested in marketable
securities and $28.5 million in short term investments. Approximately 26% of our
total cash balances were invested in securities issued by the United States
government or its agencies and in AAA-rated money market funds. The remainder
was held in corporate bonds and commercial paper that were highly-rated by
rating agencies at the time of investment. Our cash and investments are subject
to general credit, counterparty, liquidity, market and interest rate risks,
which were exacerbated by the dislocation that has affected the financial
markets and the global economy since the middle of 2007 and caused credit and
liquidity issues for a number of reputable financial institutions and a general
economic slow down. These risks associated with our investment portfolio may
have a negative effect on our liquidity and financial results.





Market
acceptance of our products in the United States and other countries is dependent
upon the medical equipment purchasing and procurement practices of our
customers, patient demand for our products and procedures and the reimbursement
of patient’s medical expenses by third-party payors, including government
healthcare programs. The current uncertainty surrounding world financial markets
may result in the purchasers of medical equipment decreasing their medical
equipment purchasing and procurement activities. In addition, tightening in
world credit markets may result in our customers having increased difficulty
securing the financing necessary to purchase our products which may result in
decreased sales. The financial condition of our customers may deteriorate and
our ability to collect payments due to us may be adversely
affected.  Widespread economic uncertainty may also result in
cost-conscious patients making fewer trips to their physicians and specialists,
which could result in reduced demand for our products and procedures.
Furthermore, third-party payors, including governments, around the world facing
tightening budgets could move to further reduce their offered reimbursement
rates or countries may adopt healthcare reforms to reduce healthcare spending.
If the current economic condition results in the occurrence of any of these
events, our business and potential growth may be materially and adversely
affected.





The
use of any of our products, 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 any 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 any of our products might necessitate a product recall. Although
we maintain product liability insurance, the coverage limits of these policies
may not be adequate to cover future claims. In the future, we may be unable to
maintain product liability insurance on acceptable terms or at reasonable costs
and such insurance may not provide us with adequate coverage against potential
liabilities. A product liability claim, regardless of merit or ultimate outcome,
or any product recall could result in substantial costs to us, damage to our
reputation, customer dissatisfaction and frustration and a substantial diversion
of management attention. A successful claim brought against us in excess of, or
outside of, our insurance coverage could have a material adverse effect on our
financial condition and results of operations.




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


18


Our
ordinary shares commenced trading on the Nasdaq Global Market in October 2001
and on the Tel-Aviv Stock Exchange in March 2004. In 2008, the closing price of
our shares has ranged from $6.51 to $23.59 per share on the Nasdaq Global Market
and NIS 24.32 to NIS 89.95 on the Tel-Aviv Stock Exchange. The price of our
shares could fluctuate significantly for, among other things, the following
reasons: macroeconomic or general market conditions, future announcements
concerning us or our competitors, the existence and outcome of litigation
concerning our intellectual property assets, changes in third-party
reimbursement practices, regulatory developments, and new clinical or economic
data regarding our current or future products. In addition, it is our practice
to provide guidance to the market as to our expected revenues and earnings per
share based on information available to us at the time of the guidance. If our
operating results do not meet our guidance or the expectations of securities
analysts or investors, the price of our shares would likely decline. In
addition, based on our experience to date, we believe that many of our customers
delay purchasing our products until the end of the fiscal quarter because they
believe this will enable them to negotiate more favorable terms. Therefore,
revenues from sales are concentrated at the end of each fiscal quarter making it
difficult for us to determine the success of each quarter until its end. This
may result in lower than expected quarterly revenues if external or other events
cause potential customers to defer their purchasing decisions even for a short
period of time. Furthermore, we believe that demand for our products may be
materially affected by seasonal factors during the summer months when physicians
and administrators are more likely to postpone purchasing decisions due to
summer vacations and patients are more likely to postpone less urgent diagnostic
procedures until later in the year.Both of these factors may
result in slower sales during the summer. Share price fluctuations may be
exaggerated by low trading volume and the concentration of ownership of our
ordinary shares and changes in trading practices in our ordinary shares, such as
short selling. Securities class action litigation has often been brought against
companies following periods of volatility in the price of their shares. Any
securities litigation claims brought against us could result in substantial
expense and divert management’s attention from our business.




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




The
largest beneficial owners of our shares, IDB Holding Corporation Ltd.,
beneficially owned approximately 48.5% of our ordinary shares, as of December
31, 2008. As a result, IDB Holding Corporation Ltd. could exercise a significant
influence over our operations and business strategy and has sufficient voting
power to influence the outcome of many matters requiring shareholder approval.
These matters may include:




•
              the
      composition of our board of directors which has the authority to direct
      our business, appoint and remove our officers and declare
      dividends;•
              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.





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




As of December 31, 2008, we had 29,257,785 ordinary shares outstanding.
Approximately 50% of these shares are “control securities” available for resale
on the Nasdaq Global Market subject, however, to volume limitations under Rule
144. In addition, all of our ordinary shares are available for resale on the
Tel-Aviv Stock Exchange, subject to compliance with Regulation S under the
Securities Act of 1933. Most of these restricted securities are held by the
largest beneficial owner of our shares, IDB Holding Corporation Ltd. Future
sales of these restricted shares, or the perception that these sales could
occur, could adversely affect the market price of our ordinary shares. We have
periodically experienced a low trading volume of our ordinary shares, and if one
or a small number of parties buys or sells a large number of our ordinary
shares, we may experience volatility in our share price and the price and
liquidity of our shares may be adversely affected.


19


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




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




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




If,
for any taxable year, our passive income, or our assets which produce passive
income, exceeds specified levels, we may be characterized as a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax consequences for our U.S.
shareholders that may include having gains realized on the sale of our shares
treated as ordinary income, rather than as capital gains and potential payment
of additional tax which apply to such gains. Furthermore, in certain cases,
long-term capital gains rates might also be denied for certain dividends that
may be paid by us to our shareholders. We believe we were not a PFIC for the
fiscal year ended December 31, 2008. 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 Item 10 – “Additional Information - Taxation – Certain Material U.S.
Federal Income Tax Considerations - Passive Foreign Investment Company
Considerations.” U.S. shareholders should consult their U.S. tax advisors with
respect to the U.S. tax consequences of investing in our ordinary
shares.




Israeli
law regulating government grants we have received from the Office of the Chief
Scientist in Israel for research and development expenditures limit our ability
to transfer or license our manufacturing and know-how outside of Israel and
require us to satisfy specified conditions. If we fail to satisfy these
conditions, we may be required to pay additional royalties to the Office of the
Chief Scientist or be subject to criminal charges.




From 1998
through 2007 we received royalty-bearing grants from the government of Israel
through the Office of the Chief Scientist of the Ministry of Industry and Trade
for the financing of a portion of our research and development expenditures in
Israel. While to date we have paid all of our royalty obligations resulting from
these grants, under Israeli law the Chief Scientist grants are perpetual and
prohibit us from manufacturing products developed using such grants, and limit
the transfer of related know-how, outside of Israel without special approvals
and possibly special payments to the Office of the Chief Scientist. These
restrictions may impair our ability to outsource manufacturing, engage in change
in control transactions or otherwise transfer our know-how outside Israel. If we
fail to comply with any of the conditions imposed by the Office of the Chief
Scientist, we may be required to pay additional royalties to the Office of the
Chief Scientist or be subject to criminal charges. See Item 10 – “Additional
Information – Taxation.”


20


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.”




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




We
currently have non-competition agreements with substantially all of our
employees who are involved in research and development, nearly all of whom are
located in Israel. These agreements prohibit our employees, if they cease
working for us, from directly competing with us or working for our competitors
for a limited period of time following termination of employment. In many
jurisdictions, courts are increasingly refusing to enforce restrictions on
competition by former employees or have interpreted them narrowly. For example,
in Israel, where approximately 51% of our employees reside, courts have required
employers seeking to enforce non-compete undertakings of a former employee to
demonstrate that the competitive activities of the former employee will harm one
of a limited number of material interests of the employer which have been
recognized by the courts, such as the secrecy of a company’s confidential
commercial information or its intellectual property. If we cannot demonstrate
that harm would be caused to us, we may be unable to prevent our competitors
from benefiting from the expertise of our former employees.




ITEM
4.INFORMATION ON THE
COMPANY




A. HISTORY AND
DEVELOPMENT OF THE COMPANY




Given
Imaging Ltd. was incorporated by RDC Rafael Development Corporation Ltd. 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 +972 -4-909-7777. Our agent in the United States
is our subsidiary Given Imaging, Inc. Given Imaging, Inc.’s address is 3950
Shackelford Road, Suite 500, Duluth GA 30096.




See
Item 5 – “Operating and Financial Review and Prospects” and Item 18 – “Financial
Statements” for a description of capital expenditures by us that are in progress
or took place in the past three fiscal years and see “Business Overview” below
for our history. We have not made any divestitures during the same time
period.


21


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 an 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 capsules can be easily ingested by patients and move
naturally through the gastrointestinal tract without discomfort while wirelessly
transmitting to a portable recorder, enabling the gastroenterologist to view
high quality video, images and data on a RAPID workstation, utilizing our
proprietary RAPID software. We believe that capsule endoscopy is a
patient-friendly solution that addresses a significant market opportunity and
overcomes many of the shortcomings of traditional diagnostic tools for
gastrointestinal disorders. We believe that each segment of the gastrointestinal
tract presents meaningful opportunities for patient-friendly diagnostic
procedures. In 2001, we commenced marketing the Given System, our capsule
endoscopy platform, with the M2A capsule (which we re-branded in 2004 as the
PillCam Small Bowel capsule, or PillCam SB), for detection of disorders of the
small bowel. As of December 31, 2008, we had an installed base of nearly 4,900
Given Systems and had sold more than 870,000 PillCam SB capsules in over 60
countries worldwide. A substantial portion of our revenues and our annual
revenue growth to date is attributable to sales of the PillCam SB capsule. Since
November 2004, we also market and sell the PillCam ESO capsule for visualizing
the esophagus. In 2007, we began selling the first generation of our PillCam
COLON capsule in Europe following receipt of the CE mark. We have also developed
the AGILE Patency Capsule and system, which is a dissolvable capsule that
enables physicians to determine whether there are obstructions or strictures in
the gastrointestinal tract that may prevent passage of our PillCam SB
capsule.




In December 2008, we acquired the Bravo
pH monitoring business from Medtronic, Inc., or Medtronic.  This is
our first acquisition since inception. The Bravo pH monitoring system is the
only wireless, catheter-free pH test for Gastro Esophageal Reflux Disease, or
GERD, and uses a disposable capsule temporarily placed in the esophagus that
measures pH levels and transmits the data to an external receiver. pH
testing is considered the gold standard for diagnosing GERD.  We
believe that the Bravo pH monitoring system is a more patient-friendly test for
GERD than catheter-based tests and is a synergistic and strategic fit with our
innovative PillCam
platform.





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:


22









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




The
gastrointestinal tract is susceptible to various disorders,
including:




•
            inflammatory bowel
      disease, including Crohn’s disease and ulcerative colitis, both of
      which inflame the lining of the digestive tract;•
            obscure bleeding and iron
      deficiency anemia, or IDA;•
            celiac disease, which
      causes damage to the intestine due to an allergic reaction to
      gluten;•
            gastro-esophageal reflux
      disease, or GERD, which is a chronic disease in which the acidic
      stomach content flows back into the esophagus due to the weakening of the
      valve between the esophagus and the stomach.  GERD can cause
      heartburn, esophagitis, which is
      inflammation of the esophageal lining, or difficulty swallowing, a
      condition known as dysphagia; if left
      untreated, GERD can cause strictures, esophageal ulcers, Barrett’s esophagus, a
      pre-cancerous condition and, ultimately, esophageal
  cancer;


23




•
            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.





Typical
symptoms of the foregoing 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 and the
Bravo pH monitoring system can have a significant role in assisting
gastroenterologists in making an evidence-based diagnosis of disorders of the
small intestine, the esophagus and the colon.  We believe that our
products may also assist in ongoing management of patients with many of these
disorders.





•
            Small intestine
      disorders. According to a study published in 2001 by the American
      Gastroenterology Association, or AGA, approximately 19 million Americans
      suffer from numerous disorders of the small intestine, including bleeding,
      Crohn’s disease, celiac disease, chronic diarrhea, irritable bowel
      syndrome and small bowel cancer. Prior to the development of capsule
      endoscopy, there was no convenient and effective method for visualizing
      the lumen of the entire small intestine. In 2006, the American Society of
      Gastrointestinal Endoscopy, or ASGE, published guidelines recommending
      capsule endoscopy of the small bowel as a first line test for imaging
      small bowel mucosa.





•
            Esophageal disorders.
      GERD is the frequent backward flow, or reflux, of stomach contents into
      the esophagus due to an improperly functioning valve between the stomach
      and esophagus. Stomach acid, enzymes and bile irritate the esophagus and
      cause a wide range of symptoms and complications, most commonly
      persistent, severe heartburn and chest pain. According to the AGA study
      mentioned above, there are approximately nine 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. Our Bravo pH monitoring system has a leading
      position in the market for pH testing, which is considered the standard
      diagnostic procedure for GERD. Esopahgeal varices is another serious
      disorder of the esophagus. This disorder is often a life-threatening
      complication of serious liver disease because it can lead to severe
      bleeding from dilated esophageal veins. 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.•
            Colonic disorders.Colonic disorders, including colorectal cancer, inflammatory bowel
      disease such as ulcerative colitis and Crohn’s colitis, diverticulosis,
      and lower gastrointestinal hemorrhage, account for significant mortality.
      According to data from the American Cancer Society, in the United States
      colon cancer is the third most common cancer diagnosed in both men and
      women and the second leading cause of death from cancer. It was recently
      estimated that each year approximately 150,000 Americans are diagnosed
      with colon cancer and approximately 50,000 Americans die from colorectal
      cancer. According to data published by World Gastroenterology News, the
      official publication of the World Gastroenterolgy Organization, it is
      estimated that each year approximately 400,000 Europeans are diagnosed
      with colon cancer and approximately 212,000 die from this
      disease.  Importantly, most colorectal cancer cases and deaths
      are thought to be preventable with screening tests that allow for the
      detection and removal of precancerous lesions. Despite the ever-growing
      body of evidence supporting the benefits of colorectal cancer screening,
      many eligible average-risk Americans do not undergo any form of screening,
      including conventional screening colonoscopy. Numerous reasons have been
      postulated to explain this including patient fears, presumed procedural
      discomfort, potential procedural complications, such as bowel perforation,
      and embarrassment. The PillCam COLON capsule was developed for use as a
      safe, minimally invasive, non-sedation requiring, patient-friendly
      modality to visualize the colon and
rectum.




24




Current
Detection Methods for Gastrointestinal Disorders




Imaging





Currently,
the most commonly used imaging methods for detection of gastrointestinal
disorders, including disorders of the small intestine, are endoscopy and
radiological imaging.




Traditional
Endoscopy




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




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




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




•
            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. Administration of sedative drugs increases the cost of
      the procedure and introduces risks associated with potential adverse drug
      reactions.


25





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




Radiological
Imaging




Radiological
imaging is a commonly used method for initial detection of the small intestine
and other parts of the gastrointestinal tract. Radiological imaging is used for
detection of disorders of the esophagus only in limited
situations, generally where gross structural lesions are suspected. During
a radiological imaging examination, the patient swallows a contrast medium (such
as barium), which is a dense liquid that coats the intestinal lining and
provides contrast that allows the intestines to be visualized 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 procedure, 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:




•
            No 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.•
            Limited detection of small
      pathologies. Radiological imaging has a limited ability to detect
      smaller-sized disorders or pathologies (typically less than five
      millimeters in diameter). Larger pathologies of up to 10 millimeters in
      diameter may also remain undetected.•
            Limited detection of
      strictures. Radiological imaging has a limited ability to detect
      strictures, which are three-dimensional phenomena, since it only produces
      a two-dimensional image resulting in frequent
  misdiagnosis.•
            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.


26





pH
Monitoring





In
December 2008 we acquired the Bravo pH monitoring business from
Medtronic.  With this acquisition, we entered the market of pH
testing, which is considered the gold standard for diagnosing GERD according to
a Position Statement on the Management of Gastro Esophageal Reflux Disease
published by the AGA Institute in 2008.





Traditional
pH testing involves inserting a small catheter through the nostril and advancing
it into the esophagus where it remains in place for 24
hours.  Although a 24-hour test period has traditionally been used,
the 48-hour test period offered by Bravo has been shown to identify additional
GERD patients that would have been missed using the 24-hour test.





Traditional
catheter pH diagnostic procedures have several additional limitations on their
usefulness.  The catheter is uncomfortable and could involve social
embarrassment for the patients because there is visible indication that a pH
test is taking place.  As a result, patients may choose or be forced
to refrain from their normal activity for the duration of the
test.  The catheter may cause throat irritation and can make eating
and resting difficult.  The procedure can be complicated by nosebleed,
and on occasion can be associated with aspiration of esophageal or gastric
contents into the trachea or lungs.  In addition, the catheter can
lose its correct position as a result of patient movement, swallowing or eating,
affecting the accuracy of the pH reading.





The
Given Imaging Solution





Capsule
Endoscopy





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




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




•
            Improved or comparable
      diagnostic yield for PillCam SB. The PillCam SB capsule is the only
      wireless test that provides direct imaging of the entire small intestine.
      By comparison, double balloon endoscopy involves inserting a tube into the
      body, requires sedation and is skill- and time-intensive. Other methods
      provide access only to approximately the first one-third of the small
      intestine. As a result, clinical trials demonstrate that the PillCam SB
      capsule has a significantly higher diagnostic yield in detecting disorders
      of the small intestine when compared to other traditional modalities,
      including push enteroscopy and radiological imaging. Diagnostic yield
      means the number of patients that had a diagnosis made using a specific
      test expressed as a percentage. In addition, as demonstrated through
      clinical studies and on-going experience with the Given System, a negative
      finding from the PillCam SB capsule, unlike conventional small bowel
      diagnostic techniques, has significant diagnostic value as it may allow
      physicians to rule out the existence of certain suspected abnormalities
      based on this finding thereby avoiding the need to engage in additional
      costly or inconvenient diagnostic
procedures.


27





•
            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 and PillCam COLON capsules, the
      patient can go about his or her daily routine as the capsule transmits
      images and other data to the portable data recorder. In the case of the
      PillCam ESO capsule, the procedure can be completed in a short visit to
      the physician’s office. We believe the Given System offers a significant
      opportunity for gastroenterologists and endoscopy departments to expand
      their business by increasing the number of procedures performed at their
      office or facility.•
            Detects small
      pathologies. Unlike radiological imaging procedures, the PillCam
      video capsule provides direct visualization of the intestinal mucosa which
      allows detailed (up to 0.1 millimeter) visualization of small pathologies.
      This increases the possibility of detecting and diagnosing at an early
      stage, pathologies that might otherwise go undetected.•
            Natural passage requires no
      insufflation. Many traditional endoscopic procedures require
      insufflation, or the forcing of air into the gastrointestinal tract. This
      process can cause considerable patient discomfort. The Given System does
      not require insufflation because the PillCam capsule is ingested and moves
      with the natural contractions of the digestive tract. The absence of
      insufflation allows the PillCam capsule to capture images of the
      gastrointestinal tract in its normal physiological state. This approach,
      called “physiological endoscopy,” allows the physician to clearly view the
      mucosa under more physiologic conditions.•
            Provides convenient digital
      reporting, storage and remote consulting capabilities. The
      physician can review the video produced by the Given System without seeing
      the patient or having him or her remain in the office or clinic during the
      review, thereby providing the physician with greater flexibility. In
      addition, the RAPID software includes various features that enhance the
      physician’s efficiency and productivity, such as innovative display
      methods for faster review, localizing findings, help in identifying
      anatomical landmarks for easy orientation, managing images and patient
      information, reporting modules and convenient options for sending still
      images or short video files to the patient file, to the referring
      physician or a colleague for consultation. Some of these features are
      proprietary and covered by patent applications, which we believe add an
      additional competitive advantage as physicians become more comfortable
      using these functions.•
            Provides a cost-effective
      diagnostic tool. We believe that the PillCam SB capsule endoscopy
      procedure is more cost-effective from a third-party payor perspective than
      traditional methods for imaging the gastrointestinal tract. With respect
      to the PillCam SB capsule for the small bowel, two economic outcomes
      studies reported by the Office of Health Policy and Clinical Outcomes of
      the Thomas Jefferson University in Philadelphia concluded that diagnosing
      small intestinal bleeding or Crohn’s disease using the PillCam SB capsule
      procedure is cost-effective from a third-party payor perspective. We
      believe that the Given System may result in additional cost savings due to
      the reduction in physician resources and facility costs permitted by the
      outpatient nature of the PillCam SB capsule procedure, its higher
      diagnostic yield – in the case of the PillCam SB capsule – and
      the potential for earlier diagnosis of disorders, allowing earlier
      therapeutic intervention or other change in patient
      management.


28


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.





Bravo
pH Monitoring





In
December 2008, we acquired the Bravo pH monitoring business from
Medtronic.  The Bravo pH monitoring system is the only wireless and
catheter-free pH test for GERD. It uses a disposable capsule temporarily placed
in the esophagus that measures pH levels and transmits the data to an external
receiver. pH testing is considered the standard diagnostic procedure for
GERD.  We believe that the Bravo pH monitoring system is a more
patient-friendly test for GERD and is a synergistic and strategic fit with our
innovative capsule endoscopy products. The main advantages of the Bravo system
over catheter-based technology are as follows:





•
            Patient-friendly
      procedure. The Bravo system allows patients to maintain their
      regular diet and activities.  The Bravo system also minimizes
      throat and nasal discomfort associated with conventional catheter-based pH
      systems and eliminates social embarrassment that accompanies traditional
      pH testing with no visible indication that a pH test is taking
      place.




•
            Improved or comparable
      diagnostic yield.By extending pH data collection period to 48
      hours, 24 hours beyond the recording capability of conventional catheter
      systems, the Bravo system provides the physician with additional data
      needed for an accurate GERD assessment.   According to a
      2003 study published in the American Journal of Gastroenterology, the
      Bravo system increases the likelihood of documenting relationships between
      atypical symptoms and reflux events with 48-hour monitoring
      period.•
            Administered on an outpatient
      basis. The Bravo pH testing is generally administered in an
      outpatient setting with a brief visit to the physician’s clinic or
      hospital. The patient can go about his or her daily routine as the capsule
      transmits images and other data to the portable data
    recorder.•
            Provides convenient digital
      reporting, storage and remote consulting capabilities. The
      physician can review the data produced by the Bravo 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.





There are
risks associated with placement and use of the Bravo
capsule.  Placement and 48-hour attachment of the capsule occasionally
can produce pain or a sense of fullness in the esophagus or
chest.  This may require medication to reduce the pain during the
course of the 48-hour data collection.  Rarely, insertion and
placement of the capsule can lead to complications which can include perforation
or tears of the esophagus if the capsule introducer is not released and removed
as required by the procedure.  The Bravo capsule may occasionally
become loose prior to completion of the 48-hour monitoring, or be displaced by
food during eating, thus reducing the accuracy of the collected
data.




Our
Products





Capsule
Endoscopy




The
Given System consists of three components:


29


PillCam
capsules.




The
PillCam capsules are miniaturized disposable color video cameras encased in a
plastic shell incorporating 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, high-capacity silver oxide batteries, an antenna and other
discrete electronic components.




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




We
are currently selling the following PillCam capsules:




•
            PillCam
      SB – Our initial capsule for the Given System was the PillCam
      SB video capsule for visualization of the small intestine, which we
      started selling in August 2001. The PillCam SB capsule measures 11mm by
      26mm (approximately 0.43 by 1.02 inches) and transmits images at a rate of
      two images per second for approximately eight hours, resulting in
      approximately 50,000 images, at which time the operation of the capsule
      stops and recording ceases. After ingesting the capsule at the physician’s
      office, the patient can continue his or her daily routine as the capsule
      transmits the images to a portable data recorder, which is later returned
      to the physician’s office for review and diagnosis. The PillCam SB capsule
      is used for a variety of conditions of the small intestine, including
      obscure bleeding, suspected or known Crohn’s disease, iron deficiency
      anemia and suspected small bowel tumors. In late 2007, we began marketing
      our newest version of the small bowel capsule, PillCam SB 2. This new
      capsule has improved optics, illumination and field of view. We believe
      that the diagnostic capabilities of PillCam SB 2 capsule exceed the
      diagnostic capabilities of the first generation PillCam SB
      capsule.•
            PillCam
      ESO – In November 2004, we received FDA clearance for our
      first generation of the PillCam ESO capsule for visualization of the
      esophageal mucosa. The PillCam ESO capsule is similar in size to the
      PillCam SB capsule and contains an imaging device and light source at both
      ends of the capsule. The patient ingests the PillCam ESO capsule in the
      physician’s office. In early 2008, we began marketing our newest version
      of our esophageal capsule, PillCam ESO 2. PillCam ESO 2 has improved
      optics and illumination compared to the first PillCam ESO and a frame rate
      of up to 18 frames per second. We believe that the PillCam ESO 2 capsule
      provides physicians with better image quality and a more precise view of
      the esophageal mucosa and suspected pathologies, which in turn are more
      likely to result in improved diagnostic capabilities compared to the first
      generation of the PillCam ESO capsule.•
            PillCam
      COLON– PillCam COLON is the third video capsule we developed.
      We began selling this product in Europe in the second half of 2007,
      following receipt of the CE mark permitting us to market this product in
      the European Union. Currently, this product does not have FDA clearance
      for marketing in the United States. The PillCam COLON capsule measures 11
      mm by 31 mm (approximately 0.43 by 1.29 inches), slightly larger than the
      PillCam SB and PillCam ESO capsules. Since the lumen of the colon is wider
      than the small bowel and it is highly compartmentalized, we have
      integrated new features into PillCam COLON. The capsule has tiny cameras
      at each end which capture four images a second for up to 10 hours. Similar
      to other methods of colon visualization, the PillCam COLON capsule
      procedure includes a colon cleansing and preparation procedure, as well as
      additional prokinetic agents to enhance capsule propulsion. The platform
      for PillCam COLON includes the same components as PillCam SB and PillCam
      ESO, including a sensor array and data recorder. Upon completion of the
      procedure, the physician downloads the recorded data to a computer
      installed with our proprietary RAPID software to review the
      images.


30


•
            AGILE
      Patency System –The AGILE Patency
      System consists of the AGILE Patency capsule, a dissolvable capsule the
      same size as the PillCam SB capsule, with a radio frequency
      identification, or 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 it getting caught in a stricture. If the scanner indicates
      that the tag is located in the patient’s body, an obstruction preventing
      the passage of the PillCam capsule may exist. If the AGILE Patency capsule
      remains in the body, it starts dissolving after 30 hours into small
      fragments that are naturally excreted. Since the capsule contains
      barium, in those instances where the AGILE Patency capsule is not excreted
      after ingestion, the physician may detect its location within the body
      using fluoroscopy.
              
              We
      expect that the availability of the AGILE Patency System will contribute
      to an increased use of the PillCam SB capsule in the diagnosis of
      suspected or known gastrointestinal obstructions or narrowing, such as
      suspected or known Crohn’s disease.




Data
recorder and sensor array.




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




Computer
workstation with proprietary RAPID software.




After
the recording ceases, the data recorder is returned to the physician’s office,
where it is connected to a computer with the RAPID software installed for
transfer and compilation of the data captured during the test. Our proprietary
RAPID software then processes the data received from the capsule using a number
of proprietary algorithms relating to the visual presentation of this data. The
Given workstation creates a video of the procedure for viewing by the physician.
The physician can then efficiently review the video carefully, saving and
annotating specific images for the patient file. The physician is able to create
thumbnail images, a complete report and even a short video clip that can be
attached to the patient’s electronic medical record or to an e-mail to be sent
to the referring physician or to consult with a colleague. The RAPID software
provides users with the ability to view simultaneously 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. Additionally, we provide our users with RAPID
Reader, which is a limited version of the RAPID software that can be installed
on a standard personal computer, allowing the physician to review RAPID videos
at any time or place as convenient. RAPID Reader also allows the physician to
activate the data recorder and transfer data from the data recorder to a data
storage device, like a disk-on-key. These features enable remote customer sites
that do not have access to a permanent workstation to administer our PillCam
capsules to patients and then deliver the results to a central location for
processing and interpretation.




Important
features of our RAPID software also include:




•
              “Automatic Mode,” which uses
      advanced software algorithms to create a more efficient review of the
      video;
 
 •
              “Quick View,” which allows fast
      preview of the video while highlighting potentially interesting images in
      the video stream; and




31


•
              Image atlas, which allows the
      physician to compare 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.




We
also market our RAPID Real-Time viewing device. This is a dedicated handheld
device that enables real-time viewing during a capsule endoscopy procedure with
our PillCam capsules.




Warranty
and Service




We
provide standard warranty for each of our products.  Warranty periods
typically range between six months to two years. During the warranty period, we
are obligated to repair or replace, at our election, every defective product.
Our warranty-related costs in 2006, 2007 and 2008 were immaterial.




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




When
the warranty expires, our customers are offered the opportunity to sign a
post-sale customer support contract with us. Under this contract, the customer
pays a fixed amount per year in consideration for receiving our maintenance and
support services.





Bravo pH
Monitoring





The Bravo
system consists of three primary components:





·
            a
      small pH capsule about the size of a gel cap that is attached to the wall
      of the esophagus and transmits data to the
  receiver;




·
            a
      proprietary delivery system that is used to place the Bravo capsule in the
      esophagus;




·
            a
      pager-sized receiver worn by the patient that receives pH data from the
      Bravo capsule; and




·
            proprietary
      pH analysis software used to perform the
  diagnosis.





The Bravo
capsule, which contains a miniature pH sensor, is attached by a
gastroenterologist to the esophagus using a proprietary delivery system. The
physician advances the Bravo capsule to the desired location in the esophagus.
After proper placement, vacuum is applied, filling the capsule’s suction chamber
with esophageal tissue. A safety clip is then removed, and a locking pin is
advanced by depressing a plunger on top of the handle of the delivery system,
which securely attaches the Bravo capsule to the wall of the
esophagus.  After the delivery system is removed, the capsule
transmits pH data wirelessly to the receiver.  Within days, the
capsule spontaneously sloughs off the wall of the esophagus and passes through
the patient’s gastrointestinal tract.  After the study is completed,
the patient returns the receiver to the hospital or clinic, and the data is
downloaded via an infrared link to a specially-configured computer, where
proprietary software known as PolygramTM Net pH Analysis Software provides a
comprehensive report for patient diagnosis.


32


Clinical
Studies




Clinical
studies are an important part of our product development and market development
activities. We use clinical studies during product development to optimize the
product parameters and the development process, typically culminating with
submission of new products for registration or clearance by regulatory
authorities. Many of our clinical studies are conducted for market development
purposes with products that have received regulatory clearance. With these
trials we strive to demonstrate the clinical and economic benefits of our
products to support their use by physician and reimbursement coverage by
third-party payors. Many of the investigators conducting clinical studies with
our products have presented their results at major gastroenterology meetings or
submitted them for publication in peer-reviewed medical journals. Accordingly,
the number of presentations and publications of studies evaluating our products
is constantly growing and hundreds of articles, editorials and case reports have
been published in peer reviewed journals to date. These papers provide the
results of clinical studies as well as accumulated experience from on-going use
of our products 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.




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, or
OGIB, is 1.5% (15 out of 1,089 cases); in patients with known Crohn’s disease it
is 5% (4 out of 80 cases); and in patients with suspected Crohn’s disease it 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 to minimize such
risk. 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 is not in and of itself an indicator of probable
retention. Once retention has been diagnosed, only endoscopic and surgical
intervention has 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.





Bravo
pH monitoring





Since its
introduction, the Bravo system has been the subject of numerous clinical studies
and more than 50 peer-reviewed publications that demonstrate the successful use
of the Bravo system for esophageal pH monitoring in clinical practice and
highlight the benefits of the Bravo system compared to traditional
catheter-based pH monitoring.  These studies and publications
specifically highlight the effectiveness of the 48-hour testing period with the
Bravo system compared to the 24-hour testing period of the catheter-based tests
and the improved patient tolerability of the procedure with the Bravo
system.




Marketing and
Distribution




Our
sales and marketing operations are organized in three geographical regions:
Americas (United States, Canada and Latin America); EMEA (Europe, Middle East
and Africa); and Asia-Pacific/Japan (Japan, Australia, New Zealand and the rest
of Asia), or AP/J. This organization enables us to focus on the particular needs
of each region. For a breakdown of our revenues by products and by geography,
see Item 5 – “Operating and Financial Review and Prospects – Operating Results –
Revenues.”


33


We
market our products using either direct or indirect sales, depending on the
potential size of the market and local market conditions. Currently, we market
our products directly in Australia, Canada, France, Germany, the United States
and Israel. Our sales in direct markets accounted for approximately 75.4% of our
revenues in 2008.  In addition to our direct markets, we market and
sell our products in over 60 other countries through local distributors or
representatives. Sales to our local distributors worldwide, including Japan,
accounted for 24.6% of our revenues in 2008. Under standard terms of our
distribution agreements, we generally grant to one distributor in each
particular country or region the right to market our products for a defined
period. During the contract period, the distributor is required to meet minimum
sales targets set out in each distribution agreement. Generally, we may, in our
sole discretion, upon prior written notice, terminate a distribution agreement
with a distributor in the event that a distributor fails to meet its minimum
sales targets. To date, we have changed a number of our distributors due to
failure to meet minimum sales targets and other reasons. We have the right not
to renew a distribution agreement if we are unable to reach an agreement with
the distributor as to minimum sales targets during any renewal period. In
general, each distributor is responsible for obtaining and maintaining any
regulatory approvals or registrations required to sell our products in that
distributor’s sales territory. Each distributor is also responsible for
preparing and submitting to us for our approval a marketing plan for our
products in that distributor’s sales territory. After receiving our approval of
the marketing plan, each distributor is responsible for implementing the
marketing plan, including, participating in local and national trade shows,
conducting education and training sessions and conducting marketing clinical
trials in its sales territory.




In
Japan, we operate through Given Imaging, K.K., our Japanese subsidiary, which
was established as a joint venture with Marubeni Corporation and Suzuken Co.,
Ltd. to commercialize the Given System in Japan. Marubeni is one of Japan’s
largest trading companies and Suzuken is a large Japanese pharmaceutical
wholeseller. To date, Marubeni invested an aggregate of $6.3 million in Given
Imaging K.K. and owns a 27.5% interest in this entity and Suzuken invested a
total of $4.0 million and owns a 16.5% interest.  We have invested a
total of $8.8 million and provided access to the technology and retain a 56%
controlling interest. We received regulatory clearance to market our RAPID
workstation and PillCam SB capsule in Japan in April 2007. Additionally,
effective October 1, 2007, Japanese authorities announced initial reimbursement
coverage for procedures using our PillCam SB capsule for small bowel indications
with obscure bleeding. This reimbursement covers the entire adult population in
Japan. During 2007 and 2008, Suzuken acted as the exclusive distributor of Given
Imaging K.K. in Japan. Sales to Suzuken accounted for 4.5% of our revenues in
2007 and 4.6% of our revenues in 2008.  However, due to lower than
expected sales of the Given System in Japan since we obtained the regulatory
approval, we appointed Fuji Medical Systems Co., Ltd., an affiliate of Fuji Film
Corporation, as a second distributor of the Given System in this territory
effective January 2009.  Following these developments, we expect our
business in Japan to improve in 2009. For more information regarding our
business in Japan, see Item 5 – “Operating Results.”





Capsule
Endoscopy




Most
of our revenues come from recurring sales of our PillCam capsules. Our marketing
strategy in our mature and educated markets in the United States, Europe and
Australia focuses on increasing the utilization of PillCam capsules by each
account and consequently increasing capsule reorders. We seek to achieve this by
providing a complete platform for capsule endoscopy that may be used for
diagnostic purposes in more than one area of the gastrointestinal tract and by
performing market development activities, such as, clinical trials and working
with third-party payors to obtain appropriate reimbursement in order to expand
the use of our PillCam capsules for additional medical indications covered by
the regulatory clearance we have for our capsules. We seek to maintain a close
relationship with our customers, educating them about the clinical and economic
benefits of our products and enhancing the operating efficiencies of the Given
System. In new markets, such as Japan, our initial focus is on driving the
placement of Given Systems in order to expand our market penetration in
gastroenterology physician offices and gastroenterology departments within
hospitals.


34





To date,
the PillCam SB capsule has been used primarily for diagnosis of obscure
gastrointestinal bleeding, or OGIB.  Our ability to expand the use of
the PillCam SB capsule for the diagnosis of additional small bowel indications,
such as Crohn’s disease, depends substantially on our ability to provide
clinical evidence and economic analysis supporting such expanded use, our
ability to enlist support from key opinion leaders specializing in inflammatory
bowel diseases, our efforts to educate and train our customers on these expanded
use opportunities and our ability to obtain favorable and effective
reimbursement coverage for the PillCam SB capsule for small bowel indications
beyond OGIB.  We allocate significant marketing and clinical resources
in an effort to expand the use of our PillCam SB capsule beyond
OGIB.




During
2008 we launched an important service in the United States called VueSpan
Diagnostic Services.  VueSpan offers to gastroenterologists the
ability to outsource the analysis and interpretation of the PillCam capsule data
to an independent faculty of gastroenterologists with recognized experience in
capsule endoscopy. VueSpan is currently offered in 18 states and is expanding
throughout the United States.  We established this service to allow
gastroenterologists who may not have the time or desire to spend time on reading
and interpreting capsule videos to outsource this task to their
colleagues.





The
clinical benefits of capsule endoscopy and its place in routine practice
management are demonstrated in hundreds of articles published in peer-reviewed
journals. One particular publication is 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, or ESGE, and an update was published in
2007. This update includes practice guidelines for using capsule endoscopy in
the detection of small bowel tumors and expanded definitions of disease states
such as iron deficiency anemia and suspected Crohn’s disease. We view the
consensus reports as a significant tool in our marketing activities and we
believe the reports will help us establish capsule endoscopy as a standard
practice worldwide. In 2008, we held one ICCE conference in Israel and a second
in Europe.





We
also use trade shows and scientific meetings and offer workshops, courses,
videos and seminars to educate our customers. In 2008, we participated in the
Digestive Disease Week, or DDW, and the annual meeting of the American College
of Gastroenterology, or ACG, in the United States, the United European Gastro
Week, or UEGW, in Vienna, and numerous other regional, national and local trade
shows. In addition, we held numerous regional and local courses and seminars and
trained hundreds of physicians and nurses on capsule endoscopy and our products.
We believe that these education programs helped also to expand the knowledge of
participating physicians and provide an independent endorsement of the clinical
value and importance of the Given System.




A
variety of special interest groups related to capsule endoscopy have been formed
in the United States, Europe, Japan, Australia and in other regions 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, or
ECEG. A similar group, the Japanese Academy of Capsule Endoscopy, or JACE,
exists in Japan and plays an important role in educating the Japanese physician
community on the practical application of capsule endoscopy. In Australia, there
is the Australian Capsule Endoscopy Interest Group which is an interest group
for the Gastroenterological Society of Australia. We believe that these special
interest groups provide an important contribution to the broad adoption of
capsule endoscopy around the world.


35


Since
2005, we have sponsored the operation of a web portal dedicated to capsule
endoscopy, www.CapsuleEndoscopy.org.
This portal addresses gastroenterology professionals and provides training and
educational materials and information, including a virtual image atlas, clinical
papers, course information and discussion forums for a variety of clinical
topics.




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





Bravo
pH Monitoring




According
to a Position Statement on the Management of Gastro Esophageal Reflux Disease
published by the AGA Institute in 2008, pH testing is considered the gold
standard for diagnosing GERD. According to the Millennium Research Group, over
258,000 pH procedures were conducted in the United States in 2007. Approximately
20% of these procedures were conducted using the Bravo system.  In
addition, Datamonitor estimates that around 147 million people, or approximately
20% of the total population in the United States, Japan, France, Germany, Italy,
Spain and the United Kingdom, suffer from GERD.





Since its
introduction, the Bravo system has been the subject of numerous clinical studies
and more than 50 peer-reviewed publications that demonstrate the successful use
of the Bravo system for esophageal pH monitoring in clinical practice and
highlight its benefits and advantages compared to traditional catheter-based pH
monitoring.  These studies and publications specifically highlight the
effectiveness of the 48-hour testing period with the Bravo system compared to
the 24-hour testing period of the catheter-based tests and the improved patient
tolerance of the procedure with the Bravo system.





In
addition, the Bravo system has been endorsed by professional societies and
organizations in the United States.  In 2005, the ASGE Technology
Committee issued an evaluation report addressing the use of the Bravo system for
investigation of suspected reflux disease.  The report concluded that
wireless pH monitoring offers a safe and comfortable alternative to pH
monitoring by conventional trans-nasal catheter systems.  In 2007, the
ACG published updated guidelines for esophageal pH monitoring, which expanded
the guidelines to include the use of wireless esophageal pH monitoring pointing
out the extended testing period available with the wireless
technology.





We plan
to sell the Bravo pH monitoring system through our existing sales force and
distribution channels.  We believe that we can capture existing market
opportunity and increase the market share of this product, primarily due
to:




·
            our
      sizable field sales force and numerous professional education activities,
      compared to the limited resources used to market and sell this product
      prior to our acquiring it;




·
            the
      considerable overlap that exists between our capsule endoscopy customer
      base and Bravo customer base and the synergy that we believe exists
      between these two capsule-based, patient friendly
      technologies;


36




·
            the
      existence of wide spread reimbursement coverage with higher reimbursement
      rates than those applicable to catheter-based pH monitoring
      products;




·
            the
      increased awareness that we believe exists for GERD, partly due to
      consumer advertisement of GERD medications by pharmaceutical companies;
      and




·
            untapped
      potential for market development outside the United States where the use
      of wireless pH monitoring is not well
known.





Manufacturing




PillCam
Capsules




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




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




We
rely on single-source suppliers for two key components of the PillCam
capsule:




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


37


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




We depend
on single source suppliers with whom we do not have long term contracts for some
other components necessary for the production of the Given System, such as the
electrical circuit boards in our PillCam capsules and our computer workstations.
For a description of the risks associated with our dependence on single source
suppliers, see Item 3 – “Risk Factors – Our reliance on single source suppliers
could harm our ability to meet demand for our products in a timely manner or
within budget.”




Portable
Data Recorder and Sensor Array




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




Computer
Workstation




Our
computer workstation is specially configured  in accordance with our
specifications and is 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.





Bravo
pH Monitoring System





The Bravo
system consists primarily of the following components:





·
            a
      small pH capsule that is attached to the wall of the esophagus and
      transmits data to the receiver;




·
            a
      proprietary delivery system that is used to place the Bravo capsule in the
      esophagus;




·
            a
      pager-sized receiver worn by the patient that receives pH data from the
      Bravo capsule; and




·
            a
      proprietary pH analysis software.




The Bravo
capsule and the delivery system are currently manufactured for us by Medtronic
under the terms of a supply agreement that we signed with Medtronic as part of
our acquisition of the Bravo pH monitoring business.  We plan to
establish our own manufacturing facility for these components in Israel and
transfer manufacturing capabilities and capacity to the Israeli site by the end
of 2009.




The Bravo
receiver is manufactured and supplied by BB Electronics, or BBE, a company based
in Denmark.  BBE is the single supplier of the
receiver.  During 2009, Medtronic will continue to source the receiver
from BBE and supply it to us while transitioning the existing contract and
business relationship to us.




The
proprietary pH analysis software, also known as POLYGRAM NET, was developed by
Medtronic and is installed on specially configured laptops.  During
2009, Medtronic will continue to supply these laptops to us loaded with the
software.  At the same time, we plan to develop new software to
replace POLYGRAM NET.


38




In
addition to the core components of the Bravo system described above, there are
several peripheral products that are manufactured by third-party
suppliers.  During 2009, we expect to begin direct relationships with
these or other suppliers.




While
transitioning the manufacturing line of the Bravo capsule and delivery system to
Israel and the business relationship and agreements with third-party suppliers,
we will depend significantly on Medtronic to ensure uninterrupted supply of the
Bravo system and in transferring the necessary manufacturing knowledge to us
successfully to allow us to begin our own manufacturing operations by the end of
2009, as planned.




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 Item 10 - “Additional Information - Taxation – Certain Material Israeli Tax
Considerations and Government Programs — Taxation of Companies in Israel —Tax
Benefits under the Law for the Encouragement of Capital Investments,
1959.”




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




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




The
FDA requires us to adhere to the Quality System Regulation which requires
manufacturers to follow elaborate design, testing, control, documentation and
other quality assurance procedures during the manufacturing process. In
addition, we are required to comply with the Medical Devices Directive of the
European Union requiring adherence to the International Standard Organization’s
standard ISO 9001 and ISO 13485, a European quality standard setting forth
requirements for medical device manufacturers that are more specific than the
general requirements specified in ISO 9001. These quality standards contain
requirements that are generally similar to the Quality System Regulation
required by the FDA.




Intellectual
Property




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




We
acquired the rights to our first issued U.S. and Israeli patents in January 1998
under a technology purchase and license agreement with Rafael Armament
Development Authority. See Item 7 - “Major Shareholders and Related Party
Transactions.” These patents expire in January 2014 and January 2015,
respectively. In addition, we own or co-own 147 additional issued patents in the
United States, Australia, Canada, China, France, Germany, India, Israel, Italy,
Japan, South Korea, Spain, Taiwan and the United Kingdom covering different
elements of our technology. As part of the acquisition of the Bravo pH
monitoring business from Medtronic, we acquired a number of patents and patent
applications relating to various aspects of this technology.


39





These
patents expire between 2017 and 2025. We also hold six utility models in Japan,
one utility model in South Korea and nine utility models in Germany. As of
December 31, 2008, we also had more than 550 pending patent applications
worldwide based on approximately 185 priority applications relating to various
elements and functions of our products and related enhancements.




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




In
March 2004, the U.S. Patent and Trademark Office, or USPTO, notified us that it
would conduct a reexamination of some of the claims in our first U.S. patent
known as the ‘531 patent, pursuant to a request submitted by Olympus
Corporation. In April 2006, the USPTO issued a decision confirming the validity
of 13 of the original 17 claims of the ‘531 patent. In September 2006, we
appealed the rejection of the other four claims.  On February 18,
2009, the USPTO conducted a hearing relating to our appeal and we are currently
awaiting a decision.




In
June 2008, we settled our patent litigation against Olympus Corporation and its
affiliates in the District Court for the Eastern District of Pennsylvania. For
more information, see Item 8 – “Financial Information – Legal
Proceedings.”




Competition




Olympus Corporation has
been marketing and selling a competing capsule endoscopy system in Europe and
Australia since October 2005. In September 2007, Olympus received FDA clearance
to market its capsule endoscopy system and small bowel capsule in the United
States and in September 2008 it received regulatory clearance to market its
capsule endoscopy system in Japan. In June 2008, we settled our patent
litigation in the United States against Olympus Corporation and its affiliates.
For a detailed description, see Item 8 – “Financial Information –
Legal Proceedings.”





In 2007 a
South Korean company began selling a competing system in Korea as well as in
Europe and Australia and has intensified its marketing and selling efforts in
these regions in 2008. Also, a Chinese company is selling its capsule
endoscopy systems in China and other Asian countries at lower prices than our
system and presented its systems at industry trade shows outside
Asia.




We
believe that we have a competitive advantage compared to other sellers of
capsule endoscopes. First, we were the first company to sell and market capsule
endoscopes in the most mature markets in the United States, Europe and Japan,
have a large installed base of customers and a reputable and recognized brand
name. Second, we have been concentrating primarily on the development and sale
of capsule endoscopy systems and are selling a platform enabling us to use our
line of PillCam capsules for diagnosing disorders in parts of the
gastrointestinal tract other than the small bowel, while the other companies
have only announced the launch of a small bowel capsule at this time. Third, we
believe our technological solution, and in particular our software solution, is
superior to the products introduced by competitors. Fourth, we provide
comprehensive customer support, extensive professional education and training to
physicians and nurses, and support clinical research
worldwide.  Finally, we have a patent portfolio that we believe
protects critical aspects of our technology and may create technological
barriers for our competitors, which may force them to enter the market with
inferior products or delay their entry into certain territories or impact the
cost of their products.


40




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




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




To
strengthen our competitive position, in March 2007 we signed a cooperation
agreement with Fuji Film. The goal of the agreement is to build closer
collaboration between the companies in research and development, component
sourcing, marketing and product distribution worldwide. Under the terms of the
agreement, we and Fuji Film collaborate to develop products and components for
the gastrointestinal endoscopy and diagnostic field. The agreement also grants
Fuji Film non-exclusive rights to distribute our capsule endoscopy capital
equipment, including our RAPID workstation and data recorders, and small bowel
products, including PillCam SB and AGILE Patency capsules, in certain countries
worldwide, which will be determined by the two companies on a case-by-case
basis. As of December 31, 2008, Fuji Film through its affiliated companies,
distributed our products in China and in January 2009 it began distributing and
selling our capsule endoscopy products in Japan, in addition to
Suzuken.




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 the pH
monitoring business, the most common esophageal pH monitoring device is the
transnasal catheter, which continuously measures pH for 24
hours.  Sierra Scientific, Sandhill and Alpine Biomed are the major pH
catheter manufacturers that compete with the Bravo system.  We
estimate that at present approximately 20% of pH monitoring procedures are
performed with the Bravo system.  We believe the Bravo system has a
number of advantages that will help us to compete effectively and improve our
competitive position compared to the catheter-based
technology.  First, the Bravo system offers a convenient catheter-free
alternative that has been shown to be better tolerated and possess a more
favorable side-effect profile than the catheter-based
procedure.  Second, the Bravo system allows physicians to record up to
48 hours of pH data, providing a more comprehensive disease profile and
potential improvement for patient care.  Third, during the last few
years Medtronic marketed and supported the Bravo system with limited resources,
primarily through telemarketing.  We intend to use our sizable field
sales force and broad customer base to market and sell the Bravo system and we
expect this will increase our market share. Finally, we believe current trends
in reimbursement will make the Bravo system more cost effective to use than the
catheter-based technology.




In
addition to competition from products performing similar clinical functions to
our products, 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 products 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.


41


U.S.
Government Regulation




FDA
Clearance and Regulation




All
of the products we market and sell in the United States have received FDA
clearance. Our first FDA clearance was received in August 2001 for the first
generation of the PillCam SB capsule. In November 2004, we received FDA
marketing clearance for our PillCam ESO capsule and in 2006 we received
clearance to market our AGILE Patency capsule and scanner. During 2007, we
received clearance to market a number of new products, such as the PillCam SB 2
and PillCam ESO 2 capsules and the newest version of our RAPID software, RAPID
5.0. All of our products that have been cleared to date by the FDA, have been
cleared through the 510(k) clearance process that is further described below.
However, in February 2008, the FDA determined that the PillCam COLON is not
substantially equivalent to any marketed device in the United States for
visualization of the colon and therefore cannot be cleared for marketing in the
United States through the 510(k) clearance process. We are currently developing
an improved PillCam COLON capsule that we plan to submit for FDA clearance in
the future once development and necessary clinical trials to attest to the
safety and effectiveness of this capsule are completed.





The Bravo
pH monitoring system received FDA clearance through the 510(k) process in
September 2000 and was categorized as a Class I exempt device, the lowest risk
category for medical devices.




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 capsule, the
advanced versions of the RAPID software and data recorder, and the Bravo system
have each received FDA marketing clearance under the 510(k) clearance process.
We cannot be sure that any of our future products will be eligible for the same
abbreviated regulatory treatment.




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.


42


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 typically takes from one to three years, but it could take
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 Given, by limiting the kinds of financial
arrangements (including sales programs) we may have with hospitals, physicians
and other potential purchasers of the medical devices. Other provisions of state
and federal law provide civil and criminal penalties for presenting, or causing
to be presented, to third-party payors for reimbursement, claims that are false
or fraudulent, or which are for items or services that were not provided as
claimed.




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 may be
applicable.




Regulation
in Europe




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


43


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




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




Regulation
in Japan and in Other Countries




In Japan,
we received regulatory clearance to market our RAPID workstation, data recorder
and PillCam SB capsule in April 2007. In October 2008, we received clearance to
sell our DR 2, an advanced version of our data recorder, and RAPID Real Time.
Marketing our other products in Japan will require additional, product-specific
regulatory clearances. In 2008, we submitted an application for marketing
clearance for our PillCam SB 2 capsule.





To date,
the Bravo system does not have regulatory clearance in Japan and is not sold
there. We do not have immediate plans to submit the Bravo system for clearance
in Japan.





We intend
to submit applications for a few additional products in 2009. Generally, the
process for obtaining marketing clearance for medical devices in Japan could
range from twelve months for products with only very minor modifications from
previous cleared product versions, to a few years in the case of a completely
new
device.





In order
for us to market our products in countries other than the United States, the
European Union and Japan (which were described above), 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 our products we have
either received regulatory approval or clearance or been informed that approval
or clearance is not required. Renewals or updates of the regulatory status of
our products in all these countries are done
annually.




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.


44


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




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




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





For Bravo
procedures performed in a physician’s office, the CPT code includes a global
value for both the technical and the professional components of the procedure.
In the outpatient hospital setting, claims are submitted using the CPT code and
paid by Medicare under the APC, which covers the technical component and
includes the cost of the facility and supplies related to the
procedure.  The physician is paid for the interpretation
separately.




Reimbursement Coverage. A
third-party 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, third-party 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
or reduce 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 provided coverage
for capsule endoscopy of the small bowel only for the diagnosis of obscure
gastrointestinal bleeding. Subsequently, reimbursement coverage has been
expanded to include other indications and, as of December 31, 2008, most
Medicare carriers and private third-party 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.


45


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




Most
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 are continuously seeking to
convince third-party payors, through economic and health outcomes analyses, that
capsule endoscopy of the small bowel should be used earlier in the typical
diagnostic process for patients with inflammatory bowel diseases such as Crohn’s
disease, and be entitled to reimbursement coverage without requiring other
endoscopic procedures to be performed prior to administering the
capsule.  As a result of these efforts, several third-party payors
issued new or updated policies that do not require other endoscopic procedures
prior to performing small bowel capsule endoscopy for patients with suspected
Crohn’s. As of December 31, 2008, approximately 39 million individuals in the
United States had coverage under these new or updated policies. Other
third-party payors providing coverage for approximately 30 million individuals
in the United States have updated their policies to require a colonoscopy as the
only endoscopic procedure to be performed prior to a small bowel capsule
endoscopy procedure for diagnosing suspected Crohn’s. Finally, out of the 209
million individuals that have coverage in the United States for suspected
Crohn’s
approximately 45 million individuals have coverage for a small bowel capsule
endoscopy procedure in cases of known Crohn’s of the large
bowel that require small bowel evaluation.




As
of December 31, 2008, approximately 42 million individuals had reimbursement
coverage for capsule endoscopy of the esophagus using our PillCam ESO capsule to
evaluate esophageal varices in patients diagnosed with cirrhosis of the liver, a
chronic liver disease. Numerous third-party payors are reimbursing this
procedure on a case-by-case basis. We have established a toll-free reimbursement
help-line whereby reimbursement specialists assist our customers with general
information about the process of submitting prior authorizations, claims and
appeals in the event of a denial.





As of
December 31, 2008, approximately 250 million individuals in the United States
had reimbursement coverage for the Bravo pH monitoring procedure. The most
common accepted indications for coverage are for patients with esophageal reflux
who are being considered for surgical anti-reflux repairs and patients with
normal endsocopic findings and reflux symptoms who are unresponsive to
therapy.




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




In
2008, for procedures performed in a physician’s office, the national average
global fee paid by Medicare under the CPT code for capsule endoscopy of the
small bowel was $944, a decrease of 1.17% compared to 2007. For procedures
performed in an outpatient hospital setting, the national average physician fee
paid by Medicare was $178, a decrease of 1.12% compared to 2007, and the
national average payment rate to the hospital for the technical component was
$607. These payment rates are modified annually. Effective January 1, 2009, the
national average global fee paid by Medicare for a procedure in a physician’s
office was decreased to $876, the national average physician fee for the
professional component of a hospital outpatient procedure was increased to $193
and the national average payment rate to the hospital for the technical
component increased to $632 due to an increase in the APC rate for
gastrointestinal small bowel procedures classified under APC
142.


46




For
capsule endoscopy of the esophagus, in 2008, the national average global fee
paid by Medicare for a procedure in a physician’s office was $756. The national
average physician fee paid by Medicare in an outpatient hospital setting was $55
and the national average payment rate to the hospital for the technical
component was $541, under the APC 141 for upper gastrointestinal procedures.
Effective January 1, 2009, the national average global fee paid by Medicare for
a procedure in a physician’s office decreased to $684, the national average
physician fee paid by Medicare in an outpatient hospital setting decreased to
$54 and the national average payment rate to the hospital for the technical
component increased to $571 under the APC 141 for upper gastrointestinal
procedures.





For Bravo
pH monitoring, in 2008, the national average global fee paid by Medicare for a
procedure in a physician’s office was $481. The national average physician fee
paid by Medicare in an outpatient hospital setting was $80 and the national
average payment rate to the hospital for the technical component was $250 under
the APC 361 for Level II alimentary tests.  Effective January 1, 2009,
the national average global fee paid by Medicare for a procedure in a
physician’s office decreased to $456, the national average physician fee paid by
Medicare in an outpatient hospital setting increased to $84 and the national
average payment rate to the hospital for the technical component increased to
$264 under the APC 361 for Level II alimentary tests.





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 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 small bowel capsule endoscopy
at the end of 2008 was approximately 226 million, compared to approximately 166
million at the end of 2007. This increase results from the decision of French
authorities to approve reimbursement for PillCam SB capsule endoscopy for over
60 million citizens in France in November 2008. The number of people in Europe
with reimbursement for indications in addition to OGIB at the end of 2008 was
approximately 161 million. In 2009, we expect to focus our efforts on the
ongoing process to obtain reimbursement for PillCam SB capsule endoscopy under
the German national insurance program which covers most of Germany’s 82 million
citizens.   About 10 percent of German citizens currently have
coverage for PillCam SB through private health insurers.




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




In
Australia, reimbursement coverage for use of capsule endoscopy in the detection
of gastrointestinal bleeding exists for all residents who hold Australian and/or
New Zealand citizenship, providing coverage for approximately 20 million
residents. In May 2008, the Department of Health and Ageing in Australia
approved permanent government funding and reimbursement for capsule endoscopy of
the small bowel. Prior to this approval, capsule endoscopy has been funded and
reimbursed on a temporary basis since 2004.




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


47





Outside
the United States, there is no meaningful reimbursement coverage for the Bravo
system.




C. ORGANIZATIONAL
STRUCTURE




Given
Imaging Ltd. is organized under the laws of the State of Israel and, as of
December 31, 2008, held directly or indirectly the outstanding capital stock of
the following subsidiaries and in the following ownership
percentages:




Name
      of Subsidiary
                  
                  Country of Incorporation
                  
                  Percentage OwnershipGiven
      Imaging Pty. Ltd.
                  
                  
                  Australia
                  
                  
                  100Given
      Imaging, Inc.
                  
                  
                  United
      States
                  
                  
                  100Given
      Imaging s.a.s.
                  
                  
                  France
                  
                  
                  100Given
      Imaging GmbH
                  
                  
                  Germany
                  
                  
                  100Given
      Imaging B.V.
                  
                  
                  Netherlands
                  
                  
                  100Given
      Imaging K.K.
                  
                  
                  Japan
                  
                  
                  56Given
      Imaging  (Asia-Pacific) PTE Ltd.
                  
                  
                  Singapore
                  
                  
                  100Endonetics,
      Inc.
                  
                  
                  United
      States
                  
                  
                  100




D. PROPERTY, PLANTS AND
EQUIPMENT




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




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




Our
subsidiaries are party to the following leases:




•
            Given
      Imaging, Inc. leases 2,318 square meters (24,919 square feet) of office
      space in Duluth, Georgia under a sub-lease that expires in May
      2015;•
            Given
      Imaging GmbH leases approximately 1,060 square meters (11,405 square feet)
      of office space in Hamburg, Germany, pursuant to a lease for an indefinite
      term that may be terminated by us or the landlord with an advance notice
      of six months;•
            Given
      Imaging Pty. Ltd. leases 244 square meters (2,626 square feet) of office
      space in North Ryde, Australia, pursuant to a lease that expires in
      February 2011;•
            Given
      Imaging s.a.s. leases a total of 241.5 square meters (2,598 square feet)
      of office space in Paris, France, consisting of 168 square meters (1,808
      square feet) pursuant to a lease that expires in September 2010 and that
      may be terminated by us at the end of each three year period upon six
      months’ notice and additional 73.5 square meters (791 square feet)
      pursuant to a lease that expires in January 2012;•
            Given
      Imaging K.K. leases 443 square meters (4,765 square feet) of office space
      in Tokyo, Japan pursuant to a lease that expires in August 2010;
      and


48





•
            Given
      Imaging (Asia-Pacific) PTE Ltd. leases 102 square meters (1,101 square
      feet) of office space in Singapore, pursuant to a lease that expires on
      August 31, 2010.




ITEM
4A.UNRESOLVED STAFF
COMMENTS





None.




ITEM
5. OPERATING AND
FINANCIAL REVIEW AND PROSPECTS




A. OPERATING
RESULTS




Overview




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




In 2001,
we commenced marketing the Given System with the PillCam SB capsule for
detection of disorders of the small bowel. As of December 31, 2008, we had an
installed base of nearly 4,900 Given Systems and had sold over 870,000 PillCam
SB capsules in more than 60 countries worldwide. Since November 2004, we also
market and sell our PillCam ESO capsule for visualization of the esophagus. In
the second half of 2007, we began selling the first generation of our PillCam
COLON capsule in Europe following receipt of certification allowing us to use
the “CE mark” and to market this capsule throughout the European Union. We also
have limited sales of the PillCam COLON capsule in our AP/J
region.  To date, we have not been able to obtain FDA clearance to
market the PillCam COLON capsule in the United States. We have also developed
and are selling in the United States, Europe and several other jurisdictions, a
patency capsule, which is a dissolvable capsule that enables physicians to
determine whether there are obstructions or strictures in the gastrointestinal
tract that may prevent passage of our PillCam capsules.





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





Acquisition
of the Bravo pH monitoring business





In
December 2008, we acquired the Bravo pH monitoring business from Medtronic for
total cash consideration of $20 million, including approximately $2.9 million as
pre-payment for inventory Medtronic will use to supply the Bravo system to us
during a transition period.  The Bravo pH monitoring business consists
primarily of intangible assets, goodwill, customer relationship and in-process
research and development.   A small percentage of the purchase
price has been put in escrow and its payment is contingent upon Medtronic
completing on schedule the development of a new capsule delivery system already
underway.  An additional small percentage of the purchase price has
been put in escrow to secure Medtronic’s indemnity obligations under the
acquisition agreement.


49





This is
our first acquisition since our inception. The Bravo pH monitoring system is the
only wireless, catheter-free pH test for GERD, and uses a disposable capsule
temporarily placed in the esophagus that measures pH levels and transmits the
data to an external receiver.





We
decided to acquire this business for the following primary
reasons:





·
            we
      believe that wireless capsule-based pH monitoring is a unique
      patent-protected technology with distinct advantages over the
      catheter-based competition;




·
            the
      Bravo pH monitoring business is a minimally invasive, diagnostic and
      capsule-based procedure that includes both capital equipment and recurring
      sales of disposables, and therefore has similar characteristics and it
      relies on a similar business model as our capsule endoscopy
      business;




·
            the
      Bravo pH monitoring procedure is backed by solid clinical evidence and has
      broad reimbursement coverage in the United
  States;




·
            we
      expect that sales of the Bravo system will be an important contributor to
      our revenues;




·
            we
      believe there is a market opportunity to grow the business primarily due
      to the prevalence and awareness of GERD in the United States, the use of
      our sizable field sales force compared to the limited resources invested
      in the marketing and sales of this product by Medtronic, favorable
      reimbursement coverage and the untapped potential for this product outside
      the United States;




·
            the
      Bravo system is used by gastroenterologists and there is a significant
      overlap between capsule endoscopy and Bravo customers, which provides us
      with cross-selling opportunities and a competitive advantage over our
      competitors in both the pH monitoring and capsule endoscopy specialties;
      and




·
            there
      is an opportunity for significant operational efficiencies through
      technological advancement of the Bravo product and integration with our
      capsule endoscopy platform.




Medtronic
will continue to supply the Bravo products to us at an agreed transfer price
until December 2009. By then, we intend to complete the transition of the Bravo
system manufacturing operations to Israel.




During
2009, we have agreed to purchase a minimum number of Bravo capsules and delivery
systems from Medtronic.  The transfer price of these items may vary
depending on the volume of our orders.  In addition to the Bravo
capsule and delivery system that are manufactured by Medtronic, Medtronic will
continue to source for us other components of the Bravo system that are
manufactured by third-party vendors. During 2009, we intend to transfer existing
contracts with these vendors and the business relationships to us.  In
particular, the Bravo receiver is manufactured and supplied by a single supplier
based in Denmark.  In addition, the proprietary pH analysis software,
also known as POLYGRAM NET, was developed by Medtronic and is installed on
specially configured laptops.  While Medtronic developed this
software, it no longer has full access to the related
know-how.  Therefore, during 2009, Medtronic will continue to supply
these laptops to us loaded with the software at an agreed price.





We have
already completed the transition of many other business functions and know-how
to our control, such as order fulfillment, supply chain, customer and technical
support, sales and marketing, and quality and regulatory affairs, and we are
running the business on our own with minimal assistance from
Medtronic.


50


In
addition, during 2009, we intend to advance two important research and
development projects related to the Bravo business that, if successful, will
result in significant operational efficiencies, which if successful, will
increase our profitability from the Bravo products.  First, as part of
the acquisition we acquired an ongoing research and development project
conducted by Medtronic for a new capsule delivery system.  Under our
agreement with Medtronic, Medtronic, in cooperation with us, will continue this
project and bring it to completion within one year of the acquisition
date.  To incentivize Medtronic to complete this project on time, we
held back a small portion of the purchase price that will be paid only if
Medtronic fulfills its contractual obligations related to this project. The new
delivery system under development is expected to be easier to use, reduce
product malfunctions and user errors leading to failed procedures and reduce
manufacturing costs.





In
parallel, we intend to develop, with Medtronic assistance, a new software
application that allows physicians to read and interpret the result of the Bravo
procedure.  The current software is complex and the know-how related
to it is no longer under complete control of Medtronic.  Upon
completion, the new software will eliminate the dependency on Medtronic and will
simplify the user interface and the related technical elements.  We
currently have a limited number of workstations loaded with the existing
software, which we expect will be sufficient to meet demand for the Bravo system
until early in 2010. If we are not able to complete the development of new
software and qualify it for use on an appropriate computer workstation within
such time, we may not be able to continue to sell the Bravo system or may be
forced to incur costs to outsource the development of new software to a third
party or to seek to obtain complete access to the know-how related to the
existing software in order to qualify it for use on a new computer workstation
not currently qualified for use with the Bravo system.





While
transitioning the manufacturing line of the Bravo capsule and delivery system to
Israel and the business relationship and agreements with third-party suppliers,
we will depend significantly on Medtronic to ensure uninterrupted supply of the
Bravo system and to successfully transfer to us the necessary manufacturing
knowledge to allow us to begin our own manufacturing operations by the end of
2009, as planned.  We also depend on Medtronic for successful and
timely completion of the research and development projects described
above.  To mitigate this risk, we may need to hold inventory levels
that are higher than usual.  For further description of the risks
related to this acquisition, see under Item 3 – “Risk Factors.”





The
impact of this acquisition on our operating results and financial position is as
follows:





·
            we
      incurred a charge to our research and development expenses of
      approximately $4.7 million in the fourth quarter of 2008 related to
      in-process research and development activities we acquired in this
      transaction;




·
            we
      have committed to purchase from Medtronic minimum quantities of Bravo
      capsules and delivery systems during 2009, and a minimum number of
      computer workstations loaded with proprietary
  software;




·
            we
      assumed Medtronic’s obligations under open purchase orders from
      third-party vendors;




·
            we
      have committed to pay a specified amount to encourage the retention of key
      manufacturing employees of Medtronic for at least 12 months following the
      acquisition to facilitate uninterrupted supply of the Bravo product to us
      during a transition period;




·
            our
      cash balance was reduced by $20 million, including approximately $2.9
      million pre-payment for inventory Medtronic will use to supply the Bravo
      system to us during a transition period;
and




·
            our
      gross margins will be adversely affected until we start manufacturing the
      Bravo system in Israel.


51


At Medtronic, the Bravo business was
not organized as a separate operating entity and was not otherwise considered a
material business for Medtronic.  As a result, audited or reviewed
financial statements were not available for the Bravo business and our decision
to acquire this business and our business expectations are based on our own due
diligence and unaudited financial information and projections we received from
Medtronic.  As a result, our financial estimates may be materially
incorrect if this business does not grow as we expect.





As of
December 31, 2008, the Bravo business had approximately 1,100 customers who
conducted approximately 50,000 procedures in 2008, which represents
approximately 20% of the number of pH monitoring procedures performed in the
United States during the year.





Revenues




We
derive most of 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. In
addition, we expect that more than $10 million of our revenues in 2009 will be
derived from sales of the Bravo system and its components. We also derive a
small portion of our revenues from post-sale customer support contracts entered
into by customers at the end of the warranty period for the computer workstation
and data recorders. We also derive limited revenues from sales of our AGILE
Patency System.




Revenue breakdown. In the
first few years following the commencement of sales of the Given System, the
majority of our revenues came from the sale of the Given System to new
customers. However, with nearly 4,900 systems now installed worldwide, of which
nearly 2,900 are in the United States, a substantial majority of our revenues is
generated from reorders of our PillCam capsules, particularly PillCam SB
capsules, by existing customers. The proportion of our revenues derived from
sales of capital equipment components of the Given System, such as the RAPID
workstations and portable data recorders, and revenues derived from sales of the
PillCam capsules, which generate recurring sales, is an important indicator of
our results of operations. In recent years, we have seen a gradual increase in
the share of revenues generated from recurring sale of our PillCam
capsules. In 2008, we derived approximately 82.3% of our revenues from sales of
the PillCam SB capsules, compared to 80.3% of our revenues in 2007 and 80.4% of
our revenues in 2006. Sales of the PillCam ESO capsule represented approximately
1.0% of our revenues in 2008, compared to 0.9% of our revenues in 2007 and 1.5%
of our revenues in 2006. Sales of PillCam COLON represented approximately 1.2%
of our revenues in 2008 compared to 1.0% in 2007. We also derived approximately
0.7% of our revenues from sales of the Bravo system and its components following
our acquisition of the Bravo pH monitoring business in December 2008. We expect
that a substantial majority of our revenues in the future will continue to come
from recurring sales of our PillCam capsules.




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




$
                                  
                                  
                                  %
      of annual revenues2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008(U.S.
      dollar in thousands)Workstations
      and data recorders
                                  
                                  $
                                  14,104
                                  
                                  
                                  $
                                  15,267
                                  
                                  
                                  $
                                  14,523
                                  
                                  
                                  
                                  14.8
                                  %
                                  
                                  
                                  13.5
                                  %
                                  
                                  
                                  11.6
                                  %PillCam
      SB capsule
                                  
                                  
                                  76,360
                                  
                                  
                                  
                                  90,614
                                  
                                  
                                  
                                  103,005
                                  
                                  
                                  
                                  80.4
                                  
                                  
                                  
                                  80.3
                                  
                                  
                                  
                                  82.3PillCam
      COLON capsule
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  1,106
                                  
                                  
                                  
                                  1,463
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  1.0
                                  
                                  
                                  
                                  1.2PillCam
      ESO capsule
                                  
                                  
                                  1,438
                                  
                                  
                                  
                                  1,012
                                  
                                  
                                  
                                  1,213
                                  
                                  
                                  
                                  1.5
                                  
                                  
                                  
                                  0.9
                                  
                                  
                                  
                                  1.0Patency
      system and capsule
                                  
                                  
                                  353
                                  
                                  
                                  
                                  523
                                  
                                  
                                  
                                  662
                                  
                                  
                                  
                                  0.4
                                  
                                  
                                  
                                  0.5
                                  
                                  
                                  
                                  0.5Bravo
      system
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  884
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  0.7Service
                                  
                                  
                                  2,774
                                  
                                  
                                  
                                  4,346
                                  
                                  
                                  
                                  3,356
                                  
                                  
                                  
                                  2.9
                                  
                                  
                                  
                                  3.8
                                  
                                  
                                  
                                  2.7Total
                                  
                                  $
                                  95,029
                                  
                                  
                                  $
                                  112,868
                                  
                                  
                                  $
                                  125,108
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100
                                  %







52


Workstations
and data recorders.In 2008, our revenues from the sale of workstations
and data recorders decreased compared to our revenues from the sale of these
products in 2007 due to lower system sales in the Americas and Asia-Pacific
regions. Typically, during the entry period in new markets, such as Japan, sales
of capital equipment are more significant than sales of disposables such as the
PillCam capsules. In the more mature markets, such as Europe and the United
States, our revenues from sale of workstations and data recorders are decreasing
compared to prior periods. The decrease in revenues from sale of capital
equipment in those other markets is attributable to both lower quantities of
workstations and data recorders sold and lower average selling price. In October
2008, we obtained reimbursement for small bowel capsule endoscopy in France,
which resulted in an increase of sales of capital equipment to new customers in
this country who decided to purchase the Given System following the
reimbursement announcement.  We believe that, other than in Japan and
France, sales of workstations and data recorders are not likely to grow since a
majority of gastroenterologists in our main markets already have access to a
capsule endoscopy system. Other important reasons for this decrease in sales of
capital equipment were the global economic crisis and our continued focus on
increasing utilization and reorders of the PillCam SB capsule in existing
accounts over capital equipment sales.




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




In
2009, revenues from sales of workstations and data recorders may increase
further in Japan and France compared to 2008. Generally, however, we believe
that a significant majority of our revenues in the foreseeable future will come
from the sale of capsules as compared to capital equipment.




PillCam
SB.Substantially all of our revenues from capsule sales were
attributable to sales of the PillCam SB capsule, which we began selling
worldwide in the fourth quarter of 2001. Worldwide PillCam SB sales were $103
million in 2008, an increase of 14% compared to 2007.  In addition, in
2008 worldwide reorders of PillCam SB increased by 17% to approximately 206,000
capsules, compared to approximately 177,000 capsules in
2007.  Reorders are recurring sales to the same customer in a
specified period of time.  We expect recurring sales of the PillCam SB
capsule to continue to account for a substantial majority of our revenues from
capsule sales in 2009. The primary reasons for this are:




•
            Most
      small bowel indications for which the PillCam SB capsule is used are
      covered by governmental and commercial reimbursement
    policies.•
            Our
      sales force is primarily focused on selling capsules and the market for
      the PillCam SB capsule is currently a more developed market compared to
      the market for our PillCam ESO capsule and PillCam COLON
      capsule.•
            Regulatory
      clearance to market the PillCam SB capsule in Japan was obtained in April
      2007 and we expanded our distribution relationship with Fuji Medical in
      Japan.•
            Our
      obtaining reimbursement coverage in France is expected to result in an
      increased use of the PillCam SB capsule in
  France.




PillCam ESO. We have marketed
the PillCam ESO in the Unites Stated since November 2004. Since then, sales of
our PillCam ESO were insignificant due primarily to the lack of favorable
reimbursement coverage, as well as limited clinical data to support widespread
use of the PillCam ESO capsule.


53




As
of December 31, 2008, approximately 42 million individuals in the United States
had reimbursement coverage for using the esophageal capsule endoscopy procedure
in the detection of esophageal varices, a common condition in patients diagnosed
with cirrhosis of the liver, a chronic liver disease. Reimbursement coverage for
the use of PillCam ESO in the detection of Gastro-Esophageal Reflux Disease, or
GERD, which is more prevalent in the general population than varices, is not
expected before additional clinical data supporting such use is
available.




In the
first quarter of 2008, we began marketing and selling PillCam ESO 2, our newest
version of our esophageal capsule. We believe that this new capsule is a
significant improvement over the prior version and will contribute to increased
demand for PillCam ESO. The existence of initial reimbursement and favorable
clinical data to support the use of PillCam ESO in the evaluation of esophageal
varices, are also expected to gradually increase the demand for our PillCam ESO
capsule, mostly for the varices indication. However, because esophageal varices
is not a common condition in the general population, we expect that sales of
PillCam ESO in the foreseeable future will continue to be small compared to
sales of PillCam SB. We believe that sales of the PillCam ESO capsule could
increase more significantly when and if there is clinical data and reimbursement
coverage to support and cover the use of this capsule in GERD patients; however,
significant market development, planning and other resources are required to
achieve these results and there is no assurance that we will be able to do
so.




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




PillCam COLON. PillCam COLON
is the third capsule we developed. We believe the launch of this capsule in
Europe in the second half of 2007 reinforces the Given Platform as the leading
product for capsule endoscopy and demonstrates our commitment to this field.
Sales of PillCam COLON in 2007 and 2008 were limited. Presently, there is only
limited clinical evidence to support the use of this capsule. We are currently
supporting a number of clinical trials in Europe that we believe will help our
market development activities. In the meantime, we market PillCam COLON in
Europe as a complementary tool for colonoscopy offering a method for
visualization of the colon in patients who are unable or unwilling to undergo
traditional colonoscopy or in cases of incomplete colonoscopies.




PillCam
COLON has not yet received FDA marketing clearance in the United States. In
February 2008, the FDA determined that the PillCam COLON capsule is not
substantially equivalent to any marketed device in the United States for
visualization of the colon and therefore cannot be cleared for marketing in the
United States, our biggest market, through the 510(k) process, based on
currently available clinical data. There can be no assurance that we will be
able to obtain FDA clearance for the PillCam COLON capsule, or even if we do,
that this capsule will achieve widespread market acceptance as superior to
existing technologies for visualization of the colon.





In
2008, we advanced the development of a new version of the PillCam COLON capsule,
which we refer to as PillCam COLON 2.  While the development is still
ongoing, we expect to begin clinical trials with this capsule in Israel during
the first half of 2009 and begin marketing of this capsule in the European Union
late in 2009.  Following the initial clinical trials in Israel, we
plan to proceed with additional, larger clinical trials in Europe and the United
States, which could serve as a basis for a subsequent application to the FDA to
clear this capsule for marketing in the United States.  Additionally,
our clinical trial activities relating to the colon include trials designed to
optimize the colon cleansing and preparation procedure that is an important
factor in a successful examination of the colon.


54





We
believe the following are important factors in determining the success of this
product in the foreseeable future:




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




We
believe that there is a significant market and a long-felt need among physicians
and patients for a simple, cost-effective and non-invasive technique for
colorectal cancer screening, which represents a significant market opportunity
for the PillCam COLON capsule. According to guidelines of professional
associations in the United States, it is estimated that approximately 88 million
people over the age of 50 or that are otherwise at increased risk for colon
cancer need to be screened in the United States, yet patient compliance is only
around 50 percent. Patient compliance rates in Europe and Japan are believed to
be even lower. We believe that the PillCam COLON procedure will eventually
provide a less invasive alternative to traditional colonoscopy. However, further
capsule and procedure development as well as significant additional clinical
data to support the use of this capsule as a screening tool are necessary before
we can realize this market opportunity. In the meantime, we market PillCam COLON
in Europe for visualization of the colon in patients who are unable or unwilling
to undergo traditional colonoscopy or in cases of incomplete
colonoscopies.




While
we expect sales of PillCam COLON to increase gradually, we do not expect that
the PillCam COLON capsule will contribute significantly to our revenues in 2009
for the following reasons:




•
            we
      expect to complete the development of new technologies required for
      enhancing the clinical effectiveness of the PillCam COLON capsule only in
      late 2009 and there is no assurance we will be able to do so on schedule
      or at all;•
            we
      do not expect to receive FDA clearance for the PillCam COLON capsule in
      2009;


55





•
            clinical
      data for the PillCam COLON is limited; and•
            reimbursement
      for the PillCam COLON procedure is not expected in
  2009.




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




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




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




2006
                    
                    2007
                    
                    2008Total
      number of PillCam SB capsules sold*
                    
                    
                    165,000
                    
                    191,800
                    
                    
                    212,000Number
      of PillCam SB capsule sales representing
    reorders
                    
                    
                    155,840
                    
                    177,000
                    
                    
                    206,000%
      of revenues from capsule sales that represent
      reorders
                    
                    
                    94.4
                    %
                    92.3
                    %
                    
                    97.0
                    %








*
            Sales
      of PillCam ESO began in November 2004 and reorders in subsequent years
      were negligible primarily due to the lack of reimbursement and clinical
      evidence supporting widespread use of this capsule. Sales of PillCam COLON
      are also limited.  Accordingly, reorders of PillCam ESO and
      PillCam COLON are not included in the above
  table.





Geographical
breakdown




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




2006
                    
                    2007
                    
                    2008Americas
                    
                    
                    71
                    %
                    66
                    %
                    
                    60
                    %EMEA
                    
                    
                    23
                    %
                    24
                    %
                    
                    28
                    %AP/J
                    
                    
                    6
                    %
                    10
                    %
                    
                    12
                    %




Sales
in the Americas region were $75.6 million in 2008, up 2.0% from $73.8 million in
2007.  At the same period, EMEA sales increased 28% to $34.9 million
compared to $27.3 million in 2007, and sales in the AP/J region increased 25% to
$14.6 million compared to $11.7 million in 2007.


56


During
the same period, PillCam SB sales in the Americas increased by 1.0% to 142,100
capsules, compared to 140,000 capsules sold in 2007.  PillCam SB sales
in the EMEA region increased by 21% and PillCam SB sales in the AP/J region more
than doubled compared to 2007. The increase in PillCam SB sales in the AP/J
region is mainly attributable to sales of this capsule in Japan and
Australia.





The
percentage of revenues we derive from sales outside the United States has
increased between 2006 and 2008 due to the higher growth rate in sales of our
capsule endoscopy products in regions outside the United States compared to the
growth rate in sales of these products in the United States.  The
lower growth rate in the United States is primarily a result of a decline in
sales of workstations and other capital equipment and a lower growth rate in
sales of our PillCam SB capsule.  We believe the decline in sales of
workstations is due in part to the economic slowdown and in part to our already
existing large installed base.  We believe that the lower growth rate
in capsule sales is due in part to the decline in sales of workstations that
typically include a sale of capsules and in part to the maturity of the market
for the most common use of the PillCam SB capsule, namely the detection of
obscure gastrointestinal bleeding, or OGIB. If we are unable to expand the use
of the PillCam SB capsule beyond OGIB, particularly in the United States, sales
of the PillCam SB capsule may decline or not increase as we expect.





The
higher growth rate outside the United States is a result of our initial
penetration of the Japanese market and expanding reimbursement coverage in the
AP/J and EMEA regions. In Japan, we received marketing clearance for the Given
System and our PillCam SB in April 2007 followed by a reimbursement coverage
announcement in October 2007. Behind the United States, Japan is considered one
of the largest markets in the world for medical devices for use in the
gastrointestinal tract. Therefore, we believe that the Japanese market
represents a significant potential growth opportunity for our business in 2009
and beyond. In EMEA, the primary reasons for the growth in PillCam SB sales is
our increasing success in taking advantage of the inclusion of this capsule in
the national listings of reimbursable products in major countries, such as Spain
and the United Kingdom, and the reimbursement coverage for the PillCam SB
capsule we obtained in France in November 2008.





We expect
that a majority of our revenues in the foreseeable future will continue to come
from the United States, mainly due to our ability to leverage existing market
share to generate additional sales, a favorable reimbursement system and general
acceptance of new technologies among physicians. In addition, a significant
majority of the sales of the Bravo system in the foreseeable future will be in
the United States.  The market for this product outside the United
States is not well developed. At the same time, we expect that in 2009 the
growth rate in sales of our capsule endoscopy products outside the United States
will continue to be higher than the growth rate in sales of our capsule
endoscopy products in the United States because of the reasons described in the
preceding paragraph.





Seasonality




We
believe that demand for our products may be affected by seasonal factors, mainly
during the summer months when physicians and administrators are more likely to
postpone purchasing decisions relating to our products 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.





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 our products and perform medical procedures with them.
Once a payor has decided to provide reimbursement for use of our products, the
level of reimbursement coverage provided also becomes a key factor in a
physician’s decision. We estimate that as of December 31, 2008, reimbursement
for small bowel capsule endoscopy was available worldwide to approximately 560
million people. In the United States approximately 209 million people are
covered with most reimbursement policies providing coverage for a number of
small bowel indications, including obscure bleeding, suspected Crohn’s disease,
suspected small bowel tumors and other small bowel pathologies. In Europe,
reimbursement coverage for small bowel capsule endoscopy was available for
approximately 226 million people as of December 31, 2008, and reimbursement
coverage for expanded indications, such as Crohn’s disease and other small bowel
disorders was available for approximately 161 million people at the end of 2008.
The most important development in this respect was the receipt of reimbursement
coverage for our PillCam SB capsule in France in November 2008.  This
decision by the French authorities provides coverage for approximately 60
million people. This represents a significant potential growth opportunity for
us in Europe.


57




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




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




We
also continued our efforts to improve reimbursement coverage for the PillCam SB
capsule. First, we are working with third-party payors to expand the number of
International Statistical Classification of Diseases, known as ICD, diagnosis
codes, for small bowel diseases. ICD diagnosis codes are used to classify
diseases and a wide variety of medical symptoms, findings and complaints and to
report diagnoses to third-party payors to support medical necessity for services
provided. We believe that the availability of more ICD diagnosis codes for small
bowel-related conditions will enhance the ability of physicians to submit and
receive payment for claims relating to small bowel diagnostic procedures using
our PillCam SB capsule, which, in turn, may result in an increased usage of this
capsule. Second, we continue our efforts to convince third-party payors, through
economic and health outcomes analysis, that capsule endoscopy of the small bowel
should be used earlier in the typical diagnostic process for patients with
inflammatory bowel diseases, such as Crohn’s disease, and be entitled to
reimbursement coverage without requiring other endoscopic procedures to be
performed prior to administering the capsule. We believe this could increase
physicians’ use of the PillCam SB capsule. As of December 31, 2008,
approximately 39 million individuals in the United States had reimbursement
coverage for PillCam SB as a primary diagnostic tool. Other third-party payors
have updated their policies to require a colonoscopy as the only endoscopic
procedure to be performed prior to administration of the PillCam SB
capsule.  As of December 31, 2008, approximately 30 million
individuals in the United States were covered under these policies.




As
of December 31, 2008, 42 million individuals in the United States have coverage
for using our PillCam ESO for the diagnosis of esophageal varices.




To date,
there is no reimbursement coverage for procedures with our PillCam COLON
capsule. This capsule is new to the market and more clinical evidence will be
necessary to support reimbursement. Reimbursement coverage for this capsule is
not expected in 2009.





As of
December 31, 2008, approximately 250 million individuals in the United States
had reimbursement coverage for the Bravo pH monitoring procedure. The most
common accepted indications for coverage are for patients with esophageal reflux
who are being considered for surgical anti-reflux repairs and patients with
normal endsocopic findings and reflux symptoms who are unresponsive to
therapy.


58





For
discussion of the reimbursement rates applicable to various procedures with our
products see in Item 4 – “The Business of the Company – Business Overview –
Third-Party Reimbursement - Reimbursement Rates.” Reimbursement rates may also
be modified in the future. Based on recent history, we do not expect that modest
changes to reimbursement rates will have a material effect on our
business.




Competition




Olympus
Corporation has been marketing and selling a competing capsule endoscopy system
in Europe and Australia since October 2005. In September 2007, Olympus received
FDA clearance to market its capsule endoscopy system and small bowel capsule in
the United States and in September 2008 it received regulatory clearance to
market its capsule endoscopy system in Japan. In addition, in 2007 a South
Korean company began selling a competing system in Korea and other Asian
countries, as well as in Europe and Australia, and has intensified its marketing
and selling efforts in these regions in 2008. Finally, a Chinese company is
selling its capsule endoscopy systems in China and other Asian countries at
lower prices than us and presented its systems at industry trade shows outside
Asia.




The
effect of competition from Olympus or other possible direct competitors on our
capsule endoscopy business is expected to be mixed. On the one hand, we may lose
market share, be forced to reduce the price of our products or experience delays
in completing sales as a result of a longer decision making process among
potential customers. On the other hand, we believe that the entry of Olympus and
other companies into the capsule endoscopy market further validates the market
opportunity of our PillCam platform and may result in greater market acceptance
of our capsule endoscopy products, which we believe have a number of advantages
over competing products. First, we were the first company to sell and market
capsule endoscopes in the most mature markets in the United States, Europe and
Japan and have a large installed base of customers and a recognized brand name
in this field. Second, we have been concentrating primarily on the development
and sale of capsule endoscopy systems and have a platform enabling us to use our
line of PillCam capsules for diagnosing disorders in areas of the
gastrointestinal tract in addition to the small bowel, while Olympus and other
companies only have a small bowel capsule at this time. Third, we believe our
technological solution, and in particular our software solution, is superior to
the products introduced by competitors. Finally, we have a patent portfolio that
we believe protects critical aspects of our technology and may create
technological barriers for our competitors, which may force them to enter the
market with inferior products or delay their entry into certain territories or
impact the cost of their products.





In the pH
monitoring business, the most common esophageal pH monitoring device is the
transnasal catheter, which continuously measures pH for 24
hours.  Sierra Scientific, Sandhill and Alpine Biomed are the major pH
catheter manufacturers that compete with the Bravo system.  We
estimate that at present approximately 20% of pH monitoring procedures in the
United States are performed with the Bravo system.





We
believe the Bravo system has a number of advantages that will help us to compete
effectively and improve our competitive position compared to the catheter-based
technology:





·        the
Bravo system offers a convenient catheter-free alternative that has been shown
to be better tolerated and possess a more favorable side-effect profile than the
catheter-based procedure;




·        the
Bravo system allows physicians to record up to 48 hours of pH data, providing a
more comprehensive disease profile and potential improvement for patient
care;




·        we
intend to use our sizable field sales force and broad customer base to market
and sell the Bravo system in comparison to the limited marketing and sale
resources  utilized by Medtronic prior to our acquisition of this
business and we expect this will increase our market share compared to that
achieved during the last few years Medtronic marketed and supported the Bravo
system with limited resources, primarily through telemarketing;
and


59




·        we
believe current trends in reimbursement will make the Bravo system more cost
effective to use than the catheter-based technology.





Customers
and customer concentration




We
market and sell our products 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 our products primarily to
hospitals, gastroenterology offices and gastroenterology outpatient facilities.
In 2008, we derived $30.8 million, or 24.6%, of our revenues from sales to local
distributors, compared to $24.7 million, or 21.8% in 2007. Our direct sales
revenues are derived from a large number of individual customers and have higher
gross margins. In 2008, no single direct sales customer accounted for more than
0.3% of our revenues and no single distributor accounted for more than 3.2% of
our revenues, except sales to Suzuken, which had exclusive distribution rights
in Japan during 2008 and accounted for 4.6 % of our revenues. It is our policy
to require collateral or security in connection with sales to distributors. Due
to these factors and the geographical dispersion of our customers, we believe
that we adequately control our exposure to credit risks associated with accounts
receivable. To date, we have not experienced any material bad debts and we have
collected substantially all of our receivables.




Cost
of revenues and gross margins




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




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





Our
average gross margins over the last three fiscal years were 74%.  Our
anticipated gross margins in 2009 are expected to be lower than the average
gross margins in previous years due to the negative impact of the Bravo product
on our gross margins.  Gross margins are expected to improve and
return closer to historical levels once we complete the integration of the Bravo
product into our business and the transition of the Bravo manufacturing line to
Israel, which we expect to occur in late 2009.




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, our products, 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 OCS. We plan
to continue investing in research and development, as we enhance the Given
System and the recently acquired Bravo business, pursue the development of new
products and perform more clinical trials to drive continued expansion of
reimbursement for our products worldwide.


60


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
gradually in the future as we increase sales of our products, further expand our
sales and marketing team, expand our educational activities and expand our
promotional efforts.





From
November 2004 until December 31, 2007, our marketing expenses included
commissions we paid Ethicon under our exclusive sales representation,
co-promotion and cooperation agreement for the marketing of the PillCam ESO
capsule. Under this agreement, we paid Ethicon commissions on sales in the
United States at a rate of 50% on the sale of the PillCam ESO capsule and 10% on
sales of capital equipment parts of the Given System, including workstations and
data recorders, to customers that use the PillCam ESO capsule. Under the terms
of the agreement, as of December 31, 2007, we received from Ethicon milestone
payments totaling $25 million. We have recorded these milestone payments as a
reduction of commission expenses and recognize them ratably over the term of the
agreement. Our agreement with Ethicon was terminated in January 2008. Ethicon
has paid us $7.6 million in fees associated with the termination of the
agreement. In addition, Ethicon has paid us $1.2 million to continue to fund
clinical trial activities in 2008 relating to the PillCam ESO capsule. As a
result of the early termination of our agreement with Ethicon, we accelerated
the effect of the milestone payments we had received from Ethicon prior to the
termination and recorded an additional credit to operating expenses of
approximately $23 million in the fourth quarter of 2007. We recorded an
additional credit to operating expenses of approximately $5.4 million as a
result of this early termination during the first quarter of 2008. These credits
have resulted in increases to our net income in similar amounts.




General
and administrative. Our general and administrative expenses consist
primarily of salaries and related costs for our executive and administrative
staff, insurance premiums, and legal, accounting and consulting expenses. Our
general and administrative expenses in 2007 and 2008 were at a relatively high
level compared to prior periods, primarily as a result of legal expenses
associated with our patent litigation in the United States with Olympus, which
we settled in June 2008. The proceeds of approximately $2.3 million we received
from this settlement were recorded as a credit to our general and administration
expenses in the second quarter of 2008.




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. Under Financial Accounting Standard,
SFAS 123(R), we recognize as an expense the grant-date fair value of stock
options and other equity-based compensation to employees using the modified
prospective method for the valuation of our equity-based
compensation.  The application of FAS 123(R) has a material impact on
our earnings per share. In 2008, we recognized $6.9 million in equity-related
compensation expense, compared to $5.7 million of equity-related compensation
expense in 2007.  We expect to continue our practice of granting stock
options and other equity awards to our directors, officers, employees and
consultants. The resulting compensation expenses in 2009 will be impacted by
various factors, including the number of options we grant and their fair value
at the date of grant.




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




61


Taxes.
In 2008, Israeli companies were generally subject to income tax at the corporate
tax rate of 27%. This tax rate is expected to be gradually reduced to a rate of
25% by 2010. However, our investment program in leasehold improvements and
equipment at our manufacturing facility in Yoqneam, Israel has been granted
approved enterprise status and, therefore, we are eligible for the reduced tax
benefits described later in this section in “Corporate Tax.” These benefits
should result in income recognized by us from our investment program being tax
exempt for a specified period. However, these benefits may not be applied
to reduce the tax rate for any income that is not derived from sales of our
product manufactured at our facility in Yoqneam, Israel.




As
of December 31, 2008, we have recorded a net deferred tax asset of $1.2 million.
On a regular basis, we estimate our actual current tax exposures and assess
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. The
deferred tax asset represents our assessment of accumulated losses that could be
carried forward to future years to reduce taxable income in those future years.
We consider projected future taxable income and tax planning strategies in
making this assessment. We must then assess the likelihood that our deferred tax
assets will be recovered and, to the extent we believe that recovery is not more
likely than not, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations. The
deferred tax asset may be realized over time, depending upon the generation of
future taxable income during the periods in which those accumulated losses
become deductible.




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




Minority
share in losses (profits) of subsidiary. Minority share in losses
(profits) of subsidiary consists of the losses (profits) attributed to the 44%
interest of minority shareholders in our 56% controlled Japanese subsidiary,
Given Imaging K.K.




Critical
Accounting Policies




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




·
                    Revenue recognition. We
      recognize revenues from sales of our products 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. In any case, revenues are not
      recognized for an initial sale of a system until all equipment has been
      delivered so that the customer may use and operate the system as a whole
      for its intended purpose.  Our arrangements with customers and
      distributors do not contain product return rights. Certain of our sales
      contracts include a post-contract customer support, or PCS, component. We
      defer recognition of the revenue attributed to the PCS component of the
      sale and recognize revenue based on the term of the support period, which
      is generally a one-year period following the sale. The fair value of the
      PCS component is based on the price at which we sell customer support
      contracts separately following the expiration of the standard warranty
      period for our
products.




62




·
                Inventories.
      Inventories are stated at the lower of cost or market, cost being
      determined on the basis of the average cost method for raw materials and
      finished goods and on the basis of actual manufacturing costs for
      work-in-progress and sub-contractors. We write down fully the cost of
      components in our inventory which we discover do not perform during the
      production process. As we expand and enhance our manufacturing operations,
      the write down of amounts of non-performing components in our inventory
      may change. Spare parts and raw materials that are no longer used in
      producing our products are written down to their fair market value. In
      addition, we add to the cost of finished products held in inventory the
      overhead from our manufacturing process.·
                Foreign currency
      translation. In preparing our consolidated financial statements, we
      are required to translate non-U.S. dollar amounts in our financial
      statements and the financial statements of our subsidiaries into U.S.
      dollars. Under the relevant accounting guidance the treatment of any gains
      or losses resulting from this translation is dependent upon our
      management’s determination of the functional currency of each subsidiary.
      The functional currency is determined based on management’s judgment and
      involves consideration of all relevant economic facts and circumstances
      affecting the subsidiary. Generally, the currency in which the subsidiary
      transacts a majority of its transactions, including billings, financing,
      payroll and other expenditures would be considered the functional
      currency. However, any dependency upon the parent and the nature of the
      subsidiary’s operations must also be considered. If any subsidiary’s
      functional currency is deemed to be the local currency, then any gain or
      loss associated with the translation of that subsidiary’s financial
      statements into U.S. dollars would be included as other comprehensive
      income. However, if the functional currency of a subsidiary is deemed to
      be the U.S. dollar, then any gain or loss associated with the translation
      of that subsidiary’s financial statements would be included within
      statement of operations. Based on our assessment of the factors discussed
      above, we consider the U.S. dollar to be the functional currency for us
      and each of our subsidiaries. All translations gains and losses derived
      from transactions in currencies other than the U.S. dollar 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 exposures 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 net deferred tax
      asset of $1.2 million as of December 31, 2008. Based upon our
      projections for future taxable income in our U.S. subsidiary over the
      periods in which the deferred tax assets are deductible, we believe that
      it is more likely than not that we will realize the unreserved benefits of
      these deductible differences. The amount of the deferred tax asset
      considered realizable, however, could be reduced in the near term if
      estimates of future taxable income during the carry forward period are
      reduced. Effective January 1, 2007, we adopted the provision of FASB
      Interpretation No. 48, “Accounting for Uncertainties in Income Taxes”
      which prescribes a recognition threshold and measurement process for
      recording in the financial statements uncertain tax positions taken or
      expected to be taken in a tax return. We performed our evaluation
      mainly in respect of tax years that may still be subject to, or are
      currently under examination by local tax authorities in some tax
      jurisdictions.




63




·
            Accounting for Equity
      Awards. Effective January 1, 2006, we adopted SFAS No. 123(R),
      which supersedes Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees.” SFAS 123(R) requires all equity-based
      payments to employees, including grants of employee stock options, to be
      recognized in the statement of operations based on their fair values. In
      2008, we recognized equity-based compensation expense under SFAS 123(R) in
      the amount of $6.9 million. Compensation costs recognized in 2008 include
      also compensation costs for all share-based payments granted prior to, but
      not yet vested, as of December 31, 2008. When calculating this
      equity-based compensation expense we took into consideration awards that
      are ultimately expected to vest. Therefore, this expense has been reduced
      for estimated forfeitures. The compensation cost for the fixed plans was
      recorded over the period the employee performs the service to which the
      stock compensation relates.Accounting for Business
      Combinations. In preparing our 2008 consolidated financial
      statements we had to evaluate the accounting for the Bravo pH monitoring
      business acquisition. The acquisition was accounted for by the purchase
      method. The results of operations of the Bravo business were included in
      the consolidated financial statements of the Company commencing December
      2008. The consideration for the acquisition was attributed to net assets
      on the basis of fair value of assets acquired according to a valuation
      performed by a third party. Identifiable intangible assets, including
      purchased in-process research and development, were valued utilizing a
      forecast of expected cash inflows (including adjustments, as appropriate,
      for regulatory and commercial risks), cash outflows and contributory
      charges for economic returns on tangible and intangible assets employed.
      The purchase price allocated to patents of the existing core technology,
      customer relationships, trade names and trademarks is being amortized
      using the straight line method over a period of 8 years to 20 years, which
      approximate their expected useful lives. These definite life intangible
      assets will be evaluated for recoverability whenever events or changes in
      circumstances indicate that the carrying amount may not be
      recoverable.  Amounts assigned to tangible and intangible assets
      to be used in a particular research and development project that have not
      reached technological feasibility and have no alternative future use were
      charged to In-process research and development acquired in a Business
      Combination in operating expense at the acquisition date. Goodwill
      reflects the excess of the purchase price of the Bravo pH monitoring
      business acquired in December 2008 over the fair value of net assets as of
      the date of the acquisition. Goodwill is not amortized but rather tested
      for impairment at least annually.




64




Results
of Operations




Our
consolidated statements of operations data for the years ended December 31,
2006, 2007 and 2008 are set forth below:




Year ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008(in thousands)Statements of Operations
      Data:Revenues
                        
                        $
                        95,029
                        
                        
                        $
                        112,868
                        
                        
                        $
                        125,108Cost
      of revenues
                        
                        
                        (24,154
                        )
                        
                        
                        (29,721
                        )
                        
                        
                        (33,001
                        )Early
      repayment of royalty bearing government grants
                        
                        
                        —
                        
                        
                        
                        (4,843
                        )
                        
                        
                        —Gross
      profit
                        
                        
                        70,875
                        
                        
                        
                        78,304
                        
                        
                        
                        92,107Operating
      expenses:Research
      and development, gross
                        
                        
                        (12,678
                        )
                        
                        
                        (12,847
                        )
                        
                        
                        (15,126In-process
      research and development acquired in a business
combination
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (4,700
                        )Royalty-bearing
      government grants
                        
                        
                        1,867
                        
                        
                        
                        1,242
                        
                        
                        
                        1,530Research
      and development, net
                        
                        
                        (10,811
                        )
                        
                        
                        (11,605
                        )
                        
                        
                        (18,296
                        )Sales
      and marketing
                        
                        
                        (50,732
                        )
                        
                        
                        (55,446
                        )
                        
                        
                        (60,902
                        )General
      and administrative
                        
                        
                        (16,027
                        )
                        
                        
                        (20,981
                        )
                        
                        
                        (19,320
                        )Termination
      of marketing agreement
                        
                        
                        —
                        
                        
                        
                        22,860
                        
                        
                        
                        5,443Other
                        
                        
                        —
                        
                        
                        
                        (422
                        )
                        
                        
                        (867
                        )Total
      operating expenses
                        
                        
                        (77,570
                        )
                        
                        
                        (65,594
                        )
                        
                        
                        (93,942
                        )Operating
      profit (loss)
                        
                        
                        (6,695
                        )
                        
                        
                        12,710
                        
                        
                        
                        (1,835
                        )Financial
      income, net
                        
                        
                        3,980
                        
                        
                        
                        5,520
                        
                        
                        
                        4,004Profit
      (loss) before taxes on income and minority
      interest
                        
                        
                        (2,715
                        )
                        
                        
                        18,230
                        
                        
                        
                        2,169Income
      tax benefit (expense)
                        
                        
                        (127
                        )
                        
                        
                        (4,548
                        )
                        
                        
                        (250
                        )Profit
      (loss) before minority share
                        
                        
                        (2,842
                        )
                        
                        
                        13,682
                        
                        
                        
                        1,919Minority
      share in losses of subsidiary
                        
                        
                        1,334
                        
                        
                        
                        1,503
                        
                        
                        
                        2,087Net
      profit (loss)
                        
                        $
                        (1,508
                        )
                        
                        $
                        15,185
                        
                        
                        $
                        4,006




Our
historical operating results as a percentage of net revenues for the years ended
December 31, 2006, 2007 and 2008 are set forth below:




Year ended December 31,2006
                            
                            
                            2007
                            
                            
                            2008Statements of Operations
      Data:Revenues
                            
                            
                            100
                            %
                            
                            
                            100
                            %
                            
                            
                            100
                            %Cost
      of revenues
                            
                            
                            25.4
                            
                            
                            
                            26.3
                            
                            
                            
                            26.4Early
      repayment of royalty bearing government grant
                            
                            
                            —
                            
                            
                            
                            4.3
                            
                            
                            
                            —Gross
      profit
                            
                            
                            74.6
                            
                            
                            
                            69.4
                            
                            
                            
                            73.6Operating
      expenses:Research
      and development, gross
                            
                            
                            (13.3
                            )
                            
                            
                            (11.4
                            )
                            
                            
                            (12.1
                            )In-process
      research and development acquired in a business
combination
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (3.7
                            )Royalty-bearing
      government grants
                            
                            
                            2.0
                            
                            
                            
                            1.1
                            
                            
                            
                            1.2Research
      and development, net
                            
                            
                            (11.3
                            )
                            
                            
                            (10.3
                            )
                            
                            
                            (14.6
                            )Sales
      and marketing
                            
                            
                            (53.4
                            )
                            
                            
                            (49.1
                            )
                            
                            
                            (48.7
                            )General
      and administrative
                            
                            
                            (16.9
                            )
                            
                            
                            (18.6
                            )
                            
                            
                            (15.4
                            )Termination
      of marketing agreement
                            
                            
                            —
                            
                            
                            
                            20.2
                            
                            
                            
                            4.3Other
                            
                            
                            —
                            
                            
                            
                            (0.4
                            )
                            
                            
                            (0.7
                            )Total
      operating expenses
                            
                            
                            (81.6
                            )
                            
                            
                            (58.2
                            )
                            
                            
                            (75.1
                            )Operating
      profit (loss)
                            
                            
                            (7.0
                            )
                            
                            
                            11.2
                            
                            
                            
                            (1.5
                            )Financial
      income, net
                            
                            
                            4.2
                            
                            
                            
                            4.9
                            
                            
                            
                            3.2Profit
      (loss) before taxes on income and minority
    share
                            
                            
                            (2.8
                            )
                            
                            
                            16.1
                            
                            
                            
                            1.7Income
      tax benefit (expense)
                            
                            
                            (0.1
                            )
                            
                            
                            (4.0
                            )
                            
                            
                            (0.2
                            )Profit
      (loss) before minority share
                            
                            
                            (2.9
                            )
                            
                            
                            12.1
                            
                            
                            
                            1.5Minority
      share in losses of subsidiary
                            
                            
                            1.4
                            
                            
                            
                            1.3
                            
                            
                            
                            1.7Net
      profit (loss)
                            
                            
                            (1.5
                            )
      %
                            
                            
                            13.4
                            %
                            
                            
                            3.2
                            %




65




Year
Ended December 31, 2008 compared to Year Ended December 31, 2007





Revenues.Revenues increased
by $12.2 million, or 10.8%, to $125.1 million in 2008, compared to $112.8
million in 2007.  This increase was primarily due to an increase of
$12.4 million, or 13.7%, in sales of our PillCam SB capsule, an increase of $0.4
million, or 0.3%, in sales of our PillCam COLON capsule and an increase of $0.2
million in sales of our PillCam ESO capsule. In addition, sales of the Bravo pH
monitoring system contributed approximately $0.8 million to our revenues in
2008.  Approximately $9.5 million of the $12.2 million increase in
revenues was attributable to increases in the volume of products and services
sold and approximately $3.9 million was attributable to the effect of changes in
exchange rates, which were partially offset by a decrease of approximately $1.3
million resulting from a decrease in the sales price of our
products.




Cost
of revenues and gross margins. Cost of revenues increased to $33.0
million in 2008, compared to $29.7 million in 2007. Gross margins were 73.6% in
2008, compared to 69.4% in 2007. However, gross margins in 2007 included the
impact of a one-time charge of $4.8 million related to the early repayment of
royalty bearing participation to the Office of the Chief Scientist in
Israel.  Excluding the effect of this one-time charge, gross margins
in 2007 were 73.7%.




Research
and development. Gross research and development expenses, excluding a
one-time write-off of $4.7 million of in-process research and development
related to the Bravo acquisition, were $15.1 million, compared to $12.8 million
in 2007. Including this one-time charge, gross research and development expenses
were $19.8 million in 2008.  The increase in research and development
expenses is due to an increase of $1.4 million in labor expenses, an increase of
$1.0 million in research and development projects, an increase of $0.2 in
maintenance of patents and an increase in other expenses of $0.7 million. These
increases were offset by a $1.0 million lower investment in clinical trials,
resulting primarily from the decision of the FDA not to clear our PillCam COLON
for marketing in the United States.





Research
and development expenses, net of government grants, totaled $13.6 million in
2008, excluding the one-time charge mentioned above relating to the acquisition
of Bravo, compared to $11.6 million in 2007. Government grants totaling
$1.5 million were received in 2008, compared to $1.2 million received in 2007.
In both years, the grants were received for new products under
development.




Sales and
marketing. Sales and
marketing expenses increased by $5.5 million, or 9.8%, to $60.9 million in 2008
from $55.4 million in 2007. This increase consisted primarily of an
increase of $5.1 million in employment-related expenses due to the
increased number of sales and marketing employees, partially offset by a
decrease of $1.2 million in commissions to our sales representatives. In
addition, this increase is attributable to the impact of currency fluctuations
and various other expenses.




General
and administrative. General and administrative expenses decreased by $1.7
million, or 7.9%, to $19.3 million in 2008 from $21 million in 2007. This
decrease was primarily due to $2.3 million received from the settlement of the
patent litigation with Olympus and an additional reduction of $2.0 million in
litigation expenses.  These decreases were offset by an increase in
stock-option compensation expenses of $1.5 million and an increase in consulting
and professional fees and IT expenses of $0.7 million.




Financial
income, net. Financial income, net, decreased by $1.5 million to $4.0
million in 2008 from $5.5 million in 2007. The decrease was due mainly to lower
interest rates, and losses recorded as a result of sales of certain marketable
securities.




66


Taxes
on income.We had a tax expense of $0.3 million in 2008, compared to a
tax expense of $4.5 million in 2007. Tax expenses in 2007 included a $3.0
million tax expense resulting from the termination of our agreement with
Ethicon.




Minority
share in losses of subsidiary. Minority share in losses of a subsidiary,
Given Imaging K.K., was $2.1 million in 2008, compared to $1.5 million in 2007.
Given Imaging K.K. started marketing activities in Japan in April 2007, after
our PillCam SB capsule was cleared for marketing in Japan.





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




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




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




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




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




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




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




67


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




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




Minority
share in losses of subsidiary. Minority share in losses of a subsidiary,
Given Imaging K.K., was $1.5 million in 2007, compared to $1.3 million in 2006.
Given Imaging K.K. started marketing activities in Japan in April 2007, after
our PillCam SB capsule was cleared for marketing in Japan.




Impact
of Currency Fluctuations




Our
sales to our customers in 2008 were denominated 63% in U.S. dollars, 28% in
Euros, 5% in Japanese Yen and 4% in other currencies, depending on the location
of the customer or the distributor used to fulfill our customers’ orders. In
2008, 29% of our expenses, principally salaries and related personnel expenses,
were denominated in Shekels, and we expect this level of Shekel expenses to
continue for the foreseeable future. During 2008, the U.S. dollar weakened
against the Shekel by 1.1%. In addition, 48% of our expenses were denominated in
U.S. dollars, 15% were denominated in Euros, 29% were denominated in Shekels and
8.0% were denominated in Yen or other currencies. If the value of a currency in
which our revenues are denominated weakens against the value of a currency in
which our expenses are denominated, there will be a negative impact on the
profit margins for sales of our products. In addition, as of December 31, 2008,
42% of our cash and cash equivalents were denominated in currencies other than
U.S. dollar and we are therefore subject to the risk of exchange rate
fluctuations among U.S. dollar, Yen, Shekel, Australian dollar and Euro. In
2008, we have used different hedging tools in order to minimize the effect of
currency fluctuations on our income and were generally able to neutralize the
impact of exchange rate fluctuations on our financial results. If we wish to
maintain the dollar-denominated value of our product in non-U.S. markets,
devaluation in the local currencies of our customers relative to the U.S. dollar
could cause our customers to cancel or decrease orders or default on
payment.




B.     
LIQUIDITY AND
CAPITAL RESOURCES





From our
inception through December 31, 2008, we raised a total of $152 million through
public and private sales of our equity securities. As of December 31, 2008,
we had a cash balance of approximately $90.3 million, consisting of $31.7
million in cash and cash equivalents, $30.1 million invested in marketable
securities and $28.5 million in short term investments. Our working capital,
which we calculate by subtracting our current liabilities from our current
assets, was $85.2 million.




On March
11, 2009, we paid a cash dividend of $0.54 per share, or a total of
approximately $16 million. Following a request by our affiliated shareholders
(48.5% ownership) to consider a potential cash dividend, our board of directors
reviewed our current and projected liquidity, our anticipated operating
performance, and our growth strategies, and concluded that a cash dividend in
excess of our expected cash requirements was appropriate.  This was a
special dividend and we currently intend to retain all future earnings to
finance our operations and to expand our business. Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including future earnings,
capital requirements, legal restrictions, financial condition and future
prospects and other factors the board of directors may deem
relevant.





In 2008,
we invested $4.1 million in our Japanese subsidiary, Given Imaging K.K., to
finance its operations.  One of the other existing shareholders also
invested $1.1 million.  As a result of this investment, we have
increased our ownership of this subsidiary from 51% to 56%.  We expect
that during 2009 we will have to make another investment of approximately three
to five million dollars to finance the operations of our Japanese subsidiary
until it starts generating sufficient cash to finance its own operations. Such
additional investment will be made out of our cash
resources.





68


We have
no borrowings or loans.  We believe that our cash reserves and
expected cash from operations will be sufficient to meet our present working
capital requirements. We do not rely on cash transfers from our subsidiaries to
fund our operations.  Distributions, loans and advances from our
subsidiaries may be prohibited or restricted by tax regimes and statutory or
contractual restrictions.





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




2006
                        
                        
                        2007
                        
                        
                        2008(in thousands)Net
      cash provided by operating activities
                        
                        $
                        2,861
                        
                        
                        $
                        11,375
                        
                        
                        $
                        9,478Net
      cash used in investing activities
                        
                        
                        (30,757
                        )
                        
                        
                        (23,958
                        )
                        
                        
                        (17,334
                        )Net
      cash provided by financing activities
                        
                        
                        6,795
                        
                        
                        
                        4,936
                        
                        
                        
                        2,420Effect
      of exchange rate changes on cash
                        
                        
                        255
                        
                        
                        
                        240
                        
                        
                        
                        30Decrease
      in cash and cash equivalents
                        
                        $
                        (20,846
                        )
                        
                        $
                        (7,407
                        )
                        
                        $
                        (5,406
                        )




Net cash
provided by operating activities was $9.5 million in 2008, compared to $11.4
million in 2007 and $2.9 million in 2006. The decrease in net cash from
operating activities in 2008 compared to 2007 resulted primarily from a decrease
in net income of $11.2 million, an increase of $5.1 million in marketable
securities, an increase of $5.2 million in inventories and a decrease of $11.9
million in accounts payable, offset by a decrease of $20.6 million in trade and
non-trade accounts receivable and an increase of $7.0 million in deferred
income, as well as the acquisition of $4.7 million of in-process research and
development as part of the acquisition of the Bravo pH monitoring business from
Medtronic. The increase in net cash from operating activities in 2007 compared
to 2006 resulted primarily from an increase in net income of $16.7 million, a
decrease of $10.1 million in marketable securities, a decrease of $4.4 million
in inventories and an increase of $8.0 million in accounts payable, offset by an
increase of $17.5 million in trade and non-trade accounts receivable and a
decrease of $13.7 million in deferred income.




Net
cash used in investing activities was $17.3 million in 2008, compared to $24.0
million in 2007 and $30.8 million in 2006. Investing activities in 2008
consisted primarily of investment of $6.3 million in fixed assets and an
investment of $16.7 million in a business combination, namely the Bravo
acquisition, offset by net proceeds from sales of marketable securities of $5.7
million. Our investments in fixed assets in 2008 consisted primarily of
investments of $2.0 million in manufacturing machinery and equipment, $2.4
million in computer hardware and software, and $1.1 million in patents.
Investing activities in 2007 consisted primarily of investment of $5.8 million
in fixed assets and an investment of $17.8 million in marketable securities, net
of proceeds from sales of such securities. Our investments in fixed assets in
2007 consisted primarily of investments of $2.7 million in manufacturing
machinery and equipment, $1.3 million in computer hardware and software, and
$1.1 million in patents. Investment activities in 2006 consisted primarily of
investing $24.9 million in marketable securities and $5.9 million in fixed
assets and the capitalization of costs associated with our patents and
trademarks. Our investments in fixed assets in 2006 consisted primarily of $1.9
million in machinery and equipment, $0.5 million in new real property leases on
our facilities, $1.3 million in computers and software, $0.4 million in office
furniture and equipment and $1.2 million in patents. We expect to continue
investing significant amounts in 2009 in order to support our growth
plans.




Net
cash provided by financing activities was $2.4 million in 2008, compared to $4.9
million in 2007 and $6.8 million in 2006. In 2008, net cash provided by
financing activities consisted primarily of $2.3 million, representing a
minority investment in our Japanese subsidiary, Given Imaging K.K.  In
2007, net cash provided by financing activities consisted primarily of proceeds
of $4.3 million received from the exercise of employee stock options. In 2006,
net cash provided by financing activities consisted primarily of proceeds of
$2.0 million received from the exercise of employee stock options and $4.8
million representing a minority investment in our Japanese subsidiary, Given
Imaging
K.K.





69




Market Risk




As
of December 31, 2008, we had $31.7 million in cash and cash equivalents, which
were invested in bank accounts and deposits with maturities of three months or
less deposited with a number of highly-rated banks inside and outside of Israel.
In addition, as of December 31, 2008, we had $30.1 million invested in
marketable securities and $28.5 million in short term investments. We invest
these additional amounts in longer-term financial instruments in order to seek
to achieve a higher yield. Approximately two-thirds of these cash balances were
invested in securities issued by the United States government or its agencies
and in AAA-rated money market funds. The remainder was held in corporate bonds
and commercial paper that were highly-rated by rating agencies at the time of
investment. All investments are made in compliance with investment policies and
authorization rights approved by the audit committee of our board of directors,
are focused on the preservation of capital and are monitored periodically by our
audit committee.





Our cash
and investments are subject to general credit, counterparty, liquidity, market
and interest rate risks, which were exacerbated by the dislocation that has
recently affected the financial markets and global economy and caused credit and
liquidity issues for a number of reputable financial institutions.





During
the first quarter of 2008, in light of the turmoil in the global financial
markets, we transferred all of our “held-to-maturity” securities in the amount
of $44.3 million into the “available-for-sale” category. This transfer generated
an accumulated other comprehensive loss of $0.4 million. In addition, we reduced
the relative proportion of corporate bonds in our financial investments, and
increased the relative proportion of government bonds. As a result of these
actions, we have reduced our risk of principal loss while at the same time
reduced our expected interest income (to the extent the interest rates remain at
their current low level).





Market
acceptance of our products in the United States and other countries is dependent
upon the medical equipment purchasing and procurement practices of our
customers, patient demand for our products and procedures and the reimbursement
of patient’s medical expenses by third-party payors, including government
healthcare programs. The current uncertainty surrounding world financial markets
may result in the purchasers of medical equipment decreasing their medical
equipment purchasing and procurement activities. In addition, tightening in
world credit markets may result in our customers having increased difficulty
securing the financing necessary to purchase our products which may result in
decreased sales. The financial condition of our customers may deteriorate and
our ability to collect payments due to us may be adversely affected. Widespread
economic uncertainty may also result in cost-conscious patients making fewer
trips to their physicians and specialists, which could result in reduced demand
for our products and procedures. Furthermore, third-party payors, including
governments, around the world facing tightening budgets could move to further
reduce their offered reimbursement rates or countries may adopt healthcare
reforms to reduce healthcare spending. If the current economic condition results
in the occurrence of any of these events, our liquidity and financial results
may be materially and adversely affected.





For more
information about market risks, see Item 3 – “Risk Factors,” Item 5 –
“Operating and Financial Review and Prospects – Impact of Currency
Fluctuations” and Item 11 – “Quantitative and Qualitative Disclosures About
Market Risks.”




Corporate
Tax




Israeli
companies were generally subject to income tax at the corporate rate of 27% in
2008. This tax rate was reduced to 26% in 2009 and is expected to be at a rate
of 25% in 2010. As of December 31, 2008, our net operating loss
carry-forwards for Israeli tax purposes amounted to $4.4 million. Under Israeli
law, net operating losses can be carried forward indefinitely and offset against
certain future taxable income.




70


In
addition, our investment program in equipment and leasehold improvements at our
manufacturing facility in Yoqneam, Israel has been granted approved enterprise
status and we are, therefore, eligible for tax benefits under the Law for the
Encouragement of Capital Investments, 1959 (the “Investment Law”). Subject to
compliance with applicable requirements, the portion of our undistributed income
derived from our approved enterprise program will be exempt from corporate tax
for a period of ten years commencing in the first year in which we generate
taxable income. The ten-year period may not extend beyond the later of
14 years from the year in which approval was granted or 12 years from
the year in which operations or production by the enterprise began. We received
approved enterprise status for investments beginning in 1999. According to a
recent reform to the Investment Law, we are permitted to claim tax benefits in
respect of future investments retroactively on our corporate tax returns instead
of filing an application for tax benefits in advance with the Investment Center,
the administrator of the Investment Law, and without prior approval and without
submitting any reports to the Investment Center. Audits of any claim for tax
benefits will take place by the Israeli income tax authority as part of the
general tax audits it may perform from time to time. There can be no assurance
that we will receive approvals in the future for approved enterprise status or
that tax benefits for approved investments will continue at current levels or at
all.




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




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




As
of December 31, 2008, the net operating loss carry-forwards of our
subsidiaries for tax purposes amounted to $29.3 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




Until
the end of 2007, our research and development efforts have been financed, in
part, through grants from the Office of the Chief Scientist, or OCS, of the
Israeli Ministry of Industry, Trade and Labor. Over the years, we have received
grants totaling $7.5 million from the Office of the Chief
Scientist.




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




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





71


While to
date we have paid all of our royalty obligations resulting from these grants,
the terms of the Chief Scientist grants are perpetual and prohibit us from
manufacturing products developed using such grants, and limit the transfer of
related know-how, outside of Israel without special approvals and possibly
special payments to the OCS. These restrictions may impair our ability to
outsource manufacturing, engage in change of control transactions or otherwise
transfer our know-how outside Israel. If we fail to comply with any of the
conditions imposed by the OCS, we may be required to pay additional royalties to
the OCS or be subject to criminal charges.





In
particular, any change of control requires a prior written notice to the OCS and
any change of control that would make a non-Israeli citizen or resident an
“interested party” requires the prior approval of the OCS.




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





We also
lead a consortium of Israeli companies, academic and healthcare institutions
that is partially funded by the OCS.  The goal of this Israeli
consortium is to develop new technologies based on light that could be used for
medical and biological applications particularly relevant to diagnosis and
therapy of diseases of the gastrointestinal tract.  This consortium
began its work in late 2007 and is expected to last between three to five
years.




C.     
RESEARCH AND
DEVELOPMENT




Our
gross research and development expenditures were $15.1 million for the year
ended December 31, 2008, $12.8 million for the year ended December 31, 2007 and
$12.7 million for the year ended December 31, 2006. Our research and development
activities are conducted by our research and development and regulatory affairs
staff primarily at our headquarters in Israel. Our research and development
efforts are focused primarily on developing new capsules to be used in the
detection of abnormalities in the colon, improvements to our existing products
and new technologies for future expansion of our product offering. In
particular, during 2008, we advanced the development of a new version of the
PillCam COLON capsule, which we refer to as PillCam COLON 2. During 2009, we
intend to continue the development of PillCam COLON 2 and allocate research and
development resources to the development of new software for the Bravo product.
We view our innovation and focus on capsule endoscopy technology as an important
competitive advantage and intend to continue our focus on research and
development activities.





72




D.     
TREND
INFORMATION




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




E.      
OFF-BALANCE
SHEET ARRANGEMENTS




None.





F.      
CONTRACTUAL
OBLIGATIONS




The
following table of our material contractual obligations as of December 31, 2008,
summarizes the aggregate effect that these obligations are expected to have on
our cash flows in the periods indicated:





Payments due by periodContractual obligations
                                                                
                                                                Total
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                2010
                                                                
                                                                
                                                                2011
                                                                
                                                                
                                                                2012
                                                                
                                                                
                                                                
                                                                2013
                                                                
                                                                
                                                                Later
                                                                  Years(in
      thousands)Capital
      Leases(1)
                                                                
                                                                $
                                                                589
                                                                
                                                                
                                                                $
                                                                149
                                                                
                                                                
                                                                $
                                                                149
                                                                
                                                                
                                                                $
                                                                149
                                                                
                                                                
                                                                $
                                                                116
                                                                
                                                                
                                                                $
                                                                26
                                                                
                                                                
                                                                $
                                                                —Operating
      Leases(2)
                                                                
                                                                
                                                                17,296
                                                                
                                                                
                                                                
                                                                3,989
                                                                
                                                                
                                                                
                                                                3,261
                                                                
                                                                
                                                                
                                                                2,628
                                                                
                                                                
                                                                
                                                                2,167
                                                                
                                                                
                                                                
                                                                2,107
                                                                
                                                                
                                                                
                                                                3,144Purchasing
      Obligations (3)
                                                                
                                                                
                                                                30,419
                                                                
                                                                
                                                                
                                                                19,169
                                                                
                                                                
                                                                
                                                                375
                                                                
                                                                
                                                                
                                                                750
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                1,000
                                                                
                                                                
                                                                
                                                                8,125Tax
      Contingency Reserve(4)
                                                                
                                                                
                                                                3,041
                                                                
                                                                
                                                                
                                                                3,041
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Total
                                                                
                                                                $
                                                                51,345
                                                                
                                                                
                                                                $
                                                                26,348
                                                                
                                                                
                                                                $
                                                                3,785
                                                                
                                                                
                                                                $
                                                                3,527
                                                                
                                                                
                                                                $
                                                                3,283
                                                                
                                                                
                                                                $
                                                                3,133
                                                                
                                                                
                                                                $
                                                                11,269







(1)
            Consists
      of capital leases for motor vehicles.(2)
            Consists
      of operating leases for office and manufacturing space and motor
      vehicles.(3)
            Consists
      of contractual obligations related to the acquisition of Bravo and
      obligations to third-party vendors and suppliers(4)
            Tax
      contingency resulting from the termination of our agreement with
      Ethicon.




73




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:




74




Name
                
                Age
                
                PositionExecutive
      Officers:Nachum
      (Homi) Shamir
                
                55
                
                President,
      Chief Executive Officer and DirectorKevin
      Rubey
                
                51
                
                Chief
      Operations OfficerYuval
      Yanai
                
                56
                
                Chief
      Financial OfficerChristopher
      Rowland*
                
                47
                
                President,
      AmericasKazem
      Samandari
                
                58
                
                President,
      Asia-Pacific/JapanManfred
      Gehrtz
                
                58
                
                President,
      EMEAOri
      Braun
                
                52
                
                Senior
      Vice President, Business DevelopmentKeith
      Chrzanowski
                
                48
                
                Senior
      Vice President, Global Human ResourcesIsrael
      Raz
                
                60
                
                Senior
      Vice President, Chief Marketing OfficerDavid
      Mason
                
                62
                
                Senior
      Vice President, Chief Medical OfficerDirectors:Nachum
      (Homi) Shamir
                
                55
                
                President,
      Chief Executive Officer and DirectorIsrael
      Makov (1)
                
                69
                
                Chairman
      of the Board of DirectorsDoron
      Birger(2)
                
                57
                
                DirectorJames
      M. Cornelius (1)(2)(3)(4)
                
                65
                
                DirectorMichael
      Grobstein (1)(2)(3)(4)
                
                66
                
                DirectorDennert
      O. Ware (3)
                
                67
                
                DirectorArie
      Mientkavich
                
                66
                
                DirectorProf.
      Anat Loewenstein
                
                49
                
                Director







*
            Mr.
      Rowland left the Company in March 2009.(1)
            Member
      of our executive committee.(2)
            Member
      of our compensation and nominating committee.(3)
            Member
      of our audit committee.(4)
            Outside
      director under the Israeli Companies
Law.




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




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




75


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




Christopher
Rowland served as President of our Americas region from May 2006 until
March 2009, when his employment with us ended. He joined us in February 2006 as
our Senior Vice President of Business Development and Corporate Strategy. Prior
to that, Mr. Rowland worked for 17 years at Boston Scientific Corporation, a
medical device company, in various sales, marketing and general management
positions across all Boston Scientific divisions and in several countries. Most
recently he was Vice President of Marketing for the Endovations division of
Boston Scientific, where he had responsibility for all marketing, product
development and product launch activities in the gastrointestinal field. Prior
to that, from 1985 until 1989, Mr. Rowland worked for Xerox Corporation in
various sales positions. Mr. Rowland has a B. Sc. in Marketing from Southern
Illinois University.




Kazem Samandari has served as
the President of our Asia-Pacific/Japan Region since July 2007. Prior to joining
us, from 2004 to 2007, Mr. Samandari was Executive Vice President Global Sales
& Marketing at Eastman Kodak, Inkjet Printing Solutions. From 1994 to 2004,
Mr. Samandari held several positions at Scitex Digital Printing, including Vice
President, Asia Pacific & Japan between 2001 and 2004, and was in charge of
the commercial, technical & legal aspects of the activities in the region.
From 1986 to 1994, Mr. Samandari served as Managing Director of GMC Digital
Systems, a high-tech start-up company founded in 1984, which was a pioneer in
the field of high speed, high performance, digital printing equipment. Mr.
Samandari holds an M.S. degree in electrical & electronics engineering and a
Ph.D. in technical sciences and industrial economy from the Swiss Federal
Institute of Technology.




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




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




76


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





Israel Raz has served as our
Senior Vice President and Chief Marketing Officer since April 2008. Prior to
joining Given Imaging, Mr. Raz worked at GE Healthcare since 2001, where he
served as a Global Product Manager for the Cardiovascular Ultrasound business,
and then as the General Manager of Global Marketing for the Molecular Imaging
business portfolio. Between 1986 and 2000, Mr. Raz worked at Bio-logic Systems
Corp, a small medical device company, in several marketing positions leaving as
the Director of Marketing. His industry tenure was preceded by academic teaching
and post-doctoral research at Northwestern University. Mr. Raz holds a BA and MA
in Audiology from Tel-Aviv University School of Medicine, a Ph.D. in Speech
& Hearing Sciences from the University of Kansas, and an Executive MBA from
The Kellogg Graduate School of Management, Northwestern University.





David Mason has served as our
Senior Vice President and Chief Medical Officer since November
2008.  Prior to joining Given Imaging, Mr. Mason was the founding
partner and Chief Medical Officer at Percept BioSciences. Prior to that, from
2003 until 2007, he was Vice President and Global Head of Inflammation at UCB
Pharma.  From 2000 until the end of 2003, he was Senior Vice President
of Clinical Research and Regulatory Affairs at AVI BioPharma and from 1994 until
2000 he was Vice President and Head of Medical Affairs at Elan
Pharmaceuticals.  From 1985 until 1993, he held several senior roles
at Somatogen, Lederle Laboratories and Ciba-Geigy.  Prior to becoming
a business executive, Dr. Mason was in private practice of Internal Medicine in
North Carolina and also was an Assistant Professor of Internal Medicine and
Infectious Diseases at the University of Michigan Medical Center, where he did
his postgraduate training.  Dr. Mason holds a BA in Chemistry from
Willams College and an MD from Duke University School of Medicine. Dr. Mason is
Board Certified in Internal Medicine.




Israel Makov has served as the
Chairman of our board of directors since July 2007. Prior to joining us, he
served as President and Chief Executive Officer of Teva Pharmaceutical
Industries Ltd. from April 2002 until March 2007 and is currently serving as
Advisor to the Board of Directors of Teva. Previously, he served as Teva’s Chief
Operating Officer from January 2001, Executive Vice President from 1999 and Vice
President for Business Development from 1995 until 1999. Prior to joining Teva,
Mr. Makov was Chief Executive Officer of Gottex from 1993 until 1995, Chief
Executive Officer of Yachin Hakal Ltd. from 1991 until 1993 and Chairman of
Axiom Ltd. from 1987 until 1991. Mr. Makov was also a director of Bank Hapoalim
Ltd. from October 2002 until February 2006, a director of Ramot at Tel-Aviv
University from 2001 until January 2006, and one of the founders and a director
of the INNI-Israel National Nanotechnology Initiative since 2003. Mr. Makov has
also served on the Board of Governors of the Technion – Israel Institute of
Technology since 2006 and on the Board of Governors of the Weizmann Institute of
Science since 2007.  He also serves as the President of the Friends of
Schnieder Children’s Medical Center of Israel and also the Chairman of the Board
of the Institute for Policy and Strategy at the Interdisciplinary Center, or IDC
in Herzliya since 2008.  Mr. Makov holds a B.Sc. in Agriculture and
M.Sc. in Economics from the Hebrew University Jerusalem.




77


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




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




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




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




78


Dennert (Denny) O. Ware has
served as a director since July 2007. Since April 2008, Mr. Ware has also been a
director of Pelikan Technologies, Inc., a company developing products for the
self monitoring blood glucose business.  Prior to joining our board of
directors, he served as a Director, President and Chief Executive Officer of
Kinetic Concepts, Inc., or KCI, from April 2000 to December 2006. Before joining
KCI, he served as President and Chief Executive Officer of Boehringer Mannheim
Corporation, a market leader in medical diagnostic equipment. He joined
Boehringer in 1972 as Vice President of Technical Affairs of DePuy, the
company’s Orthopedic Division. He later held senior management positions in the
Diagnostic Division and became President and Chief Executive Officer of
Boehringer Mannheim’s North American operations in 1997 a position he held until
the acquisition of Boehringer Mannheim Group by Hoffman La Roche in 1998. After
this acquisition, Mr. Ware continued on as President and Chief Executive Officer
of Roche Diagnostics Corp until the end of 1999. Mr. Ware holds a BSChE degree
from Purdue University and an M.B.A from Indiana University.




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




B.     
COMPENSATION




The
aggregate compensation paid by us and our subsidiaries to our directors and
executive officers for the year ended December 31, 2008 was $10 million.
This amount includes the fees we paid our directors and $4.8 million of stock
based-compensation as described below and also includes approximately $0.4
million set aside or accrued to provide pension, severance, retirement or
similar benefits or expenses. This amount does not include business travel,
relocation, professional and business association dues and expenses reimbursed
to office holders, and other benefits commonly reimbursed or paid by companies
in Israel.




In
2008, we granted our directors and executive officers a total of 718,000 options
to purchase our ordinary shares, resulting in a compensation expense of $4.8
million. The total number of options granted includes a total of 138,000 options
granted to our non-employee directors as part of their directors’ fee and
100,000 options granted to Mr. Shamir, our President and Chief Executive
Officer. The exercise price of these options ranges between $7.35 and $23.25
with a weighted average exercise price of $15.84. Equity awards granted to
executive officers typically vest ratably over a four-year period. Equity awards
granted to non-employee directors typically vest after one year of continued
service on the board of directors or a committee thereof. The exercise price of
these options was equal to the fair market value of our ordinary shares on the
date of grant. These options will expire five years from the date of
grant.




The
regular fees for each non-employee director include a quarterly fee of $6,250
for their service on our board of directors, and a $1,500 fee for attending and
participating in each meeting of the board of directors or any committee of the
board of directors. The total amount of these payments in 2008 was $275,000. In
addition, all of our directors were reimbursed for their expenses for each board
of directors meeting attended. The directors’ fees for service by our directors,
Doron Birger and Arie Mientkavich, are paid to Elron, where they serve as
President and Chief Executive Officer and Chairman of the board of directors,
respectively.





79


In
addition, as part of their board service fee, our non-employee directors receive
recurring annual grants of options to purchase our ordinary shares. Any
non-employee chairperson of our board of directors and any committee thereof
receives an annual grant of 11,000 options, any non-employee director receives
an annual grant of 10,000 options for board service and any non-employee
director serving on a committee of the board of directors receives an annual
grant of 5,000 options for each committee on which such director is
serving.  These grants are cumulative.




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




C.     
BOARD
PRACTICE




Board
of Directors and Officers




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




A
simple majority of our shareholders at a general meeting may remove any of our
directors from office, except the outside directors nominated under the Israeli
Companies Law, and elect directors in their stead or fill any vacancy, however
created. In addition, vacancies on the board of directors, other than vacancies
created by an outside director, may be filled by a vote of a majority of the
directors then in office. Our board of directors may also appoint additional
directors up to the maximum number permitted under our articles of association.
A director so chosen or appointed will hold office until the next annual meeting
of our shareholders. There are no family relationships among any of our
directors and executive officers.




Each
of our executive officers serves at the discretion of the board of directors and
holds office until his or her successor is elected or until his or her earlier
resignation or removal. In 2008, we hired Mr. Israel Raz as Chief Marketing
Officer, Mr. David Mason, as Chief Medical Officer and Rafi Nave, as Vice
President of Research and Development. Mr. Rowland, who was President of our
U.S. subsidiary, left his employment with us in March 2009.




All
of our executive officers have signed employment agreements.




80


Outside
and Independent Directors




Under
the Israeli Companies Law, companies incorporated under the laws of the State of
Israel whose shares are listed on an exchange, including the Nasdaq Global
Market, are required to appoint at least two outside directors. Outside
directors are required to meet standards of independence set forth in the
Israeli Companies Law. Outside directors are elected by a majority vote at a
shareholders’ meeting, provided that either (1) the majority of shares voted at
the meeting, including at least one-third of the shares of non-controlling
shareholders voted at the meeting, vote in favor of the election of the outside
director, or (2) the total number of shares voted against the election of the
outside director does not exceed one percent of the aggregate voting rights in
the company. The initial term of an outside director is three years. An outside
director of a company whose shares are dually listed on an Israeli exchange and
on a foreign exchange, including the Nasdaq Global Market, may be re-elected to
one or more additional three-year terms, subject to the conditions described
above for election of outside directors, if the audit committee and the board of
directors have determined that these additional terms benefit the company in
light of the outside director’s expertise and contribution to the company and
the reasons for this determination have been presented to the shareholders prior
to their approval of the re-election. 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 Israeli Companies Law to immediately call a shareholders’ meeting to appoint
a new outside director. Our two outside directors are James Cornelius and
Michael Grobstein. At our annual shareholders meeting in July 2007, after our
audit committee and board of directors determined that re-election will benefit
the company in light of their expertise and contribution to the company and the
reasons for such determination were presented to the shareholders at the
meeting, they were elected to a third term as outside directors, which will
expire in December 2010.




In
addition, the Israeli Companies Law provides that every outside director
appointed to the board of directors of an Israeli company must qualify as a
“financial and accounting expert” or as “professionally competent,” as such
terms are defined in the applicable regulations under the Israeli Companies Law,
and that at least one outside director must qualify as a “financial and
accounting expert.” We comply with these requirements. In addition, the Israeli
Companies Law requires Israeli companies to determine how many directors, in
addition to the outside directors, qualify as “financial and accounting experts”
taking into account the nature of the company’s business, the complexity of the
activities carried out by the company and the size of its board of directors. In
February 2009, our board of directors determined that at least one of our
directors will be a “financial and accounting expert,” in addition to the
outside directors. Currently, Doron Birger qualifies as a “financial and
accounting expert,” as defined in the applicable regulations.





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 of our
outside directors. An outside director is entitled to compensation as provided
in regulations adopted under the Israeli Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in
connection with services provided as an outside director.




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




Audit
Committee




Under
the Israeli 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, a director
employed by the company or who provides services to the company on a regular
basis, or a controlling shareholder or a relative of a controlling shareholder.
Under the Nasdaq Global Market listing requirements, we are required to have an
audit committee consisting of at least three members, each of whom must be
“independent,” as defined under the rules of the Nasdaq Global Market and the
Securities Exchange Act of 1934 (the “Exchange Act”), and each must be able to
read and understand fundamental financial statements. In addition, one member of
the audit committee must have past employment experience in finance or
accounting or other comparable experience which results in the individual’s
financial sophistication. We believe that each of the current members of our
audit committee, Michael Grobstein, James Cornelius and Dennert Ware, meets
these independence and financial literacy requirements. In addition, the board
of directors has determined that Mr. Grobstein has the requisite experience and
is the financial expert serving on our audit committee.




81


Under
the Israeli 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 or the company’s independent public accountants, and, if
irregularities are found, 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 Israeli Companies Law.
Under the Nasdaq Global Market listing requirements, our audit committee has
adopted a charter setting forth its responsibilities. The audit committee’s
charter states that in fulfilling this role the committee is entitled to rely on
interviews and consultations with our management, our internal auditor and our
independent public accountants, and is not obligated to conduct any independent
investigation or verification. The charter also states that the audit committee
is required to nominate the company’s independent public accountants, which the
shareholders subsequently are required to approve.




Internal
Auditor




Under
the Israeli 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 Israeli 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 Israeli Companies Law as any person or
entity holding 5% or more of the outstanding shares or the voting rights in the
company, any person or entity who has the right to designate one director or
more or the chief executive officer of the company or any person who serves as a
director or as a chief executive officer. Our internal auditor is an employee of
the Israeli member firm of Deloitte Touche Tohmatsu.




Compensation
and Nominating Committee




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




Executive
Committee




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




·
                      the
      executive committee must comprise at least three directors and the
      majority of the committee’s members must qualify as “independent
      directors” under applicable law and the Nasdaq Global Market independent
      director requirements (and one member must qualify as an “outside
      director” under the Israeli Companies Law);·
                      the
      Chairman of our board of directors must serve as a member of the executive
      committee;·
                      the
      executive committee shall meet as needed to conduct and oversee our
      affairs and fulfill its responsibilities and not less than once each
      quarter;




82




·
              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.




D.     
EMPLOYEES




The
table below shows the number of employees in our primary markets as of December
31 of each of the years indicated:





2006
                          
                          
                          2007
                          
                          
                          2008Israel
                          
                          
                          199
                          
                          
                          
                          232
                          
                          
                          
                          247Americas
                          
                          
                          143
                          
                          
                          
                          150
                          
                          
                          
                          153EMEA
                          
                          
                          49
                          
                          
                          
                          50
                          
                          
                          
                          53AP/J
                          
                          
                          17
                          
                          
                          
                          26
                          
                          
                          
                          32408
                          
                          
                          
                          458
                          
                          
                          
                          485





Headcount
grew by approximately 9.5% in 2008, compared to 2007, and by approximately 9.0%
in 2007, compared to 2006.  This growth occurred predominantely in
Israel to support manufacturing operation and research and development
activities and in AP/J to support the growth of the business, primarily in Japan
following receipt of regulatory clearance to sell our PillCam SB capsule in
Japan and initial reimbursement coverage.





Under
Israeli law, we and our employees in Israel are subject to protective labor
provisions, including restrictions on working hours, minimum wages, minimum
vacation, minimum termination notice, sick pay, severance pay and social
security as well as equal opportunity and anti-discrimination laws. Orders
issued by the Israeli Ministry of Labor and Welfare make certain industry-wide
collective bargaining agreements and collective bargaining agreements in the
electricity, steel and electronics industries applicable to us. These agreements
affect matters such as cost of living adjustments to salaries, number of daily
and weekly working hours, 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 the jurisdictions we operate. 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.




83




E.     
SHARE
OWNERSHIP




Share
Ownership by Directors and Executive Officers




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




Stock
Option Plans




2006
Equity Incentive Plan




Our
2006 Equity Incentive Plan provides for the grant of options to purchase our
ordinary shares or the grant of restricted stock to our (and our subsidiaries’)
eligible employees, directors and consultants. The 2006 equity plan is
administered by our board of directors and compensation and nominating
committee. The plan contains provisions relating to the vesting, price, exercise
and other terms of awards; however, in many cases our Compensation and
Nominating Committee has authority to grant awards under different terms at its
discretion. We have reserved for issuance a total of 4,000,000 authorized but
unissued ordinary shares under the 2006 equity plan. As of December 31, 2008, we
had outstanding under this plan options to purchase 2,885,587 ordinary shares
and 106,000 shares of restricted stock.




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




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




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




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




84


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




2003
Stock Option Plan




Our
2003 stock option plan provides for a grant of options to our directors,
employees and consultants, including members of our medical advisory committee,
and to the directors, employees or consultants of our subsidiaries. We have
reserved a total of 2,500,000 ordinary shares for issuance under the plan. In
addition, we have reserved for issuance under the plan any ordinary shares
underlying unvested options granted under our 1998 and 2000 stock option plans
that expired without exercise. As of December 31, 2008, we had outstanding
options to purchase 2,318,915 ordinary shares under the 2003 stock option
plan.




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




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




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




85




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, 2008, we had outstanding options to purchase 564,137 ordinary
shares under the 2000 stock option plan. Ordinary shares underlying options
which expire without exercise under the 2000 stock option plan become available
for issuance under the 2003 stock option plan.




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




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




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




1998
Stock Option Plan




Our
1998 stock option plan 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, 2008, we had outstanding options to purchase 37,500 ordinary shares under
the 1998 stock option plan. Ordinary shares underlying options which expire
without exercise under the 1998 stock option plan become available for issuance
under the 2003 stock option plan.




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




86




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 15, 2009 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 February 15, 2009. 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.




Name and Address
                          
                          Number of
                            Shares
                            Beneficially
                            Owned
                          
                          
                          Percentage of
                            Shares
                            Beneficially OwnedPrincipal
      shareholders:IDB
      Holding Corporation Ltd. (1)
                          
                          
                          14,184,348
                          
                          
                          
                          48.5
                          %A
      HealthCor Management L.P. (2)
                          
                          
                          2,487,855
                          
                          
                          
                          8.5Morgan
      Stanely and FrontPoint Partners LLC (3)
                          
                          
                          1,984,438
                          
                          
                          
                          6.8Directors
      and executive officers:Nachum
      Shamir (4)
                          
                          
                          280,000
                          
                          
                          
                          *Yuval
      Yanai (5)
                          
                          
                          121,250
                          
                          
                          
                          *Kevin
      Rubey (6)
                          
                          
                          283,750
                          
                          
                          
                          *Christopher
      Rowland (7)
                          
                          
                          68,000
                          
                          
                          
                          *Kazem
      Samandari (8)
                          
                          
                          16,000
                          
                          
                          
                          *Manfred
      Gehrtz (9)
                          
                          
                          131,000
                          
                          
                          
                          *Ori
      Braun (10)
                          
                          
                          65,000
                          
                          
                          
                          *Keith
      Chrzanowski (11)
                          
                          
                          9,005
                          
                          
                          
                          *Israel
      Raz
                          
                          
                          —
                          
                          
                          
                          —David
      Mason
                          
                          
                          —
                          
                          
                          
                          —Israel
      Makov
                          
                          
                          —
                          
                          
                          
                          —Doron
      Birger (12)
                          
                          
                          14,241,226
                          
                          
                          
                          48.7James
      M. Cornelius (13)
                          
                          
                          290,038
                          
                          
                          
                          *Michael
      Grobstein (14)
                          
                          
                          258,000
                          
                          
                          
                          *Arie
      Mientkavich (15)
                          
                          
                          14,193,098
                          
                          
                          
                          48.5Dennert
      O. Ware (16)
                          
                          
                          13,750
                          
                          
                          
                          *Anat
      Loewenstein (17)
                          
                          
                          43,000
                          
                          
                          
                          *All
      directors and executive officers as a group (18)
                          
                          
                          15,828,769
                          
                          
                          
                          54.1
                          %




87







* Less than
1%




(1)
            Based
      on a Schedule 13D/A filed on March 3, 2009 and on information provided to
      us supplementally, this number consists of 6,802,710 ordinary shares owned
      by Elron Electronic Industries Ltd., or Elron, 4,719,528 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 such Schedule 13D/A, this number does not include (i) 766,649 ordinary
      shares held for members of the public through mutual funds, provident
      funds, pension funds, exchange traded funds and insurance policies which
      are managed by subsidiaries of Clal Insurance Enterprises Holdings Ltd.,
      or CIEH, a subsidiary of IDB Development Corporation, or IDBD, and (ii)
      210 ordinary shares which are held by unaffiliated third-party client
      accounts managed by Epsilon Investment House Ltd., and indirect subsidiary
      of IDBD, as portfolio managers.
              
              Based
      on such Schedule 13D/A, 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
      2,662,110 ordinary shares owned by RDC. In addition, Elron and DIC are
      parties to a voting agreement pursuant to which, among other things, Elron
      shares the power to vote 4,719,528 Ordinary Shares owned by DIC and,
      therefore, may be deemed to be the beneficial owner of a total of
      14,184,348, or 48.5% of our ordinary shares.  This voting
      agreement was entered into on September 29, 2003 with a term of one year
      and renews automatically annually 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.
              
              The
      6,802,710 ordinary shares owned by Elron include 1,462,640 shares
      purchased by Elron in June 2008 at a price of $16.54 per share through a
      special tender offer conducted under the provisions of the Israeli
      Companies Law.  As a result of this purchase, Elron and its
      affiliates increased their ownership of our ordinary shares from
      approximately 43.5% to approximately 48.5% as of June 20,
      2008.  Prior to that, based on a Schedule 13D/A filed on May 22,
      2007, each of Elron and DIC purchased 579,701of our ordinary shares, or
      1,159,402 ordinary shares in the aggregate, in a series of transactions on
      the open market between May 10, 2007 and May 21,
      2007.  Additionally, based on Schedule 13D/A filed on June 4,
      2007, Elron purchased 137,666 of our ordinary shares and DIC purchased
      137,665 of our ordinary shares in a series of transactions on the open
      market between May 22, 2007 and May 24, 2007.
              
              Based
      on such Schedule 13D/A filed on March 3, 2009 and on information provided
      to us supplementally, as of January 12, 2009, DIC owned approximately
      48.7% 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. As of such date, IDB Holding Corporation Ltd., or IDBH, owned
      86.8% of the outstanding shares of IDB Development Corporation Ltd., or
      IDBD, which, in turn, owned 74.45% 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 DIC, IDBH and
      IDBD is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel-Aviv
      67023, Israel. The address of RDC is Building 7, New Industrial Park,
      Yoqneam 20692, Israel. The address of Elron is The Triangular Tower, 42nd
      Floor, 3 Azrieli Center, Tel-Aviv 67023, Israel. IDBH, IDBD and DIC are
      public companies traded on the Tel-Aviv Stock Exchange. Elron is a public
      company traded on the Tel-Aviv Stock Exchange and on the Nasdaq Global
      Select Market.As
      of January 12, 2009, (i) Ganden Holdings Ltd., or Ganden, a private
      Israeli company controlled by Nochi Dankner and his sister Shelly Bergman,
      held, directly and through a wholly-owned subsidiary, approximately 55.26%
      of the outstanding shares of IDBH; (ii) Shelly Bergman, through a
      wholly-owned company, held approximately 4.23% of the outstanding shares
      of IDBH; (iii) Ytzhak Dankner (the father of Shelly Bergman and Nochi
      Dankner), through a wholly-owned subsidiary, held approximately 3.32% of
      IDBH's shares; (iv) Avraham Livnat Ltd., or Livnat, a private Israeli
      company controlled by Avraham Livnat, held, directly and through a
      wholly-owned subsidiary, approximately 13.43% of the outstanding shares of
      IDBH; and (v) Manor Holdings BA Ltd., or Manor, a private company
      controlled by Ruth Manor and Isaac Manor, held, directly and through a
      majority-owned subsidiary, approximately 13.42% of the outstanding shares
      of IDBH.




88




Subsidiaries
      of Ganden, Livnat and Manor have entered into a shareholders agreement
      with respect to their shares of IDBH constituting, respectively, 31.02%,
      10.34% and 10.34% of the outstanding shares of IDBH, for the purpose of
      maintaining and exercising control of IDBH as a group. Their additional
      holdings in IDBH are not subject to the shareholders agreement. The term
      of the shareholders agreement expires in May 2023. Based on the foregoing,
      Ganden, Manor and Livnat (by reason of their control of IDBH) and Nochi
      Dankner, Shelly Bergman, Ruth Manor, Isaac Manor and Avraham Livnat (by
      reason of their control of Ganden, Manor and Livnat, respectively) may be
      deemed to share with DIC, Elron and RDC the power to vote and dispose of
      our ordinary shares held by these entities.Nochi
      Dankner is Chairman and Chief Executive Officer of IDBH, the Chairman of
      IDBD and DIC. Rona Dankner, the daughter of Nochi Dankner, is a director
      of Elron. Zehava Dankner, the mother of Nochi Dankner and Shelly Bergman
      and the wife of Yitzhak Dankner, is a director of IDBH, IDBD and DIC.
      Isaac Manor and Zvi Livnat (a son of Avraham Livnat) are directors of
      IDBH, IDBD and DIC. Shai Livnat (another son of Avraham Livnat) is a
      director of IDBD and Elron. Dori Manor (the son of Isaac and Ruth Manor)
      is a director of IDBH, IDBD, DIC and Elron. The address of Nochi Dankner
      is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel-Aviv 67023,
      Israel. The address of Shelly Bergman is 9 Mishmar Ezrehi Street, Afeka,
      Tel-Aviv 69697, Israel. The address of Ruth Manor and Isaac Manor is 26
      Hagderot Street, Savyon 56526, Israel. The address of Avraham Livnat is
      Taavura Junction, Ramle 72102, Israel. These individuals disclaim
      beneficial ownership of the shares owned by the foregoing entities except
      to the extent of their pecuniary interest therein.(2)
                                                                        Based
      on a Schedule 13G/A filed on February 17, 2009, HealthCor, L.P., Healthcor
      Offshore Master Fund, L.P.and HealthCor Hybrid Offshore Master Fund, L.P.,
      each a “Fund” and together, the “Funds,” are the beneficial owners of a
      total of 2,487,855 of our ordinary shares. By virtue of their position as
      feeder funds, HealthCor Offshore, Ltd. and HealthCor Hybrid Offshore, Ltd.
      may be deemed beneficial owners of the ordinary shares owned by HealthCor
      Offshore Master Fund, L.P., and HealthCor Hybrid Offshore Master Fund,
      L.P., respectively. HealthCor Offshore GP, LLC is the general partner of
      HealthCor Offshore Master Fund, L.P. Accordingly, HealthCor Offshore GP,
      LLC may be deemed to beneficially own the ordinary shares that are
      beneficially owned by HealthCor Offshore Master Fund, L.P. HealthCor
      Group, LLC is the general partner of HealthCor Offshore GP, LLC and,
      therefore, may be deemed to beneficially own the ordinary shares that are
      beneficially owned by HealthCor Offshore Master Fund, L.P. HealthCor
      Hybrid Offshore GP, LLC is the general partner of HealthCor Hybrid
      Offshore Master Fund, L.P.  Accordingly, HealthCor Hybrid
      Offshore GP, LLC may be deemed to beneficially own the ordinary shares
      that are beneficially owned by HealthCor Hybrid Offshore Master Fund, L.P.
      HealthCor Group, LLC is the general partner of HealthCor Hybrid Offshore
      GP, LLC and, therefore, may be deemed to beneficially own the ordinary
      shares that are beneficially owned by HealthCor Hybrid Offshore Master
      Fund, L.P. By virtue of its position as the investment manager of the
      Funds, HealthCor Management, L.P. may be deemed a beneficial owner of
      allthe
      ordinary shares owned by the Funds. HealthCor Associates, LLC is the
      general partner of HealthCor Management, L.P. and thus may also be deemed
      to beneficially own the ordinary shares that are beneficially owned by the
      Funds. HealthCor Group LLC is the general partner of HealthCor Capital,
      L.P., which is in turn the general partner of HealthCor, L.P.
      Accordingly,          each
      of HealthCor Capital L.P. and HealthCor Group, LLC may be deemed to
      beneficially own the ordinary shares that are beneficially owned by
      HealthCor, L.P. As the managers of HealthCor Associates, LLC, Arthur Cohen
      and Joseph Healey exercise both voting and investment power with respect
      to the ordinary shares indicated herein, and therefore each may be deemed
      a beneficial owner of such ordinary shares. Each of the persons and
      entities mentioned above disclaims any
      beneficial          ownership
      of any such ordinary shares in excess of their actual pecuniary interest
      therein.(3)
                                                                        Based
      on Schedule 13G filed on February 17, 2009, Morgan Stanley and its
      wholly-owned subsidiary FrontPoint LLC, an investment advisor, own
      1,984,438 of our ordinary
shares.




89




(4)
            Consists
      of 5,000 ordinary shares, 100,000 shares of restricted stock and options
      to purchase 175,000 ordinary shares.(5)
            Consists
      of 5,000 ordinary shares and options to purchase 116,250 ordinary
      shares.(6)
            Consists
      of options to purchase 283,750 ordinary shares.(7)
            Consists
      of 3,000 ordinary shares and options to purchase 65,000 ordinary shares.
      Mr. Rowland left the company in March 2009.(8)
            Consists
      of 6,000 restricted shares and options to purchase 10,000 ordinary
      shares.(9)
            Consists
      of 1,000 ordinary shares and options to purchase 130,000 ordinary
      shares.(10)
            Consists
      of options to purchase 65,000 ordinary shares.(11)
            Consists
      of 380 ordinary shares and options to purchase 8,625 ordinary
      shares.(12)
            Consists
      of 2,878 ordinary shares and options to purchase 54,000 ordinary shares
      owned by Mr. Birger personally, 6,802,710 ordinary shares owned by Elron,
      2,662,110 ordinary shares owned by RDC and 4,719,528 ordinary shares owned
      by DIC. Mr. Birger is a director of RDC and President and Chief Executive
      Officer of Elron and by virtue of his position and the voting agreement
      between Elron and DIC may be deemed to have voting and investment power,
      and thus beneficial ownership with respect to the shares that DIC, Elron
      and RDC own. Mr. Birger disclaims such beneficial ownership except to the
      extent of his pecuniary interest therein.(13)
            Consists
      of 121,038 ordinary shares and options to purchase 169,000 ordinary
      shares.(14)
            Consists
      of 30,000 ordinary shares and options to purchase 228,000 ordinary
      shares.(15)
            Consists
      of options to purchase 8,750 ordinary shares owned by Mr. Mientkavich
      personally, 6,802,710 ordinary shares owned by Elron, 2,662,110 ordinary
      shares owned by RDC and 4,719,528 ordinary shares owned by DIC. Mr.
      Mientkavich is the Chairman of the board of directors of Elron and by
      virtue of his position and the voting agreement between Elron and DIC may
      be deemed to have voting and investment power, and thus beneficial
      ownership, with respect to the shares that DIC, Elron and RDC own. Mr.
      Mientkavich disclaims such beneficial ownership except to the extent of
      his pecuniary interest therein.(16)
            Consists
      of options to purchase 13,750 ordinary shares.(17)
            Consists
      of options to purchase 43,000 ordinary shares.(18)
            Includes
      14,184,348 ordinary shares beneficially owned by DIC, Elron and RDC, as
      well as ordinary shares and options to purchase ordinary shares
      beneficially held by directors and officers in their personal capacities
      or by their nominees. Our directors and officers disclaim beneficial
      ownership of the shares owned by the foregoing entities except to the
      extent of their pecuniary interest
therein.




Based on
a Schedule 13G/A filed on February 13, 2009, Alliance Bernstein L.P., or
Alliance, and AXA Equitable Life Insurance Company, or AXA Equitable, together
own 1,181,570, or approximately 4.1% of our ordinary shares.  On March
31, 2008, we reported in our annual report on Form 20-F for the year ended
December 31, 2007, that these entities owned approximately 11.4% of our ordinary
shares as of February 14, 2008.  Assuming these entities will continue
to own less than five percent (5%) of our ordinary shares, they will no longer
be required to disclose their ownership on Schedule 13G.





90


B. RELATED PARTY
TRANSACTIONS




Registration
Rights Agreement




In
July 2007, our shareholders approved a Registration Rights Agreement among us,
Elron, DIC and RDC. Elron, DIC and RDC own an aggregate of 48.5% of our ordinary
shares and are collectively referred to as the “affiliated shareholders.” This
Registration Rights Agreement has replaced earlier registration rights granted
by us to Elron, DIC, RDC, entities affiliated with OrbiMed Capital LLC and other
shareholders in connection with a private placement of our ordinary shares
completed in September 2000, before our initial public offering. These earlier
registration rights expired in October 2006.




Our
board of directors believes that this agreement is necessary to protect the
market for our ordinary shares. On several occasions and most recently in June
2008, the affiliated shareholders demonstrated their commitment to our business
by increasing their ownership level by purchasing additional shares in the open
market. The Registration Rights Agreement provides the affiliated shareholders
means for liquidity that are otherwise not available to them under applicable
law given their ownership level. At the same time, it increases the likelihood
that a sale by the affiliated shareholders will be coordinated with us and not
disrupt the ordinary activity in the market for our shares due to the sale of a
large number of shares at one time or during a short period.




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




Demand
Registration Rights




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




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




Incidental
Registration Rights




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


91




Form
F-3 Registration Rights


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




Termination




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




Expenses




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




Directors’
Fees




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




Agreements
with Directors and Officers




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




Employment Agreement with the
Chairman of the Board of Directors




In June
2007, we entered into an employment agreement with Mr. Israel Makov, who serves
as the Chairman of our board of directors. This agreement was approved by our
shareholders in the annual shareholders meeting held in July 2007. In
consideration for his service as a director and Chairman of the Board of
Directors, Mr. Makov receives a monthly payment of NIS 60,000 (approximately
$14,326 as of the date of this annual report), subject to adjustment based on
the Israeli Consumer Price Index, in lieu of any statutory or other typical
adjustments. Including this adjustment, Mr. Makov’s salary as of December 31,
2008, was NIS 63,836 (approximately $15,242 as of the date of this annual
report).   For fiscal year 2009, Mr. Makov has agreed to reduce
his annual base salary by 10% to NIS 57,094 (approximately $13,632 as of the
date of this annual report).  In addition, Mr. Makov is entitled to
pension, disability, study fund, health insurance and other benefits in
accordance with standard terms of employment in Israel, including a monthly
deduction to severance fund in lieu of statutory severance. The total monthly
contributions required to be made by us under all of these items is 23.3% of
base salary and the total contribution by Mr. Makov is 7.5% of base salary. Mr.
Makov is entitled to vacation and sick leave in accordance with standard
practices in Israel. We reimburse Mr. Makov for all business-related expenses
and provide him with directors’ and officers’ insurance coverage and
indemnification, in accordance with the terms approved by our
shareholders.


92




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




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




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




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




Employment
Agreement with our President and Chief Executive
Officer




We have
an employment agreement with Mr. Shamir, which we signed in April 2006. The
employment agreement contains provisions standard for a firm in our industry
regarding non-competition, confidentiality of information and assignment of
inventions. Since Mr. Shamir is also a director, under Israeli law his
employment agreement and terms, as well as any changes to the agreement, are
subject to approval by our shareholders.




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




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




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


93




In
fiscal year 2008, Mr. Shamir received (1) an annual base salary of $416,000,
effective July 1, 2008 compared to an annual base salary of $400,000 prior to
that date, (2) a cash bonus of $450,000 relating to our results in 2007, and (3)
options to purchase 100,000 of our ordinary shares at an exercise price of
$16.00, which is equal to the closing price of the ordinary shares on the Nasdaq
Global Market on the date the shareholders approved the grant, vesting in four
equal installments beginning on the first anniversary of the date of the
grant.





For
fiscal year 2009, Mr. Shamir has agreed to reduce his annual base salary by 10%
to $374,400 as part of our commitment and efforts to control operating expenses
at times of a global economic crisis.  In addition, our compensation
committee, audit committee and board of directors approved for Mr. Shamir (1) a
cash bonus of $361,000 relating to our results in 2008, which Mr. Shamir has
also agreed to reduce by 10% to $326,000, (2) a grant of options to purchase
125,000 of our ordinary shares, at an exercise price equal to the closing price
of the ordinary shares on the Nasdaq Global Market on the date the shareholders
approve the grant, vesting in four equal installments beginning on the first
anniversary of the date of the grant, and (3) a bonus plan for 2009 under which
Mr. Shamir may be entitled to a bonus of up to 200% of his annual base salary,
similar to percentage cap in prior years, subject to meeting certain personal
and company performance targets determined by the board of directors. For
purposes of calculating the 2009 bonus, Mr. Shamir’s voluntary reduction of his
annual base salary will be disregarded.





The
payment of the 2008 bonus and the grant of stock options to Mr. Shamir as
described above are subject to approval by our shareholders at our next annual
shareholders’ meeting expected in June 2009.




Exculpation,
Insurance and Indemnification




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




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




•
            a financial liability imposed on
      him or her in favor of another person pursuant to a judgment, settlement
      or arbitrator’s award approved by a court, to extent such liability is
      related to events, which in the opinion of the Board, are anticipated in
      light of our actual activities at the time of granting the obligation to
      indemnify and is limited to sum or measurements determined by the Board as
      reasonable under the
circumstances;





•
            reasonable litigation expenses,
      including attorneys’ fees, incurred by the office holder or imposed by a
      court in proceedings instituted against him or her by the company, on its
      behalf or by a third party, or in connection with criminal proceedings in
      which the office holder was acquitted or as a result of a conviction for a
      crime that does not require proof of criminal intent;
      and


94





•
            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 Israeli 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 Israeli Companies Law. Our office
holders are currently covered by a directors and officers’ liability insurance
policy. To date, no claims for directors and officers’ liability insurance have
been filed under this policy.




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




C.INTERESTS OF EXPERTS
AND COUNSEL




Not
applicable.


95




ITEM
8.FINANCIAL
INFORMATION




A.     
CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION




Financial
Statements




See
Item 18 – “Financial Statements” 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. Substantially all of our
products are exported out of Israel. For information regarding our revenues by
geographic market, see Item 5 - “Operating and Financial Review and
Prospects.”




Legal
Proceedings




Patent
Disputes




In June
2008, we settled our patent litigation against Olympus Corporation, Olympus
Medical Systems Corp. and Olympus America Inc., collectively referred to in this
section as “Olympus.” The litigation began in May 2006, was conducted in the
United States and was related to the two companies’ respective capsule endoscopy
products.





The
settlement agreement includes certain worldwide cross-licenses under which each
party receives a royalty-free license under all existing patents of the other
party for its respective capsule endoscopy products existing as of the
settlement date.  The parties also exchanged covenants not to sue on
currently available medical device products and agreed to a release of all past
causes of action.  The settlement also includes a cross-license under
existing and future patents of each party for future capsule endoscopy products,
which may include the payment of royalties by either party at a rate to be
determined through an agreed upon mechanism.  Finally, as part of the
settlement we received a cash payment of $2.33 million and an agreement to
cooperate in future mutually beneficial joint market development
projects.





From
time to time we may be involved in legal proceedings. Currently we are not party
to any legal proceedings whose outcome we expect will be material to our
financial condition or results of operations.




Dividend
Policy




On
March 11, 2009, we paid a cash dividend of $0.54 per share, or a total of
approximately $16 million. Following a request by our affiliated shareholders
(48.5% ownership) to consider a potential cash dividend, our board of directors
reviewed our current and projected liquidity, our anticipated operating
performance, and our growth strategies, and concluded that a cash dividend in
excess of our expected cash requirements was appropriate.  This was a
special dividend and we currently intend to retain all future earnings to
finance our operations and to expand our business. Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including future earnings,
capital requirements, legal restrictions, financial condition and future
prospects and other factors the board of directors may deem
relevant.




Significant
Changes




Except
as otherwise disclosed in this Form 20-F, there has been no significant change
in our financial position since December 31, 2008.


96




ITEM
9.THE OFFER AND
LISTING




A.     
OFFER AND
LISTING DETAILS




Nasdaq
Global Market




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




Annual Highs and Lows
                
                High
                
                
                Low2008
                
                $
                23.59
                
                
                $
                6.512007
                
                
                31.49
                
                
                
                19.252006
                
                
                28.37
                
                
                
                14.462005
                
                
                36.04
                
                
                
                20.392004
                
                
                44.08
                
                
                
                17.87




Quarterly Highs and Lows
                
                High
                
                
                Low4th
      quarter 2008
                
                $
                11.19
                
                
                $
                6.513rd
      quarter 2008
                
                
                16.97
                
                
                
                10.752nd
      quarter 2008
                
                
                17.39
                
                
                
                14.661st
      quarter 2008
                
                
                23.59
                
                
                
                14.364th
      quarter 2007
                
                
                30.19
                
                
                
                22.433rd
      quarter 2007
                
                
                31.49
                
                
                
                25.022nd
      quarter 2007
                
                
                31.42
                
                
                
                21.221st
      quarter 2007
                
                
                22.04
                
                
                
                19.25





Most Recent Six Months
                
                High
                
                
                LowFebruary
      2009
                
                $
                9.86
                
                
                $
                7.80January
      2009
                
                
                11.09
                
                
                
                9.16December
      2008
                
                
                9.80
                
                
                
                8.14November
      2008
                
                
                9.94
                
                
                
                6.51October
      2008
                
                
                11.19
                
                
                
                8.04September
      2008
                
                
                16.97
                
                
                
                10.75




On
March 19, 2009, the closing price of our ordinary shares on the Nasdaq Global
Market was $7.86 per share. We believe that as of March 19, 2009, there were
approximately 7,000 holders of record of our ordinary shares.




Tel-Aviv
Stock Exchange




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


97




Annual Highs and Lows
                                        
                                        High
                                        
                                        Low2008
                                        
                                        NIS
                                        89.95
                                        
                                        NIS
                                        24.322007
                                        
                                        
                                        135.90
                                        
                                        
                                        81.472006
                                        
                                        
                                        132.60
                                        
                                        
                                        65.022005
                                        
                                        
                                        155.30
                                        
                                        
                                        95.79




Quarterly Highs and Lows
                                                                                              
                                                                                              High
                                                                                              
                                                                                              Low4th
      quarter 2008
                                                                                              
                                                                                              NIS
                                                                                              39.14
                                                                                              
                                                                                              NIS
                                                                                              24.323rd
      quarter 2008
                                                                                              
                                                                                              
                                                                                              60.93
                                                                                              
                                                                                              
                                                                                              40.402nd
      quarter 2008
                                                                                              
                                                                                              
                                                                                              61.48
                                                                                              
                                                                                              
                                                                                              48.551st
      quarter 2008
                                                                                              
                                                                                              
                                                                                              89.95
                                                                                              
                                                                                              
                                                                                              47.174th
      quarter 2007
                                                                                              
                                                                                              
                                                                                              123.60
                                                                                              
                                                                                              
                                                                                              47.173rd
      quarter 2007
                                                                                              
                                                                                              
                                                                                              135.90
                                                                                              
                                                                                              
                                                                                              102.702nd
      quarter 2007
                                                                                              
                                                                                              
                                                                                              125.10
                                                                                              
                                                                                              
                                                                                              86.141st
      quarter 2007
                                                                                              
                                                                                              
                                                                                              92.74
                                                                                              
                                                                                              
                                                                                              81.47




Most Recent Six Months
                        
                        High
                        
                        LowFebruary
      2009
                        
                        NIS
                        40.17
                        
                        NIS
                        32.57January
      2009
                        
                        
                        43.18
                        
                        
                        33.30December
      2008
                        
                        
                        39.00
                        
                        
                        29.20November
      2008
                        
                        
                        38.85
                        
                        
                        24.32October
      2008
                        
                        
                        39.14
                        
                        
                        28.99September
      2008
                        
                        
                        60.93
                        
                        
                        40.40




On March
19, 2009, the closing price of our ordinary shares on the Tel-Aviv Stock
Exchange was NIS 32.08 per share. The average exchange ratio of NIS to U.S.
dollar in 2008 was NIS 3.5878 to $1.00.




B.     
PLAN OF
DISTRIBUTION





Not
applicable.





C.     
MARKETS




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




D.      SELLING
SHAREHOLDERS





Not
applicable.


98





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




We
are registered with the Israeli registrar of companies in
Jerusalem.  Our registration number is 51-257802-2.  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. Our ordinary shares is the only class of
shares we have issued and outstanding.




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 prior notice of any
shareholders’ meeting in accordance with any applicable rule or regulation,
including the rules of the stock exchange on which our shares are
traded.





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.




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 Israeli 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.


99





Under the
Isaeli Companies Law and our articles of association, a director must disclose
to us any personal interest he or she has, directly or indirectly, in any
existing or proposed transaction to which we are a party (a “Related Party
Transaction”) and specify the nature of such interest. Generally, a director is
not permitted to participate in a discussion and vote on any transaction in
which he or she has a personal interest, unless and to the extent permitted
under the Israeli Companies Law. If a majority of the directors have an interest
in a “Related Party Transaction,” all of the directors may attend the meeting
and vote and the transaction will require the approval of the shareholders.
Under the Israeli Companies Law, Related Party Transactions with our directors,
including compensation to directors, must be approved by the audit committee,
the board of directors and the shareholders.




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




Shareholder
Meetings




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




Quorum




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


100




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 Israeli 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
Israeli Companies Law does not describe the substance of this duty and there is
no binding case law that addresses this subject directly.





Alteration
of Rights





Under our
Articles of Association, the rights attached to our ordinary shares may be
modified with the approval by the holders of a majority of our ordinary
shares.  Accordingly, modifications to our Articles of Association
must be approved by our shareholders.




Resolutions




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




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




Access
to Corporate Records




Under
the Israeli 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 or the Israeli Securities Authority. 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 Israeli Companies Law. We may deny
a request to review a document if we determine that the request was not made in
good faith, that the document contains a commercial secret or a patent or that
the document’s disclosure may otherwise harm our interests.




Acquisitions
under Israeli Law




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


101




The
Israeli Companies Law provides that, except in specified circumstances, an
acquisition of shares of a public company must be made by means of a tender
offer if as a result of the acquisition a person becomes the owner of 25% or
more of the voting rights. This rule does not apply if there is already another
25% shareholder of the company. To our knowledge, IDBH beneficially owns more
than 25% of our outstanding ordinary shares as determined in accordance with the
Israeli Companies Law. Similarly, the Israeli Companies Law provides that,
except in specified circumstances, an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser becomes the owner of more than 45% of the voting rights, if at such
time there is no other shareholder that owns more than 45% of the voting rights
of the company. To our knowledge, IDBH beneficially owns more than 45% of our
outstanding ordinary shares as determined in accordance with the Israeli
Companies Law.




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




Anti-Takeover
Measures




The
Israeli 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 Israeli 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 certain material contracts and amendments to these contracts are included in
this Form 20-F under Item 4 – “Information on the Company – Part B:
Business Overview.” in Item 5 – Operating and Financial Review and Prospects –
Operating Results – Overview – Acquisition of the Bravo pH Monitoring Business,”
and under Item 7 – “Major Shareholders and Related Party Transaction – Related
Party Transactions.”


102




D.     
EXCHANGE
CONTROLS




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




E.      TAXATION




Certain
Material Israeli Tax Considerations and Government Programs




The
following is a description of the material Israeli income tax consequences of
the ownership of our ordinary shares. The following also contains a description
of material relevant provisions of the current Israeli income tax structure
applicable to companies in Israel, with special reference to its effect on us.
To the extent that the discussion is based on new tax legislation which has not
been subject to judicial or administrative interpretation, there can be no
assurance that the tax authorities will accept the views expressed in the
discussion in question. The discussion is not intended, and should not be taken,
as legal or professional tax advice and is not exhaustive of all possible tax
considerations.




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




Taxation
of Companies in Israel




General
Corporate Tax Structure. In 2008, Israeli companies were subject to
corporate tax at the rate of 27% of taxable income. This tax rate is expected to
decrease to 26% in 2009 and to 25% thereafter. 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.


103





A company
that has an approved enterprise program is eligible for further tax benefits if
it qualifies as a foreign investors’ company. A foreign investors’ company is a
company where more than 25% of its share capital and combined share and loan
capital is owned by non-Israeli residents. A company that qualifies as a foreign
investors’ company and has an approved enterprise program is eligible for tax
benefits for a ten-year benefit period. As specified above, depending on the
geographic location of the approved enterprise within Israel, income derived
from the approved enterprise program, if undistributed, may be exempt from tax
for a period of between two to 10 years, and will be subject to a reduced tax
rate for the remainder of the benefit period. The tax rate for the remainder of
the benefit period will be (i) 25% for levels of foreign investment that do not
exceed 49%, (ii) 20% for levels of foreign investment of 49% or more and less
than 74%, (iii) 15% for levels of foreign investment of 74% or more and less
than 90%, and (iv) 10% for levels of foreign investment of 90% or
more.





The
Investment Law also provides that an approved enterprise is entitled to
accelerated depreciation for property and equipment that is included in an
approved investment program. Generally, such accelerated depreciation ranges
from 200% of ordinary depreciation rates for equipment to 400% for buildings,
and is applied during the first five tax years of the operation of these assets,
with a ceiling of 20% per year for depreciation on buildings.




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




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




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




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


104




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




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




In
March 2005, the Investment Law was reformed and its provisions were
significantly changed. Under this reform, “approved enterprise” status is
generally limited to companies that derive at least 25% of their income from
export activities.  In addition, 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 within the framework of the Office of the Chief
Scientist research plan until 100% of the dollar-linked grant is repaid,
together with interest equal to the 12 month London Interbank Offered Rate
applicable to dollar deposits that is published on the first business day of
each calendar year. Following the full repayment of the grant, there is no
further liability for repayment of such grants.





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, assuming we receive approval from the
Chief Scientist to manufacture our products outside Israel, we may be required
to pay increased royalties. The increase in royalties depends upon the
manufacturing volume that is performed outside of Israel follows:




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




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


105




The
know-how developed within the framework of the Chief Scientist plan may not be
transferred to third parties outside Israel without the prior approval of a
governmental committee charted under the Research Law. The approval, however, is
not required for the export of any products developed using grants received from
the Chief Scientist.  Transfer of know-how,, including within Israel,
is subject to an undertaking of the recipient to comply with 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.





While to
date we have paid all of our royalty obligations resulting from grants we
received from the Office of the Chief Scientist, the terms of the Chief
Scientist grants are perpetual and prohibit us from manufacturing products
developed using such grants, and limit the transfer of related know-how, outside
of Israel without special approvals and possibly special payments to the Office
of the Chief Scientist. These restrictions may impair our ability to outsource
manufacturing, engage in change of control transactions or otherwise transfer
our know-how outside Israel. If we fail to comply with any of the conditions
imposed by the Chief Scientist, we may be required to pay additional royalties
to the Office of the Chief Scientist or be subject to criminal
charges.





In particular, any change of control
requires a prior written notice to the Chief Scientist and any change of control
that would make a non-Israeli citizen or resident an “interested party” requires
the prior approval of the Office of the Chief
Scientist.





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




•
            The expenditures are approved by
      the relevant Israeli government ministry, determined by the field of
      research;





•
            The research and development is
      for the promotion of the company;
and





•
            The research and development is
      carried out by or on behalf of the company seeking the
      deduction.




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




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


106




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;





•
            claiming expenses in connection
      with the issuance and listing of shares on the Tel-Aviv Stock Exchange or,
      on or after January 1, 2003, on a recognized stock market outside of
      Israel, over a period of three years;
and





•
            Accelerated depreciation rates on
      equipment and buildings.




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




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 2008 we qualified as an Industrial Company under the Industry
Encouragement Law. We cannot provide any assurance that the Israeli tax
authorities will agree with the determination that we qualified as an industrial
company in the past or that we will maintain this qualification or our status as
an industrial company.




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




•
            Where a company’s equity, as
      calculated under the Inflationary Adjustments Law, exceeds the depreciated
      cost of fixed assets, a deduction from taxable income is permitted equal
      to the excess multiplied by the applicable annual rate of inflation. The
      maximum deduction permitted in any single tax year is 70% of taxable
      income, with the unused portion permitted to be carried forward linked to
      the Israeli consumer price index. The unused portion that was carried
      forward may be deducted in full in the following
    year.





•
            Where a company’s depreciated
      cost of fixed assets exceeds its equity, then the excess multiplied by the
      applicable annual rate of inflation is added to taxable
      income.





•
            Depreciation deductions on fixed
      assets and losses carried forward are adjusted for inflation based on the
      increase in the consumer price
index.





•
            Gains on traded securities are
      taxable at the regular corporate tax rate in specified
      circumstances.





The
Inflationary Adjustments Law was repealed with respect to the 2008 taxable year
and thereafter.


107




Taxation
of Our Shareholders




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





The
capital gain recognized by individuals on the sale of our shares that were
purchased on or after January 1, 2003 will be taxed at the rate of 20%, except
if the shareholder is a person who holds, directly or indirectly, 10% or more of
one of our means of control.  In addition, an individual claiming
deduction of financing expenses in respect of capital gain recognized from the
sale of our shares will be taxed at the rate of 25%. Generally, the capital gain
recognized by a corporation will be subject to tax at the rate of
25%.  The capital gain recognized from the sale of our shares that
were purchased prior to January 1, 2003 will be subject to different tax rates
depending on the date of acquisition of such shares.  The marginal tax
rate for individuals (up to 47% in 2008) and the regular corporate tax rate for
corporations (27% in 2008) will be applied to the amount obtained by multiplying
the entire recognized gain on the sale by a fraction the numerator of which is
the number of days from the date of the purchase of such shares until January 1,
2003 and the denominator of which is the number of days from the date of
purchase of such shares and the date of sale.  The remainder of the
gain realized on the sale will be subject to capital gains tax at the rates
applicable to an asset purchased after January 1, 2003, as described
above.




Individual
and corporate shareholders dealing in securities in Israel are taxed at the tax
rates applicable to business income. In 2008, these regular tax rates were 27%
for corporations and up to 47% for individuals.




Non-Israeli residents. Under
Israeli law, the
capital gain from the sale of shares by non Israeli residents is tax exempt in
Israel as long as our shares are listed on the Nasdaq Global Market or any other
stock exchange recognized by the Israeli Ministry of Finance, and provided
certain other conditions are met, the most relevant of which are: (A) the
capital gain is not attributed to the foreign resident’s permanent establishment
in Israel, (B) the shares were acquired by the foreign resident after the
company’s shares had been listed for trading on the foreign exchange, and (C) if
the seller is a corporation, less than 25% of its means of control are held by
Israeli residents.




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




•
            who holds such shares as a
      capital asset;




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




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




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


108





If our
securities are sold in Israel, the purchaser of such shares, any Israeli
stockbroker used in the transaction and any financial institution through which
the sold securities are held, are obliged, subject to some exemptions, to
withhold tax on the amount of consideration paid with respect to such sale (or
on the capital gain realized on the sale, if known) at the rate of 25% for
corporations and 20% for individuals.




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




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




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




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





Israeli Withholding Tax on
dividends. 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.





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




Certain
Material U.S. Federal Income Tax Considerations




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


109




·
            regulated
      investment companies;





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





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





·
            tax-exempt
      organizations or retirement plans;





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





·
            persons
      subject to the alternative minimum
tax;





·
            banks
      and other financial institutions;





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





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





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





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





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




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




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




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




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


110




•
            citizen or resident of the United
      States;





•
            a corporation or other entity
      taxable as a corporation for U.S. federal income tax purposes created or
      organized in or under the laws of the United States or any state thereof,
      or the District of Columbia;





•
            an estate if its income is
      subject to U.S. federal income taxation regardless of its source;
      or





•
            a trust (A) if a court within the
      United States is able to exercise primary jurisdiction over its
      administration and one or more U.S. persons have authority to control all
      of its substantial decisions, or (B) if, in general, it was in existence
      on August 20, 1996, was created as a U.S. person under the Code on the
      previous day and made a valid election to continue to be so
      treated.




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




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




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




Distributions




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




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


111




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




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




Sale
or Exchange of Our Ordinary Shares




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




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




Passive
Foreign Investment Company Considerations




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




Based
on our estimated gross income, the average value of our gross assets (determined
by reference to the market value of our shares and valuing our intangible assets
using the methods prescribed for publicly traded corporations) and the nature of
our business, we believe that we will not be classified as a PFIC for the
taxable year ended December 31, 2008. 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, there can be no assurance that we will not be
considered a PFIC for any taxable year. In general, if we were
characterized as a PFIC for any taxable year, any gain recognized by a U.S.
Holder who sells our ordinary shares would be treated as ordinary income and
would be subject to tax as if the gain had been realized ratably over the
holding period of such ordinary shares. The amount allocated to the current
taxable year and any taxable year with respect to which were not a PFIC would be
taxed as ordinary income (rather than capital gain) earned in the current
taxable year. The amount allocated to other taxable years would be taxed at the
highest marginal rates applicable to ordinary income for such taxable years, and
the U.S. Holder also would be liable for an additional tax equal to the interest
on such tax liability for such years.


112




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




Backup
Withholding and Information Reporting




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




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




F.      
DIVIDENDS AND
PAYING AGENTS





Not
applicable.





G.     
STATEMENTS BY
EXPERTS





Not
applicable.





H.     
DOCUMENTS ON
DISPLAY




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




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


113




I.       
SUBSIDIARY
INFORMATION





Not
applicable.




ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Currency fluctuations. Our
sales in 2008 were denominated 63% in U.S. dollars, 28% in Euros, 5% in Japanese
Yen and 4% in currencies other than U.S. dollars and Euros, depending on the
location of the customer or the distributor used to fulfill our customers’
orders. As most of our sales are made in U.S. dollars, a strengthening of the
U.S. dollar could make our products less competitive in foreign markets and
could cause our non-U.S. customers to cancel or decrease orders or default on
payment.




We
develop and manufacture products primarily in Israel and sell the majority of
the products in the United States, and to a lesser extent in other countries. If
the value of a currency in which our revenues are denominated weakens against
the value of a currency in which our expenses are denominated, there will be a
negative impact on the profit margins for sales of our products. In 2008, 48% of
our expenses were denominated in U.S. dollars and 29% of our expenses were
denominated in Shekels, principally consisting of salaries and related personnel
expenses. We expect this level of Shekel expenses to continue for the
foreseeable future. During 2008, the U.S. dollar weakened against the Shekel by
approximately 1.1%. We estimate that a change of 10% in the exchange rate
between the Shekel and the U.S. dollar has an impact of approximately $2.5
million on our operating expenses. In addition, 15% of our expenses were
denominated in Euros and 8.0% were denominated in Yen or other currencies.
However, since we also generate revenues in these currencies the net effect on
our business of exchange rate fluctuations of these currencies against the U.S.
dollars is not material.




As of
December 31, 2008, 42% of our cash and cash equivalents were denominated in
currencies other than the U.S. dollar and we are therefore subject to the risk
of exchange rate fluctuations among the U.S. dollar, Yen, Shekel, Australian
dollar and Euro. In 2008, we have used a variety of hedging tools to seek to
minimize the effect of currency fluctuations on our income.




Interest rate fluctuations.
We invest some of our cash in bank accounts and deposits with maturities of
three months or less located with a number of highly-rated banks inside and
outside of Israel. We invest the majority of our cash in longer-term financial
instruments in order to seek to achieve a higher yield. As of December 31, 2008,
approximately 51% of our investments were subject to the risk of changes in
interest rates. Due to the current low interest rates in the United States and
other countries, we estimate that a change of 10% in interest rates would not
have a material impact on our finance income.




General market risks. As of
December 31, 2008, approximately two thirds of our cash balances were invested
in securities issued by the United States government or its agencies and in AAA
money market funds. The remainder was held in corporate bonds and commercial
paper that were highly-rated by rating agencies at the time of investment.
Nonetheless, these investments are subject to general credit, counterparty,
liquidity and market risks, which were exacerbated by the dislocation that has
affected the financial markets and the global economy since the middle of 2007
and caused credit and liquidity issues for a number of reputable financial
institutions.





During
the first quarter of 2008, in light of the turmoil in the global financial
markets, we transferred all of our “held-to-maturity” securities in the amount
of $44.3 million into the “available-for-sale” category. This transfer generated
an accumulated other comprehensive loss of $0.4 million. In addition, we reduced
the relative proportion of corporate bonds in our financial investments, and
increased the relative proportion of government bonds. As a result of these
actions, we have reduced our risk of principal loss while at the same time
reduced our expected interest income (to the extent the interest rates remain at
their current low level).


114





Market
acceptance of our products in the United States and other countries is dependent
upon the medical equipment purchasing and procurement practices of our
customers, patient demand for our products and procedures and the reimbursement
of patient’s medical expenses by third-party payors, including government
healthcare programs. The current uncertainty surrounding world financial markets
may result in the purchasers of medical equipment decreasing their medical
equipment purchasing and procurement activities. In addition, tightening in
world credit markets may result in our customers having increased difficulty
securing the financing necessary to purchase our products which may result in
decreased sales. The financial condition of our customers may deteriorate and
our ability to collect payments due to us may be adversely affected. Widespread
economic uncertainty may also result in cost-conscious patients making fewer
trips to their physicians and specialists, which could result in reduced demand
for our products and procedures. Furthermore, third-party payors, including
governments, around the world facing tightening budgets could move to further
reduce their offered reimbursement rates or countries may adopt healthcare
reforms to reduce healthcare spending. If the current economic condition results
in the occurrence of any of these events, our liquidity and financial results
may be materially and adversely affected.




ITEM12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES




Not
applicable.





PART II




ITEM
13.DEFAULTS, DIVIDEND
ARREARAGES AND DELINQUENCIES




None.




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




Not
applicable.




ITEM
15.CONTROLS AND
PROCEDURES




Disclosure Controls and
Procedures. We maintain disclosure controls and procedures that are
designed to provide reasonable assurance that information required to be
disclosed in our periodic filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer. 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.


115




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




•
            pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect the
      transactions and dispositions of the assets of the
      company;





•
            provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that receipts and expenditures of the company are being made only in
      accordance with authorizations of management and directors of the company;
      and





•
            provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of the company’s assets that could have a material effect
      on the financial statements.




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




Management
assessed the effectiveness of the company’s internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO in Internal Control-Integrated
Framework. Based on our assessment, management believes that, as of
December 31, 2008, the company’s internal control over financial reporting is
effective.




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




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




ITEM
16.[RESERVED]




ITEM
16A.AUDIT COMMITTEE FINANCIAL
EXPERT.




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


116




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 Securities and Exchange Commission as Exhibit 11.1
to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003
and is also available on our website, www.givenimaging.com.
A hard copy of our code of ethics may be obtained by sending an e-mail request
to info@givenimaging.com
or by a written request to the corporate secretary at 2 Hacarmel Street, 20692,
Yoqneam, Israel.




ITEM
16C.PRINCIPAL ACCOUNTANT
FEES AND SERVICES




The
following table sets forth fees for professional audit services rendered by
Somekh Chaikin, a member firm of KPMG International, for the audit of our
financial statements for the years ended December 31, 2007 and 2008, and fees
billed for other services rendered by Somekh Chaikin, including through other
offices of KPMG worldwide:





2007
                      
                      2008(in thousands)Audit
      fees
                      
                      $
                      465
                      
                      
                      $
                      519Audit-related
      fees (1)
                      
                      
                      283
                      
                      
                      
                      15Tax
      fees (2)
                      
                      
                      233
                      
                      
                      
                      252All
      other fees
                      
                      
                      3
                      
                      
                      
                      —Total
                      
                      $
                      984
                      
                      
                      $
                      786





(1)
            “Audit-related fees” in 2007 are
      related principally to analysis of the accounting for U.S. income
      tax.





(2)
            “Tax fees” includes fees for
      professional services rendered by our auditors for tax compliance, tax
      advice on actual or contemplated transactions and work regarding transfer
      prices.




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




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




None.




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




None.





ITEM
16F.     CHANGE IN REGISTRANT’S CERTIFYING
ACCOUNTANTS


117





Not
applicable.





ITEM
16G.     CORPORATE GOVERNANCE





None.




PART III




ITEM
17.FINANCIAL
STATEMENTS




See
pages F-1 to F-39.




ITEM
18.FINANCIAL
STATEMENTS




Not
applicable.




ITEM
19.EXHIBITS




Exhibit
              
              Description1.1
              
              Amended
      and Restated Articles of Association as of June 17,
20084.1
              
              Production
      Development, Manufacturing and Sales Agreement, dated as of November 26,
      2002, by and between Micron Technology, Inc. and the Registrant,
      incorporated by reference to Exhibit 4.3 of the Annual Report on Form 20-F
      for the year ended December 31, 2003, filed with the Commission on March
      17, 2004.†4.2
              
              Addendum,
      dated as of June 10, 2005, to Production Development, Manufacturing and
      Sales Agreement, dated as of November 26, 2002, by and between Micron
      Technology, Inc. and the Registrant, incorporated by reference to Exhibit
      4.2 of the Annual Report on Form 20-F for the year ended December 31,
      2007, filed with the Commission on March 31, 2008. †4.3
              
              Amended
      Form of Indemnification Agreement between directors and officers of the
      Registrant and the Registrant, as of June 17, 2008.4.4
              
              Lease
      Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam
      L.P. and the Registrant, incorporated by reference to Exhibit 10.20 of the
      Registration Statement on Form F-1 (File No. 333-81514) filed with the
      Commission on February 1, 2002.4.5
              
              Summary
      of Material Terms of Addendum, dated December 2002, to Lease Agreement,
      dated as of November 26, 2001, by and between Sha’ar Yoqneam and the
      Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report
      on Form 20-F for the year ended December 31, 2002, filed with the
      Commission on April 10, 2003.4.6
              
              Second
      Addendum, dated July 5, 2004, to the Lease Agreement, dated as of November
      26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant,
      incorporated by reference to Exhibit 4.15 of the Annual Report on Form
      20-F for the year ended December 31, 2004, filed with the Commission on
      March 25, 2005.4.7
              
              Development
      and Supply Agreement, dated April 8, 2002, by and between Zarlink
      Semiconductor AB and the Registrant, incorporated by reference to Exhibit
      4.11 of the Annual Report on Form 20-F for the year ended December 31,
      2004, filed with the Commission on March 25,
  2005.†


118





4.8
                
                Addendum
      to Development and Supply Agreement, dated July 2005, by and between
      Zarlink Semiconductor AB and the Registrant, incorporated by reference to
      Exhibit 4.12 of the Annual Report on Form 20-F for the year ended December
      31, 2005, filed with the Commission on April 7,
  2006.†


4.9
                
                Termination
      Agreement, dated as of December 18, 2007, by and between Ethicon
      Endo-Surgery, Inc. and the Registrant incorporated by reference to Exhibit
      4.16 of the Annual Report on Form 20-F for the year ended December 31,
      2007, filed with the Commission on March 31, 2008.4.10
                
                Registration
      Rights Agreement, dated as of July 18, 2007, by and among the Registrant
      and Discount Investment Corporation Ltd., Elron Electronic Industries Ltd.
      and RDC Rafael Development Corporation Ltd. incorporated by reference to
      Exhibit 4.17 of the Annual Report on Form 20-F for the year ended December
      31, 2007, filed with the Commission on March 31, 2008.4.11
                
                Distribution
      Agreement, dated May 9, 2002, by and between Given Imaging K.K. and
      Suzuken Co., Ltd. incorporated by reference to Exhibit 4.18 of the Annual
      Report on Form 20-F for the year ended December 31, 2007, filed with the
      Commission on March 31, 2008. †8.1
                
                List
      of subsidiaries of the Registrant.11.1
                
                Code
      of Ethics adopted on December 9, 2003, incorporated by reference to
      Exhibit 11.1 of the Annual Report on Form 20-F for the year ended December
      31, 2003, filed with the Commission on March 17, 2004.12.1
                
                Certification
      of Chief Executive Officer of the Registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.12.2
                
                Certification
      of Chief Financial Officer of the Registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.13.1
                
                Certification
      of Chief Executive Officer of the Registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*13.2
                
                Certification
      of Chief Financial Officer of the Registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*15.1
                
                Consent
      of Somekh Chaikin, a member firm of KPMG International, independent
      registered public
accountants.





†
            Portions
      of this exhibit were omitted and have been filed separately with the
      Secretary of the Securities and Exchange Commission pursuant to an
      application requesting confidential treatment under Rule 24b-2 of the
      Securities Exchange Act of 1934.*
            This
      document is being furnished in accordance with SEC Release Nos. 33-8212
      and 34-47551.


119




SIGNATURES




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




GIVEN
      IMAGING LTD.By:
                  /s/
      Nachum ShamirName:
      Nachum ShamirTitle:
      President and Chief Executive
                    OfficerBy:
                  /s/
      Yuval YanaiName:
      Yuval YanaiTitle:
      Chief Financial
Officer





Date: March 31, 2009


120





ANNUAL
REPORT ON FORM 20-F




INDEX
OF EXHIBITS




Exhibit
                
                Description1.1
                
                Amended
      and Restated Articles of Association as of June 17,
  2008.4.1
                
                Production
      Development, Manufacturing and Sales Agreement, dated as of November 26,
      2002, by and between Micron Technology, Inc. and the Registrant,
      incorporated by reference to Exhibit 4.3 of the Annual Report on Form 20-F
      for the year ended December 31, 2003, filed with the Commission on March
      17, 2004.†4.2
                
                Addendum,
      dated as of June 10, 2005, to Production Development, Manufacturing and
      Sales Agreement, dated as of November 26, 2002, by and between Micron
      Technology, Inc. and the Registrant, incorporated by reference to Exhibit
      4.2 of the Annual Report on Form 20-F for the year ended December 31,
      2007, filed with the Commission on March 31, 2008.
  †4.3
                
                Amended
      Form of Indemnification Agreement between directors and officers of the
      Registrant and the Registrant, as of June 17,
  2008.4.4
                
                Lease
      Agreement, dated as of November 26, 2001, by and between Sha’ar Yoqneam
      L.P. and the Registrant, incorporated by reference to Exhibit 10.20 of the
      Registration Statement on Form F-1 (File No. 333-81514) filed with the
      Commission on February 1, 2002.4.5
                
                Summary
      of Material Terms of Addendum, dated December 2002, to Lease Agreement,
      dated as of November 26, 2001, by and between Sha’ar Yoqneam and the
      Registrant, incorporated by reference to Exhibit 4.11 of the Annual Report
      on Form 20-F for the year ended December 31, 2002, filed with the
      Commission on April 10, 2003.4.6
                
                Second
      Addendum, dated July 5, 2004, to the Lease Agreement, dated as of November
      26, 2001, by and between Sha’ar Yoqneam L.P. and the Registrant,
      incorporated by reference to Exhibit 4.15 of the Annual Report on Form
      20-F for the year ended December 31, 2004, filed with the Commission on
      March 25, 2005.4.7
                
                Development
      and Supply Agreement, dated April 8, 2002, by and between Zarlink
      Semiconductor AB and the Registrant, incorporated by reference to Exhibit
      4.11 of the Annual Report on Form 20-F for the year ended December 31,
      2004, filed with the Commission on March 25, 2005.†4.8
                
                Addendum
      to Development and Supply Agreement, dated July 2005, by and between
      Zarlink Semiconductor AB and the Registrant, incorporated by reference to
      Exhibit 4.12 of the Annual Report on Form 20-F for the year ended December
      31, 2005, filed with the Commission on April 7, 2006.†4.9
                
                Termination
      Agreement, dated as of December 18, 2007, by and between Ethicon
      Endo-Surgery, Inc. and the Registrant, incorporated by reference to
      Exhibit 4.16 of the Annual Report on Form 20-F for the year ended December
      31, 2007, filed with the Commission on March 31,
  2008.


121





4.10
              
              Registration
      Rights Agreement, dated as of July 18, 2007, by and among the Registrant
      and Discount Investment Corporation Ltd., Elron Electronic Industries Ltd.
      and RDC Rafael Development Corporation Ltd., incorporated by reference to
      Exhibit 4.17 of the Annual Report on Form 20-F for the year ended December
      31, 2007, filed with the Commission on March 31, 2008.4.11
              
              Distribution
      Agreement, dated May 9, 2002, by and between Given Imaging K.K. and
      Suzuken Co., Ltd., incorporated by reference to Exhibit 4.18 of the Annual
      Report on Form 20-F for the year ended December 31, 2007, filed with the
      Commission on March 31, 2008. †8.1
              
              List
      of subsidiaries of the Registrant.11.1
              
              Code
      of Ethics adopted on December 9, 2003, incorporated by reference to
      Exhibit 11.1 of the Annual Report on Form 20-F for the year ended December
      31, 2003, filed with the Commission on March 17, 2004.12.1
              
              Certification
      of Chief Executive Officer of the Registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.12.2
              
              Certification
      of Chief Financial Officer of the Registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.13.1
              
              Certification
      of Chief Executive Officer of the Registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*13.2
              
              Certification
      of Chief Financial Officer of the Registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*15.1
              
              Consent
      of Somekh Chaikin, a member of KPMG International, independent registered
      public accountants.





†
            Portions
      of this exhibit were omitted and have been filed separately with the
      Secretary of the Securities and Exchange Commission pursuant to an
      application requesting confidential treatment under Rule 24b-2 of the
      Securities Exchange Act of 1934.*
            This
      document is being furnished in accordance with SEC Release Nos. 33-8212
      and 34-47551.


122




Given
Imaging Ltd.


and
its Subsidiaries





Consolidated


Financial
Statements





As
of and for the


Year
Ended December 31, 2008


and
2007





123




Given
Imaging Ltd. and its subsidiaries





Index
to Consolidated Financial Statements




PageReport
      of Independent Auditor
              F-2Consolidated
      Balance Sheets
              F-4Consolidated
      Statements of Operations
              F-6Consolidated
      Statements of Changes in Shareholders’ Equity
              F-7Consolidated
      Statements of Cash Flows
              F-8Notes
      to the Consolidated Financial Statements
              F-9




F-1





Report of Independent
Registered Public Accounting Firm





The Board
of Directors and Shareholders of


Given
Imaging Ltd:





We have
audited the accompanying consolidatedbalance sheets of Given
Imaging Ltd as of December 31, 2008 and 2007, 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, 2008. We also have
audited Given Imaging Ltd’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Given Imaging Ltd’s management is responsible for
these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’sAnnualReport on Internal Control Over
Financial Reportingappearing under
Item 15 of Part II of this Form20-F.
Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.





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





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


F-2





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Given Imaging Ltd as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, Given Imaging Ltd maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.





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





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




Somekh
Chaikin


Certified
Public Accountants (Israel)


Member
Firm of KPMG International





Tel -
Aviv, Israel


March 24,
2009


F-3


Given
Imaging Ltd. and its subsidiaries
 
 Consolidated
Balance Sheets
 (In
thousands except per share data)
  December
      31Note
                    
                    
                    2008
                    
                    
                    2007AssetsCurrent
      assetsCash
      and cash equivalents
                    
                    
                    1D;
      2
                    
                    
                    $
                    31,697
                    
                    
                    $
                    37,103Short-term
      investments
                    
                    
                    1H;
      5
                    
                    
                    
                    28,509
                    
                    
                    
                    23,191Accounts
      receivable:Trade,
      net
                    
                    
                    1E
                    
                    
                    
                    21,673
                    
                    
                    
                    23,315Other
                    
                    
                    3
                    
                    
                    
                    4,662
                    
                    
                    
                    10,385Inventories
                    
                    
                    1F;
      4
                    
                    
                    
                    18,931
                    
                    
                    
                    15,960Advances
      to suppliers
                    
                    
                    16
                    
                    
                    
                    3,540
                    
                    
                    
                    190Deferred
      tax assets
                    
                    
                    1R;
      14D
                    
                    
                    
                    1,178
                    
                    
                    
                    1,350Prepaid
      expenses
                    
                    
                    
                    
                    
                    
                    1,631
                    
                    
                    
                    1,289Total
      current assets
                    
                    
                    
                    
                    
                    
                    111,821
                    
                    
                    
                    112,783Deposits
                    
                    
                    
                    
                    
                    
                    1,094
                    
                    
                    
                    892Assets
      held for employees’ severance payments
                    
                    
                    1G;
      10
                    
                    
                    
                    3,686
                    
                    
                    
                    3,007Marketable
      securities
                    
                    
                    1H;
      5
                    
                    
                    
                    30,063
                    
                    
                    
                    41,629Fixed
      assets, less accumulated depreciation
                    
                    
                    1I;
      6
                    
                    
                    
                    15,115
                    
                    
                    
                    15,422Intangible
      assets less accumulated amortization
                    
                    
                    1J;
      7; 16
                    
                    
                    
                    12,067
                    
                    
                    
                    3,583Goodwill
                    
                    
                    1K;
      16
                    
                    
                    
                    4,069
                    
                    
                    
                    -Total
      Assets
                    
                    
                    
                    
                    
                    $
                    177,915
                    
                    
                    $
                    177,316
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
  Given
Imaging Ltd. and its subsidiaries
 
 Consolidated
Balance Sheets
 (In
thousands except share data)
 
 December
      31Note
                
                
                2008
                
                
                2007Liabilities
      and shareholders' equityCurrent
      liabilitiesCurrent
      installments of obligation under capital lease
                
                
                8B
                
                
                $
                114
                
                
                $
                121Accounts
      payable:Trade
                
                
                
                
                
                
                7,418
                
                
                
                7,275Other
                
                
                9
                
                
                
                17,612
                
                
                
                21,012Deferred
      income
                
                
                1P
                
                
                
                1,523
                
                
                
                9,379Total
      current liabilities
                
                
                
                
                
                
                26,667
                
                
                
                37,787Long-term
      liabilitiesObligation
      under capital lease
                
                
                8B
                
                
                
                485
                
                
                
                448Liability
      in respect of employees’ severance payments
                
                
                10
                
                
                
                4,599
                
                
                
                3,490Total
      long-term liabilities
                
                
                
                
                
                
                5,084
                
                
                
                3,938Total
      liabilities
                
                
                
                
                
                
                31,751
                
                
                
                41,725Commitments
      and contingencies
                
                
                8Minority
      interest
                
                
                
                
                
                
                1,993
                
                
                
                1,996Shareholders’
      equityShare
      capital:
                
                
                11Ordinary
      Shares, NIS 0.05 par value each(90,000,000
      shares authorized as of December 31, 2007 and 2008,29,241,785
      and 29,257,785 shares issued and fullypaid
      as of December 31, 2007 and 2008, respectively)
                
                
                
                
                
                
                343
                
                
                
                343Additional
      paid-in capital
                
                
                
                
                
                
                173,983
                
                
                
                166,813Capital
      reserve
                
                
                
                
                
                
                2,166
                
                
                
                2,166Accumulated
      other comprehensive loss
                
                
                
                
                
                
                (600
                )
                
                
                -Accumulated
      deficit
                
                
                
                
                
                
                (31,721
                )
                
                
                (35,727
                )Total
      shareholders' equity
                
                
                
                
                
                
                144,171
                
                
                
                133,595Total
      liabilities and shareholders' equity
                
                
                
                
                
                $
                177,915
                
                
                $
                177,316
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
  Given
Imaging Ltd. and its subsidiaries
 
 Consolidated
Statements of Operations
 (In
thousands except share and per share data)
 
 Year
      ended December 31,Note
                
                
                2008
                
                
                2007
                
                
                2006Revenues
                
                
                1P;
      12
                
                
                $
                125,108
                
                
                $
                112,868
                
                
                $
                95,029Cost
      of revenues
                
                
                
                
                
                
                (33,001
                )
                
                
                (29,721
                )
                
                
                (24,154
                )Early
      repayment of royalty bearing government grants
                
                
                8A
                
                
                
                -
                
                
                
                (4,843
                )
                
                
                -Gross
      profit
                
                
                
                
                
                
                92,107
                
                
                
                78,304
                
                
                
                70,875Operating
      expensesResearch
      and development, gross
                
                
                1S
                
                
                
                (15,126
                )
                
                
                (12,847
                )
                
                
                (12,678
                )In-process
      research and development acquiredin
      a business combination
                
                
                16
                
                
                
                (4,700
                )
                
                
                -
                
                
                
                -(19,826
                )
                
                
                (12,847
                )
                
                
                (12,678
                )Government
      grants
                
                
                1Q;
      8A
                
                
                
                1,530
                
                
                
                1,242
                
                
                
                1,867Research
      and development, net
                
                
                
                
                
                
                (18,296
                )
                
                
                (11,605
                )
                
                
                (10,811
                )Sales
      and marketing
                
                
                
                
                
                
                (60,902
                )
                
                
                (55,446
                )
                
                
                (50,732
                )General
      and administrative
                
                
                
                
                
                
                (19,320
                )
                
                
                (20,981
                )
                
                
                (16,027
                )Termination
      of marketing agreement
                
                
                8C
                
                
                
                5,443
                
                
                
                22,860
                
                
                
                -Other,
      net
                
                
                6,
      7
                
                
                
                (867
                )
                
                
                (422
                )
                
                
                -Total
      operating expenses
                
                
                
                
                
                
                (93,942
                )
                
                
                (65,594
                )
                
                
                (77,570
                )Operating (loss) profit
                
                
                
                
                
                
                (1,835
                )
                
                
                12,710
                
                
                
                (6,695
                )Financial
      income, net
                
                
                13
                
                
                
                4,004
                
                
                
                5,520
                
                
                
                3,980Profit
      (loss) before taxes on incomeand
      minority share
                
                
                
                
                
                
                2,169
                
                
                
                18,230
                
                
                
                (2,715
                )Income
      tax expense
                
                
                1R,
      14
                
                
                
                (250
                )
                
                
                (4,548
                )
                
                
                (127
                )Profit
      (loss) before minority share
                
                
                
                
                
                
                1,919
                
                
                
                13,682
                
                
                
                (2,842
                )Minority
      share in losses of subsidiary
                
                
                
                
                
                
                2,087
                
                
                
                1,503
                
                
                
                1,334Net
      profit (loss)
                
                
                
                
                
                $
                4,006
                
                
                $
                15,185
                
                
                $
                (1,508
                )Earnings
      (loss) per share:Basic
      Earnings (loss) per Ordinary Share
                
                
                1N
                
                
                $
                0.14
                
                
                $
                0.52
                
                
                $
                (0.05
                )Diluted
      Earnings (loss) per Ordinary Share
                
                
                
                
                
                $
                0.13
                
                
                $
                0.49
                
                
                $
                (0.05
                )Weighted
      average number of OrdinaryShares
      used to compute basic Earnings(loss)
      per Ordinary Share
                
                
                1N
                
                
                
                29,254,035
                
                
                
                28,961,968
                
                
                
                28,053,849Weighted
      average number of OrdinaryShares
      used to compute diluted Earnings(loss)
      per Ordinary Share
                
                
                1N
                
                
                
                30,798,360
                
                
                
                31,030,459
                
                
                
                28,053,849
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
  Given
Imaging Ltd. and its subsidiaries
 
 Consolidated
Statements of Changes in Shareholders' Equity
 (In
thousands except share data)
  AccumulatedAdditional
                          
                          
                          
                          
                          
                          OtherPaid-In
                          
                          
                          Capital
                          
                          
                          Comprehensive
                          
                          
                          AccumulatedOrdinary
      shares
                          
                          
                          Capital
                          
                          
                          Reserve
                          
                          
                          Loss
                          
                          
                          Deficit
                          
                          
                          TotalShares
                          
                          
                          AmountBalance
      as of December 31,2005
                          
                          
                          27,950,281
                          
                          
                          $
                          327
                          
                          
                          $
                          148,955
                          
                          
                          $
                          2,166
                          
                          
                          $
                          -
                          
                          
                          $
                          (49,404
                          )
                          
                          $
                          102,044Changes
      during the year 2006:Exercise
      of stock options
                          
                          
                          591,010
                          
                          
                          
                          7
                          
                          
                          
                          2,029
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,036Restricted
      shares issued
                          
                          
                          100,000
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,213
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,213Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (1,508
                          )
                          
                          
                          (1,508
                          )Balance
      as of December 31,  2006
                          
                          
                          28,641,291
                          
                          
                          
                          335
                          
                          
                          
                          156,197
                          
                          
                          
                          2,166
                          
                          
                          
                          -
                          
                          
                          
                          (50,912
                          )
                          
                          
                          107,786Changes
      during the year 2007:Exercise
      of stock options
                          
                          
                          589,262
                          
                          
                          
                          8
                          
                          
                          
                          4,272
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,280Excess
      tax benefits related to stock based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          693
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          693Exercise
      of warrants
                          
                          
                          5,232
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Restricted
      shares issued
                          
                          
                          6,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,651
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,651Net
      profit
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          15,185
                          
                          
                          
                          15,185Balance
      as of December 31,  2007
                          
                          
                          29,241,785
                          
                          
                          
                          343
                          
                          
                          
                          166,813
                          
                          
                          
                          2,166
                          
                          
                          
                          -
                          
                          
                          
                          (35,727
                          )
                          
                          
                          133,595Changes
      during the year 2008:Exercise
      of stock options
                          
                          
                          16,000
                          
                          
                          
                          *
                          
                          
                          
                          252
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          252Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,918
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,918Unrealized
      losseson
      available for sale securities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (600
                          )
                          
                          
                          -
                          
                          
                          
                          (600
                          )Net
      profit
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,006
                          
                          
                          
                          4,006Balance
      as of December 31,  2008
                          
                          
                          29,257,785
                          
                          
                          $
                          343
                          
                          
                          $
                          173,983
                          
                          
                          $
                          2,166
                          
                          
                          $
                          (600
                          )
                          
                          
                          (31,721
                          )
                          
                          
                          144,171
 
 *
Represents less than 1.
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-7
  Given
Imaging Ltd. and its subsidiaries
 
 Consolidated
Statements of Cash Flows
 (In
thousands)
 
 Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Cash
      flows from operating activities:Net
      profit (loss)
                    
                    $
                    4,006
                    
                    
                    $
                    15,185
                    
                    
                    $
                    (1,508
                    )Adjustments
      required to reconcile net profit (loss) to net cashprovided
      by operating activities:Minority
      share in losses of subsidiary
                    
                    
                    (2,087
                    )
                    
                    
                    (1,503
                    )
                    
                    
                    (1,334
                    )Depreciation
      and amortization
                    
                    
                    5,183
                    
                    
                    
                    4,771
                    
                    
                    
                    4,237In-process
      research and development
                    
                    
                    4,700
                    
                    
                    
                    -
                    
                    
                    
                    -Goodwill
      impairment
                    
                    
                    406
                    
                    
                    
                    -
                    
                    
                    
                    -Deferred
      tax assets
                    
                    
                    172
                    
                    
                    
                    24
                    
                    
                    
                    (155
                    )Stock
      based  compensation
                    
                    
                    6,918
                    
                    
                    
                    5,651
                    
                    
                    
                    5,213Excess
      tax benefits related to stock based compensation
                    
                    
                    -
                    
                    
                    
                    (693
                    )
                    
                    
                    -Other
                    
                    
                    621
                    
                    
                    
                    380
                    
                    
                    
                    18Net
      decrease (increase) in trading securities
                    
                    
                    -
                    
                    
                    
                    5,092
                    
                    
                    
                    (5,060
                    )Decrease
      (increase) in accounts receivable – trade
                    
                    
                    1,642
                    
                    
                    
                    (4,428
                    )
                    
                    
                    (562
                    )Decrease
      (increase) in other accounts receivable
                    
                    
                    5,723
                    
                    
                    
                    (8,922
                    )
                    
                    
                    4,801Decrease
      (increase) in prepaid expenses
                    
                    
                    (342
                    )
                    
                    
                    51
                    
                    
                    
                    (320
                    )Decrease
      (increase) in advances to suppliers
                    
                    
                    (3,350
                    )
                    
                    
                    (108
                    )
                    
                    
                    250Decrease
      (increase) in inventories
                    
                    
                    (2,971
                    )
                    
                    
                    2,208
                    
                    
                    
                    (1,996
                    )Increase
      (decrease) in accounts payable
                    
                    
                    (3,287
                    )
                    
                    
                    8,570
                    
                    
                    
                    500Decrease
      in deferred income
                    
                    
                    (7,856
                    )
                    
                    
                    (14,903
                    )
                    
                    
                    (1,223
                    )Net
      cash provided by operating activities
                    
                    
                    9,478
                    
                    
                    
                    11,375
                    
                    
                    
                    2,861Cash
      flows from investing activities:Purchase
      of fixed assets and intangible assets
                    
                    
                    (6,300
                    )
                    
                    
                    (5,772
                    )
                    
                    
                    (5,876
                    )Purchase
      of fixed assets, intangible assets, and goodwill in a business
      combination
                    
                    
                    (16,660
                    )
                    
                    
                    -
                    
                    
                    
                    -Deposits
                    
                    
                    (192
                    )
                    
                    
                    (355
                    )
                    
                    
                    (41
                    )Proceeds
      from sale of marketable securities
                    
                    
                    67,743
                    
                    
                    
                    18,753
                    
                    
                    
                    13,120Proceeds
      from sales of fixed assets
                    
                    
                    61
                    
                    
                    
                    -
                    
                    
                    
                    -Investments
      in marketable securities
                    
                    
                    (61,986
                    )
                    
                    
                    (36,584
                    )
                    
                    
                    (37,960
                    )Net
      cash used in investing activities
                    
                    
                    (17,334
                    )
                    
                    
                    (23,958
                    )
                    
                    
                    (30,757
                    )Cash
      flows from financing activities:Principal
      payments on capital lease obligation
                    
                    
                    (120
                    )
                    
                    
                    (37
                    )
                    
                    
                    (14
                    )Proceeds
      from the issuance of Ordinary Shares
                    
                    
                    252
                    
                    
                    
                    4,280
                    
                    
                    
                    2,037Excess
      tax benefits related to stock based compensation
                    
                    
                    -
                    
                    
                    
                    693
                    
                    
                    
                    -Issuance
      of shares by a consolidated company
                    
                    
                    2,288
                    
                    
                    
                    -
                    
                    
                    
                    4,772Net
      cash provided by financing activities
                    
                    
                    2,420
                    
                    
                    
                    4,936
                    
                    
                    
                    6,795Effect
      of exchange rate changes on cash
                    
                    
                    30
                    
                    
                    
                    240
                    
                    
                    
                    255Decrease
      in cash and cash equivalents
                    
                    
                    (5,406
                    )
                    
                    
                    (7,407
                    )
                    
                    
                    (20,846
                    )Cash
      and cash equivalents at beginning of year
                    
                    
                    37,103
                    
                    
                    
                    44,510
                    
                    
                    
                    65,356Cash
      and cash equivalents at end of year
                    
                    
                    31,697
                    
                    
                    
                    37,103
                    
                    
                    
                    44,510Supplementary
      cash flow informationYear
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Income
      taxes paid
                    
                    $
                    259
                    
                    
                    $
                    1,098
                    
                    
                    $
                    300Assets
      acquired under capital lease
                    
                    $
                    109
                    
                    
                    $
                    569
                    
                    
                    
                    -
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-8
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
 
 A.
              General
 
 Given
Imaging Ltd. (the "Company") was incorporated in Israel in January
1998.
 
 The
Company has developed the Given System, a proprietary wireless imaging system
that represents a new approach to visual examination of the gastrointestinal
tract. The system uses a miniaturized video camera contained in a capsule,
referred to as the PillCamTM capsule, which is ingested by the patient and
delivers high quality color images in a painless and noninvasive
manner.
 
 The Given
System consists of three principal components:
 
 •
              a
      single-use, disposable PillCam color-imaging capsule that is ingested by
      the patient;
 
 •
              a
      portable data recorder and array of sensors that are worn by the patient;
      and
 
 •
              a
      computer workstation with a proprietary RAPID software for downloading,
      processing and analyzing recorded
data.
 
 After
      receiving marketing clearance from the United States Food and Drug
      Administration (“FDA”) in August of 2001, the Company commenced the
      marketing of the Given System with 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 PillCam ESO, a capsule for detection of
      disorders in the esophagus.  In late 2006, the Company completed
      the development of the first generation of PillCam Colon, a capsule for
      visual examination of the colon and received the regulatory clearance that
      permits the Company to market and sell this capsule in Europe. In April
      2007, the Company received marketing clearance for the PillCam SB capsule
      from the Ministry of Health, Labor and Welfare in
  Japan.
 
 The
Company has direct or indirect wholly-owned subsidiaries in the United States,
the Netherlands, Germany, France, Australia and Singapore.  The
Company also has a subsidiary in Japan, Given Imaging K.K. (“Given K.K.”), in
which it has a controlling interest (see note 16).
 
 In
      December 2008, the Company acquired the Bravo pH monitoring business from
      Medtronic, Inc. The Bravo pH monitoring system is the only wireless,
      catheter-free pH test for Gastro Esophageal Reflux Disease, or GERD, and
      uses a disposable capsule temporarily placed in the esophagus that
      measures pH levels and transmits the data to an external receiver. pH
      testing is considered the standard test for diagnosing GERD. As part of
      this acquisition, the Company acquired 100% of the shares of Endonetics,
      Inc., which owns a number of intellectual property assets related to the
      Bravo business and is not an operating entity (see note
    16).
 
 The
Company operates in the medical device industry and its business is subject to
numerous risks, including, without limitations, (1) the Company’s ability to
develop and bring to market new products, (2) the Company’s ability to receive
regulatory clearance or approval to market its products or changes in regulatory
environment, (3) the Company’s success in implementing its sales, marketing and
manufacturing plans, (4) protection and validity of patents and other
intellectual property rights, (5) the impact of currency exchange rates, (6) the
effect of competition by other companies, (7) the outcome of significant
litigation, and (8) the existence of favorable reimbursement for its product
from government and commercial payors.
  F-9
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
(cont'd)
  B.           Basis
of presentation
 
 The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and its wholly-owned subsidiaries in the
United States, Germany, France, the Netherlands, Singapore and Australia and its
56% owned subsidiary in Japan.  As part of the acquisition of the
Bravo pH monitoring business from Medtronic, Inc., the Company acquired 100% of
the shares of Endonetics, Inc.  The accounts of the subsidiaries are
consolidated from the date of their inception, except for the accounts of
Endonetics, Inc., which are consolidated from December 8, 2008, the closing date
of the Bravo acquisition. All the subsidiaries were established for the purpose
of marketing and selling the Company’s products, except Endonetics, Inc. which
holds a number of intellectual property assets related to the Bravo business and
is not an operating entity. All intercompany balances and transactions have been
eliminated in consolidation.  As of December 31, 2008, the Company
considers itself operating in only one segment.
 
 C.           Functional
and reporting currency
 
 The
Company and all its subsidiaries’ functional and reporting currency is the U.S.
dollar.
 
 Transactions
denominated in foreign currencies other than the U.S. dollar are translated into
the functional currency using the prevailing exchange rates at the date of the
transactions.  Gains and losses from the translation of foreign
currency transactions are recorded in other income or expenses.
 
 D.           Cash
and cash equivalents
 
 All
highly-liquid investments with original maturity of three months or less from
the date of deposit are considered to be cash equivalents.
 
 E.           Allowance
for doubtful accounts receivable - trade
 
 The
allowance for doubtful accounts receivable is calculated on the basis of
specific identification of balances, the collection of which, in management's
opinion, is doubtful. In determining the adequacy of the allowance, management
bases its opinion on the estimated risk, in reliance on available information
with respect to the debtor's financial position and an evaluation of the
collateral received.
  F-10
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
(cont'd)
 
 E.           Allowance
for doubtful accounts receivable – trade (cont’d)
 
 The
activity in the allowance for doubtful accounts for the three years ended
December 31, 2008 is as follows:
 
 Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Opening
      balance
                    
                    $
                    329
                    
                    
                    $
                    787
                    
                    
                    $
                    431Provision
                    
                    
                    10
                    
                    
                    
                    (79
                    )
                    
                    
                    356Write-offs
                    
                    
                    (129
                    )
                    
                    
                    (379
                    )
                    
                    
                    -Closing
      balance
                    
                    $
                    210
                    
                    
                    $
                    329
                    
                    
                    $
                    787
 
 F.           Inventories
 
 Inventories
are stated at lower of cost or market.  Cost is determined using the
average cost method for raw materials, components and finished goods and on the
basis of actual manufacturing costs for work in progress.
 
 G.           Assets
held for employees’ severance payments
 
 Assets
held for employees’ severance payments represent contributions to insurance
policies that are recorded at their current redemption value.
 
 H.           Marketable
securities
 
 The
Company accounts for marketable securities under Statement of Financial
Accounting Standards (SFAS) No. 115 “Accounting for Certain Investments in Debt
and Equity Securities (“SFAS 115”). As of December 31, 2008, marketable
securities consist of U.S. government bonds and corporate bonds, which the
Company classified as “available-for-sale”. As of December 31, 2007 marketable
securities were classified as “held-to-maturity”.
 
 During
the first quarter of 2008, in light of the turmoil in the U.S financial markets,
the Company decided to transfer its “held-to-maturity” securities into the
“available-for-sale” category.
 
 Held-to-maturity
debt securities are securities that the Company has the ability and intent to
hold until maturity and are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Premiums and discounts are
amortized or accreted over the life of the related held-to-maturity security as
an adjustment to yield using the effective-interest method.
 
 A decline
in the market value of any “held-to-maturity” security below cost, that is
deemed other than temporary, will result in a reduction in the carrying amount
to fair value and a corresponding impairment.  The impairment is
charged to earnings and a new cost basis for the security is established. During
2006 and 2007 no impairment charge was recognized.
 
 Trading
securities are bought and held principally for the purpose of selling them in
the near term.  Trading securities are recorded at fair value and
changes in the fair value, based on closing market prices of the securities at
the balance sheet date, represent unrealized gains and losses which are included
in earnings.
  F-11
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
(cont'd)
 
 H.           Marketable
securities (cont’d)
 
 Available-for-sale
securities are recorded at fair value. Changes in fair value based on closing
market prices of the securities at balance sheet date are recorded directly to
shareholders’ equity as accumulated other comprehensive income (loss). A decline
in market value of available for sale security below cost deemed “other than
temporary” will be charged to the statement of operations when it
occurs.
 
 I.           Fixed
assets
 
 Fixed
assets are stated at cost.  Depreciation is computed by the
straight-line method over the estimated useful lives of the assets at the
following annual rates:
 
 %Computers
      and software
                      
                      
                      33Instruments
      and laboratory equipment
                      
                      
                      15Leasehold
      improvements
                      
                      
                      10Motor
      vehicles
                      
                      
                      15Machinery
      and equipment
                      
                      
                      15Communication
      equipment
                      
                      
                      15Office
      furniture and equipment
                      
                      
                      10-15
 
 Motor
vehicles purchased under capital lease arrangements are recorded at the present
value of the minimum lease payments at lease inception.  Such assets
and leasehold improvements are depreciated and
amortized, respectively, using the straight-line method over the shorter of the
lease term or estimated useful life of the asset.
 
 The
Company evaluates long-lived assets and certain intangible assets for impairment
in accordance with the provisions of SFAS No. 144, “Accounting for the
Impairment of or Disposal of Long-Lived Assets” (“Statement
144”).  This Statement requires that long-lived assets and certain
identifiable intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.   Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the asset.  If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
 
 J.           Definite-life
Intangible assets
 
 Definite-life
intangible assets acquired in a business combination in December 2008 consist
mainly of acquired technology, patents and customer relationships, and are
amortized using the straight-line method over their estimatedperiod of useful life, mainly
8 to 20 years (see note 16).
 
 Legal
expenses related to patents and trademarks registration have been capitalized
and amortized over the remaining life of the assets, which is generally 8
years.
 
 Technology
and content costs are generally expensed as incurred, except for certain costs
relating to the development of the Company’s website that are capitalized and
amortized in accordance with EITF 00-2) “Accounting for website development
costs” over their estimated useful life which is generally 3
years.
 
 Definite
- life intangible assets are evaluated for recoverability whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
  F-12
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
(cont'd)
 
 K.
              Goodwill
 
 Goodwill
reflects the excess of the purchase price of the Bravo pH monitoring business
acquired in December 2008 over the fair value of net assets (see note 16 A) and
the excess of the cash invested over the fair value of the Company’s share in
the net assets of its subsidiary in Japan adjusted to an impairment of
approximately $ 300 as of December 31, 2008 (see also note 16 B).
 
 Pursuant
to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite
life intangible assets are not amortized but rather tested for impairment
at least annually.
 
 L.
              Stock
      compensation plans
 
 Employees
and Directors
 
 Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.
123R”).  This Statement requires compensation expense relating to
share-based payments to be recognized in net income using a fair-value
measurement method.  Under the fair value method, the estimated fair
value of awards is charged to income on a straight-line basis over the requisite
service period, which is generally the vesting period.  The Company
elected the modified-prospective method and therefore prior periods were not
restated.  Under the modified-prospective method, compensation costs
recognized in 2006 include also compensation costs for all share-based payments
granted prior to, but not yet vested, as of December 31, 2005.
 
 Stock-based
compensation recognized in the consolidated statements of operations for the
years ended December 31, 2006 and 2007 and 2008 is based on awards ultimately
expected to vest. As a result the expense has been reduced for estimated
forfeitures.  SFAS No. 123R required forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
 
 Basic and
diluted Earnings (loss) per Ordinary Share are presented in conformity with SFAS
No. 128, “Earnings Per Share”, for all years presented.  Basic
Earnings (loss) per Ordinary Share is calculated by dividing the net Earnings
(loss) attributable to Ordinary Shares, by the weighted average number of
Ordinary Shares outstanding.  The Diluted Earnings (loss) per Ordinary
share calculation is similar to Basic Earnings Per Share except that the
weighted average of common shares outstanding is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares from options had been exercised.
  F-13
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
1 - Organization and Summary of Significant Accounting Policies
(cont'd)
 
 N.           Earnings
(loss) per Ordinary Share
 
 The
following table summarizes information related to the computation of basic and
diluted Earnings (loss) per Ordinary Share for the years indicated.
 
 Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      profit (loss) attributable to Ordinary Shares
                    
                    $
                    4,006
                    
                    
                    $
                    15,185
                    
                    
                    $
                    (1,508
                    )Weighted
      average number of Ordinary Shares outstandingused
      in basic Earnings (loss) per Ordinary ShareCalculation
                    
                    
                    29,254,035
                    
                    
                    
                    28,961,968
                    
                    
                    
                    28,053,849Add
      assumed exercise of outstanding dilutivepotential
      Ordinary Shares
                    
                    
                    1,544,325
                    
                    
                    
                    2,068,491
                    
                    
                    
                    -Weighted
      average number of Ordinary Shares outstandingused
      in diluted Earnings (loss) per Ordinary ShareCalculation
                    
                    
                    30,798,360
                    
                    
                    
                    31,030,459
                    
                    
                    
                    28,053,849Basic
      Earnings (loss) per Ordinary Share
                    
                    $
                    0.14
                    
                    
                    $
                    0.52
                    
                    
                    $
                    (0.05
                    )Diluted
      Earnings (loss) per Ordinary Share
                    
                    $
                    0.13
                    
                    
                    $
                    0.49
                    
                    
                    $
                    (0.05
                    )Number
      of options excluded from thediluted
      Earnings per share calculationbecause of anti-dilutive effect
                    
                    
                    5,461,047
                    
                    
                    
                    1,881,033
                    
                    
                    
                    4,114,604
 
  F-14


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





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





O.           Use
of estimates





The
preparation of the consolidated financial statements, in accordance with
generally accepted principles in the United States of America, requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Significant items
subject to such estimates and assumptions include the useful lives of fixed
assets; allowances for doubtful accounts and sales returns; deferred tax assets,
fixed assets, inventory, investments, share-based compensation; income tax
uncertainties and other contingencies. Actual results could differ from those
estimates.





P.           Revenue
recognition





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





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





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





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





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





Q.
            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.





R.           Taxes
on income





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


F-15


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





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





R.           Taxes
on income (cont’d)





On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”   (“FIN 48”),
which prescribes a recognition threshold and measurement process for recording
in the financial statements uncertain tax positions taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition of tax
benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition.


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





S.           Research
and development costs





Research
and development costs are expensed as incurred.





In
connection with a business combination, amounts assigned to tangible and
intangible assets to be used in a particular research and development
project that have not reached technological feasibility and have
no alternative future use are charged to In-process research and
development acquired in a Business Combination in operating expense at the
acquisition date.





T.           Allowance
for product warranty





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





U.           Concentration
of credit risk





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


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





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





V.           Comprehensive
Income





For the
years ended December 31, 2006 and 2007, comprehensive income (loss) equals net
profit (loss). For the year ended December 31, 2008, comprehensive income of
$3,406 is comprised of a net profit in the amount of $4,006 and unrealized
losses on available-for-sale debt securities in the amount of
$600.


F-16


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





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





W.           Accounting
pronouncements adopted in 2008





In
September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurement"
(Statement 157). Statement 157 defines fair value, establishes a framework for
the measurement of fair value, and enhances disclosures about fair value
measurements. The Statement does not require any new fair value measures. The
Statement is effective for fair value measures already required or permitted by
other standards for fiscal years beginning after November 15, 2007. The Company
adopted Statement 157 beginning on January 1, 2008. The FASB announced a
one-year deferral of Statement 157's fair-value measurement requirements for
non-financial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis.





In
February 2007, the FASB issued FASB Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
No. 115" (Statement 159). Statement 159 gives the Company the irrevocable option
to carry most financial assets and liabilities at fair value that are not
currently required to be measured at fair value.





X.           Recent
accounting pronouncements





In
December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations”
(Statement 141R) and FASB Statement No. 160, “Non controlling Interests in
Consolidated Financial Statements– an amendment to ARB No. 51” (Statement 160).
Statements 141R and 160 require most identifiable assets, liabilities, non
controlling interests, and goodwill acquired in a business combination to be
recorded at “full fair value” and require non-controlling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with non-controlling interest
holders. Both Statements are effective for periods beginning on or after
December 15, 2008, and earlier adoption is prohibited. Statement 141R will be
applied to business combinations occurring after the effective date. Statement
160 will be applied prospectively to all non-controlling interests, including
any that arose before the effective date. The Company believes adopting
Statement 141R and Statement 160 will not have a material impact on its results
of operations and financial position.





In May
2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The Company does not expect the adoption
of SFAS 162 to have a material impact on its consolidated results of operations
and financial position.





On
October 10, 2008, the FASB issued FSP FAS 157-3 to clarify the application of
FASB Statement No. 157, in an inactive market and to illustrate how an entity
would determine fair value in an inactive market. The FSP augments the guidance
in a Questions and Answers document that was released jointly by the SEC Chief
Accountant’s Office and FASB Staff. The FSP is effective immediately and applies
to prior periods for which financial statements have not been issued. The
adoption of FSP FAS 157-3 did not have an impact on the Company’s consolidated
results of operations and financial position.


F-17


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





Note
2 - Cash and Cash Equivalents


December
      312008
                  
                  
                  2007Denominated
      in U.S. dollars
                  
                  $
                  18,401
                  
                  
                  $
                  22,877Denominated
      in New Israeli Shekels
                  
                  
                  3,118
                  
                  
                  
                  2,022Denominated
      in Euros
                  
                  
                  4,422
                  
                  
                  
                  6,642Denominated
      in Australian dollars
                  
                  
                  277
                  
                  
                  
                  1,102Denominated
      in Singapore dollars
                  
                  
                  216
                  
                  
                  
                  168Denominated
      in Japanese Yen
                  
                  
                  5,263
                  
                  
                  
                  4,292$
                  31,697
                  
                  
                  $
                  37,103





Note
3 - Accounts Receivable - Other


December
      312008
                  
                  
                  2007Government
      institutions
                  
                  $
                  3,434
                  
                  
                  $
                  2,118In
      Scope (Note 8C)
                  
                  
                  -
                  
                  
                  
                  7,620Other
                  
                  
                  1,228
                  
                  
                  
                  647$
                  4,662
                  
                  
                  $
                  10,385





Note
4 - Inventories


December
      312008
                  
                  
                  2007Raw
      materials and components
                  
                  $
                  9,651
                  
                  
                  $
                  7,733Work-in-progress
                  
                  
                  3,024
                  
                  
                  
                  2,941Finished
      goods
                  
                  
                  6,256
                  
                  
                  
                  5,286$
                  18,931
                  
                  
                  $
                  15,960





Note
5 - Marketable Securities





As of
December 31, 2007 and 2008, marketable securities consist of U.S. government
bonds and corporate bonds.





During
the first quarter of 2008, and in light of the turmoil in the US financial
markets, the Company decided to transfer its “held-to-maturity” securities into
the “available-for-sale” category.


F-18


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





Note
5 - Marketable Securities (cont’d)





The
transfer of the “held-to-maturity” securities into the “available-for-sale”
category as described above, generated accumulated other comprehensive loss of
$364, presented in the statement of shareholders’ equity as “unrealized losses
on available for sale securities”.





As of
December 31, 2008 the Company held approximately $23.4 million of U.S government
or government agencies marketable securities and approximately $20.9 million of
marketable corporate debt securities. During 2008 the Company recorded $600 of
unrealized losses from corporate bonds. Proceeds from the sale of
available-for-sale securities were $67.7 million in 2008; gross realized losses
included in finance income in 2008 were $400.





The
carrying amount, gross unrealized holding gains, gross unrealized holding
losses, and fair value of available-for-sale and held-to-maturity debt
securities by major security type and class of security at December 31,
2008 and 2007 are as follows:





Carrying
                  amount
                
                
                Gross
                  unrealized
                  holding
                  gains
                
                
                Gross
                  unrealized
                  holding
                  (losses)
                
                
                Fair
      valueAt
      December 31, 2008Available-
      for- sale:U.S
      government or government agencies
                
                $
                22,967
                
                
                $
                407
                
                
                $
                -
                
                
                $
                23,374Corporate
      debt securities
                
                
                21,950
                
                
                
                35
                
                
                
                (1,042
                )
                
                
                20,943Total
      At December 31, 2008
                
                
                44,917
                
                
                
                442
                
                
                
                (1,042
                )
                
                
                44,317Total
      At December 31, 2007
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -At
      December 31, 2008:Held-
      to- maturity:U.S
      government or government agencies
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Corporate
      debt securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      at December 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      at December 31, 2007
                
                
                64,820
                
                
                
                -
                
                
                
                (802
                )
                
                
                64,018





Maturities
of debt securities classified as available-for-sale and held-to-maturity were as
follows at December 31, 2008:


CarryingAmount
                    
                    
                    Fair
      valueAvailable-
      for- sale:Current
      maturities
                    
                    $
                    14,889
                    
                    
                    $
                    14,254Due
      after one year through five years
                    
                    
                    30,028
                    
                    
                    
                    30,063$
                    44,917
                    
                    
                    $
                    44,317


F-19


Given
Imaging Ltd. and its subsidiaries





Notes
to the Consolidated Financial Statements


(In
thousands except share data)





Note
5 - Marketable Securities (cont’d)





Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at
December 31, 2008 were as follows:





Less
      than 12 months
                
                
                TotalUnrealized
                  losses
                
                
                Fair
      value
                
                
                Unrealized
                  losses
                
                
                Fair
      valueAvailable
      for sale:U.S
      government or  government agencies–
                
                
                -
                
                
                
                4,629
                
                
                
                -
                
                
                
                23,374Corporate
      debt securities
                
                
                863
                
                
                
                9,624
                
                
                
                1,042
                
                
                
                20,943863
                
                
                
                14,253
                
                
                
                1,042
                
                
                
                44,317





The
unrealized losses on investments in U.S government or government agencies and
corporate debt securities were caused mainly by current market
conditions  Since the Company has the ability and intent to hold these
investments until a market price recovery or maturity, these investments are not
considered other than temporarily impaired.





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





December
      312008
                
                
                2007Computers
      and software
                
                $
                9,026
                
                
                $
                6,957Instruments
      and laboratory equipment
                
                
                1,367
                
                
                
                1,077Leasehold
      improvements
                
                
                4,743
                
                
                
                4,600Motor
      vehicles
                
                
                233
                
                
                
                186Machinery
      and equipment
                
                
                16,120
                
                
                
                16,060Communication
      equipment
                
                
                475
                
                
                
                492Office
      furniture and equipment
                
                
                1,857
                
                
                
                1,797Fixed
      assets, at cost
                
                
                33,821
                
                
                
                31,169Accumulated
      depreciation
                
                
                (18,706
                )
                
                
                (15,747
                )Fixed
      assets at cost, less accumulated depreciation
                
                $
                15,115
                
                
                $
                15,422





Depreciation
expenses for the years ended December 31, 2006, 2007 and 2008 were $3,599,
$4,055, and $4,378, respectively. During 2008, the Company wrote off
manufacturing equipment which was no longer in use. This resulted in a charge of
$427 recorded in operating expenses- other on the consolidated statement of
operations.





As of
December 31 2007 and 2008, the cost of fixed assets under capital lease was $571
and $607 respectively, and the accumulated depreciation was $49 and $117
respectively.


F-20


Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 Note
7 - Intangible Assets, at Cost, Less Accumulated Amortization
 
 December
      312008
                    
                    
                    2007Capitalized
      patents and trademarks
                    
                    $
                    6,560
                    
                    
                    $
                    5,545Web
      site development
                    
                    
                    1,214
                    
                    
                    
                    1,165Software
      development
                    
                    
                    647
                    
                    
                    
                    647Patents,
      trademarks and trade names acquired in a business combination (note
      16)
                    
                    
                    6,400
                    
                    
                    
                    -Customer
      relationships acquired in a business combination (note 16)
                    
                    
                    1,800
                    
                    
                    
                    -Intangible
      assets at cost
                    
                    
                    16,621
                    
                    
                    
                    7,357Accumulated
      amortization
                    
                    
                    (4,554
                    )
                    
                    
                    (3,774
                    )Intangible
      assets, less accumulated amortization
                    
                    $
                    12,067
                    
                    
                    $
                    3,583
 
 Amortization
expenses for the years ended December 31, 2006, 2007 and 2008 were $638, $716
and $805 respectively. Estimated amortization expenses for the next five years
are: $1,617 in 2009, $1,505 in 2010, $1,401 in 2011, $1,322 in 2012 and $1,194
in 2013. During 2008, the Company wrote off patent and trademarks which are no
longer expected to be used. This resulted in a charge of $ 89 recorded in
Operating expenses - other in the consolidated statement of
operations.
 
 Note
8 - Commitments and Contingencies
 
 A.
              Office
      of the Chief Scientist Grants
 
 Through
December 2007, the Company’s research and development efforts had been partially
financed through grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade (the “OCS”).  In return for the OCS’s
participation, the Company was committed to pay royalties to the Israeli
Government at the rate of 3% of the sales of its products for each of the first
three years of the launch of the related product and, from the fourth year
onwards, at the rate of 3.5% up to 100% of the amount of the grants received,
plus LIBOR interest. The Company was entitled to the grants only upon incurring
research and development expenditures.  There were no future
performance obligations related to the grants received from the
OCS.  During December 2007, the Company made an early repayment of all
its outstanding royalty obligation and accrued interest of $4,843 to the
OCS.  This repayment resulted in a one-time charge of $4,843 presented
as an early repayment of royalty bearing government grants in the Company’s
consolidated statement of operations.
 
 The
Company continues to participate in other non-royalty bearing programs of the
OCS.
  F-21
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
8 - Commitments and Contingencies (cont’d)
 
 B.           Operating
leases
 
 The
Company and its subsidiaries currently lease office space and manufacturing
space for periods of up to an additional 12 years (including options to extend
the terms of the leases). The current lease for the Company’s headquarters is in
Yoqneam, Israel.  This facility houses the Company’s corporate
headquarters, research and development and manufacturing
facilities.  Under this lease agreement, the Company will pay
approximately $1,570 a year in rent and management fees.  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 $790 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 $196 to guarantee their performance under
the terms of the lease agreements.
 
 The
Company is committed to minimum annual payments over the next five years as
follows:
 
 Capital
      leases
                  
                  
                  Operating
      leases2009
                  
                  $
                  149
                  
                  
                  $
                  3,9892010
                  
                  
                  149
                  
                  
                  
                  3,2612011
                  
                  
                  149
                  
                  
                  
                  2,6282012
                  
                  
                  116
                  
                  
                  
                  2,1672013
      and thereafter
                  
                  
                  26
                  
                  
                  
                  5,251$
                  589
                  
                  
                  $
                  17,296
 
 Depreciation
of vehicles and equipment under capital lease for the years ended December 31,
2006, 2007 and 2008 was $9, $25 and $56 respectively.
 
 Rental
expenses under the lease agreements for the years ended December 31, 2006, 2007
and 2008 were $2,914, $3,484 and $4,338 respectively.
 
 C.           Agreement
with InScope
 
 On May
10, 2004, the Company entered into an exclusive sales representation,
co-promotion and cooperation Agreement (the “Agreement”) with InScope, a
division of Ethicon Endo-Surgery, a Johnson & Johnson company, providing
InScope with the exclusive rights to market the Company’s PillCam ESO capsule
for visual examination of the esophagus in the United States. Under the terms of
the Agreement, the Company received milestone payments totaling $25,000 in 2004
and 2005 and was paying InScope a commission of 50% on sales of PillCam ESO
capsules and a 10% commission on sales of capital equipment parts of the Given
System, such as workstations and portable data recorders.
  F-22
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
8 - Commitments and Contingencies (cont’d)
 
 C.
              Agreement
      with InScope (Cont’d)
 
 Milestone
payments received were deferred and were being systematically recognized, on a
straight-line basis, by the Company as a reduction of sales and marketing
expenses over the 15 year term of the Agreement.
 
 In
November 2007 InScope advised the Company that it had decided to terminate the
Agreement.  Under the terms of termination agreed to between the
parties in December 2007, InScope agreed to pay the Company an amount of $8,820,
comprising of the following:
 
 Termination
      payments
                      
                      $
                      7,620Reimbursement
      for certain clinical trials
                      
                      
                      1,200$
                      8,820
 
 The
Agreement and each party’s rights and obligations were terminated in January
2008.
 
 The
termination payments of $7,620 were recognized in the Company’s consolidated
financial statements for the year ended December 31, 2007.
 
 Pursuant
to the early termination and the change in the remaining life of the Agreement,
the Company has amortized the remaining deferred income balance at the date of
termination of $20,683 over the remaining term of the Agreement of two months.
As a result, the Company has recognized income of $22,860 in its consolidated
statement of operations for the year ended December 31, 2007, under “Termination
of marketing agreement,” comprised of additional accelerated amortization of
$15,240 of previously received milestones, and $7,620 in termination payments.
The Company recognized the remaining deferred income of $5,443 in its
consolidated statement of operations for the year ended December 31,
2008.
 
 InScope
paid $1,200 during December 2007, and the remaining $7,620 was paid during
January 2008.
 
 As of
December 31, 2007, deferred income includes the following unamortized amounts
relating to the Agreement:
 
 Original
      and additional milestone payments
                      
                      $
                      5,443Reimbursement
      for certain clinical trials
                      
                      
                      1,200$
                      6,643
 
 The
milestone payments of $5,443 and the reimbursement for clinical trials of $1,200
were recognized in the Company’s consolidated financial statements for the year
ended December 31, 2008.
 
 D.           Agreements
with key single - source suppliers and commitments to suppliers
 
 (1)
              In
      2002, the Company entered into an agreement with a Canadian company
      (“Canadian Company”) that supplies a component that is integrated into the
      PillCam capsules.  The agreement also includes non-compete
      provisions prohibiting the Canadian company from selling the component to
      other parties and, for a certain period of time following termination of
      the agreement, from transferring any of the intellectual property and
      design specifications associated with the development of the component to
      any potential competitors in the Company’s
  market.
 
  F-23
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
8 - Commitments and Contingencies (cont’d)
 
 D.
              Agreements
      with key single - source suppliers and commitments to suppliers
      (cont’d)
 
 In July
2005, the Company agreed with the Canadian Company that it will develop and
manufacture an additional version of the component.  In addition, the
initial term of the agreement was extended until April 2012, subject to earlier
termination in specified circumstances, with the option to extend annually
thereafter for up to five years.
 
 (2)
              The
      Company is a party to a development, manufacturing and supply agreement
      with another supplier (“Supplier”), under which the Supplier has developed
      a component, that is integrated into the PillCam capsules and is also
      manufacturing and supplying this component exclusively for the
      Company.  Under this contract, the Supplier may not offer the
      component as a standard catalog part. In the event that the Supplier
      ceases operations or enters into liquidation, the Company is entitled to
      receive all information necessary to manufacture the component upon the
      payment of reasonable royalties to be agreed upon with the
      Supplier.  The Company has agreed to purchase the enhanced
      component only from the Supplier and the Supplier has agreed to sell the
      component exclusively to the Company. The agreement permits the Supplier
      to disregard the exclusive sales requirement if the Company materially
      breaches the agreement and fails to cure such breach within a specified
      time.
 
 In
February 2006, the Company signed an amendment to this agreement and agreed that
the Supplier will develop and manufacture an enhanced version of the
component.  This amendment also extended the initial term of the
agreement until November 2012, with an option to extend that term by mutual
agreement, thereafter. Under this amendment, the Company has agreed to specified
minimum purchase commitments, which the Company may terminate if the supplier
fails to satisfy agreed-upon performance criteria.
 
 Purchases
under such agreements with these two suppliers for the years ended December 31,
2006, 2007 and 2008 were $8,875, $6,042 and $10,404, respectively.
 
 (3)
              The
      Company’s annual commitments under agreements with single source and other
      suppliers (including commitments related to the acquisition of the Bravo
      business as discussed in Note 16) for the next 5 years are as
      follows:
 
 2009
                    
                    $
                    19,1692010
                    
                    
                    3752011
                    
                    
                    7502012
                    
                    
                    1,0002013
      and beyond
                    
                    
                    9,125$
                    30,419
  F-24
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
8 - Commitments and Contingencies (cont’d)
 
 E.           Patent
Litigation
 
 In June
2008, the Company settled its patent litigation against Olympus Corporation,
Olympus Medical Systems Corp. and Olympus America Inc., collectively referred to
in this section as “Olympus.” The litigation began in May 2006, was conducted in
the United States and was related to the two companies’ respective capsule
endoscopy products.
 
 The
settlement agreement includes certain worldwide cross-licenses under which each
party receives a royalty-free license under all existing patents of the other
party for its respective capsule endoscopy products existing as of the
settlement date.  The parties also exchanged covenants not to sue on
currently available medical device products and agreed to a release of all past
causes of action.  The settlement also includes a cross-license under
existing and future patents of each party for future capsule endoscopy products,
which may include the payment of royalties by either party at a rate to be
determined through an agreed upon mechanism.  Finally, as part of the
settlement, the Company received a cash payment of $2,330 which was recorded as
a reduction of litigation expenses as part of the general and administrative
expenses in the statement of operations.
 
 F.           Other
Claims
 
 Claims
are filed against the company from time to time in the regular course business.
The Company’s management believes that these claims are not material
individually or in the aggregate to the consolidated financial statements as a
whole.
 
 G.           Registration
Rights Agreement
 
 In July
2007, the Company's shareholders approved a Registration Rights Agreement
between the Company and its major shareholders holding together an aggregate of
43.9% of the Company's ordinary shares (“affiliated shareholders.”). This
Registration Rights Agreement has replaced earlier registration rights, which
expired in October 2006, granted by the Company in connection with a private
placement completed in September 2000, before the Company's initial public
offering.
 
 Under
this agreement, at the request of one or more of the affiliated shareholders
holding at least 5% of the Company's then outstanding ordinary shares, the
Company must use its best efforts to register any or all of these shareholders’
ordinary shares to the extent that the aggregate offering price of the shares to
be registered is at least $15 million. In addition, the affiliated shareholders
also have the right to request that the Company includes their ordinary shares
in any registration statements filed by the Company in the future for the
purposes of a public offering, subject to specified limitations. All
registration rights will expire on the fifth anniversary of the agreement. With
respect to any shareholder, registration rights will expire if that shareholder
can sell all of its ordinary shares within a 90 day period under Rule 144 under
the United States Securities Act of 1933, as amended. Generally, the Company is
obligated to pay all expenses incurred in carrying out the above registrations,
as well as the fees and expenses of one legal counsel for the selling
shareholders in each registration.
  F-25
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
9 - Accounts Payable - Other
 December
      312008
                  
                  
                  2007Government
      institutions
                  
                  $
                  4,596
                  
                  
                  $
                  4,766Liabilities
      relating to employees
                  
                  
                  8,292
                  
                  
                  
                  8,348Advances
      from customers
                  
                  
                  139
                  
                  
                  
                  21Warranty
                  
                  
                  98
                  
                  
                  
                  338Commissions
                  
                  
                  826
                  
                  
                  
                  1,659Accrued
      expenses
                  
                  
                  3,661
                  
                  
                  
                  5,880$
                  17,612
                  
                  
                  $
                  21,012
  Note
10 - Liability in Respect of Employee Severance Payments
 
 Under
Israeli law and labor agreements the Company is required to pay severance
payments to each employee who was employed by the Company for over one year and
has been terminated by the Company or resigned under certain specified
circumstances.  The Company's liability for severance payments is
covered mainly by deposits with insurance companies in the name of the employee
and/or by purchase of insurance policies.  The liability is calculated
on the basis of the latest salary of the employee multiplied by the number of
years of employment as of the balance sheet date.  The liability for
employee severance payments included in the balance sheet represents the total
amount due for such severance payment, while the assets held for severance
benefits included in the balance sheet represents the Company’s contributions to
insurance policies.  The Company may make withdrawals from the funds
only upon complying with the Israeli severance pay law or labor
agreements.
 
 Expenses
recorded in respect of employee severance payments for the years ended December
31, 2006, 2007 and 2008 are, $862, $ 806 and $1,490 respectively.
 
 The U.S.
subsidiary has a defined contribution retirement plan for its employees.
Employees are allowed to contribute up to 18% of their salary in any one year,
subject to a regulatory limit.
 
 The
Company contributes 3% of an employee's salary subject to regulatory
limits.  Employees are vested in the Company's contributions after 30
days of employment.
 
 Expenses
recorded in respect of the defined contribution retirement plan in the U.S for
the years ended December 31, 2006, 2007 and 2008 are, $603, $604 and $596
respectively.
  F-26
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
11 - Share Capital
 
 A.           Ordinary
shares
 
 All of
the issued and outstanding Ordinary Shares of the Company are authorized, issued
and fully paid.  The Ordinary Shares of the Company are not redeemable
and have no preemptive rights.  The ownership or voting of Ordinary
Shares by non-residents of Israel is not restricted in any way by the Company’s
memorandum or articles of association or the laws of the State of Israel, except
that citizens of countries which are, or have been, in a state of war with
Israel may not be recognized as owners of Ordinary Shares.
 
 B.
              Employees’
      and non employees’ stock options
 
 In 2003,
the Company adopted a stock option plan for directors, employees and
consultants.  The 2003 Plan replaced and superseded previous option
plans adopted by the Company in 1998 and 2000.  Under these plans, the
Board of Directors (or a compensation committee appointed by the board) (the
“Board”) has the authority to grant options to employees of the Company and its
subsidiaries, directors or consultants.  Each option entitles the
holder to purchase one Ordinary Share of par value of NIS 0.05 and expires after
10 years from the date of grant. The company has reserved for issuance a total
of 2,500,000 ordinary shares under the plan. As of December 31, 2008, 409,271
options out of this plan had not been granted.
 
 The
purchase price of each share pursuant to the options granted under the 2003 Plan
shall be the fair market value on the date the Board approves the grant of the
option or as otherwise determined by the Board.
 
 Unless
otherwise determined by the Board, where a grant of options under the 2003 Plan
is the first grant of options made to a person, 50% of the options vest and
become exercisable on the second anniversary of the date of grant.  An
additional 25% of the options vest and become exercisable on each of the third
and fourth anniversaries of the date of the grant.  If, however, a
grant under the 2003 Plan is made to a person who previously received stock
options under the 2003 Plan or a previous plan of the Company, 25% of the
options granted are immediately vested and exercisable and an additional 25% of
the options vest and become exercisable on each of the first, second and third
anniversaries of the date of the grant.
 
 In 2006,
the Company adopted the 2006 Equity Incentive Plan (“the Plan”) permitting the
grant of equity awards, including options and restricted stock of the Company,
to eligible employees, directors and consultants of the Company and its
subsidiaries.  The Plan is administered by the Company’s Board of
Directors and Compensation and Nominating Committee.  The Plan
contains provisions concerning the vesting, price, exercise and other terms of
awards; however, the Compensation and Nominating
 
  F-27
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
11 - Share Capital (cont’d)
 
 B.
              Employees’
      and non employees’ stock options
(cont’d)
 
 Committee
has authority to grant awards under different terms at its
discretion.  The Company has reserved for issuance a total of
4,000,000 Ordinary Shares under the Plan. As of December 31, 2008 there were
2,991,587 options outstanding under this plan, and 106,000 shares of restricted
stock issued and outstanding under this plan.
 
 Equity
awards under this plan must be granted at no less than the fair market value of
the Company’s ordinary shares on the date of the grant and the term of the
awards may not exceed ten years.  The Company’s current policy is that
options granted under the Plan expire five years following the date of the
grant.
 
 Generally,
where a grant of an award under the plan is the first grant of equity to an
employee or consultant, 50% of the award is exercisable on the second
anniversary of the date of grant, and 25% becomes exercisable on each of the
third and fourth anniversaries of the date of the grant.  In cases of
subsequent grants, awards vest in four equal installments beginning with the
first anniversary of the grant.  To the extent the awards have vested,
they may be exercised in whole or in part from time to time until their
expiration as long as the recipient is providing services to the
Company.
 
 In case
of participating employees and consultants, all unvested awards are cancelled
upon the termination of their employment or service.  All vested
awards may be exercised within 180 days following termination.  All
vested awards not exercised within this period are automatically forfeited and
cancelled.  Unvested awards to non-employee directors whose service is
terminated or discontinued for any reason other than for cause after more than
five years of service on the Company’s Board of Directors, will automatically
vest and become exercisable immediately prior to termination or discontinuation
of service.  These vested awards may be exercised within 180 days
following termination or discontinuation of service, except in cases where
termination or discontinuation of service is a result of statutory requirements,
death, disability or other circumstances of forced cessation of service, in
which case awards may be exercised at any time until their expiration
date.  In a case of termination for cause of a plan participant, all
awards, whether vested or unvested, are automatically forfeited and
cancelled.
 
 Under
this plan, in the event of an acquisition or merger in which the Company is not
the surviving entity and the acquiring entity does not agree to assume the
awards, all outstanding, but unvested, awards will be accelerated and
exercisable, ten days prior to the acquisition or merger.  In
addition, if the employment of a holder of outstanding awards is terminated in
anticipation of or during the 12 month period following an acquisition or
merger, all awards that are scheduled to vest within two years of such
acquisition or merger, will be automatically accelerated and exercisable,
subject to certain adjustments and exceptions.
 
 Awards
granted under the 2006 equity plan to Israeli residents may be granted under
Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards or
the Ordinary Shares issued upon their exercise must be deposited with a trustee
for at least two years following the date of the grant. Under Section 102, any
tax payable by an employee from the grant or exercise of the awards is deferred
until the transfer of the awards or ordinary shares by the trustee to the
employee or upon the sale of the awards or ordinary shares.  Gains on
awards granted under the plan are subject to capital gains tax of 25% and the
Company is not entitled to a tax deduction.  Options granted under the
plan to U.S. residents may also qualify as incentive stock options (ISO) within
the meaning of Section 422 of the U.S. Internal Revenue Code of
1986.  Options that do not contain terms that will qualify them as
ISOs are treated as Non-Qualified Stock Options.
  F-28
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
11 - Share Capital (cont’d)
 
 B.
              Employees’
      and non employees’ stock options
(cont’d)
 
 The fair
value of options granted during the years ended December 31, 2007 and 2008 was
estimated on the date of grant using the Black - Scholes model, with the
following assumptions:
  1.
                Dividend
      yield of zero percent.
  2.
              Risk
      free average interest rate of 4.75% and 2.59% for the years ended December
      31, 2007 and 2008, respectively, which represents the risk free rate of
      US$ zero - coupon U.S Government
Bonds.
 
 3.
              Weighted
      average expected life of 3.75 and 3.41 years for the years ended December
      31, 2007 and 2008, respectively, which represents the period for which the
      options granted are expected to be
outstanding.
 
 The
      expected life of the options granted to employees and directors, is
      calculated based on the Simplified Method as allowed under Staff
      Accounting Bulletin No. 110, giving consideration to the contractual term
      of the options and their vesting
schedules.
 
 4.
              Expected
      average volatility of 43.17% and 35.06% for the years ended December 31,
      2007 and 2008 respectively, which represents a weighted average standard
      deviation rate for the price of the Company's Ordinary Shares in the
      NASDAQ National Market.
 
 The
following table summarizes information relating to stock options for Ordinary
Shares outstanding and exercisable, as of December 31, 2007 and
2008:
 
 Options outstandingExercise price
                    
                    Number outstanding at
                    
                    
                    Weighted average remainingDecember 31, 2008
                    
                    
                    contractual life (in years)$1
      - $10
                    
                    
                    488,217
                    
                    
                    
                    2.95$10.01-$20
                    
                    
                    2,542,100
                    
                    
                    
                    3.87$20.01-$30
                    
                    
                    2,275,006
                    
                    
                    
                    3.84$30.01-$40
                    
                    
                    500,816
                    
                    
                    
                    5.905,806,139
  Options outstandingExercise price
                    
                    Number outstanding at
                    
                    
                    Weighted average remainingDecember 31, 2007
                    
                    
                    contractual life (in years)$1
      - $10
                    
                    
                    438,217
                    
                    
                    
                    3.73$10.01-$20
                    
                    
                    1,687,900
                    
                    
                    
                    4.64$20.01-$30
                    
                    
                    2,308,687
                    
                    
                    
                    4.81$30.01-$40
                    
                    
                    499,066
                    
                    
                    
                    6.904,933,870
  F-29
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
11 - Share Capital (cont’d)
 
 B.
              Employees’
      and non employees’ stock options
(cont’d)
 
 The stock
option activity under the Plans is as follows:
 Weighted average
                      
                      
                      Weighted averageNumber of shares
                      
                      
                      exercise price
                      
                      
                      grant date fair valueBalance
      at December 31, 2006
                      
                      
                      4,114,604Granted
                      
                      
                      1,453,392
                      
                      
                      $
                      26.08
                      
                      
                      $
                      10.22Forfeited
                      
                      
                      (44,864
                      )
                      
                      
                      24.40
                      
                      
                      
                      12.26Exercised
                      
                      
                      (589,262
                      )
                      
                      
                      7.26
                      
                      
                      
                      5.12Balance
      at December 31, 2007
                      
                      
                      4,933,870Balance
      at December 31, 2007
                      
                      
                      4,933,870Granted
                      
                      
                      990,350
                      
                      
                      $
                      15.91
                      
                      
                      $
                      4.98Forfeited
                      
                      
                      (102,081
                      )
                      
                      
                      20.79
                      
                      
                      
                      8.69Exercised
                      
                      
                      (16,000
                      )
                      
                      
                      15.73
                      
                      
                      
                      7.91Balance
      at December 31, 2008
                      
                      
                      5,806,139
 
 The
following table summarizes information relating to non-vested stock options for
Ordinary Shares as of December 31, 2008 and related changes during the year
ended December 31, 2008:
 
 Weighted average grantNon-vested options
                    
                    Number of Shares
                    
                    
                    date fair valueBalance
      at January  1, 2008
                    
                    
                    2,202,466
                    
                    
                    $
                    9.18Granted
                    
                    
                    988,850
                    
                    
                    
                    4.96Vested
                    
                    
                    (577,545
                    )
                    
                    
                    8.71Forfeited
                    
                    
                    (93,395
                    )
                    
                    
                    8.58Balance
      at December 31, 2008
                    
                    
                    2,520,376
                    
                    
                    
                    8.20
 
 As of
December 31, 2008, unrecognized compensation costs related to non-vested options
aggregated $12,265 to be recognized over a weighted average period of 1.54years.
 
 The
aggregate intrinsic value of options outstanding as of December 31, 2007 and
2008 is $1,344 and $22,442, respectively. The aggregate intrinsic value of
options excisable as of December 31, 2008 and 2007, is $1,297 and $19,293,
respectively.
 The total
intrinsic value of options exercised during the year ended December 31, 2008 and
2007, is $45 and $11,039, respectively.
 
 On May
30, 2006, the Company issued 100,000 restricted shares to its CEO. The
restricted shares will vest in four installments over a period of four years,
beginning on May 30, 2007.  On June 15, 2007 the Company issued 6,000
restricted shares to another one of its officers. These restricted shares will
vest in three installments over a period of four years, beginning on June 15,
2009. The fair value of the restricted shares as of the date of issue is being
amortized over the vesting period. Unrecognized compensation costs related to
the restricted shares, as of December 31, 2007 and 2008, to be recognized over
3.4 and 2.4 years were $1,211 and $725 respectively, and compensation expenses
of $466 and $486 were recognized for the years ended December, 31 2007 and 2008,
respectively.
  F-30
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
11 - Share Capital (cont’d)
 
 B.
              Employees’
      and non employees’ stock options
(cont’d)
 
 The
following table summarizes the allocation of the stock-based compensation charge
for both employee and non-employee stock option grants:
  Year ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Research
      and development costs
                      
                      $
                      307
                      
                      
                      $
                      406
                      
                      
                      $
                      569Selling
      and marketing expenses
                      
                      
                      1,756
                      
                      
                      
                      1,889
                      
                      
                      
                      1,839General
      and administrative expenses
                      
                      
                      4,855
                      
                      
                      
                      3,356
                      
                      
                      
                      2,805$
                      6,918
                      
                      
                      $
                      5,651
                      
                      
                      $
                      5,213
 
 Note
12 - Revenues
 
 A.
              Revenues
      by activities
 
 Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Workstations
      and recorders
                    
                    $
                    14,523
                    
                    
                    $
                    15,267
                    
                    
                    $
                    14,104PillCam
      SB capsule
                    
                    
                    103,005
                    
                    
                    
                    90,614
                    
                    
                    
                    76,360PillCam
      ESO capsule
                    
                    
                    1,213
                    
                    
                    
                    1,012
                    
                    
                    
                    1,438PillCam
      Colon capsule
                    
                    
                    1,465
                    
                    
                    
                    1,106
                    
                    
                    
                    -Patency
      capsules and scanners
                    
                    
                    662
                    
                    
                    
                    523
                    
                    
                    
                    353Bravo
      pH monitoring products
                    
                    
                    884
                    
                    
                    
                    -
                    
                    
                    
                    -Services
                    
                    
                    3,356
                    
                    
                    
                    4,346
                    
                    
                    
                    2,774$
                    125,108
                    
                    
                    $
                    112,868
                    
                    
                    $
                    95,029
 
 B.
              Revenues
      by geographic areas
 
 Year ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Americas
                    
                    $
                    75,609
                    
                    
                    $
                    73,849
                    
                    
                    $
                    67,648Europe,
      Middle East and Asia
                    
                    
                    34,908
                    
                    
                    
                    27,299
                    
                    
                    
                    21,642Asia
      Pacific
                    
                    
                    14,591
                    
                    
                    
                    11,720
                    
                    
                    
                    5,739$
                    125,108
                    
                    
                    $
                    112,868
                    
                    
                    $
                    95,029
  F-31
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
13 - Financial Income, net
 Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Currency
      gains, net
                    
                    $
                    1,504
                    
                    
                    $
                    1,456
                    
                    
                    $
                    778Interest
      income
                    
                    
                    753
                    
                    
                    
                    1,069
                    
                    
                    
                    1,639Income
      from marketable securities
                    
                    
                    2,115
                    
                    
                    
                    3,109
                    
                    
                    
                    1,849Other
                    
                    
                    (368
                    )
                    
                    
                    (114
                    )
                    
                    
                    (286
                    )$
                    4,004
                    
                    
                    $
                    5,520
                    
                    
                    $
                    3,980
 
 The
Company uses forward contracts and option strategies to manage its foreign
exchange rate exposures. Contracts with notional amounts of $43.1 million and
$42.5 million and with estimated fair values that totaled $520 thousand and $480
thousand at December 31, 2008 and 2007, respectively, were not designated as
hedging instruments for accounting purposes. The change in fair value of these
contracts of $1,073 thousand, $496 thousand and $(19) thousand for the years
ended December 31, 2008, 2007 and 2006, respectively, have been recognized in
financial income, net. The periodic net cash (receipts) settlements totaled $45
thousand, $(600) thousand and $262 for the years ended December 31, 2008, 2007
and 2006, respectively. These amounts have been recorded as reductions or
additions to financial income, net, in those years.
 
 Note
14 - Taxes on Income
 
 A.           Company
 
 (1)
              Israeli
      income tax is computed on the basis of the Company’s results in New
      Israeli Shekels (“NIS”) determined for statutory purposes. Until 2007, the
      Company was assessed for tax purposes under the Income Tax Law
      (Inflationary Adjustments 1985), the purpose of which is to prevent
      taxation on inflationary profits. Starting January 1, 2008, this law was
      postponed and most of its provisions are not applicable for the 2008
      taxable income.
 
 Pursuant
to the Encouragement Capital Investments Law -1959 (the “Law”), the Company was
awarded “Approved Enterprise” status under the government alternative benefits
track beginning in 1999.  The program is for investments in the
development of infrastructure and for investments in locally produced and
imported equipment.  The main benefits to which the Company will be
entitled, if it implements all the terms of an approved program, are the
exemption from tax on income deriving from an Approved Enterprise, and reduced
tax rates on dividends originating from this income.
 
 Under the
alternative benefits track, the income derived from an Approved Enterprise will
be exempt from tax for a ten-year period, commencing on the date that taxable
income is first generated by the Approved Enterprise (limited to the earlier of
a maximum period of 12 years from the year of commencement of operations or 14
years from the year the approval letter was received).
 
 Dividend
distributions originating from income of an Approved Enterprise will be subject
to a withholding tax at the shareholders level at the rate of 15%, provided that
the dividend is distributed during the period stipulated under Israeli
law.
 
 In the
event of a dividend distribution (including withdrawals and charges that are
deemed to be dividends) out of the income originating from the Approved
Enterprise, and on which the Company received a tax exemption, the distribution
is subject to corporate taxes at rates varying from 10% - 25% depending on the
percentage of foreign investment holding in the Company as defined by the
Law.
 
 If the
Company derives income from sources other than the Approved Enterprise during
the relevant period of benefits, such income will be taxable at regular
corporate tax rates (see (4) below).
  F-32
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
14 - Taxes on Income (cont'd)
 
 A.           Company
(cont'd)
 
 Additional
provisions of the 2005 amendment to the Encouragement of Capital Investments Law
– 1959 which apply to the Company are as follows:
 
 a.
              Companies
      that meet the criteria of the Alternative Path of tax benefits will
      receive those benefits without prior approval.  In addition,
      there will be no requirement to file reports with the Investment
      Center.  Companies will be required to notify the Israeli Income
      Tax Authorities regarding the implementation of the Alternative Path.
      Audit will take place via the Income Tax Authorities as part of the tax
      audits.  Request for pre-ruling is
  possible.
 
 b.
              Tax
      benefits of the Alternative Path include lower tax rates or zero tax
      depending on the investment zone and the path chosen, lower tax rates on
      dividends and accelerated
depreciation.
 
 c.
              In
      order to receive benefits in the Grant Path or the Alternative Path, the
      Industrial Enterprise must contribute to the economic independence
      of  Israel’s economy in one of the following
    ways:
 
 1.
              Its
      primary activity is in the Biotechnology or Nanotechnology fields and
      pre-approval is received from the head of research and development at the
      Office of the Chief Scientist;
 
 2.
              Its
      revenue from a specific country is not greater than 75% of its total
      revenues that year;
 
 3.
              25%
      or more of its revenues are derived from a specific foreign market of at
      least 12 million residents.
 
 The
amendments to the Law do not apply retroactively for investment programs having
an Approved Enterprise approval certificate from the Investment Center issued up
to December 31, 2004 (even when investments under these programs are conducted
after January 1, 2005). Consequently, the amendments should not impact an
existing Approved Enterprise, which received prior written approval. The new tax
regime shall apply for a new Approved Enterprise and for an Approved Enterprise
expansion for which the first year of benefits may be as early as
2004.
 
 (2)
              As
      of December 31, 2008, the Company has net operating loss carryforwards in
      Israel of approximately $4,400 and $10,000 which are available to offset
      future regular taxable income and taxable capital gains respectively for
      indefinite period.
 
 (3)
              As
      explained above, the Israeli Company is exempt from tax for a ten-year
      period.  Therefore, the Israeli Company has not recorded
      deferred tax assets and
liabilities.
 
 (4)
              In
      2005 tax legislation was passed in Israel which provided a gradual
      reduction in the corporate tax rate as follows: 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
      also be subject to tax of 25%.
  F-33


Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
 
 Note
14 - Taxes on Income (cont’d)
 
 B.
                Foreign
      subsidiaries
 
 At
December 31, 2008, all of the Company’s subsidiaries had local, federal and
state accumulated net operating loss carryforwards of approximately $39,800.
Federal state and tax loss carryforwards in the U.S subsidiary, totaling
approximately $10,500 will expire through 2023. Operating loss carryforwards in
the Japanese subsidiary, totaling approximately $16,400 will expire through
2015. Operating loss carryforwards in the German, French and Australian
subsidiaries amounted to approximately $8,100, $4,200 and $600, respectively,
can be carried forward indefinitely.
 
 C.
                Profit
      (loss) before tax and income tax benefit (expense) included in the
      consolidated statements of
operations
  Year ended December 312008
                
                
                2007
                
                
                2006Profit (loss) before taxes on income and minority share:Israel
                
                $
                2,536
                
                
                $
                13,438
                
                
                $
                3,459Foreign
      jurisdiction
                
                
                (367
                )
                
                
                4,792
                
                
                
                (6,174
                )2,169
                
                
                $
                18,230
                
                
                $
                (2,715
                )Current taxes:Israel
                
                $
                (286
                )
                
                $
                (3,669
                )
                
                $
                (200
                )Foreign
      jurisdiction
                
                
                208
                
                
                
                (855
                )
                
                
                (82
                )$
                (78
                )
                
                $
                (4,524
                )
                
                $
                (282
                )Deferred taxes:Israel
                
                $
                -
                
                
                $
                -
                
                
                $
                -Foreign
      jurisdiction
                
                $
                (172
                )
                
                
                (24
                )
                
                
                155$
                (172
                )
                
                $
                (24
                )
                
                $
                155Income
      tax expense
                
                $
                (250
                )
                
                $
                (4,548
                )
                
                $
                (127
                )
 
 D.           Deferred
taxes
  In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. 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, 2008. 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.
  F-34
 Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
14 - Taxes on Income (cont’d)
 
 D.
              Deferred
      taxes (cont’d)
 
 The tax
effects of significant items comprising the Company’s deferred
taxes:
 
 December
      312008
                  
                  
                  2007Tax
      loss carryforwards of subsidiaries
                  
                  $
                  11,076
                  
                  
                  $
                  7,636Other
      timing differences
                  
                  
                  1,109
                  
                  
                  
                  2,397Total
      gross deferred tax assets
                  
                  
                  12,185
                  
                  
                  
                  10,003Valuation
      allowance
                  
                  
                  (11,007
                  )
                  
                  
                  (8,683
                  )Net
      deferred tax asset
                  
                  $
                  1,178
                  
                  
                  $
                  1,350
 
 The
Company adjusted the footnote presentation of its 2007 deferred tax asset and
its related valuation allowance and reserve for unrecognized tax benefits to
conform to the presentation in 2008. This adjustment had no impact on any line
items within the balance sheet, statement of operations or statement of cash
flows (see also 14 F below).
 
 The net
changes in the total valuation allowance for the years ended December 31, 2006,
2007 and 2008 are $789, $1,446 and $2,324 respectively.
 
 E.
              Reconciliation
      of the statutory tax benefit (expense) to actual income tax benefit
      (expense)
 
 Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Profit
      (loss) before taxes on incomeand minority
      share
                  
                  $
                  2,169
                  
                  
                  $
                  18,230
                  
                  
                  $
                  (2,715
                  )Tax
      rate
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Computed
      expected tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Increase
      in unrecognized tax benefits
                  
                  
                  (320
                  )
                  
                  
                  (2,901
                  )
                  
                  
                  -Permanent
      difference related to share based compensation expenses and
      Other
                  
                  
                  2,034
                  
                  
                  
                  1,256
                  
                  
                  
                  (200
                  )Change
      in valuation allowance
                  
                  
                  (2,324
                  )
                  
                  
                  (1,446
                  )
                  
                  
                  (789
                  )Foreign
      tax rate differential
                  
                  
                  360
                  
                  
                  
                  (1,457
                  )
                  
                  
                  862Income
      tax expense
                  
                  $
                  (250
                  )
                  
                  $
                  (4,548
                  )
                  
                  $
                  (127
                  )
  F-35
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
14 - Taxes on Income (cont’d)
 
 F.            
Accounting for income tax uncertainties
 
 The
Company and its subsidiaries file income tax returns in Israel, the U.S and
other foreign jurisdictions. The U.S. subsidiary files income tax returns in
federal jurisdictions, and various states within the U.S. With few exceptions,
the Company is no longer subject to Israeli, U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before
2003.
 
 The
German tax authorities commenced an examination of the Company's subsidiary
income tax returns in Germany for the years 2001 through 2004 that is
anticipated to be completed by the end of 2009. The Company believes that this
tax audit will be finalized with a tax adjustment to previously filed tax
returns as reflected in the reserve for unrecognized tax benefits.
 
 The
Israeli tax authorities commenced an examination of the Company's income tax
returns in Israel for the years 2004 through 2007 that is anticipated to be
completed by the end of 2009. The Company expects that as a result of the tax
audit, it is more likely than not that its net operating loss carryforwards in
Israel will be adjusted. This adjustment may cause the Company to amend its 2004
through 2007 tax filings which may affect the commencement date of benefits
provided under the Approved Enterprise as will be agreed with the tax
authorities.
 
 As
discussed in 14 D above, due to uncertain tax position affecting the total tax
loss carryforward in one of the Company’s subsidiaries, the Company adjusted the
footnote presentation of its December 31, 2007 reserve for unrecognized tax
benefits to conform to the presentation in 2008. This adjustment included in
table below had no impact on any line items within the balance sheet, statement
of operations or statement of cash flows
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
based on the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, is as follows:
 
 2008
                    
                    
                    2007Balance
      at January 1
                    
                    $
                    6,771
                    
                    
                    
                    3,870Additions
      based on tax positions related to the current year
                    
                    
                    180
                    
                    
                    
                    2,901Additions
      for tax positions of prior years
                    
                    
                    140
                    
                    
                    
                    -Reductions
      for tax positions of prior years
                    
                    
                    -
                    
                    
                    
                    -Settlements
                    
                    
                    -
                    
                    
                    
                    -Balance
      at December 31
                    
                    $
                    7,091
                    
                    
                    
                    6,771
 
 Unrecognized
tax benefits in the amount of $7,091, if recognized, would affect the effective
tax rate of the Company.
 
 During
the year ended December 31, 2007 and 2008 the Company recorded approximately $99
and $415 in interest relating to unrecognized tax benefits in the consolidated
statements of operations and accrued $99 and $514 in the balance sheets as of
December 31, 2007 and 2008, respectively.
  F-36
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
15 - Fair Value of Financial Instruments
 
 The
Company's financial instruments include mainly 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 their fair value.
 
 Note
16 - Acquisition and Investment
 
 A.          
 Acquisition of Bravo pH monitoring business
 
 In
December 2008, the Company acquired the Bravo pH monitoring business from
Medtronic, Inc. (“Medtronic”) for $20,000 in cash. For accounting purposes, the
transaction was valued at $ 20,501 (including transaction costs of
$501).
 
 Medtronic
will supply the Bravo system to the Company during a 12-month transition period
ending December 8, 2009. The acquired Bravo business consists of intangible
assets related to the core technology of the business, manufacturing equipment,
customer relationships, in-process research and development, shares in a wholly
owned subsidiary of Medtronic holding a number of intellectual property assets
and goodwill. A small percentage of the purchase price has been put in escrow
and its payment is contingent upon Medtronic completing on schedule the
development of a new capsule delivery system already
underway.  Additional small percentage of the purchase price has been
put in escrow to secure Medtronic’s indemnity obligations under the acquisition
agreement.  During the transition period (until December 2009), the
Company intends to complete the transition of the Bravo system manufacturing
operations to Israel.
 
 During
the 12 month transition period, Medtronic will continue to supply the Bravo
products to the Company.  The Company has agreed to purchase a minimum
number of units of the Bravo capsule, and delivery systems at an agreed upon
price, and a number of notebook computers, including proprietary software
required to interpret the pH test results, also at an agreed upon
price.  The Company also assumed Medtronic’s commitment to suppliers
in the amount of approximately $579, mostly related to open purchase orders from
third party suppliers for components of the Bravo system.
 
 The Bravo
system is the only wireless, catheter-free pH test for GERD. The Bravo system
uses a disposable capsule temporarily placed in the esophagus that measures pH
levels and transmits the data to an external receiver. The Company intends to
market the Bravo system through its direct sales force and distribution chain
through out the world . Currently, the Bravo business is primarily focused on
the market in the United States.
 The
acquisition was accounted for by the purchase method. The results of operations
of the Bravo business were included in the consolidated financial statements of
the Company commencing December 2008. The consideration for the acquisition was
attributed to net assets on the basis of fair value of assets acquired according
to a valuation performed by a third party.
  F-37
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
16 - Acquisition and Investment (cont’d)
 
 A.           Acquisition
of Bravo pH monitoring business (Cont’d)
 
 The
following table summarizes the estimated fair values of the assets
acquired:
 
 Property,
      plant and equipment
                      
                      $
                      250Identifiable
      intangible assets:Patents
      of core technology
                      
                      
                      5,000Customer
      relationships
                      
                      
                      1,800Trademarks
      and trade name
                      
                      
                      1,400In-process
      research and development
                      
                      
                      4,700Goodwill
                      
                      
                      3,510Total
      assets acquired
                      
                      
                      16,660Prepayments
      for inventory supply and future R&D services
                      
                      
                      3,841Purchase
      price allocated (including transaction costs of $501)
                      
                      $
                      20,501
 
 An amount
of $4,700 of the purchase price was allocated to the estimated fair value of
purchased in-process research and development, which, as of the closing date of
the acquisition, had not reached technological feasibility and had no
alternative future use, and, in accordance with US GAAP, was charged to
operating expenses upon acquisition.
 
 Identifiable
intangible assets, including purchased in-process research and development, were
valued utilizing a forecast of expected cash inflows (including adjustments, as
appropriate, for regulatory and commercial risks), cash outflows and
contributory charges for economic returns on tangible and intangible assets
employed.
 
 The
purchase price allocated to patents of the existing core technology, customer
relationships, trade names and trademarks is being amortized using the straight
line method over a period of 8 years to 20 years, which approximate their
expected useful lives.
 
 B.
              Investment
      in the Japanese Subsidiary
 
 On
January 29, 2008, the Board of Directors of Given Imaging KK (“Given K.K”)
approved an additional round of financing of $8 million (in Japanese Yen) with
its three existing shareholders. Each shareholder had been asked to invest an
amount according to its respective share in Given K.K. The Company and one
additional shareholder invested a total $5.2 million, of which the Company’s
portion was $4.1 million. The third shareholder declined its option to make an
investment. Consequently, the Company’s ownership in Given K.K has increased
from its current 51% controlling interest to 56%. As a result, the Company
recorded the excess of assets received due to the increase in ownership over the
amount invested as goodwill in the amount of approximately $900. Following the
annual impairment test as of December 31, 2008, this goodwill was impaired by
approximately $300 thousands.
  F-38
  Given
Imaging Ltd. and its subsidiaries
 
 Notes
to the Consolidated Financial Statements
 (In
thousands except share data)
  Note
17- Dividend
 
 On
February 10, 2009, the Board of Directors decided to declare and distribute a
dividend of $0.54 per share. This divident was paid on March 11, 2009. In making
the decision to pay the dividend, the Board reviewed the Company's current and
projected liquidity, its anticipated operating performance, and its growth
strategies. No additional dividends are currently anticipated.
 
 Note
18 - Subsequent Events
 
 On
January 20, 2009, the Company announced the expansion of its distribution
relationship with Fuji Film. The Company entered a non-exclusive distribution
agreement with Fuji Film to market and sell the Company’s products in Japan to
customers in the gastroenterology and radiology Market.
  F-39