As filed with the Securities Exchange
Commission on May 16, 2007

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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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, 2006
|                                           
|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   



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GIVEN IMAGING LTD.(Exact name of Registrant as specified in its
charter)

Israel(Jurisdiction
of incorporation or organization)

Hermon Building, New Industrial
Park
Yoqneam 20692, Israel(Address
of principal executive offices)

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

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

Ordinary Shares, par value NIS 0.05 per share

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

The number of outstanding
shares of each of the issuers classes of capital or common stock as of
December 31, 2006:

28,641,291Ordinary Shares, par value NIS 0.05 per
share



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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.

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Yes x  No o

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

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

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

Item 17 o Item 18 x

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

Yes o  No x

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TABLE OF CONTENTS

|          |                                                                                |     
|--------- | ------------------------------------------------------------------------------ | ----
|          |                                                                                | Page
|          |                                                                                |     
|PART I    |                                                                                |     
|Item 1.   | Identity of Directors, Senior Management and Advisers                          | 4   
|Item 2.   | Offer Statistics and Expected Timetable                                        | 4   
|Item 3.   | Key Information                                                                | 4   
|Item 4.   | Information on the Company                                                     | 17  
|Item 4A   | Unresolved Staff Comments                                                      | 40  
|Item 5.   | Operating and Financial Review and Prospects                                   | 40  
|Item 6.   | Directors, Senior Management and Employees                                     | 58  
|Item 7.   | Major Shareholders and Related Party Transactions                              | 67  
|Item 8.   | Financial Information                                                          | 74  
|Item 9.   | The Offer and Listing                                                          | 75  
|Item 10.  | Additional Information                                                         | 77  
|Item 11.  | Quantitative and Qualitative Disclosures about Market Risk                     | 89  
|Item 12.  | Description of Securities other than Equity Securities                         | 89  
|          |                                                                                |     
|PART II   |                                                                                |     
|Item 13.  | Defaults, Dividend Arrearages and Delinquencies                                | 90  
|Item 14.  | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 90  
|Item 15T. | Controls and Procedures                                                        | 90  
|Item 16.  | [Reserved]                                                                     | 91  
|Item 16A. | Audit Committee Financial Expert                                               | 91  
|Item 16B. | Code of Ethics                                                                 | 91  
|Item 16C. | Principal Accountant Fees and Services                                         | 91  
|Item 16D. | Exemptions from the Listing Standards for Audit Committees                     | 91  
|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated
  Purchasers       | 91  
|          |                                                                                |     
|PART III  |                                                                                |     
|Item 17.  | Financial Statements                                                           | 92  
|Item 18.  | Financial Statements                                                           | 92  
|Item 19.  | Exhibits                                                                       | 92  

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

-3-

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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, 2004, 2005 and 2006, and the selected consolidated balance sheet
data as of December 31, 2005 and 2006, 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,
2002 and 2003, and the selected consolidated balance sheet data as of December
31, 2002, 2003 and 2004, have been derived from our audited consolidated
financial statements not included in this Form 20-F, which have been prepared
in accordance with generally accepted accounting principles in the United
States of America. You should read the selected consolidated financial
information set forth below in conjunction with our consolidated financial
statements and the related notes as well as Item 5 Operating and Financial
Review and Prospects included elsewhere in this Annual Report on Form 20-F.

|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | ---------- | ---- | - | ---------- | - | ---- | ---------- | ------- | - | ---------- | - | - | ---------- | -
|                                                                                                              |  | Year ended December 31,                           |           
|                                                                                                              |  |                                                   |           
|                                                                                                              |  | 2002                                              |            | 2003 |   | 2004       |   | 2005 |            | 2006(1) |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |  
|                                                                                                              |  | (in thousands, except share and per
  share data) |           
|Statements of
  Operations Data:                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Revenues                                                                                                      |  | $                                                 | 28,904     |      | $ | 40,539     |   | $    | 65,020     |         | $ | 86,776     |   | $ | 95,029     |  
|Cost of revenues                                                                                              |  |                                                   | 11,907     |      |   | 13,551     |   |      | 17,734     |         |   | 22,070     |   |   | 24,154     |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Gross profit                                                                                                  |  |                                                   | 16,997     |      |   | 26,988     |   |      | 47,286     |         |   | 64,706     |   |   | 70,875     |  
|Operating expenses:                                                                                           |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Research and development,
  gross                                                                             |  |                                                   | (8,609     | )    |   | (7,037     | ) |      | (7,363     | )       |   | (8,833     | ) |   | (12,678    | )
|Royalty-bearing participation                                                                                 |  |                                                   |           |      |   | 1,303      |   |      | 1,140      |         |   | 1,244      |   |   | 1,867      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Research and development, net                                                                                 |  |                                                   | (8,609     | )    |   | (5,734     | ) |      | (6,223     | )       |   | (7,589     | ) |   | (10,811    | )
|Sales and marketing                                                                                           |  |                                                   | (22,681    | )    |   | (26,804    | ) |      | (33,652    | )       |   | (43,281    | ) |   | (50,732    | )
|General and administrative                                                                                    |  |                                                   | (4,749     | )    |   | (5,312     | ) |      | (6,916     | )       |   | (9,657     | ) |   | (16,027    | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Total operating expenses                                                                                      |  |                                                   | (36,039    | )    |   | (37,850    | ) |      | (46,791    | )       |   | (60,527    | ) |   | (77,570    | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Operating profit (loss)                                                                                       |  |                                                   | (19,042    | )    |   | (10,862    | ) |      | 495        |         |   | 4,179      |   |   | (6,695     | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Financing income, net                                                                                         |  |                                                   | 1,469      |      |   | 995        |   |      | 956        |         |   | 762        |   |   | 3,980      |  
|Other expenses, net                                                                                           |  |                                                   | (711       | )    |   |           |   |      |           |         |   |           |   |   |           |  
|Profit (loss) before taxes on
  income                                                                        |  |                                                   | (18,284    | )    |   | (9,867     | ) |      | 1,451      |         |   | 4,941      |   |   | (2,715     | )
|Taxes on income                                                                                               |  |                                                   |           |      |   |           |   |      | 690        |         |   | 286        |   |   | (127       | )
|Profit (loss) before minority
  share                                                                         |  |                                                   | (18,284    | )    |   | (9,867     | ) |      | 2,141      |         |   | 5,227      |   |   | (2,842     | )
|Minority share in losses
  (profits) of subsidiary                                                            |  |                                                   | (26        | )    |   | 258        |   |      | 747        |         |   | 1,116      |   |   | 1,334      |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Net profit (loss)                                                                                             |  | $                                                 | (18,310    | )    | $ | (9,609     | ) | $    | 2,888      |         | $ | 6,343      |   | $ | (1,508     | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Basic profit (loss) per
  ordinary share (2)                                                                  |  | $                                                 | (0.73      | )    | $ | (0.38      | ) | $    | 0.11       |         | $ | 0.23       |   | $ | (0.05      | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Diluted profit (loss) per
  ordinary share (2)                                                                |  | $                                                 | (0.73      | )    | $ | (0.38      | ) | $    | 0.10       |         | $ | 0.21       |   | $ | (0.05      | )
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Weighted average number of
  ordinary shares used in computing basic profit (loss) per ordinary share (2)     |  |                                                   | 25,182,563 |      |   | 25,493,073 |   |      | 26,633,964 |         |   | 27,781,223 |   |   | 28,053,849 |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  
|Weighted average number of
  ordinary shares used in computing diluted profit (loss) per ordinary share
  (2) |  |                                                   | 25,182,563 |      |   | 25,493,073 |   |      | 29,353,448 |         |   | 29,695,164 |   |   | 28,053,849 |  
|                                                                                                              |  |                                                   |            |      |   |            |   |      |            |         |   |            |   |   |            |  

-4-

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|                                                |  |                    |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------- |  | ------------------ | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                |  | As of December 31, |        
|                                                |  |                    |        
|                                                |  | 2002               |         | 2003 |   | 2004    |   | 2005 |         | 2006 |  
|                                                |  |                    |         |      |   |         |   |      |         |      |  
|                                                |  | (in thousands)     |        
|Balance Sheet Data:                             |  |                    |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Cash
  and cash equivalents                     |  | $                  | 35,792  |      | $ | 25,367  |   | $    | 80,861  |      | $ | 65,356  |   | $ | 44,510  |  
|Working
  capital                               |  |                    | 43,972  |      |   | 34,970  |   |      | 92,987  |      |   | 86,217  |   |   | 79,015  |  
|Marketable
  securities                         |  |                    |        |      |   |        |   |      |        |      |   | 21,664  |   |   | 34,769  |  
|Total
  assets                                  |  |                    | 68,728  |      |   | 55,569  |   |      | 124,224 |      |   | 149,110 |   |   | 158,177 |  
|Long-term
  liabilities, net of current portion |  |                    | 882     |      |   | 1,192   |   |      | 10,984  |      |   | 24,246  |   |   | 22,838  |  
|Total
  liabilities                             |  |                    | 12,969  |      |   | 8,847   |   |      | 28,430  |      |   | 47,005  |   |   | 46,892  |  
|Accumulated
  deficit                           |  |                    | (49,026 | )    |   | (58,635 | ) |      | (55,747 | )    |   | (49,404 | ) |   | (50,912 | )
|Total
  shareholders equity                    |  |                    | 53,577  |      |   | 44,798  |   |      | 94,617  |      |   | 102,044 |   |   | 107,786 |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2006, we have adopted FAS 123R, 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 also include a total of $5.2
  million 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 FAS 123R, see note 1K to
  our consolidated financial statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | See Notes 1L and 11 of the notes to our consolidated financial
  statements for an explanation of the number of shares used in computing per
  share data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

This 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 expansion in acceptance of
  our current and future products by the medical community, particularly
  gastroenterologists;                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                      
| |  | statements as to expected increases in sales, operating results and
  certain expenses, including research and development and sales and marketing
  expenses;                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                      
| |  | statements as to anticipated reimbursement from U.S. and non-U.S.
  healthcare payers for our products;                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                      
| |  | expectations as to the development of our products and technology,
  and the timing of enhancements to our products and new product launches;                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                      
| |  | expectations as to the market opportunities for the Given System and
  other products, including capsule endoscopes, for visualizing other sections
  of the gastrointestinal tract, such as the esophagus, stomach and the colon,
  as well as our ability to take advantage of those opportunities;
| |   |                                                                                                                                                                                                                                                                                                      
| |  | expectations as to the timing, results and content of future clinical
  studies and publications;                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                      
| |  | statements as to the expected outcome of legal and patent proceedings
  in which we are involved;                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                      
| |  | statements as to the expectation for the content of future
  publications regarding our products;                                                                                                                                                                                                    

-5-

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expectations as to the receipt and timing of regulatory clearances
  and approvals, and the anticipated timing of sales of the Given System in new
  markets or for new indications;
| |   |                                                                                                                                                                                     
| |  | estimates of the impact of changes in currency exchange rates on our
  operating results;                                                                                           
| |   |                                                                                                                                                                                     
| |  | expectations as to the adequacy of our inventory of critical
  components and finished products;                                                                                    
| |   |                                                                                                                                                                                     
| |  | expectations as to the adequacy of our manufacturing facilities; and                                                                                                                
| |   |                                                                                                                                                                                     
| |  | statements as to our expected treatment under Israeli and U.S.
  federal tax legislation and the impact that new tax and corporate legislation
  may have on our operations.        

In
addition, forward-looking statements may be, but are not necessarily, identified
by the use of forward-looking terminology such as may, anticipates,
estimates, expects, intends, plans, believes, and words and terms of
similar substance. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual events, results,
performance, circumstances or achievements of the Company to be materially
different from any future events, results, performance, circumstances or
achievements expressed or implied by such forward-looking statements. Factors
that could cause actual events, results, performance, circumstances or
achievements to differ from such forward-looking statements include, but are
not limited to, the following: (1) changes in regulatory environment, (2) our
success in implementing our sales, marketing and manufacturing plans, (3)
protection and validity of patents and other intellectual property rights, (4)
the impact of currency exchange rates, (5) the effect of competition by other
companies, (6) the outcome of future litigation, (7) the reimbursement policies
for our product from healthcare payers, (8) quarterly variations in operating
results, (9) the possibility of armed conflict or civil or military unrest in
Israel, and (10) 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,
2006. 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.

RISK FACTORS

If we are unable to
manufacture, market or sell the PillCam SB capsules, we may not be able to
maintain our current annual growth rate.

A
substantial portion of our revenues and our annual revenue growth to date has
resulted from sales of the PillCam SB capsule. We expect that a substantial
majority of our revenues for the foreseeable future will come from sales of the
PillCam SB capsule. Sales of the PillCam SB capsule contributed $41.6 million,
or 64% of our revenues, in 2004, $62.5 million, or 72%, in 2005 and $76.4
million, or 80%, in 2006. If we are unable to manufacture, market or sell the
PillCam SB for any reason, including, for example, product recall, natural
disaster, war in Israel or as a result of a legal action against us, our
revenues may decline significantly.

If we fail to
increase PillCam SB capsule reorders by gastroenterologists, 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 reorders of our PillCam SB capsule by our customers is
an important factor in growing our revenues. We are seeking to increase the
level of reorders by a number of methods, including increased selling and
marketing activities, more frequent contact with our customers, attaining
reimbursement coverage for broader indications and as a primary diagnostic
tool, generating supporting clinical evidence and educating physicians
regarding the clinical benefits of the PillCam capsule, increasing operating
efficiencies of our system to the benefit of physicians and collaborating with
strategic industry participants. Increasing the level of reorders by our
customers is also important to attracting new customers to purchase and use the
Given System. If we are unable to increase the level of reorders of our PillCam
SB capsule, we may not be able to achieve the revenues necessary to maintain
our growth.

-6-

---



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

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

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

Our
principal product is the Given System, consisting of a line of PillCam capsules and
the related data recorder and computer workstation. As of December 31, 2006, we had an installed base
of nearly 3,500 systems worldwide. Growth in our installed base of Given
Systems has contributed to our revenue growth. Our success in making or
increasing sales of the Given System depends on a number of factors. First, we
must demonstrate that the Given System is clinically-effective and
cost-effective in diagnosing a range of disorders of the gastrointestinal
tract, and we must inform and educate both physicians and the third-party
payers responsible for providing reimbursement coverage about the clinical and
economic benefits of using the Given System.
Second, we must broaden the
indications for which the use of the Given System is reimbursed, expand the
number of people with such reimbursement coverage and educate healthcare
providers as to the clinical and economic benefits of using the Given System
for such broader indications so that they are encouraged to adopt the
Given System. Third, we must continue to
improve operational efficiencies of the Given System and demonstrate and
convince gastroenterologists that the Given System fits within their normal practice
routines. If the number of Given Systems we sell declines, we may not be able
to achieve broader market penetration or may choose to place systems in the
market at a discounted price, in which case our revenues and gross margins will
be negatively affected.

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

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

Growth in sales of
our PillCam ESO capsule depends in part on the success of Ethicon Endo-Surgery
in marketing this capsule in the United States.

InScope, a
division of Ethicon Endo-Surgery, a Johnson & Johnson company, has
exclusive rights to market our PillCam ESO capsule in the United States.
Consequently, our future growth depends in part on the success of InScope in
doing so. The results of our cooperation with InScope since signing the
agreement have not met our expectations and we and

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InScope have taken a number of actions in an effort to improve sales of
the PillCam ESO capsule, including the transfer to us of InScopes initial
responsibility to obtain a dedicated CPT code for the esophageal capsule
endoscopy procedure and shifting the initial focus of the InScope personnel
from selling activities to market development activities. Sales of the PillCam
ESO capsule in 2006 were insignificant and may continue to be lower than we
expect if InScope is not successful in marketing the PillCam ESO capsule. This
may negatively impact our revenue growth.

Growth in sales of
our PillCam ESO capsule also depends in part on the availability and adequacy
of third-party reimbursement for the esophageal capsule endoscopy procedure.

Our ability
to market and sell our PillCam ESO capsule is highly dependent on the
availability and adequacy of third party reimbursement for the procedures
performed with this capsule. As of January 31, 2007, approximately 6.6 million
individuals in the United States had reimbursement coverage for using the
esophageal capsule endoscopy procedure in the detection of esophageal varices,
a condition prevalent in cirrhotic patients. 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. Our ability
to expand the use of the PillCam ESO capsule depends
substantially on our ability to convince
additional third party payers to provide reimbursement coverage for this
capsule for the varices indication, the adequacy of such coverage and our
ability to generate and present clinical data supporting reimbursement for the
varices and GERD indications. If we
are unable to obtain such reimbursement coverage, sales of the PillCam ESO
capsule may not grow as we expect or at all.

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

In late
2006, we completed the development of our new PillCam COLON capsule for
visualization of the colon and received the CE mark that permits us to market
and sell this capsule in Europe. We have also submitted this capsule for FDA
clearance in the United States. We intend to market and sell this capsule as a
complementary tool for traditional colonoscopy for patients who are unable or
unwilling to undergo traditional colonoscopy or have an incomplete colonoscopy.
We believe this population represents a significant growth opportunity for us.
There can be no assurance of widespread market acceptance of the PillCam COLON
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 complete the development, receive regulatory clearance
  and successfully market and sell a further advanced version of our RAPID
  software, which we refer to as RAPID 5.0. RAPID 5.0 will be required for
  optimal performance of capsule endoscopy of the Colon. We expect that RAPID 5.0
  will be commercially available by the fourth quarter of 2007.                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The availability of sufficient clinical and cost-effectiveness data
  for the American Medical Association, or AMA, to provide a favorable
  permanent current procedural terminology, or CPT, code and for private
  third-party payers to make an adequate reimbursement decision to provide
  coverage for the PillCam COLON procedure.                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The availability of a reliable colon cleansing and preparation
  procedure for the PillCam COLON capsule, which is accepted by physicians and
  patients.                                                                                                                                                                                                                                                                                                             

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

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

In October
2005, Olympus Corporation launched a competing capsule endoscopy system and
began sales in Europe and Australia. Based on publicly available information,
Olympus is also conducting clinical trials in the United States and has
submitted an application to the FDA seeking clearance to market its capsule
endoscopy system in the United States. In addition, we believe that other
companies in Korea and China began selling capsule endoscopy systems in these
territories in 2005 and are selling these systems at a lower price than ours.
If we are unable to compete effectively in the marketplace against the Olympus
capsule endoscopy system and other competing systems, we may lose market share,
experience delays in completing sales as a result of longer decision making
process among potential customers, or experience erosion of our gross margins
as a result of growing price pressure.

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

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

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

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

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

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If we are unable to successfully manage the
introduction of new or improved products into the market, we may create
frustration and confusion among our customers and our operating results may be
negatively affected.

We
began marketing and selling the Given System in August 2001. Since then, we
have introduced new products or significant improvements to existing components
of the Given System every year. Newer products or system components may not be
able to support and work with older product versions. For example, our PillCam
ESO capsule only works with RAPID 3.0 or newer versions of the RAPID software.
In order for as many of our customers as possible to utilize our most advanced
capsule endoscopy technology, we need to manage new product introductions and
installations efficiently, addressing concerns of customers regarding product
upgrade costs, time constraints and training and education in light of possible
short product cycles. We also need to phase out old products gradually without
creating obsolete inventory. 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 create dissatisfaction and frustration
among our customers, 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 other products
for use in other parts of the gastrointestinal tract our growth may be
negatively affected.

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

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

Since we
began selling the Given System in 2001, most of our revenues have been
generated from sales in the United States. Sales in the United States accounted
for $46.7 million, or 72%, of our revenues in 2004, $63.9 million, or 74%, of
our revenues in 2005 and $66.4 million, or 70%, of our revenues in 2006. 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, regulatory requirements, macro-economic changes and
other events, many of which are outside our control, may result in a material
reduction in our revenues and negatively affect our operating results.

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

In April
2007, we received regulatory clearance to market our capital equipment and
PillCam SB capsule in Japan. This is our first regulatory clearance in Japan.
We may not be able to generate significant revenues in Japan until
reimbursement is available for the small bowel capsule endoscopy procedure and
there can be no assurance that we will receive this reimbursement under
favorable terms or at all. Furthermore, marketing our other products in Japan
will require additional, product-specific regulatory clearances. Generally, the
process for obtaining marketing clearance for medical device in Japan could
range from six months for products with only very minor modifications from
previous cleared product versions to a few years in case of a completely new
device. There is no assurance that we will receive regulatory clearances in
Japan for any of our additional products. Finally, Suzuken Co. Ltd.,
one of Japans largest medical device and
pharmaceutical distributor, has exclusive rights to distribute our products in
Japan. Consequently, our future growth in the

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Japanese market depends in part on the success of Suzuken in doing so.
If we are unable to successfully market and sell our products in Japan for any
of the foregoing reasons, one of our significant growth opportunities will be
materially adversely affected.

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

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

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

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

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

We are required to adhere to the FDAs Medical Device Reporting
regulation, which requires that manufacturers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious injury if it
were to recur. The FDA also requires us to adhere to the Quality System
Regulation, which covers the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging and shipping of the
Given System. The FDA enforces the Quality System Regulation through
inspections. Our quality system has passed several audits, including an annual
re-certification audit pursuant to the Medical Devices Directive of the
European Union for compliance with the International Standard Organizations
standard ISO 9001:2000, ISO 13485:1996 and ISO 13485:2003, which are quality
standards setting forth requirements for medical device manufacturers that are
more specific than the general requirements specified in ISO 9001. While these
quality standards contain requirements which are generally similar to the
Quality System Regulation required by the FDA, we have never been through a
Quality System Regulation inspection by the FDA and cannot assure you that we
would pass. If we fail a Quality System Regulation inspection, our operations
could be disrupted and our manufacturing delayed. Failure to take adequate
corrective action in response to a Quality System Regulation inspection could
force a shutdown of our manufacturing operations and a recall of the Given
System, which would have a material adverse effect on our product sales,
financial condition and results of operations.

-11-

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

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

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

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

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

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

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

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

With the exception of Australia, France, Germany, Israel and the United
States, we rely on distributors for the marketing and distribution of the Given
System. Under most of our agreements with local distributors, a distributor is
granted the right to market the Given System for an initial period of
approximately two years in a particular country or region, subject to the
attainment of minimum sales targets. The distributor is required to prepare and
submit to us for our approval a sales plan for the Given System and to obtain
the requisite regulatory and reimbursement approvals for the Given System. Our
success in generating sales in countries or regions where we have engaged local
distributors depends in part on the efforts of

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others whom we do not control. In 2006, we derived $15.7 million, or
16.5%, of our revenues from sales to local distributors, compared to $11.9
million, or 13.7%, from sales to local distributors in 2005. To date, we have
changed a number of our distributors due to a failure to meet minimum sales
targets and other reasons. If a distributor is terminated by us or goes out of
business, it may take us a period of time to locate an alternative distributor
and to train its personnel to market the Given System and our ability to sell
the Given System in that distributors country or region could be adversely
affected.

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

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

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

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

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

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

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

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

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

In 2006, we
derived 73% of our revenues in U.S. dollars and 22% in Euro, with the remainder
denominated in Japanese Yen and other currencies. The currency denomination of
our revenues depends on the location of the customer or the distributor used to
fulfill our customers orders. Conversely, in 2006, in addition to our U.S.
dollar and Euro-denominated liabilities, 25% of our expenses were denominated
in New Israeli Shekels, or Shekels. Our Shekel-denominated liabilities consist
principally of salaries and related personnel expenses. We anticipate that for
the foreseeable future a material portion of our liabilities will continue to
be denominated in Shekels. If the value of a currency in which our receivables
are denominated devalues against the value of a currency in which our
liabilities are denominated, there will be a negative impact on our operating
margins, as well as on our net income. Our revenues and expenses may not always
be fully hedged against our currency exposure through financial instruments. In
addition, if we wish to maintain the dollar-denominated value of our products
in non-U.S. markets, devaluation in the local currencies of our customers
relative to the U.S. dollar could cause our customers to cancel or decrease
orders or default on payment. In addition, as of December 31, 2006, 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 Yen, the Shekel, the Australian dollar and the Euro.

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

Our
business exposes us to an inherent risk of potential product liability claims
related to the manufacturing, marketing and sale of medical devices. The
medical device industry has historically been litigious, and we face financial
exposure to product liability claims if the use of our product were to cause or
contribute to injury or death, whether by aggravating existing patient symptoms
or otherwise. There is also the possibility that defects in the design or
manufacture of the Given System might necessitate a product recall. Although we
maintain product liability insurance for the Given System, the coverage limits
of these policies may not be adequate to cover future claims. 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 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. 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.

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

Our
ordinary shares commenced trading on the Nasdaq Global Market in October 2001
and on the Tel Aviv Stock Exchange in March 2004. In 2006, the closing price of
our shares has ranged from $14.46 to $28.37 per share on the Nasdaq Global
Market and NIS 65.02 to NIS 132.60 on the Tel Aviv Stock Exchange. The price of
our shares could fluctuate significantly for, among other things, the following
reasons: future announcements concerning us or our competitors, the existence
and outcome of litigation concerning our intellectual property assets, changes
in third-party reimbursement practices, regulatory developments, and new
clinical or economic data regarding our current or future products. In
addition, it is our practice to provide guidance to the market as to our
expected revenues and earnings per share based on information available to us
at the time of the guidance. If our operating results do not meet our guidance
or the expectations of securities analysts or investors, the price of our
shares would likely decline. In addition, based on our experience to date, we
believe that many of our customers delay purchasing our products until the end
of the fiscal quarter because they believe this will enable them to negotiate
more favorable terms. Therefore, revenues from sales are concentrated at the
end of each fiscal quarter making it difficult for us to determine the success
of each quarter until its end. This may result in lower than expected quarterly
revenues if external or other events cause potential customers to defer their
purchasing decisions even for a short period of time. Furthermore, we believe
that demand for
systems and capsules may be materially affected by seasonal factors during the
summer months when physicians and administrators are more likely to postpone
purchasing decisions due to summer vacations and patients are more likely to
postpone less urgent diagnostic procedures until later in the year.Both of
these factors may result in slower sales during the summer. Share price
fluctuations may be exaggerated by low trading volume of our ordinary shares
and changes in trading practices in our ordinary shares, such as short selling.
Securities class action litigation has often been brought against companies
following periods of volatility in the price of their shares. Any securities
litigation claims brought against us could result in substantial expense and
divert managements attention from our business.

-14-

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

The largest
beneficial owners of our shares, four individuals in Israel who together
control IDB Holding Corporation Ltd., beneficially owned approximately 39.4% of
our ordinary shares as of December 31, 2006. As a result, IDB Holding
Corporation Ltd. could exercise a significant influence over our operations and
business strategy and have sufficient voting power to control the outcome of
matters requiring shareholder approval. These matters may include:

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

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

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

As of December 31, 2006, we had
28,641,291 million ordinary shares outstanding. Approximately 50% of these shares are restricted securities available
for resale on the Nasdaq Global Market subject, however, to volume limitations
under Rule 144. In addition, all of our ordinary shares are available for
resale on the Tel Aviv Stock Exchange, subject to compliance with Regulation S
under the Securities Act of 1933. Most of these restricted securities are held
by the largest beneficial owner of our shares, IDB Holding Corporation Ltd.
Future sales of these restricted shares, or the perception that these sales
could occur, could adversely affect the market price of our ordinary shares. We
have periodically experienced a low trading volume of our ordinary shares, and
if one or a small number of parties buys or sells a large number of our
ordinary shares, we may experience volatility in our share price and the price
and liquidity of our shares may be adversely affected.

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

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

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

If, for any
taxable year, our passive income, or our assets which produce passive income,
exceed specified levels, we may be characterized as a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax consequences for our U.S.
shareholders, which may include having gains realized on the sale of our
ordinary shares treated as ordinary income, rather than as capital gains
income, having potentially punitive interest charges apply to those gains, and
the denial of the taxation of certain dividends that may be paid by us at the
lower rates applicable to long-term capital gains. We believe we were not a
PFIC for the fiscal year ended December 31, 2006. 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

-15-

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give any assurance that we will not become a PFIC, in particular, since
the value of our shares is likely to fluctuate. For a more detailed discussion
of the consequences of our being classified as a PFIC, see Taxation and
Government ProgramsUnited States Federal Income TaxationPassive Foreign
Investment Company Considerations. U.S. shareholders are urged to consult with
their own U.S. tax advisors with respect to the U.S. tax consequences of
investing in our ordinary shares.

The government grants
we have received for research and development expenditures limit our ability to
manufacture products and transfer technologies outside of Israel and require us
to satisfy specified conditions. If we fail to satisfy these conditions, we may
be required to refund grants previously received together with interest and
penalties, and may be subject to criminal charges.

From 1998
through 2006, we received grants totaling $6.8 million from the government of
Israel through the Office of the Chief Scientist of the Ministry of Industry
and Trade for the financing of a portion of our research and development
expenditures in Israel, of which $2.5 million has since been paid. The terms of
the Chief Scientist grants prohibit us from manufacturing products developed
using these grants outside of Israel without special approvals and completely
prohibit the transferring of our technologies and related intellectual property
rights outside of Israel. Even if we receive approval to manufacture the Given
System outside of Israel, we would be required to pay an increased total amount
of royalties, which may be up to 300% of the grant amount plus interest,
depending on the manufacturing volume that is performed outside of Israel, as
well as a possible increased rate or royalties. This restriction may impair our
ability to outsource manufacturing, engage in change in control transactions or
otherwise transfer our technology outside Israel. We currently hold an approval
from the Office of the Chief Scientist to manufacture limited quantities of the
PillCam SB capsule in Pemstars facilities in Ireland without an increase in
royalty rates and we will be required to obtain an approval before
manufacturing the PillCam ESO capsule or the PillCam COLON capsule outside of
Israel. In addition, if we fail to comply with any of the conditions imposed by
the Office of the Chief Scientist, we may be required to refund any grants
previously received together with interest and penalties, and may be subject to
criminal charges. In recent years, the government of Israel has accelerated the
rate of repayment of Chief Scientist grants and may further accelerate them in
the future.

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

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

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

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

-16-

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ITEM 4. INFORMATION ON THE COMPANY

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

Given
Imaging Ltd. was incorporated by RDC Rafael Development Corporation under the
laws of the State of Israel in January 1998. We are registered with the Israeli
registrar of companies in Jerusalem. Our registration number is 51-257802-2.
Our address is Hermon Building, New Industrial Park, Yoqneam 20692, Israel. Our
telephone number is +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
Items 5 and 18 for a description of capital expenditures by us for the past
three fiscal years. We have not made any divestitures during the same time
period.

|   |                  
|-- | -----------------
|B. | BUSINESS OVERVIEW

We develop,
manufacture and market innovative diagnostic products for the visualization and
detection of disorders of the gastrointestinal tract. We pioneered capsule
endoscopy, a proprietary approach to visual examination of the gastrointestinal
tract through the use of a miniaturized video camera contained in a ingestible
disposable capsule. Our principal product, which incorporates our core
technology, is the Given System, a proprietary wireless imaging system that
uses our disposable video capsules, which we refer to as the PillCam capsules. The
PillCam video capsules are easily ingested by the patient and move naturally
through the gastrointestinal tract without discomfort while wirelessly
transmitting to a portable recorder, enabling the gastroenterologists to view
high quality video, images and data on our workstation, utilizing our
proprietary RAPID software. We believe that capsule endoscopy provides a
patient-friendly solution that addresses a significant market opportunity and
overcomes many of the shortcomings of traditional diagnostic tools for
gastrointestinal disorders. In 2001, we commenced marketing the Given System, our
capsule endoscopy platform, with the M2A capsule (which we 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, 2006, we had an installed base of nearly
3,500 Given Systems and had sold more than 470,000 PillCam SB capsules in over
60 countries worldwide. A substantial portion of our revenues and our annual
revenue growth to date has resulted from sales of the PillCam SB capsule. Since
November 2004, we also market and sell the PillCam ESO capsule for visualizing
the esophagus. We market the PillCam ESO video capsule in the United States
through a strategic marketing and sales alliance we formed in May 2004 with
InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson company.
We have also developed the AGILE Patency Capsule and system, which is a
dissolvable capsule that enables physicians to determine whether there are
obstructions or strictures in the gastrointestinal tract that may prevent
passage of our PillCam SB capsule. We launched the original Patency Capsule and
scanner in Europe in November 2003. Following receipt of FDA clearance, we
began marketing and selling the AGILE Patency System in the United States in
May 2006.

Our
long-term objective, subject to further development and receipt of regulatory
clearances and/or approvals, is to establish the Given System as a platform for
diagnosis of disorders in all parts of the gastrointestinal tract and the
PillCam capsules as a primary diagnostic administered to patients with such
suspected disorders. We believe that each segment of the gastrointestinal tract
presents meaningful opportunities for patient-friendly diagnostic procedures.
In furtherance of these objectives, in October 2006, we completed the
development of our first generation PillCam COLON capsule and received the CE
mark to market this capsule throughout the European Union. In December 2006, we
submitted this capsule for FDA clearance, which we expect to receive in 2007.
We plan to release the PillCam COLON for sale gradually into cleared markets
following the completion of ongoing clinical trials and obtaining regulatory
clearance for a new version of our RAPID software, RAPID 5.0, which is required
for optimal performance of a capsule endoscopy procedure with this capsule.

Disorders of the
Gastrointestinal Tract

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

-17-

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(FIGURE)

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

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

| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | inflammatory bowel
  disease,
  including Crohns disease and ulcerative colitis, both of which inflame the
  lining of the digestive tract;                                                                                      
| |   |                                                                                                                                                                                                                                   
| |  | celiac disease, which causes damage
  to the intestine due to an allergic reaction to gluten in the diet;                                                                                                                         
| |   |                                                                                                                                                                                                                                   
| |  | Gastro-esophageal reflux disease, which is the flow-back of acidic stomach
  content into the esophagus, causing esophagitis,
  which is inflammation of the esophageal lining, or Barretts esophagus, a pre-cancerous condition;

-18-

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| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                   | gastritis, which is inflammation of the lining of the
  stomach;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | irritable bowel
  syndrome, which
  is a functional disorder characterized by abdominal pain or cramping and
  changes in bowel function without any organic manifestation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | peptic ulcer
  disease, which
  occurs when the lining of the stomach or duodenum is worn away by stomach
  acid; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | growths,such as tumor or
  polyps, which may be cancerous.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Our products currently assist in the diagnosis of disorders of the
  small intestine, the esophagus and the colon.
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | Small intestine disorders. According to data from the American
  Gastroenterology Association, or AGA, approximately 19 million Americans
  suffer from numerous disorders of the small intestine, including bleeding,
  Crohns disease, celiac disease, chronic diarrhea, irritable bowel syndrome
  and small bowel cancer. Prior to the development of capsule endoscopy, there
  was no convenient and effective method for visualizing the interior of the
  entire small intestine. In 2006, the American Society of Gastrointestinal
  Endoscopy, or ASGE, published a guideline document, which recommends capsule
  endoscopy of the small bowel as a first line test for imaging small bowel
  mucosa.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | Esophageal disorders. GERD is the frequent backward flow, or reflux,
  of stomach contents into the esophagus due to an improperly functioning valve
  between the stomach and esophagus. Stomach acid, enzymes and bile irritate
  the esophagus and cause a wide range of symptoms and complications, most
  commonly persistent, severe heartburn and chest pain. According to AGA data,
  an estimated 61 million Americans suffer from heartburn at least once a month
  and there are approximately 9 million physician office visits each year
  diagnosing GERD. If left untreated, GERD can lead to ulceration of the
  esophagus, respiratory problems or esophageal cancer. It is estimated that
  approximately 10% to 15% of patients with GERD symptoms have Barretts esophagus,
  a pre-cancerous condition with an associated risk for esophageal cancer. In
  the United States alone, according to the American Cancer Society, there were
  expected to be approximately 14,250 new cases of esophageal cancer in 2004.
  Another serious disorder of the esophagus is known as esophageal varices, a
  life-threatening complication caused by severe bleeding from small veins in
  the esophagus, usually associated with chronic liver disease. Esophageal
  varices are present in about 40% of patients with cirrhosis of the liver,
  which has been reported to affect 400,000 Americans based on data from the
  National Digestive Disease Information Clearinghouse. The risk of death with
  the first variceal bleed is approximately 20%25%. Thus, it is very important
  to screen patients with cirrhosis of the liver for the presence of varices
  and to monitor those patients with known varices. We believe that the PillCam
  ESO capsule may provide an effective method for screening for and detecting
  esophageal varices.
| |                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                   | Colon DisordersColonic disorders, including colorectal cancer,
  inflammatory bowel disease such as ulcerative colitis and Crohns colitis,
  diverticulosis, and lower gastrointestinal hemorrhage, account for
  significant morbidity and mortality. According to data from the American
  Cancer Society, colon cancer is the third most common cancer diagnosed in
  both men and women in the United States. It is expected that in 2007 alone,
  more than 100,000 Americans will be diagnosed with a new colon cancer and
  more than 40,000 with rectal cancer. Moreover, it is estimated that more than
  50,000 Americans will die in 2007 from colorectal cancer, accounting for more
  than 10% of all U.S. cancer deaths. Importantly, approximately 90% of all
  colorectal cancer cases and deaths are thought to be preventable with
  screening tests that allow for the detection and removal of precancerous
  lesions. Despite the ever-growing body of evidence supporting the benefits of
  colorectal cancer screening, most eligible average-risk Americans do not undergo
  any form of screening, including conventional screening colonoscopy. Numerous
  reasons have been postulated to explain this including patient fears,
  presumed procedural discomfort, and embarrassment. The PillCam COLON capsule
  was developed for use as a safe, minimally invasive, non-sedation requiring,
  patient-friendly modality to visualize the colon and rectum. We believe that
  the PillCam COLON capsule may provide an effective method for achieving this
  purpose.                                                                                                                                                                                                                                                                         

-19-

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Current Detection Methods for Gastrointestinal
Disorders

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

Traditional
Endoscopy

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Upper endoscopy. In upper endoscopy, the physician inserts an
  endoscope, which is an approximately 3.5 foot long tube, through the
  patients mouth. In esophagogastroduodenoscopy, or EGD, the
  gastroscope passes down the esophagus and
  into the stomach and duodenum for visual examination. In esophagoscopy, only
  the esophagus is viewed.                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Colonoscopy. In colonoscopy, the physician inserts a
  colonoscope, which is an approximately 5.5 foot long endoscope, into the
  patients colon through the anus. Colonoscopy is the primary method for
  detecting disorders of the colon. Because of the increasing awareness of
  colon cancer, colonoscopy as a screening tool for early detection of colon
  cancer is becoming more common.                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Push enteroscopy. Push enteroscopy involves the insertion of an
  approximately six foot long push enteroscope into the mouth. Due to the
  length and curvature of the small intestine, push enteroscopy enables the
  physician to view only the first one-third of the small intestine. The
  procedure is lengthy and difficult to perform for both the physician and the
  patient and is substantially more complicated than gastroscopy.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Requires sedation. Due to the need to insert a tube through the
  mouth or anus, a traditional endoscopic examination typically requires
  sedation of the patient due to patient discomfort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Involves potential
  complications.
  Potential complications of traditional endoscopic procedures include
  difficulty in breathing while the tube is inserted in the mouth, perforation
  or tearing of the intestinal wall, post-procedural infection and vomiting,
  abdominal swelling, sore throat, diarrhea and cross-contamination resulting
  from inadequate disinfection of endoscopes. Certain clinical studies have
  reported that perforation rates range between 0.01% and 1.9% for
  esophagoscopy, between 0.1% and 0.7% for esophagogastroduodenoscopy,
  or EGD, and between 0.01% and 0.3% for
  colonoscopy. These studies report that mortality rates range between zero and
  0.98% for esophagoscopy, between zero and 0.07% for esophagogastroduodenoscopy, and between 0.01 and 0.02% for colonoscopy. By
  comparison, to date, there have been no reports of perforation or mortality
  attributed to the capsule endoscopy procedure after more than 470,000 capsule
  ingestions as of December 31, 2006.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 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,

-20-

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generally where gross structural lesions are suspected. During a
radiological imaging examination, the patient swallows a contrast medium (such
as barium), which is a dense liquid that coats the internal organs and makes
them appear on x-ray film. The procedure produces a series of black and white
x-ray images of the lumen, or cavity, of the small intestine.

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

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

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

The Given Imaging
Solution

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

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

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

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | concluded that diagnosing small intestinal bleeding or Crohns
  disease using the PillCam SB capsule procedure is cost-effective from a third
  party payor perspective. We believe that the Given System may result in
  additional cost savings due to the reduction in physician resources and
  facility costs permitted by the outpatient nature of the PillCam SB capsule
  procedure, its higher diagnostic yield  in the case of the PillCam SB
  capsule  and the potential for earlier diagnosis of disorders, allowing
  earlier therapeutic intervention or other change in patient management.

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

Our Products

The Given
System consists of three components:

PillCam capsules.

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

Until their
use, the PillCam capsules are stored in a hermetically sealed package. Before
the patient ingests a capsule, the package is opened and the removal of the
capsule from the package triggers a switch that activates the capsule. After
the patient ingests the PillCam capsule with a small amount of water, the
capsule passes naturally through the gastrointestinal tract. The PillCam
capsules are excreted naturally from the body, usually within a day or two,
without pain or discomfort. There is no need to retrieve the capsules after
passage.

We
are currently selling the following PillCam capsules:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PillCam
  SB  Our initial capsule for the Given System was
  PillCam SB video capsule for visualization of the small intestine. The
  PillCam SB capsule transmits images at a rate of two images per second for
  approximately eight hours, resulting in approximately 50,000 images, at which
  time the operation is stopped and recording ceases. After ingesting the
  capsule at the physicians office, during the procedure, the patient can continue his or her daily
  routine as the capsule transmits to a portable data recorder and then return
  the data recorder to the physicians office for review and diagnosis.
  The PillCam SB capsule is used with a variety of indications of the small
  intestine, including obscure bleeding, suspected Crohns disease, iron
  deficiency anemia and suspected small bowel tumors.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | PillCam
  ESO  In November 2004, we received FDA clearance
  for our PillCam ESO capsule for visualization of the esophageal mucosa, which
  we market in the United States through our strategic marketing alliance with
  InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson company.
  The PillCam ESO capsule contains an imaging device and light source at both
  ends of the capsule and is designed to capture up to 14 images per second as
  it passes down the esophagus. The patient ingests the PillCam ESO capsule in
  a reclining position in the physicians office. The PillCam ESO capsule can
  be used only with DataRecorder 2.0 or newer versions and RAPID 3.0 or newer
  versions.                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | PillCam
  COLON- PillCam
  COLON is the third video capsule we developed. In October 2006, we received
  the CE mark permitting us to market this product in the European Union. In
  December 2006, we submitted this product for clearance by the U.S. Food and
  Drug Administration, or FDA. We plan to release this product for sale
  gradually, following completion of two pivotal multi-center trials that are
  underway in                                                                                                                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Europe and the U.S and obtaining regulatory clearance for a new
  version of our RAPID software, RAPID 5.0. The PillCam COLON capsule measures
  11 mm by 31 mm  roughly the size of a large vitamin pill. 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.
  Each camera contains automatic lighting control and captures more than twice
  the coverage area and depth of field of the PillCam SB capsule that is used
  to diagnose diseases in the small intestine. Similar to other methods of
  colon visualization, the PillCam COLON capsule procedure includes a colon
  cleansing and preparation procedure, as well as additional prokinetic agents
  to enhance capsule propulsion. The platform for PillCam COLON includes the
  same components as PillCam SB and PillCam ESO, including a sensor array and
  data recorder. Upon completion of the procedure, the physician downloads the
  recorded data to a RAPID workstation to review the images.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | AGILE
  Patency System -The
  AGILE Patency System consists of the AGILE Patency capsule, a dissolvable
  capsule the same size as the PillCam with a radio frequency identification
  (RFID) tag packed in a lactose and barium powder. The AGILE Patency capsule is ingested by the
  patient and allows physicians to confirm
  free passage of a PillCam capsule in a patients gastrointestinal tract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Data recorder and
sensor array.

After
ingestion by the patient, the PillCam capsule transmits information from the
body to a proprietary wireless data recorder through an array of antennae, or
sensor array, that are secured with adhesive pads to the abdomen, in the case
of a procedure performed with a PillCam SB or a PillCam COLON capsule, or to
the chest, in the case of a procedure performed with a PillCam ESO capsule. The
data recorder is worn on a belt around the waist of the patient for the
duration of the examination. Simultaneously with the launch of our PillCam ESO
video capsule in November 2004, we introduced an advanced version of our data
recorder, the DR 2.0, and in January 2006 we commenced selling of an advanced
version of the DR 2.0 with larger storage capacity, we refer to as DR 2.0C.
This advanced version is now part of the standard package for all new Given
Systems we sell. This advanced version supports all three types of capsule
procedures performed with our products. Customers who wish to use our PillCam
COLON must also have the DR2.0C version of our data recorder. In addition to
having larger storage capacity, this advanced version is similar to the earlier
version of DR 2.0, completely solid-state, much less susceptible to shock,
enables quicker and more reliable connection to the sensor array, weighs less
and is therefore more comfortable for the patient and has a robust storage
mechanism and faster download capability compared to previous generations of
our data recorders.

Computer workstation
with proprietary RAPID software.

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

In
December 2005 we received FDA clearance to market RAPID 4.0, our newest version
of RAPID software, which is now
provided as part of the standard package for all Given Systems we sell. Earlier versions of
the RAPID software are not compatible with our PillCam SB and PillCam ESO
capsules. RAPID 4.0 introduces several new features that we believe
significantly improve physicians reading efficiency and diagnostic confidence.
These features include:

|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
| | Automatic Mode, which uses advanced software resulting in more
  efficient review of the video;

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|  |                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Quick View, which allows fast preview of the video and highlights
  potentially interesting images in the video stream; and                                                                                                          
|  |                                                                                                                                                                                                                                        
| | Image atlas, which compares the on-screen case image with known
  reference images stored in the database. The reference images can be searched
  by findings, diagnosis, or using Capsule Endoscopy Structured Terminology, or
  CEST.

In May
2006, we received clearance in the United States and Europe to market our RAPID
Access RT device. This is a dedicated handheld device with our RAPID software
that enables real-time viewing during a capsule endoscopy procedure with our
PillCam capsules. The RAPID Access device also allows the physician to activate
the data recorder and transfer data from the data recorder to a data storage
device, like a disk-on-key. These features enable remote customer sites that do
not have access to a permanent workstation to administer our PillCam capsules
to patients and then deliver the results to a central location for processing
and interpretation.

Upgrades of the
Given System

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

In 2006, we
completed the development of the first version of our PillCam COLON and in
October 2006 received the CE mark permitting us to market this product in the
European Union. In December 2006, we submitted this product for clearance by
the FDA. We plan to release this product for sale gradually, following
completion of two pivotal multi-center trials that are underway in Europe and
the U.S and obtaining regulatory clearance for a new version of our RAPID
software, RAPID 5.0. Further, in May 2006 we introduced our new RAPID Access
RT, a handheld device that enables real-time viewing during a capsule endoscopy
procedure with our PillCam capsules. We also began selling our new AGILE system
and capsule in the United States and Europe. In addition, ,beginning in
December 2005, following receipt of FDA clearance to market the newest version
of the RAPID software, RAPID 4.0, we began including RAPID 4.0 as part of the
standard package for all systems we now sell. At the same time, we began
including a modified version of our DR 2.0 with larger storage capacity as part
of those new systems. During 2006, we upgraded a majority of our customers
worldwide to RAPID 4.0 from older versions they were using.

Newer
products or system components may not be able to support and work with older
product versions. For example, our PillCam ESO capsule may only work with RAPID
3.0 or newer versions of the RAPID software and our PillCam COLON capsule will
require for optimal performance our RAPID 5.0 version, which we expect will be
available by the fourth quarter of 2007 following regulatory clearance. 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 old product inventory
management, and concerns of customers regarding product upgrade costs, time
constraints and training and education in light of possible short product
cycles.

Warranty and Service

Our
standard warranty for PillCam SB capsules is 14 months from the date of
manufacture; for PillCam ESO capsules our standard warranty is 18 months from
the date of manufacture. The warranty period for our PillCam COLON capsule will
be determined once we start commercial shipments of this capsule. Our standard
warranty for other components of the Given System normally extends for a period
of one year from the date of the first installation at the customers location
with the exception of the Sensor Array, which carries a limited warranty of 6
months from installation or 10 months from delivery. Generally, no warranty is
provided more than 16 months from the date of shipment of the Given System to
the customer. During the warranty period, we are obligated to repair or
replace, at our election, every defective product.

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

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provide maintenance and support services for our products from a remote
location, including our distributors office, through a telephone line.

When the
warranty expires, our customers are offered the opportunity to sign a post-sale
customer support contract with us. Under this contract, the customer pays a
fixed amount per year in consideration for receiving our maintenance and
support services. As of December 31, 2006, we had an installed base of nearly
3,500 systems worldwide, of which 1,340 were under warranty and 401 were
covered by a service contract.

Clinical Studies

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

The results
of these clinical studies to date have demonstrated that capsule endoscopy with
our PillCam SB has a comparable or higher diagnostic yield in the detection of
disorders of the small intestine than comparable methods, such as
push-enteroscopy and radiological examinations, such as barium follow-through
and computerized tomography (CT). Many of the investigators conducting these
studies have presented their results at major gastroenterology meetings or
submitted them for publication in peer-reviewed medical journals. Accordingly,
the number of presentations and publications of studies evaluating the Given
System is constantly growing and hundreds of articles, editorials and case reports
have been published in peer reviewed journals to date. These papers provide the
results of clinical studies as well as accumulated experience from on-going use
of the Given System for a range of indications. We believe that these
presentations and publications assist our marketing and educational efforts and
support our efforts to obtain new reimbursement coverage policies and expand
existing policies. In 2007, we plan to initiate clinical studies to examine and
validate the use of the PillCam SB capsule in patients with suspected
Inflammatory Bowel Disease.

PillCam ESO. We have also conducted
clinical trials to compare the PillCam ESO capsule to traditional endoscopy in
the detection of esophageal disorders. The pivotal trial for obtaining FDA
clearance was conducted in seven hospitals in the United States, Germany and
Israel, and involved 106 patients with GERD symptoms. The patients were
examined first using the PillCam ESO capsule followed by traditional endoscopy
on the same day performed with a gastroscope. In this trial, the PillCam ESO
capsule showed comparable efficacy to conventional upper-endoscopy. All
patients ingested the PillCam ESO capsule without difficulty, no adverse events
were reported and patients preferred the PillCam ESO capsule
over conventional endoscopy in all categories. The investigators concluded that the PillCam ESO capsule is a
convenient, patient-friendly, sensitive method for visualization of esophageal
disorders and may provide an effective method to screen patients for Barretts
esophagus, a pre-cancerous complication of GERD. In 2006, we conducted a
multi-center, multinational study clinical study evaluating the PillCam ESO
for the detection of esophageal varices. We expect that the analysis of the
study results will be completed and published in 2007.

PillCam COLON. In 2006, we completed the
first two pilot studies with the first generation of our PillCam COLON capsule.
These studies were conducted independently by the Rambam Medical Center,
Hillel-Yaffe Medical Center and Bikur Holim Hospital in Israel and Erasme
University Hospital in Belgium. The results of these pilot studies were
published in the October 2006 issue of Endoscopy, the official journal of The
European Society of Gastrointestinal Endoscopy.

One study
evaluated the use of the PillCam COLON capsule in the detection of colonic
pathology in 84 patients. These patients were all scheduled for traditional
colonoscopies following the PillCam procedure. Polyps of any size were found in
45 patients by either of the screening methods. PillCam COLON identified 76%
(n=34) compared to 80% (n=36) by colonoscopy. Out of the 84 patients,
approximately 24% (n=20) had significant findings, defined as at least one
polyp measuring 6 mm or three or more polyps of any size. Of these, PillCam
COLON identified 14 (70%) and colonoscopy 16 (80%). There were no adverse
events reported except in one patient who had severe abdominal pain immediately
following colonoscopy. The colonic preparation was well tolerated in all cases.
The initial 44 subjects enrolled in the study received a single oral booster
dose of sodium phosphate. The PillCam COLON capsule was excreted within 10
hours in 70% of the

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patients and reached various parts of colon in the other 30%. An
additional dose of oral sodium phosphate was added to the regimen of the final
46 subjects to improve the capsule excretion rate. The PillCam COLON capsule in
these patients was excreted within 10 hours in 78% of the patients and reached
the rectosigmoid colon in the other 22%. Study investigators concluded that
further improvements in the procedure will probably increase capsule
examination completion and polyp detection rates.

A second
study compared the use of PillCam COLON with colonoscopy for colorectal tumor
diagnosis in 36 patients. PillCam COLON identified polyps of any size in 19 of
25 patients or 76% and significant polyps, defined as at least one polyp
measuring 6 mm or three or more polyps of any size, in 10 out of 13 patients or
77%. Seven polyps not captured during colonoscopy were also identified by
PillCam COLON. The overall sensitivity of PillCam COLON to detect polyps was
77% and specificity was 70%. PillCam COLON was excreted within 10 hours in 84%
of the patients and reached various parts of colon in the other 16%. The
investigators concluded that PillCam COLON visualized the entire colon in the
majority of cases and provided encouraging sensitivity and negative predictive
values for the detection of significant lesions.

In
addition, in late 2006 we initiated two pivotal multi-center, multinational
trials with PillCam COLON that are designed to evaluate the use of PillCam
COLON in the visualization of the colon. We expect to complete these studies in
2007.

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

The Patency System

In November
2003, we launched our original Patency System in Europe, a simple and prep-less
procedure designed to enable physicians to confirm free passage of a PillCam
capsule in the gastrointestinal tract. In May 2006, following
clearance from the FDA, we began marketing and selling the AGILE Patency System
in the United States. We expect that the availability of the AGILE Patency System
will contribute to an increased use of the PillCam SB capsule in the diagnosis
of suspected or known gastrointestinal
obstructions or narrowing, such as suspected or known Crohns disease.

The AGILE Patency System consists of the AGILE
Patency capsule, a dissolvable capsule the same size as the PillCam with
a radio frequency identification (RFID) tag packed in a lactose and barium
powder. The AGILE Patency capsule is
ingested by the patient and allows
physicians to confirm free passage of a PillCam capsule in a patients
gastrointestinal tract. The reusable
component of the AGILE Patency System is a hand-held Patency Scanner, which
detects the signal from the RFID tag. If the scanner indicates that the tag is
no longer in the gastrointestinal tract, patency has been established and the
patient can ingest a PillCam capsule without fear of impaction in a stricture.
If the scanner indicates that the tag is located in the patients body, an
obstruction preventing the passage of the PillCam capsule may exist. If the
AGILE Patency capsule remains in the body, it starts dissolving after 40 hours
into small fragments that are naturally excreted. Since

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the capsule contains barium, in those instances where the AGILE Patency
capsule is not excreted after ingestion, the physician may detect its location
within the body using fluoroscopy.

Marketing and
Distribution

In 2006, our sales and
marketing operations were organized in three geographical regions: Americas
(United States, Canada and Latin America); International (including, Europe,
Asia and Australia) and Japan. Effective April 1, 2007, our International
region includes Europe, Middle East and Africa and we created the Asia-Pacific
region that includes Asia (including Japan) and Australia. This organization
enables us to focus on the particular needs of each region.

We
market the Given System using either direct or indirect sales, depending on the
potential size of the market and local market conditions. Currently, we market
the Given System directly in Australia, France, Germany, the United States and
Israel. In the United States, which accounted for 74% of our revenues in 2005
and 70% of our revenues in 2006, we market our products primarily through our wholly-owned subsidiary,
Given Imaging, Inc., located in Duluth, Georgia. As of December 31, 2006, we
had a direct sales force in the United States of approximately 71 field sales
representatives. We have approximately 16 field sales representatives in the other jurisdictions in which
we directly market the Given System.

In addition
to our direct markets, we market and sell our products in more than 60 other
countries through local distributors or representatives. Sales to our local
distributors worldwide accounted for 16.5% of our revenues in 2006. Under the
terms of our distribution agreements, we generally grant to one distributor in
each particular country or region the right to market the Given System for a
defined period. In larger territories, such as China, we may have several
regional distributors to cover the entire territory. During the contract
period, the distributor is required to meet minimum sales targets set out in
each distribution agreement. We may, in our sole discretion, upon prior written
notice, terminate a distribution agreement with a distributor in the event that
a distributor fails to meet its minimum sales targets. To date, we have changed
a number of our distributors due to failure to meet minimum sales targets and
other reasons. We have the right not to renew a distribution agreement if we
are unable to reach an agreement with the distributor as to minimum sales
targets during any renewal period. Each distributor is responsible for
obtaining and maintaining any regulatory approvals or registrations required to
sell the Given System in that distributors sales territory. Each distributor
is also responsible for preparing and submitting to us for our approval a
marketing plan for the Given System in that distributors sales territory.
After receiving our approval of the marketing plan, each distributor is
responsible for implementing the marketing plan, including, participating in
local and national trade shows, conducting education and training sessions and
conducting sponsored marketing clinical trials in its sales territory.

In Japan,
we operate through Given Imaging, K.K., our Japanese subsidiary, that was
established as a joint venture with Marubeni Corporation and Suzuken Co., Ltd.
to commercialize the Given System in Japan. Marubeni is one of Japans largest
trading companies and Suzuken is one of Japans largest pharmaceutical
distributors. Marubeni and Suzuken together invested initially an aggregate of
$4.3 million in Given Imaging K.K. in consideration of an aggregate 49% interest
and we retained a 51% controlling interest. In addition, Suzuken has been
appointed by Given Imaging K.K. as its exclusive distributor in Japan. We
received regulatory clearance to market our RAPID workstation and PillCam SB
capsule in Japan in April 2007. However, we do not expect to generate
significant revenues from sales in Japan before our products are also approved
for reimbursement by Japanese authorities, which could occur as early as the
fourth quarter of 2007 but is more likely to occur in 2008. Because the
regulatory approval process in Japan has taken longer then we initially
anticipated, in 2006 we and our partners completed additional equity financing
of approximately $9.6 million to finance the operations of our Japanese
subsidiary until it is able to generate sufficient cash from operations. Our
portion of the funding of $4.8 million was paid out of our cash reserves.

Today
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, increasing the frequency of visits to our customers and maintaining a
closer relationship with them, educating them about updated data on the
clinical and economic benefits of our products and enhancing the operating
efficiencies of the Given System. In new markets, such as Japan, our initial
focus is on driving the placement of Given Systems in order to expand our
market penetration in gastroenterology physician offices and gastroenterology
departments within hospitals.

The
clinical benefits of capsule endoscopy and its place in routine practice
management are demonstrated in the ICCE consensus reports. The ICCE is an
annual scientific meeting dedicated to presentations and discussions of the
most

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recent advances in the field
of capsule endoscopy. This annual conference serves as a basis for establishing
a community of physicians who utilize the Given System and accelerates the
dissemination of new clinical data. In ICCE 2005 a group of gastroenterology
opinion leaders from around the world issued consensus reports, which define
practice guidelines and protocols for the use of both PillCam SB and PillCam
ESO by gastroenterologists in several disease states. These consensus reports
were developed in response to the need to formalize practice guidelines for
using capsule endoscopy. The consensus reports focused on five areas:
gastrointestinal bleeding, inflammatory bowel disease, celiac disease, use of
bowel preparations and prokinetics, and esophageal capsule endoscopy. The
consensus reports were published in the October 2005 issue of Endoscopy, the
official, peer-reviewed publication of the European Society of Gastrointestinal
Endoscopy (ESGE). We view the consensus reports as a significant tool in our
marketing activities and we believe the reports will help us establish capsule
endoscopy as a standard practice worldwide. As a result of the success of the
annual ICCE meeting in the United States, in June 2006 we held a European ICCE
meeting in Paris, France, in addition to the U.S. ICCE meeting that was held in
March 2006 in Boca Raton, Florida. We expect the ICCE consensus reports from
2006 to be published in 2007.

In
order to drive strong growth in the future, we need to demonstrate and convince gastroenterologists that
the Given System fits within their normal practice routines. In December 2005,
we began marketing and selling our most advanced RAPID software, RAPID 4.0.
RAPID 4.0 introduces several new features that we believe significantly improve
physicians reading efficiency and diagnostic confidence, which we expect will
drive physicians to incorporate capsule endoscopy into their daily routine.
During 2006, we upgraded a majority of our customers worldwide to RAPID 4.0
from older versions they were using. We intend to continue investing in
training and education of our customers to help them realize the advantages of
our newest technology.

We
also use trade shows and scientific meetings and offer workshops, courses,
videos and seminars to educate our customers. In 2006, we participated in the
Digestive Disease Week (DDW) and the annual meeting of the American College of
Gastroenterology (ACG) in the United States, the United European Gastro Week
(UEGW) in Berlin, and numerous other regional, national and local trade shows.
In 2006, hundreds of physicians and nurses received training in numerous
courses and seminars on capsule endoscopy and our products. We believe that
these education programs helped also to expand the knowledge of participating
physicians and provide an independent endorsement of the clinical value and
importance of the Given System.

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

Since
2005, we have sponsored the operation of a web portal dedicated to capsule
endoscopy, www.CapsuleEndoscopy.org. This portal addresses gastroenterology
professionals and provides training and educational materials and information,
including a virtual image atlas, clinical papers, course information and
discussion forums for a variety of clinical topics. Over 3,000 members from
more than 100 countries have already enrolled at the site as of December 31,
2006.

Strategic Marketing and Sales Alliance with Ethicon
Endo-Surgery

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

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the United States in
November 2004 following FDA clearance for the PillCam ESO capsule. Under the
terms of the original agreement, we pay InScope commissions on sales in the
United States at a rate of 50% on sales of PillCam ESO capsules and 10% on
sales of other parts of the Given System, including workstations and portable
data recorders. Subject to achieving specified minimum sales targets and
meeting certain conditions, the exclusive term of the agreement will continue
for up to 11 years followed by a four-year transition period during which
InScopes rights to market the PillCam ESO capsule will be co-exclusive with
ours. Finally,
under the terms of the original agreement, Ethicon Endo-Surgery committed to
pay us up to $50 million, pending achievement of specified milestones by both
parties. Out of this amount, we received to date a total of $25 million as of
December 31, 2006.

During
2005 and 2006, sales of our PillCam ESO were insignificant due primarily to the
lack of permanent dedicated CPT code for the esophageal capsule endoscopy
procedure and third-party reimbursement coverage, as well as limited clinical
data to support widespread use of the PillCam ESO capsule. Accordingly, during
2005, the number of InScope sales representative promoting the PillCam ESO was
reduced and we have assumed responsibility for the efforts to obtain a
permanent CPT Code for the PillCam ESO procedure as well as initial
reimbursement coverage from third-party payers. In September 2006, we amended
our agreement with InScope to adjust our relationship to existing market
conditions and expectations. Under the amended agreement:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | InScope personnel will be
  further reduced and initially focus on market development rather than sales,
  which will be the responsibility of our sales force. The number of InScope
  personnel is expected to grow gradually based on the level of sales of the
  PillCam ESO. The deployment of InScope personnel, as well as the addition of
  sales people to the InScope team will be coordinated between the parties
  periodically based on developing market conditions.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We will be responsible for
  the design and conduct of clinical trials with PillCam ESO in coordination
  with InScope. These trials will be funded by InScope. InScope will also fund
  one full time employee of Given that will be dedicated to clinical study
  activities for the PillCam ESO.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Both parties will continue the efforts to expand reimbursement
  coverage from third-party payers. InScope will fund one full time employee of
  Given dedicated to reimbursement activities for the PillCam ESO.                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | The 10% commission we pay InScope for sales of workstations and data
  recorders will be paid only in respect of sales made to customers who also
  purchase the PillCam ESO capsule.                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | The payment by InScope to
  us of the remaining $25 million under the original agreement, plus 7%
  interest, will be made in six equal annual installments of $5,240,000 each
  beginning in January 2008. Beginning in 2009, the last installment at any
  given time may be accelerated and paid sooner if one or more reimbursement or
  commission thresholds are achieved.                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | We may terminate the
  agreement with six months advance notice if sales of PillCam ESO do not reach
  an agreed upon level by 2010. InScope may terminate the agreement at any time
  upon advance notice of six months and paying us an agreed termination fee.                                                                                                                                                                                                                 

In
the fourth quarter of 2006, a
permanent CPT Code was assigned to our PillCam ESO capsule by the American
Medical Association, or AMA, and the Center for Medicare and Medicaid Services,
or CMS, and we saw the first third-party reimbursement coverage for procedures
with the PillCam ESO capsule to evaluate esophageal varices in patients
diagnosed with cirrhosis of the liver, a chronic liver disease. As of January
31, 2007, approximately 6.6 million people in the United States had coverage
for this indication. Accordingly, InScope is focusing on developing a market for the PillCam ESO capsule
to emergency rooms and hepatology departments or centers.

In late
2006, we conducted a large multi-center study to evaluate the use of PillCam
ESO in the evaluation of esophageal varices in patients diagnosed with
cirrhosis of the liver. We expect that the analysis of the study results will
be completed and published in 2007 and believe that favorable results may
contribute to increased sales of the PillCam ESO capsule.

To
further facilitate sales of PillCam ESO and the Given System and increase
coordination of the combined team, we have conducted and are continuing to
conduct from time to time joint training sessions for our and InScopes teams

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and have provided InScope
with a number of Given Systems for customer training and demonstrations. Both
sales teams are promoting the entire PillCam platform.

Manufacturing

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

PillCam
Capsules

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

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

We perform
all supervisory, operational and maintenance functions for all semi-automated
lines we currently operate in our manufacturing facility in Yoqneam, Israel.
The technical services agreement we had since 2002 with Pemstar, Inc., a
company based in Ireland, was terminated by mutual agreement as of September
30, 2005. Under this agreement Pemstar provided operational and technical
services to our first production line, which we purchased from Pemstar in 2001;
this line is now operated and maintained solely by us. Pemstar still performs
assembly work for us of some capsule components, leases to us the space for our
two back-up production lines and provides operational and maintenance services
for these back-up lines. The reduction in the scope of services Pemstar
provides us assisted us in reducing the cost of goods sold and had a positive
effect on our gross margins in 2006.

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Micron Technology, Inc., by and through its Micron Imaging Group and
  other wholly-owned subsidiaries, developed the imaging sensor that is
  integrated into the PillCam capsules based on our specifications and is also
  manufacturing and supplying this imaging sensor exclusively to us. Under our
  contract with Micron, Micron may not offer the imaging sensor as a standard
  catalog part. In the event that Micron ceases operations or enters into
  liquidation, we are entitled to receive all information necessary to
  manufacture the sensor upon the payment of reasonable royalties to be agreed
  upon with Micron Technology. We signed an amendment, effective as of June
  2005, to our development and manufacturing agreement with Micron and agreed
  with Micron that it will develop and manufacture an enhanced version of the
  imaging sensor based on specifications that we provide. This amendment also
  extended the initial term of the agreement until November 2012, with an
  option to extend that term by mutual agreement. We have agreed to purchase
  the enhanced sensor only from Micron and Micron has agreed to sell the sensor
  exclusively to us. The agreement permits Micron to disregard the exclusive
  sales requirement if we fail to purchase agreed-upon minimum quantities of Microns
  sensors.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Zarlink Semiconductors AB, a Canadian company, supplies the
  transmitter that is integrated into the PillCam capsules. Zarlink began
  supplying the transmitter to us in the fourth quarter of 2004, replacing our
  previous supplier, Asicom Technologies. We currently expect that Zarlink
  Semiconductor will fulfill substantially all of our future needs for
  transmitters for the PillCam capsules. Under our agreement, we have agreed to
  purchase a minimum quantity of transmitters during the first 36 months
  following the development and testing phase, and if we fail to do so we must
  make certain payments to Zarlink Semiconductor in respect of the shortfall.
  We have complied with these minimum purchase commitments. The agreement also
  includes non-compete provisions prohibiting Zarlink Semiconductor from
  selling the transmitters to other parties and, for a certain period of time
  following termination of the agreement, from transferring any of the
  intellectual property and design specifications associated with the
  development of the transmitter to any potential competitors in our market. In
  July 2005, we agreed with Zarlink that it will develop and manufacture an
  enhanced version of the transmitter                                                                                  

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| |  |                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | based on specifications that we provide. The minimum purchase
  requirements will not apply to this enhanced transmitter. In addition, the
  initial term of the agreement was extended until April 2012, subject to
  earlier termination in specified circumstances, with the option to extend
  annually thereafter for up to five years.

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

Portable Data
Recorder and Sensor Array

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

Computer
Workstation

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

Manufacturing
Facilities and Disaster-Preparedness

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have installed one back-up semi-automatic production line, and
  have purchased a clean room for a second back-up line at the facilities of
  Pemstar in Ireland. Our backup line has the capacity to manufacture
  approximately 15,000 PillCam SB capsules per month. We believe that these
  lines can be operational upon 60 days notice.
| |   |                                                                                                                                                                                                                                                                                                                                                  
| |  | Our policy is to hold inventory of critical components, such as the
  imaging sensor and the transmitter, for a period of time ranging from
  approximately two to 18 months, depending on the risk profile we allocate to
  each critical component.                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                  
| |  | Our policy is to hold approximately six weeks inventory of finished
  products at our offices in Israel, Sydney, Hamburg, Paris and 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. Our
quality system has passed three annual re-certification audits pursuant to the
Medical Devices Directive of the European Union for compliance with the
International Standard Organizations standard ISO 9001 and EN 46001, a
European quality standard setting forth requirements for medical device
manufacturers that are more specific than the general requirements specified in
ISO 9001. These quality standards contain requirements that are generally
similar to the Quality System Regulation required by the FDA. However, we have
never been through a Quality System Regulation inspection by the FDA and cannot
be certain we would pass such an inspection.

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Intellectual Property

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

We acquired
the rights to our first issued U.S. and Israeli patents in January 1998 under a
technology purchase and license agreement with Rafael Armament Development
Authority. See Item 7 Major Shareholders and Related Party Transactions. These
patents expire in January 2014 and January 2015, respectively. In addition, we
hold 60 additional issued patents in the United States, Australia, France,
Germany, India, Israel, Italy, Japan, South Korea, Spain, Taiwan and the United
Kingdom covering different elements of our technology. These patents expire
between 2017 and 2022. We also hold six utility models in Japan and nine
utility models in Germany. As of December
31, 2006, we also had 526 pending patent applications worldwide based on
approximately 200 priority applications relating to various elements and
functions of our product and its enhancements.

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

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

We
currently are in early stages of 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

In October
2005, Olympus Corporation launched a competing capsule endoscopy system and
began sales in Europe and Australia. Olympus displayed its newly developed
capsule endoscopy system in several trade shows, won some tenders published by
public hospitals in Europe, and delivered a number of its capsule endoscopy
systems to customers in Europe and Australia. In addition, based on publicly available
information, Olympus is also conducting clinical trials in the United States
and has submitted an application to the FDA seeking clearance to market its
capsule endoscopy system in the United States. According to public sources,
Olympus is also seeking regulatory clearance to market its capsule endoscopy
system in Japan. In addition to Olympus, a Chinese company began selling
capsule endoscopy systems in China in 2005 and presented its systems in
industry trade shows outside Asia. We believe that this Chinese company sells
its products at a lower price than ours. Finally, according to publicly
available information, a South Korean company reported that it successfully
completed clinical trials of a capsule endoscopy system in 2006 and applied for
regulatory clearance to market this system in South Korea.

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

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

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

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

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

U.S. Government
Regulation

FDA Clearance and Regulation of the Given
System

In August
2001, we received clearance from the FDA to market the Given System in the
United States for adjunctive use in the detection of abnormalities of the small
intestine. In 2003, based on review of a meta-analysis of data
from 32 studies in a total of 691 patients, the FDA approved the removal of the
adjunctive labeling, with the result that the Given System can now be marketed
in the United States as a standalone tool for the detection of abnormalities of
the small intestine. In 2003, we received two further clearances from the FDA:
first, for a suspected blood indicator, a new feature of the Given System which automatically marks images that contain
the color red and which therefore correlate
with the existence of suspected bleeding, and, second, for use of the PillCam
capsule in children aged 10 through 18. In November 2004, we received FDA
marketing clearance for our PillCam ESO video capsule and for the advanced
RAPID software and data recorder. In December 2005, we received clearance to
market a more enhanced version of our RAPID software, RAPID 4.0, and in May
2006 we received clearance to market our RAPID Access and the AGILE Patency
capsule and scanner.

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

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would constitute a major change in its intended use, requires a new
510(k) clearance or could even require a premarket application approval. The
FDA requires each manufacturer to make this determination in the first
instance, but the FDA can review any such decision. If the FDA disagrees with
the determination, the agency may retroactively require the manufacturer to
seek 510(k) clearance or premarket application approval. The FDA also can
require the manufacturer to cease marketing and/or recall the modified device
until 510(k) clearance or pre-market application approval is obtained. Our
PillCam ESO video capsule and the advanced versions of the RAPID software and data
recorder have received FDA marketing clearance under the 510(k) clearance
process.

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

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

FCC Clearance
and Regulation

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

Anti-Kickback
and False Claims Laws

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

Health Insurance
Portability and Accountability Act of 1996 and Related Laws

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

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

Regulation in Europe

Commercialization
of medical devices in member countries of the European Union is regulated by
directives adopted by the European Union. The European Union presently requires
that all medical products bear the CE mark, an international symbol of
adherence to quality assurance standards and demonstrated clinical
effectiveness. Compliance with the Medical Device Directive, as certified by a
recognized European Notified Body, permits the manufacturer to affix the CE mark
on its products. We received our initial authorization to affix the CE mark to
the Given System in May 2001 and have since received such authorization for
other products. We have authority to affix the CE mark to all our products that
are currently commercially available in the European Union. Most recently, we
received the CE mark for our new PillCam COLON in October 2006. To date, we
successfully passed all annual re-certification for compliance with ISO
9001:2000, ISO 13485:1996 and ISO 13485:2003 and the CE mark, including the
2006 re-certification.

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

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

Regulation in Other
Countries

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

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

In Japan,
we received regulatory clearance to market our RAPID workstation and PillCam SB
capsule in April 2007. Regulatory clearance to market the Given System in Japan
is important, but is not likely to result in significant revenues in Japan
until reimbursement is available, which could occur as early as the fourth
quarter of 2007, but is more likely to occur in 2008. Furthermore, marketing
our other products in Japan will require additional, product-specific
regulatory clearances. We intend to submit applications for at least a few
additional products in 2007. Generally, the process for obtaining marketing
clearance for medical device in Japan could range from six months for products
with only very minor modifications from previous cleared product versions to a
few years in case of a completely new device.

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Third-Party
Reimbursement

Reimbursement in the
United States

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

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

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

For capsule endoscopy of the esophagus performed
in a physicians office, the CPT code includes a global value for both the
technical and the professional components of the procedure. In the outpatient
hospital setting, claims are submitted using the CPT code and paid by Medicare
under the APC, which covers the technical component and includes the cost of
the facility and supplies related to the procedure. The physician is paid for
the interpretation separately. In November 2005, CMS assigned an upper gastrointestinal
(GI) diagnostic category APC for capsule endoscopy of the esophagus in the
hospital outpatient setting effective January 2006.

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

Third-party payers in the United States began
issuing coverage policies for capsule endoscopy in early 2002. Initially, all
reimbursement policies provided coverage for capsule endoscopy of the small
bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently,
reimbursement coverage has been expanded to include other indications and as of
December 31, 2006, most Medicare carriers and private payers, with a total
insured population in the United States of approximately 209 million
individuals, also cover capsule endoscopy of the small bowel for suspected
Crohns disease, suspected small bowel tumors and other small bowel
pathologies.

Almost all
of the reimbursement policies currently in effect require that a previous
procedure, such as endoscopy or radiology, be performed prior to using the
Given System and some may require prior authorization. We intend to continue
our efforts to establish the Given System as a primary tool administered to
patients with suspected disorders of the small bowel and to convince third
party payers to provide reimbursement coverage for capsule endoscopy as a
primary diagnostic tool by presenting to them economic and health outcomes
analyses showing the benefits of using the PillCam SB capsule as a primary
diagnostic tool. To this end, the peer-reviewed journal Disease Management
published in its Winter 2004 issue an economic analysis of using PillCam SB
capsules as a first-line tool for diagnosing patients with suspected Crohns
disease. The study, conducted by researchers at Thomas Jefferson University,
concluded that using the PillCam SB capsule as a first line procedure for
detecting small bowel Crohns disease is less costly from a third-party payor
perspective than existing

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diagnostic approaches. This publication supports the companys efforts
to convince payers to revise policies to cover PillCam SB capsules when
performed as a first line procedure in patients with suspected Crohns disease.
As a result of these efforts, in 2006 several third-party payers issued new or
updated policies that do not require endoscopy or other procedures prior to
performing small bowel capsule endoscopy. As of December 31, 2006,
approximately 18 million individuals in the United States now have coverage
under these new or updated policies.

As
of January 31, 2007, approximately 6.6 million individuals in seven states had reimbursement coverage for capsule
endoscopy of the esophagus using our PillCam ESO capsule. Numerous payers are
reimbursing this procedure on a case-by-case basis. We expect that the
assignment of a permanent CPT code for capsule endoscopy of the esophagus in
November 2006, effective January 2007, will facilitate coverage of esophageal
capsule endoscopy by additional third-party payers during 2007. We have
established a toll-free reimbursement help-line whereby reimbursement
specialists assist our customers in the process of submitting prior authorizations, claims and
appeals in the event of a denial.

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

In 2006,
the national average global fee for physicians paid by Medicare under the CPT
code for capsule endoscopy of the small bowel for a procedure in a physicians
office was $987, an increase of less than 1% compared to 2005. The national
average physician fee paid by Medicare when the procedure was performed in an
outpatient hospital was $189, an increase of 2% compared to 2005. These payment
rates are modified annually. Effective January 1, 2007, the national average
global fee paid by Medicare for a procedure in a physicians office was
decreased to $955 and the physician fee for the professional component of a
hospital outpatient procedure was decreased to $180. Effective January 1, 2007,
the national average payment rate to the hospital for the technical component
increased to $583 from $538 in 2006, due to an increase in the APC rate for
gastrointestinal small bowel procedures classified under APC 142. For capsule
endoscopy of the esophagus, effective January 1, 2007, the national average
global fee paid by Medicare for a procedure in a physicians office is $743.
The national average physician fee paid by Medicare in an outpatient hospital
setting is $53 and the national average payment rate to the hospital for the
technical component is $511, under the APC code for upper gastrointestinal
procedures.

Coverage Outside the
United States

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

In Europe, the
population with reimbursable access to capsule endoscopy grew to approximately
166 million at the end of 2006, compared to approximately 110 million at the
end of 2005. This increase was the result of obtaining additional private reimbursement
in Spain, Israel and the Czech Republic. The number of people in Europe with
reimbursement for expanded indications at the end of 2006 increased to
approximately 101 million, from 87 million at the end of 2005. In addition, the
French National Authority for Health (HAS) has completed the first step in
advancing universal reimbursement for PillCam SB capsule endoscopy for over 60
million French citizens. In late July, the HAS published a report that highly
recommends the use of PillCam SB in patients with obscure gastro-intestinal
bleeding and Crohns disease following inconclusive first-line tests. The HAS
advises the French government on decisions related to the reimbursement of
medical products and services. Receiving the code and recommendation for
reimbursement from the HAS is regarded as the pivotal step toward achieving
universal reimbursement for PillCam SB in France. The next and final step will
be for UNCAM

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(Union Nationale des Caisses Assurances Maladies) to set a monetary
value for the code, which may occur in the second half of 2007.

In
Australia, reimbursement has been approved for all residents who hold
Australian and/or New Zealand citizenship, providing coverage for approximately
20 million residents.

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

Patency System

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

|   |                         
|-- | ------------------------
|C. | ORGANIZATIONAL STRUCTURE

Given
Imaging Ltd. is organized under the laws of the State of Israel and, as of
December 31, 2006, held directly and indirectly the percentage indicated of the
outstanding capital stock of the following subsidiaries:

|                        |                          |                     
|----------------------- | ------------------------ | --------------------
|Name of Subsidiary      | Country of Incorporation | Percentage Ownership
|                        |                          |                     
|Given Imaging Pty. Ltd. | Australia                | 100                 
|Given Imaging, Inc.     | United States            | 100                 
|Given Imaging s.a.s.    | France                   | 100                 
|Given Imaging GmbH      | Germany                  | 100                 
|Given Imaging B.V.      | Netherlands              | 100                 
|Given Imaging KK        | Japan                    | 51                  

|   |                               
|-- | ------------------------------
|D. | PROPERTY, PLANTS AND EQUIPMENT

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

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

Our
subsidiaries are party to the following leases:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Given Imaging, Inc. leases 2,318 square meters (24,919 square feet)
  of office space in Duluth, Georgia under a new three-year lease;                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Given Imaging GmbH leases approximately 818 square meters (8,801
  square feet) of office space in Hamburg, Germany, pursuant to a lease for an
  indefinite term that may be terminated by us or the landlord with an advance
  notice of six months;                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Given Imaging Pty. Ltd. leases 244 square meters (2,626 square feet)
  of office space in North Ryde, Australia, pursuant to a lease that expires in
  February 2011;                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Given Imaging s.a.s. leases a total of 241.5 square meters (2,598
  square feet) of office space in Paris, France, consisting of 168 square
  meters (1,808 square meters) pursuant to a lease that expires in September
  2010 and that may be terminated by us at the end of each three year period
  upon six months notice and additional 73.5 square meters (791 square feet)
  pursuant to a lease that expires in January 2012 and that may be terminated
  by us at the end of October 2008.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Given Imaging K.K. leases 103 squares meters (1,114 square feet) of
  office space in Tokyo, pursuant to a lease that expires on December 31, 2007,
  subject to our right to terminate the lease at any time upon six months
  prior notice.                                                                                                                                                                                                                                                       

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ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

|   |                  
|-- | -----------------
|A. | OPERATING RESULTS

Overview

We develop,
manufacture and market innovative diagnostic products for disorders of the
gastrointestinal tract. Our principal product, which incorporates our core
technology, is the Given System, a proprietary wireless imaging system that
represents a fundamentally new approach to visual examination of the
gastrointestinal tract. The Given System uses a miniaturized video camera
contained in a disposable capsule, which we refer to as the PillCam capsule,
that is easily ingested by the patient and delivers high quality color video in
a noninvasive manner. 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, 2006, we had an installed base of nearly 3,500 Given
Systems and had sold over 470,000 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. We market the PillCam ESO video capsule in
the United States through a strategic marketing and sales alliance with
InScope, a division of Ethicon Endo-Surgery, a Johnson & Johnson company.
We have also developed 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
launched the first generation of our patency capsule in Europe in November
2003. In May 2006, following receipt of FDA clearance, we began marketing and
selling a new patency capsule, which we call the AGILE capsule in the United
States. We also sell the AGILE capsule in Europe.

Our
long-term objective, subject to further development and receipt of regulatory
clearances and/or approvals, is to establish the Given System as a platform for
diagnosis of disorders in all parts of the gastrointestinal tract and the
PillCam capsules as a primary diagnostic administered to patients with such
suspected disorders. We believe that each segment of the gastrointestinal tract
presents meaningful opportunities for patient-friendly diagnostic procedures.
In furtherance of these objectives, in October 2006, we completed the
development of our first generation PillCam COLON capsule and received the CE
mark to market this capsule throughout the European Union. In December 2006, we
submitted this capsule for FDA clearance, which we expect to receive in 2007.
We plan to release the PillCam COLON for sale gradually into cleared markets
following the completion of ongoing clinical trials and obtaining regulatory
clearance for a new version of our RAPID software, RAPID 5.0, which is required
for optimal performance of a capsule endoscopy procedure with this capsule.

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

Revenues

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

Revenue breakdown. In the early years since we
commenced sales of the Given System, the
majority of our revenues came from sale of the Given System to new customers.
However, with nearly 3,500systems now installed worldwide, of which nearly 2,200
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

-40-

---



from recurring
sale of our PillCam capsules. In 2006, we derived 80.4% of our revenues from
sales of the PillCam SB capsule compared to 72.1% of our revenues in 2005 and
64.0% of our revenues in 2004. Sales of the PillCam ESO capsule, which began at
the end of November 2004, represented 1.5% of our revenues in 2006, compared to
5.0% of our revenues in 2005. 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 revenues | 
|                                  |  |                |        |                      | 
|                                  |  | 2004           |        | 2005                 |  | 2006   |  | 2004 |        | 2005 |  | 2006  |  
|                                  |  |                |        |                      |  |        |  |      |        |      |  |       |  
|                                  |  | (in thousands) |        |                      |  |        |  |      |       
|Workstations and data
  recorders |  |                | 18,669 |                      |  | 16,145 |  |      | 12,513 |      |  | 28.7  |   |  | 18.6  |   |  | 13.2  |  
|PillCam SB capsule                |  |                | 41,622 |                      |  | 62,528 |  |      | 76,360 |      |  | 64.0  |   |  | 72.1  |   |  | 80.3  |  
|PillCam ESO capsule               |  |                | 1,829  |                      |  | 4,384  |  |      | 1,438  |      |  | 2.8   |   |  | 5.1   |   |  | 1.5   |  
|Patency system and capsule        |  |                | 188    |                      |  | 174    |  |      | 353    |      |  | *     |   |  | *     |   |  | *     |  
|Service                           |  |                | 2,712  |                      |  | 3,545  |  |      | 4,365  |      |  | 4.2   |   |  | 4.2   |   |  | 4.6   |  
|                                  |  |                |        |                      |  |        |  |      |        |      |  |       |   |  |       |   |  |       |  
|Total                             |  |                | 65,020 |                      |  | 86,776 |  |      | 95,029 |      |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %



---

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

Workstations
and data recorders.In
2006, our revenues from the sale of workstations and data recorders decreased
compared to our revenues from the sale of these products in 2005. This
continues the trend that started in 2005 compared to 2004. The decrease in
revenues from sale of capital equipment is attributable to both lower
quantities of workstations and date recorders sold and lower average selling
price. We believe that we sold a smaller number of workstations and data
recorders due to our already existing significant installed base, which is not
likely to grow at historical rates or at all since a majority of
gastroenterologists in the United States already have access to a capsule
endoscopy system. Another important reason for this decrease in sales of
capital equipment was our continued focus on increasing utilization and
reorders of the PillCam SB capsule over capital equipment sale. For example, in
2006, we revised the compensation plan of our U.S. sales force so that a higher
portion of their potential income is coming from sales of capsules rather than
sales of computer workstations.

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

In 2007,
revenues from sales of workstations and data recorders may increase due to the
recent clearance we received to market our system and Pillcam SB capsule in
Japan. Generally, however, we believe that a growing portion of our revenues in
the foreseeable future will come from the sale of capsules compared to capital
equipment.

PillCam
SB.Substantially
all of our revenues from capsule sales were attributed to sales of the PillCam
SB capsule, which we began selling worldwide in the fourth quarter of 2001. We
expect recurring sales of the PillCam SB capsule to continue to account for a
substantial majority of our revenues from capsule sales in 2007. The primary
reasons for this expected growth are:

|  |                                                                                                                                                                                                                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Most small bowel indications for which the PillCam SB capsule is used
  are covered by federal and private reimbursement policies.                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                 
| | In 2006, several reimbursement policies began covering small bowel
  capsule endoscopy as a primary diagnostic tool, without the requirement to
  perform other diagnostic procedures prior to using the PillCam SB capsule. We
  expect this trend to continue in 2007, which we believe will result in more
  capsule endoscopy procedures of the small bowel being performed.
|  |                                                                                                                                                                                                                                                                                                                                                                                 
| | Our sales force is primarily focused on selling capsules and the
  market for the PillCam SB capsule is currently a more developed market
  compared to the market for our PillCam ESO capsule or PillCam COLON capsule.                                                                                                                                                        

-41-

---



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
| | Receiving regulatory clearance to market the PillCam SB capsule in
  Japan in April 2007.

PillCam ESO. We market the PillCam ESO in
the Unites States through an exclusive sales representation, co-promotion and cooperation
agreement with Ethicon Endo-Surgery, a Johnson & Johnson company. InScope,
a business division of Ethicon Endo-Surgery established to market products to
the gastroenterology market, has exclusive rights to market our PillCam ESO
capsule in the United States.

During 2005 and 2006, sales of our PillCam
ESO were insignificant due primarily to the lack of permanent dedicated CPT
code for the esophageal capsule endoscopy procedure and third-party
reimbursement coverage, as well as limited clinical data to support widespread
use of the PillCam ESO capsule. As a result, we amended our agreement with
InScope to adjust our relationship to existing market conditions and
expectations. For details regarding the amended agreement, see Item 4 
Information on the Company  Business Overview  Marketing and Distribution.

In
the fourth quarter of 2006, a
permanent CPT Code was assigned to our PillCam ESO capsule by the American
Medical Association, or AMA, and the Center for Medicare and Medicaid Services,
or CMS, and we saw the first third-party reimbursement coverage for procedures
with the PillCam ESO capsule to evaluate esophageal varices in patients
diagnosed with cirrhosis of the liver, a chronic liver disease. In addition, in
late 2006, we completed a large multi-center study to evaluate the use of
PillCam ESO in the evaluation of esophageal varices in patients diagnosed with
cirrhosis of the liver. As of January 31, 2007, approximately 6.6 million
individuals in the United States had reimbursement coverage for using the
esophageal capsule endoscopy procedure in the detection of esophageal varices.
Reimbursement coverage for the use of PillCam ESO in the detection of
Gastro-Esophageal Reflux Disease, or GERD, which is more prevalent in the
general population than varices, is not expected before additional clinical
data supporting such use is available.

With
initial reimbursement in place, the existence of favorable clinical data to
support to use of PillCam ESO in the evaluation of esophageal varices and the
readjustment of our relationship with InScope, we believe the demand for our
PillCam ESO capsule will increase gradually beginning in 2007, particularly for
the varices indication. However, we expect that in 2007 sales of PillCam ESO
will continue to be small compared to sales of our PillCam SB. We expect a more
significant increase in sales of PillCam ESO when there is clinical data and
reimbursement to support and cover the use of this capsule in GERD patients. We
intend to focus on the GERD market only when the next version of our PillCam
ESO capsule is available, which we expect to occur in late 2007.

-42-

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PillCam COLON. In late 2006, we completed
the development of the first version of our PillCam COLON capsule for
visualization of the colon and received the CE mark that permits us to market
and sell this capsule in Europe. We have also submitted this capsule for FDA
clearance in the United States in December 2006. PillCam COLON is the third
video capsule we developed. We believe the launch of this capsule reinforces
the Given System platform as the leading product for capsule endoscopy. It
demonstrates our commitment to this field and has an important competitive
advantage.

Since
PillCam COLON is our newest product and has not yet received FDA marketing
clearance in the United States, there can be no assurance that we will be able
to achieve widespread market acceptance of the PillCam COLON as superior to
existing technologies for visualization of the colon. We believe the following
are important factors in determining the success of this product in the
foreseeable future:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to complete the development, receive regulatory clearance
  and successfully market and sell a further advanced version of our RAPID
  software, which we refer to as RAPID 5.0. RAPID 5.0 will be required for
  optimal performance of capsule endoscopy of the colon. We expect that RAPID
  5.0 will be commercially available by the fourth quarter of 2007.                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The availability of sufficient clinical and cost-effectiveness data
  for the American Medical Association, or AMA, to provide a favorable
  permanent current procedural terminology, or CPT, code, and for private
  third-party payers to make an adequate reimbursement decision to provide
  coverage for the PillCam COLON procedure.                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The availability of a reliable colon cleansing and preparation
  procedure for the PillCam COLON capsule, which is accepted by physicians and
  patients.                                                                                                                                                                                                                                                                                                             

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
visualization of the colon and colorectal cancer screening. We believe that the
biggest market opportunity for the PillCam COLON capsule is as a tool for
colorectal cancer screening. According to guidelines of professional
associations in the United States, more than 40 million people need to be
screened each year in the United States, yet patient compliance is only around
40 percent. 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. Based on the results from the two initial
clinical studies with PillCam COLON and currently available technology, we plan
to initially market PillCam COLON in Europe and, following FDA clearance, in
the United States, for visualization of the colon in patients who are unable or
unwilling to undergo traditional colonoscopy or in cases of incomplete
colonoscopies.

We plan to
release this product for sale gradually, following completion of additional
clinical trials that are underway in Europe and the U.S. We do not expect that
the PillCam COLON capsule will contribute significantly to our revenues in 2007
for the following reasons:

| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our newest software version, RAPID 5.0, that is required for optimal
  performance of a capsule endoscopy of the colon with our PillCam COLON, is
  expected to be commercially available in the fourth quarter of 2007;
| |   |                                                                                                                                                                                                                         
| |  | FDA clearance for the PillCam COLON capsule is not expected before
  mid-2007;                                                                                                                                          
| |   |                                                                                                                                                                                                                         
| |  | Clinical data for the PillCam COLON is limited; and                                                                                                                                                                     

-43-

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| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Reimbursement for the PillCam COLON procedure does not exist at this
  early stage and is not expected in 2007.

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.                                                                                                                                          

To achieve this, in 2006 we increased the number
of field sales representatives in the United States from 46 to 71 and decreased
the number of accounts per sales representative to allow our sales
representatives to spend more time at the physicians offices and increase the
frequency of contact with our customers. We also adjusted the compensation plan
of our sales force to offer a greater reward for capsule sales. In addition, we
continued our efforts to revise reimbursement coverage for the PillCam SB
procedure and as of December 31, 2006, approximately 18 million individuals in
the United States had reimbursement coverage for PillCam SB as a primary
diagnostic tool, without a requirement to first undergo other diagnostic tests.
Finally, we continued with our market education activities.

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:

|                                                           |  |      |        |      |  |         |   |  |         |  
|---------------------------------------------------------- |  | ---- | ------ | ---- |  | ------- | - |  | ------- | -
|                                                           |  | 2004 |        | 2005 |  | 2006    |  
|                                                           |  |      |        |      |  |         |  
|Total number of PillCam SB
  capsules sold*                |  |      | 90,400 |      |  | 135,500 |   |  | 165,000 |  
|Number of PillCam SB capsule
  sales representing reorders |  |      | 83,850 |      |  | 128,760 |   |  | 155,840 |  
|% of revenues from capsule
  sales that represent reorders |  |      | 92.7   | %    |  | 95      | % |  | 94.4    | %



---

|  |                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Sales of PillCam ESO began only in November 2004 and reorders in 2005
  and 2006 were negligible primarily due to the lack of reimbursement.
  Accordingly, reorders of PillCam ESO are not included in the above table.

Seasonality

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

Geographical
breakdown

We derived
70% of our revenues in 2006 from the United States compared to 74% in 2005. The
following table sets forth the geographic breakdown of our revenues for the
periods indicated:

|              |  |      |   |      |    |      |  |    |   | 
|------------- |  | ---- | - | ---- | -- | ---- |  | -- | - | 
|              |  | 2004 |   | 2005 |    | 2006 | 
|              |  |      |   |      |    |      | 
|United States |  | 72   | % |      | 74 | %    |  | 70 | % | 
|Europe        |  | 21   | % |      | 19 | %    |  | 22 | % | 
|Rest of World |  | 7    | % |      | 7  | %    |  | 8  | % | 

-44-

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We expect
that a significant portion of our revenues in the foreseeable future will
continue to come from the United States, mainly due to our ability to leverage
existing market share to generate additional sales, a favorable reimbursement
system and general acceptance of new technologies among physicians. In Japan,
we finally received marketing clearance for the Given System and our PillCam SB
in April 2007 and began selling the Given System there. Since Japan is a new
market, we expect to initially focus on the placement of systems in order to
expand our market penetration. However, we do not expect to generate
significant revenues from sales in Japan before these products are also
approved for reimbursement by Japanese authorities, which could occur as early
as the fourth quarter of 2007, but is more likely to occur in 2008. Behind the
United States, Japan is considered one of the largest market in the world for
medical devices for use in the gastrointestinal tract. Therefore, we believe
that the Japanese market represents a significant growth opportunity for our
business in 2008 and beyond.

Reimbursement

We believe that the existence of
reimbursement coverage and the amount of reimbursement will continue to
significantly affect the proportion of our revenues that are derived from sales
in the United States. Availability of reimbursement is a key factor in the
decision of physicians and healthcare providers to purchase the Given System
and perform capsule endoscopy procedures. Once a payor has decided to provide
reimbursement for use of the Given System, the level of reimbursement coverage
provided also becomes a key factor in a physicians decision. We estimate that
as of December 31, 2006, reimbursement for small bowel capsule endoscopy was
available worldwide to approximately 400 million people of which approximately
209 million are located in the United States. Most reimbursement policies in
the United States provide 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 for capsule endoscopy was available for
approximately 166 million people as of December 31, 2006 compared to
approximately 110 million people at the end of 2005, and reimbursement for
expanded indications, such as Crohns disease and other small bowel disorders
was available for approximately 101 million people at the end of 2006, compared
to approximately 87 million at the end of 2005. We believe the reimbursement
process in France could be completed in the second half of 2007, which will
result in coverage for approximately 60 million people. This represents a
significant growth opportunity for us in Europe in the foreseeable future.
Finally, reimbursement is available for approximately 20 million individuals in
Australia and New Zealand.

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

In
2006, we also continued our
efforts to establish the PillCam SB capsule as a primary diagnostic tool for
patients with suspected disorders of the small bowel and to convince third
party payers to provide reimbursement coverage for capsule endoscopy as a
primary diagnostic tool. Coverage as a primary diagnostic tool means that
physicians will be able to prescribe the PillCam SB capsule in the first
instance, without the requirement to perform any previous diagnostic procedure.
We believe this could increase physicians use of the PillCam SB capsule. To
convince the payers, we will need to present to them economic and health
outcomes analyses showing the benefits of using the PillCam SB capsule as a
primary diagnostic tool. As a result of these efforts, approximately 18 million
individuals in the United States had reimbursement coverage for PillCam SB as a
primary diagnostic tool, as of December 31, 2006.

Effective
January 1, 2007, the national average global fee paid by Medicare for a
procedure in a physicians office was decreased to $955 and the physician fee
for the professional component of a hospital outpatient procedure was decreased
to $180. 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.

In
2006, we also obtained a permanent CPT code for the esophageal capsule
endoscopy procedure with our PillCam ESO that became effective January 1, 2007.
We have also obtained the first few reimbursement policies for this procedure
with 6.6 million individuals in the United States covered as of January 31,
2007.

-45-

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Competition

In October 2005, Olympus Corporation launched a
competing capsule endoscopy system and began sales in Europe and Australia.
Olympus displayed its capsule endoscopy system at several trade shows, won some
tenders published by public hospitals in Europe, and delivered a number of its
capsule endoscopy systems to customers in Europe and Australia. In addition, based
on publicly available information, Olympus is also conducting clinical trials
in the United States and submitted an application to the FDA seeking clearance
to market its capsule endoscopy system in the United States. According to
public sources, Olympus is also seeking regulatory clearance to market its
capsule endoscopy system in Japan. In addition to Olympus, a Chinese company is
selling its capsule endoscopy systems in China at lower prices than us and
presented its systems at industry trade shows outside Asia. Finally, according
to publicly available information, a South Korean company reported that it
successfully completed clinical trials of a capsule endoscopy system in 2006
and applied for regulatory clearance to market this system in South Korea.

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

Customers and
customer concentration

We market
and sell the Given System through a direct sales force in the United States,
Germany, France, Australia and Israel. We rely on third-party distributors in
international markets outside these countries. We sell the Given System
primarily to hospitals, gastroenterology offices and gastroenterology
outpatient facilities. In 2006, we derived $15.7 million, or 16.5%, of our
revenues from sales to local distributors, compared to $11.9 million, or 13.7%
in 2005. Our direct sales revenues are derived from a large number of
individual customers and have higher gross margins. In 2006, no single direct
sales customer accounted for more than 0.6% of our revenues and no single
distributor accounted for more than 2.5% 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, as well as manufacturing costs and
related depreciation of our production facilities, the salary and related costs
of our technical staff who assemble our products, royalties payable to the
Office of the Chief Scientist, warranty costs and product liability insurance.

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

-46-

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Operating
expenses

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

Sales
and marketing. Our
sales and marketing expenses consist primarily of salaries, commissions to our
sales force, travel and related costs for our internal sales staff and costs
related to marketing activities such as medical meetings, medical training and
education, trade shows, and promotional and public relations activities, as
well as costs associated with development of our website. We expect that our selling and marketing
expenses will increase in the future as we increase sales of PillCam capsules,
further expand our sales and marketing team, expand our educational activities
and expand our promotional efforts. Our marketing expenses include commissions
we pay InScope under our exclusive sales representation, co-promotion and
cooperation agreement for the marketing of the PillCam ESO capsule. Under this
agreement, we pay InScope 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. Accordingly, our marketing
expenses may increase if sales of our PillCam ESO capsule increase. Under the terms of the agreement, as of
December 31, 2006, we received from InScope milestone payments totaling $25
million. We expect to receive an additional $25 million, plus 7% interest
annually, in six installments beginning in January 2008. We record these
milestone payments as a reduction of commission expenses and will recognize
them ratably over the term of the agreement, which is 15 years. Subject to
achieving specified minimum sales targets and meeting certain other conditions,
the exclusive term of the agreement will continue for up to 11 years followed
by a four-year transition period during which InScopes marketing rights will
be co-exclusive with our rights.

General
and administrative.
Our general and administrative expenses consist primarily of salaries and
related costs for our executive and administrative staff, insurance premiums,
and legal, accounting and consulting expenses. We expect general and administrative
expenses to increase significantly in 2007, primarily as a result of legal
expenses associated with our patent litigation in the United States against
Olympus.

Equity-based compensation. Our operating
expenses also include amortization of stock-based compensation, which is
allocated among research and development expenses, marketing expenses and
general and administrative expenses based on the division in which the
recipient of the option grant is employed. In December 2004, the Financial
Accounting Standard Board, or FASB, issued a new Financial Accounting Standard,
FAS 123R, that requires companies, including Given Imaging, to recognize as an
expense the grant-date fair value of stock options and other equity-based
compensation to employees. Effective January 1, 2006, we have adopted FAS 123R
using the modified prospective method for the valuation of our equity-based
compensation. The adoption of FAS 123R resulted in the recognition of $5.2
million of additional compensation expense in 2006 and, consequently, has had a
material impact on our earnings per share. Had FAS123R been in effect during
2004 and 2005, our resulting compensation expense from the granting of options
would have been $13.4 million and $10.3 million, respectively. 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 2007 will be impacted by various factors, including
the number of options we grant and their fair value at the date of grant.

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

Taxes.
In 2006, Israeli companies were generally subject to income tax at the
corporate tax rate of 31%. This tax rate has been reduced to 29% in 2007 and is
expected to be gradually reduced to a rate of 25% by 2010. However, our
investment program in leasehold improvements and equipment at our manufacturing
facility in Yoqneam, Israel has been granted approved enterprise status and,
therefore, we are eligible for the reduced tax benefits described later in this
section in Corporate Tax. These benefits should result in income recognized
by us from our investment program being tax exempt for a specified period after
we begin to report taxable income and exhaust any net operating loss
carry-forwards. However,

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these benefits
may not be applied to reduce the tax rate for any income that is not derived
from sales of our product manufactured at our facility in Yoqneam, Israel.

We
recorded a deferred tax asset of $1.4 million as of December 31, 2006. On
a regular basis, we estimate our actual current tax exposure and assess
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. The
deferred tax asset represents our assessment of accumulated losses that could
be carried forward to future years to reduce taxable income in those future
years. We consider projected future taxable income and tax planning
strategies in making this assessment. We must then assess the likelihood
that our deferred tax assets will be recovered and, to the extent we believe
that recovery is not likely, we must establish a valuation allowance. To the
extent we establish a valuation allowance or increase this allowance in a
period, we must include an expense within the tax provision in the statement
of operations. The deferred tax
asset may be realized over time, depending upon the generation of future
taxable income during the periods in which those accumulated losses become
deductible.

Significant
management judgment is required in determining our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax
assets. Based upon our projections for future taxable income over the
periods in which the deferred tax assets are deductible, we believe that it is
more likely than not that we will realize the benefits of this deferred tax
asset. However, the amount of the deferred tax asset considered realizable
could be reduced in the near term if estimates of future taxable income during
the carry-forward period are reduced.

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

Critical Accounting
Policies

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue recognition. We recognize revenues
  from sales of the Given System upon delivery, provided that collection of
  payment is probable, there is persuasive evidence of an arrangement, no
  significant obligations in respect of installation remain and the price is
  fixed or determinable. Our arrangements with customers and distributors do
  not contain product return rights. Certain of our sales contracts include a
  post-contract customer support, or PCS, component. We defer recognition of
  the revenue attributed to the PCS component of the sale and recognize revenue
  based on the term of the support period, which is generally a one-year period
  following the sale. The fair value of the PCS component is based on the price
  at which we sell customer support contracts separately following the
  expiration of the standard warranty period for our products.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Warranty costs. Our products are usually
  covered by a one-year warranty following sale. We accrue estimated warranty
  costs at the time of shipment. Our warranty reserve is based on our best
  estimate of the amounts
  necessary to settle future claims on products sold as of the balance sheet
  date based on contractual warranty rights and our historical experience of
  the frequency of failures of our products which are not covered by warranties
  that our suppliers give to us. The amount of our estimated warranty liability
  is currently approximately 3.0% of the sales of such products and may change
  if the costs incurred due to product failures increase in the future. In
  2006, our warranty costs did not exceed our reserve of $18,000. In the event
  of any future problems with our products, we will need to increase the amount
  of our reserves.          

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories. Inventories are stated at the
  lower of cost or market, cost being determined on the basis of the average
  cost method for raw materials and finished goods and on the basis of actual
  manufacturing costs for work-in-progress and sub-contractors. We write down
  fully the cost of components in our inventory which we discover do not
  perform during the production process. As we expand and enhance our
  manufacturing operations, the write down of amounts of non-performing
  components in our inventory may change. Spare parts and raw materials that
  are no longer used in producing our products are written down to their fair
  market value. In addition, we add to the cost of finished products held in
  inventory the overhead from our manufacturing process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Foreign currency translation. In preparing
  our consolidated financial statements, we are required to translate non-U.S.
  dollar amounts in our financial statements and the financial statements of
  our subsidiaries into U.S. dollars. Under
  the relevant accounting guidance the treatment of any gains or losses
  resulting from this translation is dependent upon our managements
  determination of the functional currency of each subsidiary. The functional
  currency is determined based on managements judgment and involves
  consideration of all relevant economic facts and circumstances affecting the
  subsidiary. Generally, the currency in which the subsidiary transacts a
  majority of its transactions, including billings, financing, payroll and
  other expenditures would be considered the functional currency. However, any
  dependency upon the parent and the nature of the subsidiarys operations must
  also be considered. If any subsidiarys functional currency is deemed to be
  the local currency, then any gain or loss associated with the translation of
  that subsidiarys financial statements into U.S. dollars would be included as
  other comprehensive income. However,
  if the functional currency of a subsidiary is deemed to be the U.S. dollar,
  then any gain or loss associated with the translation of these financial
  statements would be included within statement of operations. Based on our
  assessment of the factors discussed above, we consider the U.S. dollar to be
  the functional currency for each of our subsidiaries. Therefore, all gains
  and losses from translations are recorded in our statement of operations and
  are included in determining our net income. In the event that we determine
  that the functional currency of these or any future subsidiaries is not the
  U.S. dollar, any foreign currency gains or losses would not affect our net
  income for the year presented.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Accounting for income taxes. As part of the
  process of preparing our consolidated financial statements we are required to
  estimate our income taxes in each of the jurisdictions in which we operate.
  This process requires us to estimate our actual current tax exposure and make
  an assessment of temporary differences resulting from differing treatment of
  items for tax and accounting purposes. These differences result in deferred
  tax assets and liabilities, which are included within our consolidated
  balance sheet. We must then assess the likelihood that our deferred tax
  assets will be recovered and, to the extent we believe that recovery is not
  likely, we must establish a valuation allowance. To the extent we establish a
  valuation allowance or increase this allowance in a period, we must include
  an expense within the tax provision in the statement of operations.
  Significant management judgment is required in determining our deferred tax
  assets and liabilities and any valuation allowance recorded against our net
  deferred tax assets. We have recorded a deferred tax asset, net of $1.4 million
  as of December 31, 2006. Based upon our projections for future taxable
  income in our U.S. subsidiary over the periods in which the deferred tax
  assets are deductible, we believe that we will realize the benefits of these
  deductible differences. The amount of the deferred tax asset considered
  realizable, however, could be reduced in the near term if estimates of future
  taxable income during the carry forward period are reduced.                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Accounting for Equity Awards. Effective January 1, 2006, we adopted SFAS
  No. 123R, which supersedes Accounting Principles Board Opinion No. 25,
  Accounting for Stock Issued to Employees. Generally, the approach in SFAS
  123R is similar to the approach described in SFAS 123 Accounting for
  Stock-Based Compensation (SFAS No. 123). However, SFAS 123R requires all
  equity-based payments to employees, including grants of employee stock
  options, to be recognized in the statement of income based on their fair
  values. We elected the modified-prospective method and therefore prior periods
  were not restated. Under the modified-prospective method, compensation costs
  recognized in 2006 include also compensation costs for all share-based
  payments granted prior to, but not yet vested, as of December 31, 2006. In
  2006, we recognized equity-based compensation expense under SFAS 123R in the
  amount of $5.2 million. When calculating this equity-based compensation
  expense we took into consideration awards that are ultimately expected to
  vest. Therefore, this expense has been reduced for estimated forfeitures. In
  our pro forma information required under SFAS No. 123 for the periods prior
  to fiscal 2006, we accounted for forfeitures as they occurred. We elected to
  apply the intrinsic value-based method prescribed in APB Opinion No. 25 for
  our equity-based                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | compensation
  to employees and directors and provide the pro forma disclosure provisions of
  SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based
  Compensation - Transition and Disclosure, an amendment of SFAS No. 123. As
  such, we computed and recorded compensation expense for grants whose terms
  were fixed with respect to the number of shares and option price only if the
  market price on the date of grant exceeded the exercise price of the stock
  option. The compensation cost for the fixed plans was recorded over the
  period the employee performs the service to which the stock compensation
  relates.

Results of Operations

Our
consolidated statements of operations data for the years ended December 31,
2004, 2005 and 2006 are set forth below:

|                                       |  |                         |         |      |   |         |   |   |         |  
|-------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                       |  | Year ended December 31, |        
|                                       |  |                         |        
|                                       |  | 2004                    |         | 2005 |   | 2006(*) |  
|                                       |  |                         |         |      |   |         |  
|                                       |  | (in thousands)          |        
|Statements of Operations Data:         |  |                         |         |      |   |         |   |   |         |  
|Revenues                               |  | $                       | 65,020  |      | $ | 86,776  |   | $ | 95,029  |  
|Cost of revenues                       |  |                         | 17,734  |      |   | 22,070  |   |   | 24,154  |  
|                                       |  |                         |         |      |   |         |   |   |         |  
|Gross profit                           |  |                         | 47,286  |      |   | 64,706  |   |   | 70,875  |  
|Operating expenses:                    |  |                         |         |      |   |         |   |   |         |  
|Research and development, gross        |  |                         | (7,363  | )    |   | (8,833  | ) |   | (12,678 | )
|Royalty-bearing participation          |  |                         | 1,140   |      |   | 1,244   |   |   | 1,867   |  
|                                       |  |                         |         |      |   |         |   |   |         |  
|Research and development, net          |  |                         | (6,223  | )    |   | (7,589  | ) |   | (10,811 | )
|Sales and marketing                    |  |                         | (33,652 | )    |   | (43,281 | ) |   | (50,732 | )
|General and administrative             |  |                         | (6,916  | )    |   | (9,657  | ) |   | (16,027 | )
|                                       |  |                         |         |      |   |         |   |   |         |  
|Total operating expenses               |  |                         | (46,791 | )    |   | (60,527 | ) |   | (77,570 | )
|                                       |  |                         |         |      |   |         |   |   |         |  
|Operating profit (loss)                |  |                         | 495     |      |   | 4,179   |   |   | (6,695  | )
|Financing income, net                  |  |                         | 956     |      |   | 762     |   |   | 3,980   |  
|Other expenses, net                    |  |                         |        |      |   |        |   |   |        |  
|                                       |  |                         |         |      |   |         |   |   |         |  
|Profit (loss) before taxes on income   |  |                         | 1,451   |      |   | 4,941   |   |   | (2,715  | )
|Taxes on income                        |  |                         | 690     |      |   | 286     |   |   | (127    | )
|                                       |  |                         |         |      |   |         |   |   |         |  
|Profit (loss) before minority share    |  |                         | 2,141   |      |   | 5,227   |   |   | (2,842  | )
|Minority share in losses of subsidiary |  |                         | 747     |      |   | 1,116   |   |   | 1,334   |  
|                                       |  |                         |         |      |   |         |   |   |         |  
|Net profit (loss)                      |  | $                       | 2,888   |      | $ | 6,343   |   | $ | (1,508  | )
|                                       |  |                         |         |      |   |         |   |   |         |  

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* 2006
results include $0.6 million of compensation expense in research and
development, $1.8 million of compensation expense in sales and marketing, and
$2.8 million of compensation expense in general and administrative expenses,
resulting from the grant of options.

Our
historical operating results as a percentage of net revenues for the years
ended December 31, 2004, 2005 and 2006 are set forth below:

|                                       |  |                         |       |      |  |       |   |  |       |  
|-------------------------------------- |  | ----------------------- | ----- | ---- |  | ----- | - |  | ----- | -
|                                       |  | Year ended December 31, |      
|                                       |  |                         |      
|                                       |  | 2004                    |       | 2005 |  | 2006  |  
|                                       |  |                         |       |      |  |       |  
|Statements of Operations Data:         |  |                         |       |      |  |       |   |  |       |  
|Revenues                               |  |                         | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                       |  |                         | 27.3  |      |  | 25.4  |   |  | 25.4  |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Gross profit                           |  |                         | 72.7  |      |  | 74.6  |   |  | 74.6  |  
|Operating expenses:                    |  |                         |       |      |  |       |   |  |       |  
|Research and development, gross        |  |                         | 11.3  |      |  | 10.2  |   |  | 13.3  |  
|Royalty-bearing participation          |  |                         | 1.7   |      |  | 1.4   |   |  | 2.0   |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Research and development, net          |  |                         | 9.6   |      |  | 8.8   |   |  | 11.3  |  
|Sales and marketing                    |  |                         | 51.8  |      |  | 49.9  |   |  | 53.4  |  
|General and administrative             |  |                         | 10.6  |      |  | 11.1  |   |  | 16.9  |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Total operating expenses               |  |                         | 72.0  |      |  | 69.8  |   |  | 81.6  |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Operating profit (loss)                |  |                         | 0.7   |      |  | 4.8   |   |  | (7.0  | )
|Financing income, net                  |  |                         | 1.5   |      |  | 0.9   |   |  | 4.2   |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Profit (loss) before taxes on income   |  |                         | 2.2   |      |  | 5.7   |   |  | (2.8  | )
|Taxes on income                        |  |                         | 1.1   |      |  | 0.3   |   |  | (0.1  | )
|                                       |  |                         |       |      |  |       |   |  |       |  
|Profit (loss) before minority share    |  |                         | 3.3   |      |  | 6.0   |   |  | (2.9  | )
|                                       |  |                         |       |      |  |       |   |  |       |  
|Minority share in losses of subsidiary |  |                         | 1.1   |      |  | 1.3   |   |  | 1.4   |  
|                                       |  |                         |       |      |  |       |   |  |       |  
|Net profit (loss)                      |  |                         | 4.4   |      |  | 7.3   |   |  | (1.5  | )
|                                       |  |                         |       |      |  |       |   |  |       |  

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

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

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

Research
and development. Gross research and development
expenses increased by $3.9 million, or 43.5%, to $12.7 million in 2006 from
$8.8 million in 2005. This increase was due mainly to a $1.4 million increase
in labor expenses, $0.6

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million of
stock-options compensation expenses as a result of the adoption of FAS 123R, an
increase of $0.6 million in investments in R&D projects, an increase of
$0.7 million in investments in clinical trials and an increase of $0.5 million
in other expenses.

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

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

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

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

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

Minority
share in losses of subsidiary. Minority share in
losses of a subsidiary, Given Imaging K.K., was $1.3 million in 2006 compared
to $1.1 million in 2005. Given Imaging K.K. did not generate any significant
revenues in 2005 and 2006 because at that time the Given System had not yet
been approved for marketing by the relevant regulatory authority in Japan.

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

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

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

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improvement in
gross margins was partially offset by an increase of $0.7 million in royalties
payable to the Office of the Chief Scientist, or OCS, and an increase of $1.0 million related to manufacturing expenses,
including depreciation.

Research
and development. Gross research and development
expenses increased by $1.4 million, or 20.0%, to $8.8 million in 2005 from $7.4
million in 2004. This increase was due mainly to a $0.5 million increase
related to additional personnel and employee-related expenses, an increase of
$0.5 million in investments in R&D projects and to an increase of $0.4
million in expenses related to patent registration, maintenance and
depreciation.

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

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

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

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

Taxes
on income.We had a tax benefit of $0.3 million in
2005 compared to a tax benefit of $0.7 million in 2004.

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

Quarterly Results of
Operations

We
believe that some of our customers delay purchasing until the end of the fiscal
quarter because they believe this will enable them to negotiate more favorable
terms. Therefore, a significant portion of our revenues is frequently
concentrated at the end of each fiscal quarter making it difficult for us to
determine the revenues for each quarter until its end and resulting in lower
than expected quarterly revenues if external or other events cause a large
number of potential customers to defer their purchasing decisions even for a
short period of time. In addition, we believe that demand for systems
and capsules is affected by seasonal factors during the summer months when
physicians and administrators are more likely to postpone purchasing decisions
relating to the Given System due to summer vacations, and patients are more
likely to postpone less urgent diagnostic procedures until later in the year.
We believe that the seasonal effect in the third quarter may become more
pronounced assuming the portion of our revenues derived from reorders continues
to grow.

The
tables below set forth unaudited consolidated statement of operations data for
each of the eight consecutive quarters ended December 31, 2006. In
managements opinion, the unaudited consolidated financial statements have been
prepared on the same basis as our audited consolidated financial statements
contained elsewhere in this Form 20-F and

-53-

---



include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such financial information.

|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|-------------------------------------- |  | -------------------- | ------- | ---------------- | - | ---------------- | - | --------------- | ------- | ---------------- | - | --------------- | - | ---------------- | ------- | --------------- | - | ------- | - | - | ------- | - | - | ------- | -
|                                       |  | Three
  months ended |        
|                                       |  |                      |        
|                                       |  | March 31, 
  2005    |         | June 30, 
  2005 |   | Sept. 30,
  2005 |   | Dec. 31,
  2005 |         | March 31,
  2006 |   | June 30,
  2006 |   | Sept. 30,
  2006 |         | Dec. 31,
  2006 |  
|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |  
|                                       |  | (in
  thousands)     |        
|Revenue                                |  | $                    | 22,009  |                  | $ | 20,526           |   | $               | 19,841  |                  | $ | 24,400          |   | $                | 20,268  |                 | $ | 23,239  |   | $ | 24,050  |   | $ | 27,472  |  
|Cost of revenues                       |  |                      | (6,401  | )                |   | (5,051           | ) |                 | (4,618  | )                |   | (6,000          | ) |                  | (5,140  | )               |   | (5,771  | ) |   | (6,058  | ) |   | (7,185  | )
|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Gross profit                           |  |                      | 15,608  |                  |   | 15,475           |   |                 | 15,223  |                  |   | 18,400          |   |                  | 15,128  |                 |   | 17,468  |   |   | 17,992  |   |   | 20,287  |  
|Operating expenses:                    |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Research and development, net          |  |                      | (1,903  | )                |   | (1,617           | ) |                 | (1,687  | )                |   | (2,382          | ) |                  | (3,046  | )               |   | (2,735  | ) |   | (2,306  | ) |   | (2,724  | )
|Sales and marketing                    |  |                      | (10,812 | )                |   | (11,637          | ) |                 | (9,778  | )                |   | (11,054         | ) |                  | (12,693 | )               |   | (13,191 | ) |   | (11,239 | ) |   | (13,609 | )
|General and administrative             |  |                      | (2,039  | )                |   | (2,435           | ) |                 | (2,539  | )                |   | (2,644          | ) |                  | (3,726  | )               |   | (4,118  | ) |   | (4,410  | ) |   | (3,773  | )
|Total operating expenses               |  |                      | (14,754 | )                |   | (15,689          | ) |                 | (14,004 | )                |   | (16,080         | ) |                  | (19,465 | )               |   | (20,044 | ) |   | (17,955 | ) |   | (20,106 | )
|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Operating profit (loss)                |  |                      | 854     |                  |   | (214             | ) |                 | 1,219   |                  |   | 2,320           |   |                  | (4,337  | )               |   | (2,576  | ) |   | 37      |   |   | 181     |  
|Financing income (expenses), net       |  |                      | 51      |                  |   | (415             | ) |                 | 519     |                  |   | 607             |   |                  | 959     |                 |   | 1,418   |   |   | 581     |   |   | 1,022   |  
|Taxes on income                        |  |                      | 74      |                  |   | (16              | ) |                 | (53     | )                |   | 281             |   |                  | 271     |                 |   | (45     | ) |   | (254    | ) |   | (99     | )
|Minority share in losses of subsidiary |  |                      | 269     |                  |   | 281              |   |                 | 253     |                  |   | 313             |   |                  | 61      |                 |   | 539     |   |   | 377     |   |   | 357     |  
|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  
|Net profit (loss)                      |  | $                    | 1,248   |                  | $ | (364             | ) | $               | 1,938   |                  | $ | 3,521           |   | $                | (3,046  | )               | $ | (664    | ) | $ | 741     |   | $ | 1,461   |  
|                                       |  |                      |         |                  |   |                  |   |                 |         |                  |   |                 |   |                  |         |                 |   |         |   |   |         |   |   |         |  

Impact of Currency
Fluctuations

Currency
Risk. Our sales to our customers in 2006 were
denominated 73% in U.S. dollars, 22% in Euros and 5% in other currencies,
depending on the location of the customer or the distributor used to fulfill
our customers orders. In 2006, 25% 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 2006
the U.S. dollar weakened against the Shekel by 8.2%. In addition, 58% of our
expenses were denominated in U.S. dollars, 12% were denominated in Euros and 5%
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, 2006,
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 between the U.S. dollar, Yen, the Shekel, the Australian dollar
and the Euro. In 2006, we have used different hedging tools in order to
minimize the effect of currency fluctuations on our income. If we wish to
maintain the dollar-denominated value of our product in non-U.S. markets,
devaluation in the local currencies of our customers relative to the U.S.
dollar could cause our customers to cancel or decrease orders or default on
payment.

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

From
our inception through December 31, 2006, we raised a total of $151 million
through public and private sales of our equity securities. As of
December 31, 2006, we had $44.5 million in cash and cash equivalents and
an additional amount of $52 million invested in marketable securities. Our
working capital, which we calculate by subtracting our current liabilities from
our current assets, was $79 million.

We believe that our cash reserves and expected cash from operations will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures in 2007. We have also applied to the Office of Chief Scientist for
a grant to support our research and development activities in 2007.

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

-54-

---



|                                                  |  |                         |        |      |   |         |      |   |         |     
|------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | ---- | - | ------- | ----
|                                                  |  | Year ended December 31, |       
|                                                  |  |                         |       
|                                                  |  | 2004                    |        | 2005 |   | 2006    |     
|                                                  |  |                         |        |      |   |         |     
|                                                  |  | (in thousands)          |       
|Net cash
  provided by operating activities       |  | $                       | 11,868 |      | $ | 13,488  |      | $ | 2,861   |     
|Net cash
  used in investing activities           |  |                         | (3,230 | )    |   | (29,883 | )(1) |   | (30,757 | )(1)
|Net cash
  provided by financing activities       |  |                         | 46,816 |      |   | 1,069   |      |   | 6,795   |     
|Effect of
  exchange rate changes on cash         |  |                         | 40     |      |   | (179    | )    |   | 255     |     
|                                                  |  |                         |        |      |   |         |      |   |         |     
|Increase
  (decease) in cash and cash equivalents |  | $                       | 55,494 |      | $ | (15,505 | )    | $ | (20,846 | )   
|                                                  |  |                         |        |      |   |         |      |   |         |     

|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Includes
  $21.9 million net invested in marketable securities in 2005 and $24.9 million
  net in 2006.

Net
cash provided by operating activities was $2.9 million in 2006, compared to
$13.5 million in 2005 and $11.9 million in 2004. The decrease in net cash in
2006 resulted primarily from a reduction of $2.6 million in net income
(excluding compensation expenses which do not have an effect on cash flow) to
$3.7 million, compared to a net income of $6.3 million in 2005, an increase of
$2.0 million in inventories, a net increase in trading securities of $5.1
million and a decrease of $4.8 in accounts receivable due to $5.0 million
received in 2006 from Ethicon Endo - Surgery for the milestone achieved in 2005
under our agreement with Ethicon. The increase in net cash in 2005 resulted
primarily from net income of $6.3 million, a $3.4 million improvement compared
to the $2.9 million net income in 2004, and an increase of $2.4 million in
inventories and of $5.8 in accounts payable due to increased sales and
operating expenses during the year. The increase in net cash provided by
operations in 2005 was partially offset by an increase of $6.1 million in our
accounts receivable due to increased sales and a longer collection cycle in the
United States due to our efforts to correct our errors in sales tax collection
and an increase of $5.0 million in other accounts receivable due to accounting
for the milestone achieved in 2005 but payable by Ethicon Endo-Surgery on or
before April 1, 2006.

Net
cash used in investing activities was $30.8 million in 2006 compared to $29.9
million in 2005 and $3.2 million in 2004. Investing activities in 2006
consisted primarily of investing $24.9 million in marketable securities and
$5.9 million in capital expenditures and the capitalization of costs associated
with our patents and trademarks. Our capital expenditures in 2006 consisted
primarily of $1.9 million in machinery and equipment, $0.5 million in new real
property leases on our facilities, $1.3 million in computers and software, $0.4
million in office furniture and equipment and $1.2 million in patents. Our
capital expenditures in 2005 consisted primarily of $2.3 million in machinery
and equipment, $2.8 million in new real property leases on our facilities, $0.9
million in computers and software, $0.5 million in office furniture and
equipment and $0.9 million in patents. Our capital expenditures in 2004
consisted primarily of $1.4 million in machinery and equipment, $0.3 million in
a new real property lease on our facilities and $0.8 million in patents. We
expect to continue investing significant amounts in 2007 in order to support
our growth plans.

Net
cash provided by financing activities was $6.8 million in 2006, compared to
$1.1 million in 2005 and $46.8 million in 2004. In 2006, net cash provided by
financing activities resulted primarily from proceeds of $2.0 million received
from the exercise of employee stock options and an amount of $4.8 million
representing a minority investment in our Japanese subsidiary, Given Imaging
K.K. In 2005, net cash provided by financing activities resulted primarily from
proceeds from the exercise of employee stock options. The high level of net
cash from financing activities in 2004 was primarily attributable to the
completion of our follow-on public equity offering in June 2004 in which we
raised net proceeds of $44.3 million.

Market Risk

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

Corporate Tax

Israeli
companies were generally subject to income tax at the corporate rate of 31% in
2006. This tax rate has been reduced to 29% in 2007 and is expected to be
gradually reduced to a rate of 25% by 2010 As of December 31, 2006, our
net

-55-

---



operating loss
carry-forwards for Israeli tax purposes amounted to $13.9 million. Under
Israeli law, net operating losses can be carried forward indefinitely and
offset against certain future taxable income.

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

The
period of tax benefits for our approved enterprise programs has not yet
commenced because we are yet to realize taxable income. We expect that a
substantial portion of the income we derive in the future will be from this
approved enterprise program. These benefits should result in income recognized
by us being tax exempt for a specified period after we begin to report taxable
income and exhaust any net operating loss carry-forwards. These benefits may
not be applied to reduce the tax rate for any income that is not derived from
sales of our 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 freedom to pursue production arrangements that may
otherwise be more favorable to us if we want to maintain these tax benefits.
Therefore, we may be required to weigh the possible loss of these benefits
against other benefits from pursuing arrangements which are not, or which may
not be considered by the relevant Israeli authorities to be, in compliance
with these requirements. If we do not meet these requirements, the law permits
the authorities to cancel the tax benefits retroactively.

As
of December 31, 2006, the net operating loss carry-forwards of our
subsidiaries for tax purposes amounted to $26.6 million. A subsidiarys net
operating loss carry-forwards for tax purposes relating to a jurisdiction are
generally available to offset future taxable income of such subsidiary in that
jurisdiction, subject to applicable expiration dates.

Government Grants

Our
research and development efforts have been financed, in part, through grants
from the Office of the Chief Scientist of the Israeli Ministry of Industry,
Trade and Labor. We have received approval for grants totaling $6.8 million
from the Office of the Chief Scientist, including $1.9 million which was
provided by the Office of Chief Scientist to support our 2006 research and
development.

Under
Israeli law, royalties on the revenues derived from sales of the Given System
or any part of the Given System are payable to the Israeli government,
generally at the rate of 3.0% during the first three years of sales and 3.5%
beginning with the fourth year. The maximum aggregate royalties paid generally
cannot exceed 100% of the grants made to us. The amount bears interest equal to
the 12-month London Interbank Offered Rate (LIBOR) applicable to dollar
deposits that is published on the first business day of each calendar year.
Royalties are paid on our consolidated revenues. As of December 31, 2006, we
paid a total of $2.5 million in royalties to the Office of the Chief Scientist,
leaving our remaining royalty payment obligation at $4.3 million as of that
date.

The
government of Israel does not own proprietary rights in technology developed
using its funding and there is no restriction on the export of products
manufactured using the technology. The technology is, however, subject to other
legal restrictions, including the obligation to manufacture the products based
on this technology in Israel and to obtain the Office of the Chief Scientists
consent to transfer the technology or product rights to a third party. These
restrictions may impair our ability to outsource manufacturing or enter into
similar arrangements for those products or technologies and these restrictions
continue to apply even after we have paid the full amount of royalties payable
for the grants. If the

-56-

---



Office of the
Chief Scientist consents to the manufacture of the products outside Israel, the
regulations allow the Office of the Chief Scientist to require the payment of
increased royalties, ranging from 120% to 300% of the amount of the grant plus
interest, depending on the percentage of foreign manufacture. If the
manufacturing is performed outside of Israel by us, the rate of royalties
payable by us on revenues from the sale of products manufactured outside of
Israel will increase by 1% over the regular rates. If the manufacturing is
performed outside of Israel by a third party, the rate of royalties payable by
us on those revenues will be a percentage equal to the percentage of our total
investment in the Given System that was funded by grants. In response to our
request, the Office of the Chief Scientist has approved the manufacture of
limited quantities of the PillCam capsules using the back-up production line
that we have installed at Pemstars facilities in Ireland without increasing
royalty rates.

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

Our
research and development expenditures, excluding grants received from the
Office of the Chief Scientist, were $12.7 million for the year ended December
31, 2006, $8.8 million for the year ended December 31, 2005 and $7.4 million
for the year ended December 31, 2004. Our research and development activities
are conducted by our research and development and regulatory affairs staff
primarily at our headquarters in Israel. As of December 31, 2006, our
research and development, clinical and regulatory and engineering staff
consisted of 78 employees. Our research and development efforts are focused
primarily on developing new capsules to be used in the detection of
abnormalities in the stomach and the colon, improvements to our existing
products and new technologies for future expansion of our product offering. In
2006, we completed the development of the newest version of our AGILE Patency
capsule and received FDA clearance to market this product in the United States
in May 2006. In addition, we completed the development of RAPID Access and
received FDA clearance for this product in May 2006. Finally, during 2006, we
completed the development of the first generation PillCam COLON capsule for
diagnosis of disorders in the colon and received the CE mark to market this
product in Europe and submitted it for clearance by the FDA.

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. During 2007, we intend to complete the development of
and obtain regulatory clearance to several new or improved products. For
example, we intend to introduce a new version of our RAPID software, RAPID 5.0,
which is required for optimal performance of capsule endoscopy of the colon
with our PillCam COLON capsule and new versions of our PillCam SB and PillCam
ESO capsules, which we also expect will become commercially available in the
second half of 2007.

In
addition to our own research and development activities, we are involved in
government-funded research programs. One important program is our leadership of
a European consortium that will develop an integrated imaging and bio-sensing
system to screen for cancer of the gastrointestinal (GI) tract. This
Nano-based capsule-Endoscopy with Molecular Imaging and Optical biopsy,or
NEMO project, began in December 2006.

In
addition to Given Imaging, this consortium includes other European companies
and institutions. The NEMO group will invest a total of 4.7 million over the
next three years in this research, of which the European Commission will
contribute 2.8 million. Given Imagings expected gross and net contribution
during this period is 1.3 million and 0.6 million, respectively.

The
objective of the NEMO project is to increase patient compliance with currently
recommended screening guidelines by developing an advanced cancer screening
system that is patient-friendly, highly-sensitive and specific for early
detection of cancer. To achieve this, NEMO will attempt to integrate optical
technologies with Nano-technologies, bio-sensing and maneuvering technologies
to create a unique PillCam capsule endoscope capable of secretion analysis and
the detection of marked and deep tissue disorders. We believe that the
combination of the image and molecular analysis to mark the tumor may provide a
novel and effective medical device for mass screening of gastrointestinal
cancer.

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

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

-57-

---



|   |                               
|-- | ------------------------------
|E. | OFF-BALANCE SHEET ARRANGEMENTS
|   |                               
|   | N/A                           
|   |                               
|F. | CONTRACTUAL OBLIGATIONS       

The
following table of our material contractual obligations as of December 31,
2006, summarizes the aggregate effect that these obligations are expected to
have on our cash flows in the periods indicated:

|                          |  |                        |        |      |   |       |  |      |       |      |   |             |  |   |       |  |   |        | 
|------------------------- |  | ---------------------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ----------- |  | - | ----- |  | - | ------ | 
|                          |  | Payments due by period |       
|                          |  |                        |       
|Contractual
  obligations |  | Total                  |        | 2007 |   | 2008  |  | 2009 |       | 2010 |   | Later Years | 
|                          |  |                        |        |      |   |       |  |      |       |      |   |             | 
|                          |  | (in thousands)         |       
|Capital
  leases(1)       |  | $                      | 33     |      | $ | 13    |  | $    | 20    |      | $ |            |  |   |       |  |   |        | 
|Operating
  leases(2)     |  |                        | 15,212 |      |   | 2,884 |  |      | 2,432 |      |   | 1,880       |  |   | 1,439 |  |   | 6,577  | 
|Purchasing
  Obligations  |  |                        | 15,138 |      |   | 3,808 |  |      | 2,329 |      |   | 2,250       |  |   | 2,250 |  |   | 4,500  | 
|                          |  |                        |        |      |   |       |  |      |       |      |   |             |  |   |       |  |   |        | 
|Total                     |  | $                      | 30,383 |      | $ | 6,705 |  | $    | 4,781 |      | $ | 4,130       |  | $ | 3,689 |  | $ | 11,077 | 

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

See
Note 8 to our consolidated financial statements included in this annual report
for our royalty commitments to the Office of the Chief Scientist in Israel.

ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

|   |                                  
|-- | ---------------------------------
|A. | DIRECTORS
  AND SENIOR MANAGEMENT

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

|                                  |  |     |  |                                                  
|--------------------------------- |  | --- |  | -------------------------------------------------
|Name                              |  | Age |  | Position                                         
|                                  |  |     |  |                                                  
|                                  |  |     |  |                                                  
|Executive
  Officers:             |  |     |  |                                                  
|Nachum (Homi) Shamir              |  | 53  |  | President, Chief Executive
  Officer and Director
|Kevin Rubey                       |  | 49  |  | Chief Operations Officer                         
|Yuval Yanai                       |  | 54  |  | Chief Financial Officer                          
|Christopher Rowland               |  | 45  |  | President, Given Imaging,
  Inc.                 
|Mark Gilreath                     |  | 41  |  | Chief Marketing Officer                          
|Manfred Gehrtz                    |  | 56  |  | President, International                         
|Ori Braun                         |  | 50  |  | Senior Vice President of
  Business Development  
|                                  |  |     |  |                                                  
|Non-Employee
  Directors:         |  |     |  |                                                  
|Doron Birger (1)(2)               |  | 56  |  | Chairman of the Board of
  Directors             
|James M. Cornelius
  (1)(2)(3)(4) |  | 63  |  | Director                                         
|Michael Grobstein
  (1)(2)(3)(4)  |  | 64  |  | Director                                         
|Chen Barir                        |  | 48  |  | Director                                         
|Eyal Lifschitz (3)                |  | 39  |  | Director                                         
|Prof. Anat Loewenstein            |  | 47  |  | Director                                         

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

-58-

---



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

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

Yuval
Yanai has served as
our Chief Financial Officer since September 1, 2005. From October 2000 through
August 2005, he served as Senior Vice President and Chief Financial Officer of
Koor Industries Ltd., one of Israels largest holding corporations. Prior to
that, from April 1998 to September 2000 he served as Vice President and Chief
Financial Officer of NICE Systems Ltd., an Israeli global provider of Insight
from Interactions, and from 1991 to April 1998, he was the Vice President,
Finance and Chief Financial Officer of Elscint Ltd., a former Israeli company
engaged in the manufacturing of medical imaging devices that was acquired by
larger companies in this field. He joined Elscint in 1985 and served as
Corporate Controller and Corporate Treasurer through 1991. Mr. Yanai has served
as a director of 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 has served as
President of Given Imaging, Inc., our U.S. subsidiary, since May 2006. He
joined us in February 2006 as our Senior Vice President of Business Development
and Corporate Strategy. Prior to that, Mr. Rowland worked for 17 years at
Boston Scientific Corporation, a medical device company, in various sales,
marketing and general management positions across all Boston Scientific
divisions and in several countries. Most recently he was Vice President of
Marketing for the Endovations division of Boston Scientific, where he had
responsibility for all marketing, product development and launch activities of
products in the gastrointestinal field. Prior to that, from 1985 until 1989 Mr.
Rowland worked for Xerox Corporation in various sales positions. Mr. Rowland
has a B. Sc. in Marketing from Southern Illinois University.

Mark
Gilreath has served
as Chief Marketing Officer since January 1, 2006. From February 2003 until
December 2005, he served as Corporate Vice President  Marketing Strategy, from
April 2001 until February 2003 he served as President of Given
Imaging, Inc., from September 2000 until April 2001 as our Vice President
 Global Business Development and from October 1999 to September 2000
as a consultant to us. In 1999, Mr. Gilreath founded VortexMed, Inc.,
a developer of internet sites for healthcare professionals, where he served as
Chief Executive Officer until September 2000. From 1992 to 1999,
Mr. Gilreath held various management positions with PENTAX Precision
Instrument Corporation including Product Manager, Director of Marketing, Area
Sales Manager and Director of Business Development. Prior to joining PENTAX,
from 1989 to 1992, Mr. Gilreath served as an officer in the U.S. Navy. He
holds a B.Sc. in business finance from Winthrop University and an M.B.A. from
the Fuqua School of Business at Duke University.

Manfred
Gehrtz has served as
President, International since January 1, 2006. Prior to that, from January
2004 until December 31, 2005, Mr. Gehrtz served as our Corporate Vice
President, General Manager for Europe. Prior to joining us, from 1995 to 2003,
Mr. Gehrtz was Managing Director, the head of the Endoscope Division and Vice
President of Medical Systems Europe at Olympus Optical Co. (Europa) GmbH, a
developer of products in the fields of photography, endoscopy, microscopy,
communication and diagnostics. From 1990 to 1995, Mr. Gehrtz was Managing
Director and CEO of Aesculap Meditec GmbH, a German company that develops and
manufactures medical laser systems. Prior to that, from 1986 to 1990, Mr.
Gehrtz was a Specialist, Lab Manager and Production Facility Manager at IBM
Deutschland GmbH. Mr.

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Gehrtz holds a Ph. D. in
Physical Chemistry and an M.Sc. in Physics from the University of Munich,
Germany. From 1983 to 1985 Mr. Gehrtz was a Post-Doctoral Fellow at the IBM
Research Laboratory in San Jose, California.

Ori
Braun has served as
Senior Vice President  Business Development since October 2006. Prior to
joining us, Mr. Braun served as President of Valor Inc., a leader in
productivity increasing engineering software solutions to the PCB design,
fabrication and assembly industry. From 2004 to 2005, he served as President of
LifeWatch Inc., a leading cardiac monitoring services company. From 1985 to
2004 he founded and held various CEO and executive positions at Bventure Inc.,
a company providing services to medical startup companies, 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. During this
period, Mr. Braun also co-founded Atria Inc., a company providing solutions for
CHF patients. Between 1994 and 1996, Mr. Braun held the position of Vice
President Business Development at Rafael Development Corporation, or RDC, a
large shareholder of Given Imaging, which is a holding company controlled by
Discount Investment Corporation Ltd., or DIC, another significant shareholder
of Given Imaging. Mr. Braun holds a B.Sc. in Mechanical Engineering from the
Ben Gurion University in Beer Sheva, Israel.

Doron
Birger has served as
Chairman of the board of directors since August 2002 and as a director since
June 2000. Mr. Birger has served as Chief Executive Officer of Elron
Electronic Industries since August 2002, President since 2001, Chief Financial
Officer from 1994 to August 2002, and Corporate Secretary from 1994 to 2001.
Mr. Birger is a director of RDC Rafael Development Corporation and a
director or chairman of the board of directors of many privately held companies
in the Elron group in the fields of medical devices, semiconductors,
communication and advanced materials. From 1991 to 1994, Mr. Birger was
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 interim Chief Executive
Officer of Bristol-Myers Squibb, or BMS, on September 12, 2006 and also serves
as a director of BMS. From November 15, 2005 to April 21, 2006, Mr. Cornelius
served as the chairman of the board of directors 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, a
member of the Executive Committee and Chief Financial Officer of Eli Lilly and
Company. From 1980 to 1982, Mr. Cornelius served as President and Chief
Executive Officer of IVAC Corporation, formerly part of Eli Lillys Medical
Device and Diagnostics Division, and from 1978 to 1980, Mr. Cornelius was
Director of Acquisitions for Eli Lillys Medical Device and Diagnostics
Division. Mr. Cornelius also serves as a director of The DIRECTV Group,
Inc. Mr. Cornelius holds an M.B.A. and a B.A. in accounting from Michigan
State University.

Michael
Grobstein has served
as a director since October 2001 and was elected as an outside director in
December 2001. Mr. Grobstein 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.

Chen
Barir has served as
director since August 2002. Mr. Barir is Chairman of Berman & Co. Trading
and Investments Ltd. and subsidiaries and affiliates, a private investment
company specializing in venture investments and management focusing primarily
on seed or early stage medical device companies, investments and real estate.
Mr. Barir is chairman and Chief Executive Officer of Galil Medical Ltd, a
significant shareholder of which is Elron Electronic

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Industries Ltd., which is
also a major shareholder of the Company. Mr. Barir is also a director of
several privately-held companies in the fields of medical device and real
estate. Mr. Barir holds an LL.B from the Hebrew University of Jerusalem, an
M.B.A. from the European Institute of Business Administration (INSEAD) in
Fontainebleau, France, and a Doctorate in Law and Economics from Harvard Law
School, Cambridge, Massachusetts.

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

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

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

The
aggregate compensation paid by us and our subsidiaries to our directors and
executive officers for the year ended December 31, 2006 was $8.0 million
(excluding director fees detailed below). This amount includes $3.7 million of
stock based-compensation as described below. This amount also includes approximately
$0.3 million set aside or accrued to provide pension, severance, retirement or
similar benefits or expenses, but does not include business travel, relocation,
professional and business association dues and expenses reimbursed to office
holders, and other benefits commonly reimbursed or paid by companies in Israel.

In
2006, we granted our directors and executive officer a total of 735,000 options
to purchase our ordinary shares and 100,000 restricted shares. The exercise
price of these options ranges between $16.22 to $23.55 with a weighted average
exercise price of $19.38. Equity awards granted to executive officers typically
vest ratably over a four-year period. Equity awards granted to 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 $3,750
for their service on our board of directors, and a $1,500 fee for attending and
participating in each meeting of the board of directors or any committee of the
board of directors. The total amount of these payments in 2006 was $275,300 The
directors fees for service by our director, Doron Birger, are paid to Elron
Electronic Industries, where he serves as President and Chief Executive
Officer. In addition, all of our directors were reimbursed for their expenses
for each board of directors meeting attended.

Please
see Item 7 Major Shareholders and Related Party TransactionsAgreements with
Directors and Officers  Employment Agreements for information regarding the
employment agreements and compensation of Nachum Shamir, our President and
Chief Executive Officer.

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

Board of Directors and Officers

Our
articles of association provide that we may have up to 12 directors, each of
whom is elected at an annual general meeting of our shareholders by a vote of
the holders of a majority of the voting power present and voting at that
meeting. Our

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board of directors currently
consists of seven directors. Each director listed above will hold office until
the next annual general meeting of our shareholders, except for our outside directors who were elected in December
2001 for an initial three-year term and were reelected for one additional three
year term in May 2004, which will expire December 31, 2007. Other than Nachum
Shamir, our President and Chief Executive Officer, none of our directors are
our employees or are party to a service contract with us. Mr. Jonathan
Silverstein left our board of directors in May 2006 and Mr. Gavriel Meron left
the board and the employ of the company in September 2006.

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

Each
of our executive officers serves at the discretion of the board of directors
and holds office until his or her successor is elected or until his or her
earlier resignation or removal. In April 2006, Mr. Nachum Shamir began serving
as our President and Chief Executive Officer and a director, replacing Mr.
Gavriel Meron. Mr. Meron continued to serve as an Executive Vice Chairman of
our board of directors until September 8, 2006, when he left the company.

Christopher
Rowland, who at the beginning of 2006 served as our Senior Vice President of
Business Development and Corporate Strategy, was appointed President of Given
Imaging, Inc., our U.S. subsidiary, in May 2006. In October 2006, Mr. Ori Braun
joined us as Senior Vice President of Business Development.

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

Outside and Independent Directors

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

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

An
amendment to the Companies Law that became effective on January 19, 2006
provides that every outside director appointed to the board of directors of an
Israeli company must qualify as a financial and accounting expert or as
professionally competent, as such terms are defined in the applicable
regulations under the Companies Law, and that at least one outside director
must qualify as a financial and accounting expert. We will be required to
comply with these requirements upon the next appointment of our outside
directors in 2007. In addition, this amendment requires Israeli

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companies to determine how
many directors, in addition to the outside directors, qualify as financial and
accounting experts taking into account the nature of the companys business,
the complexity of the activities carried out by the company and the size of its
board of directors. In February 2006, our board of directors determined that at
least one of our directors will be a financial and accounting expert, in
addition to the outside directors. Currently, Doron Birger qualifies as a
financial and accounting expert, as defined in the applicable regulations.

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

Audit Committee

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

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

Internal Auditor

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

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Executive Committee

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

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

As
of December 31, 2006, we and our subsidiaries had 400 employees of whom
194 were based in Israel, 142 in the United States, 46 in Europe, 11 in Japan
and 7 in Australia. This reflects a 18% increase in the number of employees
since December 31, 2005. This increase was mainly in research and development
employees in Israel and sales personnel in our U.S. subsidiary. The primary
reason for this increase was an internal reorganization of our sales, marketing
and product management teams that we implemented in December 2005. We
implemented this change in order to enable us to focus more effectively on particular
markets, clinical indications and technology for each type of PillCam capsule
and each part of the gastrointestinal tract. The reorganization realigned our
activities along product lines and allows us to address more efficiently the
development, marketing and sale of multiple products and the accumulation and
circulation of clinical information related to multiple gastrointestinal tract
organs. We expect our headcount to increase further in 2007, primarily in
research and development, manufacturing and sales and marketing.

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

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|   |                  
|-- | -----------------
|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, see Item 7
Major Shareholders and Related Party Transactions.

Stock Option Plans

2006 Equity Incentive Plan

Our
2006 Equity Incentive Plan provides for the grant of options to purchase our
ordinary shares or the grant of restricted stock to eligible employees,
directors and consultants of us or our subsidiaries. The 2006 equity plan is
administered by our Board of Directors and Compensation and Nominating
Committee. The plan contains provisions concerning the vesting, price, exercise
and other terms of awards; however, in many cases our Compensation and
Nominating Committee has authority to grant awards under different terms at its
discretion. We have reserved for issuance a total of 2,500,000 authorized but
unissued ordinary shares under the 2006 equity plan. As of December 31, 2006,
we had outstanding under this plan options to purchase 539,500 shares and
100,000 shares of restricted stock.

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

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

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

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

Awards
granted under the 2006 equity plan to Israeli residents may be granted under
Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards or
the ordinary shares issued upon their exercise must be deposited with a trustee
for at least two years following the date of the grant. Under Section 102, any
tax payable by an employee from the grant or exercise of the awards is deferred
until the transfer of the awards or ordinary shares by the trustee to the
employee or upon the sale of the awards or ordinary shares. Gains on awards
granted under the 2006 equity plan are subject to a mixed tax rate as follows:
First, any profit derived from the excess of the average price of the ordinary
shares of the company during the 30 trading days prior to the date of grant
over the exercise price of the options and other tax

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deductible
expenses concerning the sale, referred to as the average profit at grant date,
is subject to regular income tax based on the individual tax rate of the exercising
person. Second, any profit resulting from the excess of the selling price of
the shares underlying the options over the average profit at grant date is
subject to capital gains tax at a rate of 25%, if all the conditions and
requirements under Section 102 are fulfilled. Options granted under the plan to
U.S. residents may also qualify as incentive stock options within the meaning
of Section 422 of the U.S. Internal Revenue Code of 1986. The exercise
price for incentive stock options must not be not less than the fair market
value on the date the option is granted, or 110% of the fair market value if
the option holder holds more than 10% of our share capital.

2003 Stock Option Plan

Our
2003 stock option plan provides for a grant of options to our directors,
employees and consultants, including members of our medical advisory committee,
and to the directors, employees or consultants of our subsidiaries. We
initially reserved a total of 1,500,000 ordinary shares for issuance under the
plan. In addition, we have reserved for issuance under the plan any ordinary
shares underlying unvested options granted under our 1998 and 2000 stock option
plans that expire without exercise. As of December 31, 2006, we had outstanding
options to purchase 2,754,102 shares under the 2003 stock option plan

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

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

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

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, 2006, we had outstanding options to purchase 746,502 shares under
the 2000 stock option plan. Ordinary

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shares underlying options
which expire without exercise under the 2000 stock option plan become available
for issuance under the 2003 stock option plan.

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

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

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

1998 Stock Option Plan

Our
1998 stock option provides for the grant of options to our directors,
employees, or consultants, including members of our medical advisory committee.
Our 1998 stock option plan has been superseded by our 2000 stock option plan
and we have ceased issuing options under our 1998 stock option plan. As of
December 31, 2006, we had outstanding options to purchase 74,500 shares under
the 1998 stock option plan. Ordinary shares underlying options which expire
without exercise under the 1998 stock option plan become available for issuance
under the 2003 stock option plan.

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

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

|   |                     
|-- | --------------------
|A. | MAJOR
  SHAREHOLDERS

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

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

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|                                                                                                                                |  |                                            |  |                                            |      |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  | ------------------------------------------ | ---- | -
|Name and Address                                                                                                                |  | Number of Shares 
   Beneficially
   Owned |  | Percentage of 
   SharesBeneficially Owned
|                                                                                                                                |  |                                            |  |                                           
|Principal shareholders:                                                                                                         |  |                                            |  |                                           
|IDB Holding Corporation Ltd. (1)                                                                                                |  | 11,286,975                                 |  |                                            | 39.4 | %
|AXA Assurances I.A.R.D. Mutuelle, AXA Assurances Vie
  Mutuelle,
  AXA Courtage Assurance Mutuelle, AXA, AXA Financial, Inc.(2) |  | 3,760,771                                  |  |                                            | 13.1 |  
|OrbiMed
  Advisors LLC, OrbiMed Capital LLC and Samuel D. Isaly (3)                                                             |  | 1,841,004                                  |  |                                            | 6.4  |  
|Directors and executive officers:                                                                                               |  |                                            |  |                                            |      |  
|Nachum
  Shamir (4)                                                                                                             |  | 180,000                                    |  |                                            | *    |  
|Yuval
  Yanai (5)                                                                                                               |  | 12,500                                     |  |                                            | *    |  
|Kevin
  Rubey (6)                                                                                                               |  | 240,000                                    |  |                                            | *    |  
|Christopher
  Rowland (7)                                                                                                       |  | 8,000                                      |  |                                            | *    |  
|Mark
  Gilreath (8)                                                                                                             |  | 193,900                                    |  |                                            | *    |  
|Manfred
  Gehrtz (9)                                                                                                            |  | 76,000                                     |  |                                            | *    |  
|Ori
  Braun                                                                                                                     |  |                                           |  |                                            |     |  
|Doron
  Birger (10)                                                                                                             |  | 7,307,691                                  |  |                                            | 25.4 |  
|James
  M. Cornelius (11)                                                                                                       |  | 285,000                                    |  |                                            | *    |  
|Michael
  Grobstein (12)                                                                                                        |  | 187,000                                    |  |                                            | *    |  
|Chen
  Barir (13)                                                                                                               |  | 53,500                                     |  |                                            | *    |  
|Eyal
  Lifschitz (14)                                                                                                           |  | 45,500                                     |  |                                            | *    |  
|Anat
  Loewenstein (15)                                                                                                         |  | 12,500                                     |  |                                            | *    |  
|All
  directors and executive officers as a group (16)                                                                          |  | 12,580,875                                 |  |                                            | 43.9 | %

|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                
|*
  Less than 1%
|                
|(1)              | Based on a
  Schedule 13D/A filed on August 14, 2006 and on information provided to us
  supplementally, this number consists of 4,622,703 ordinary shares owned by
  Elron Electronic Industries Ltd., or Elron, 4,002,162 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. This does
  not include 268,580 Ordinary Shares held for members of the public through
  mutual funds, provident funds, pension funds, exchange traded funds and
  insurance policies which are managed by companies controlled by Clal
  Insurance Enterprises Holdings Ltd., a majority owned subsidiary of IDB
  Holding Corporation, or IDBH, which disclaims beneficial ownership of these
  shares. Based on information contained in that Schedule 13D/A and on
  information provided to us supplementally, Elron owns all of the outstanding
  shares of DEP Technology Holdings Ltd. which, in turn, holds 50.1% of the
  voting power of RDC. As a result, Elron may be deemed to be the beneficial
  owner of the ordinary shares owned by RDC. As of January 30, 2007, DIC owned
  approximately 49% of the outstanding shares of Elron and, as a result, DIC
  may be deemed to be the beneficial owner of the ordinary shares owned by RDC
  and by Elron. The address of DIC is The Triangular Tower, 44th Floor, 3
  Azrieli Center, Tel Aviv 67023, Israel. The address of RDC is Building 7, New
  Industrial Park, Yoqneam 20692, Israel. The address of Elron is The
  Triangular Tower, 42nd Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. As of
  January 30, 2007, IDBH owned the majority of the outstanding shares of IDB
  Development Corporation Ltd., or IDBD, which, in turn, owned the majority of
  the outstanding shares of DIC. As a result, IDBH may be deemed to be the
  beneficial owner of the ordinary shares owned by DIC, RDC and Elron. The address
  of each of IDBH and IDBD is The Triangular Tower, 44th Floor, 3 Azrieli
  Center, Tel Aviv 67023, Israel. IDBH and IDBD are public companies traded on
  the Tel Aviv Stock Exchange.
|                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                 | As of
  January 31, 2007, (i) Ganden Holdings Ltd., or Ganden, a private Israeli
  company controlled by Nochi Dankner and his sister Shelly Bergman, held,
  directly and through a wholly-owned subsidiary, approximately 44.88% of the
  outstanding shares of IDBH; (ii) Shelly Bergman, through a wholly-owned
  company, held approximately 7.23% of the outstanding shares of IDBH; (iii)
  Avraham Livnat Ltd., or Livnat, a private Israeli company controlled by
  Avraham Livnat, held, directly and through a wholly-owned subsidiary,
  approximately 10.38% of the outstanding shares of IDBH; and (iv) Manor
  Holdings BA Ltd., or Manor, a private company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | controlled
  by Ruth Manor, held, directly and through a majority-owned subsidiary,
  approximately 10.37% of the outstanding shares of IDBH.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | 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, IDBH (by reason of its
  control of IDBD, and by reason of IDBDs control of DIC), Ganden, Manor and
  Livnat (by reason of their control of IDBH) and Nochi Dankner, Shelly
  Bergman, Ruth 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
  of IDBH, IDBD and DIC. Isaac Manor (the husband of Ruth Manor) and Zvi Livnat
  (a son of Avraham Livnat) are directors of IDBH, IDBD and DIC. Shai Livnat (another son of Avraham Livnat)
  is a director of IDBD. Dori
  Manor (the son of Isaac and Ruth Manor) is a director of IDBH, IDBD, DIC and
  Elron. The address of Nochi Dankner is The Triangular Tower, 44th
  Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. The address of Shelly
  Bergman is 9 Mishmar Ezrehi, Afeka, Tel Aviv, Israel. The address of Ruth
  Manor is 26 Hagderot Street, Savyon, Israel. The address of Avraham Livnat is
  Taavura Junction, Ramle, Israel. These individuals disclaim beneficial
  ownership of the shares owned by the foregoing entities except to the extent
  of their pecuniary interest therein. On September 29, 2003, Elron and DIC
  entered into a voting agreement pursuant to which, among other things, DIC
  agreed to vote all of its ordinary shares in favor of nominees to our board of
  directors proposed by Elron. The voting agreement is for a term of one year
  and renews automatically each year thereafter unless terminated by notice of
  either party to the other party no later than August 30 in each year, or
  unless earlier terminated by agreement of both parties thereto.           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(2) | Based on a Schedule 13G/A
  filed on February 14, 2007, consists of 3,584,045 ordinary shares owned by
  Alliance Bernstein L.P., or Alliance, and 176,726 ordinary shares owned by
  AXA Equitable Life Insurance Company, or AXA Equitable. Based on information
  contained in the Schedule 13G/A, Alliance and AXA Equitable are subsidiaries
  of AXA Financial, Inc. AXA Financial, Inc. is a parent holding company with
  respect to the holdings of Alliance, AXA Equitable and Frontier Trust
  Company, FSB (Advest Trust). Each of Alliance and AXA Equitable operates
  under independent management and makes independent decisions. AXA Financial,
  Inc. is controlled by AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie
  Mutuelle and AXA Courtage Assurance Mutuelle (collectively, the Mutuelles
  AXA), as a group. The address of AXA Assurances I.A.R.D Mutuelle and AXA
  Assurances Vie Mutuelle is 26, rue Drouot, 75009 Paris, France. The address
  of AXA Courtage Assurance Mutuelle is 26, rue Drouot, 75009 Paris, France.
  The address of AXA is 25, avenue Matignon, 75008 Paris, France. The address
  of AXA Financial, Inc. is 1290 Avenue of the Americas, New York, NY 10104.
  Each of the Mutuelles AXA, as a group, expressly disclaims beneficial
  ownership of any securities owned by the foregoing entities.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Based on a
  Schedule 13G/A filed on February 14, 2007, consists of 1,551,404 ordinary
  shares owned by OrbiMed Capital LLC and 289,600 ordinary shares held by
  OrbiMed Advisors LLC. Based on the information contained in the Schedule
  13G/A, OrbiMed Capital and OrbiMed Advisors hold 1,299,233 of these ordinary
  shares on behalf of Caduceus Private Investments L.P., or Caduceus; 202,600
  ordinary shares on behalf of Eaton Vance Worldwide Health Sciences Portfolio,
  or Eaton Vance; 202,500 ordinary shares on behalf of Finsbury Worldwide
  Pharmaceutical Trust, or Finsbury; 87,000 ordinary shares on behalf of UBS
  Juniper Crossover Fund LLC, or Juniper; and 47,369 ordinary shares on behalf
  of OrbiMed Associates LLC, or OrbiMed Associates. In addition, Caduceus owns
  2,157 warrants to purchase ordinary shares and OrbiMed Associates owns 145
  warrants to purchase ordinary shares. Samual D. Isaly owns a controlling
  interest in OrbiMed Advisors and OrbiMed Capital. The address of OrbiMed
  Advisors, OrbiMed Capital and Samuel D. Isaly is 767 Third Avenue, 30th
  Floor, New York, NY 10017.                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | Consists of 5,000 ordinary
  shares, 100,000 shares of restricted stock and options to purchase 75,000
  ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | Consists of 5,000 ordinary
  shares and options to purchase 7,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(6) | Consists of options to
  purchase 240,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7)  | Consists of 3,000 ordinary
  shares and options to purchase 5,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(8)  | Consists of 1,400 ordinary
  shares and options to purchase 192,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(9)  | Consists
  of 1,000 ordinary shares and options to purchase 75,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(10) | Consists of 2,878 ordinary
  shares and 20,000 options to purchase ordinary shares owned by Mr. Birger
  personally, 2,662,110 ordinary shares owned by RDC Rafael Development
  Corporation and 4,622,703
  ordinary shares owned by Elron Electronic Industries. Mr. Birger is a
  director of RDC Rafael Development Corporation and President and Chief
  Executive Officer of Elron Electronic Industries and by virtue of his
  position may be deemed to have voting and investment power, and thus
  beneficial ownership with respect to the shares that Elron Electronic
  Industries and RDC Rafael Development Corporation own. Mr. Birger disclaims
  such beneficial ownership except to the extent of his pecuniary interest
  therein.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(11) | Consists of 121,038
  ordinary shares held in person, 38,962 ordinary shares held in a trust to the
  benefit of family members to which Mr. Cornelius disclaims beneficial
  ownership, and options to purchase 125,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(12) | Consists of 30,000
  ordinary shares and options to purchase 157,000 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(13) | Consists of options to
  purchase 50,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(14) | Consists of options to
  purchase 45,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(15) | Consists of options to
  purchase 12,500 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(16) | Includes 11,286,975 ordinary shares beneficially owned by IDB Holding Corporation, as
  well as ordinary shares and options to purchase ordinary shares held by
  directors and officers in their personal capacities or by their nominees. Our
  directors and officers disclaim beneficial ownership of the shares owned by
  the foregoing entities except to the extent of their pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|B.   | RELATED
  PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Registration Rights Agreement

In
December 2006, our Audit Committee and Board of Directors approved a proposed
Registration Rights Agreement among us, Elron, DIC and RDC. Elron, DIC and RDC
own an aggregate of 39.4% of our ordinary shares and are collectively referred
to as the affiliated shareholders. This Registration Rights Agreement is
intended to replace earlier registration rights granted by us to Elron, DIC,
RDC, entities affiliated with OrbiMed Capital LLC and other shareholders in
connection with a private placement completed in September 2000, before our
initial public offering. These earlier registration rights expired in October
2006.

Our
Board of Directors believes that this agreement is necessary to protect the
market for our ordinary shares. During 2006, the affiliated shareholders
demonstrated their commitment to our business by increasing their ownership
level by purchasing additional shares in the open market. The proposed 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.

This
registration Rights Agreement requires approval by our shareholders and will be
submitted for approval in our next annual meeting of shareholders expected in
July 2007. Since the affiliated shareholders are considered controlling
shareholders under the Companies Law, the approval of this Registration Rights Agreement
requires the vote of a majority of the shares present at the meeting, provided
that either such majority includes (1) the affirmative vote of at least
one-third of the shares of shareholders who do not have a personal interest in
the subject matter of the proposed resolution, voting in person or by proxy,
not including abstention votes, or (2) the total number of shares voted against
the approval by

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---



shareholders who do not have
a personal interest in the subject matter of the proposed resolutions, does not
exceed one percent (1%) of the aggregate voting rights in the company. Elron,
DIC and RDC are controlling shareholders of the Company.

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

Demand Registration Rights

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

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

Incidental Registration Rights

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

Form F-3 Registration Rights

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

Termination

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

Expenses

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

Agreement for Travel Services

In
2005, we engaged Diesenhaus to provide us with travel-related services for
Israeli employees. Diesenhaus is a provider of travel services in Israel and is
controlled by IDB Holding Corporation Ltd., which beneficially owns
approximately 39.4% of our ordinary shares. The terms of our engagement with
Diesenhaus are similar to the terms we have

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with other providers of
travel services to us. In 2006, we paid Diesenhaus a total of $146,000, or 26%
of our travel expenses. This agreement was approved by our audit committee and
board of directors in accordance with Israeli law.

Agreement for Mobile Communication Services.

In
December 2005, we entered into an agreement with Cellcom Ltd., an Israeli
provider of mobile communication services. Cellcom is controlled by IDB Holding
Corporation Ltd., which is also a controlling shareholder of our company. Under
the agreement, Cellcom will be the sole provider of mobile communication to us
during the term of the agreement. This agreement was approved by our audit
committee and Board of Directors in accordance with Israeli law. In 2006, we paid
Cellcom a total of $155,000.

Directors Fees

We pay
directors fees in respect of service by our directors (other than our President
and Chief Executive Officer, Nachum Shamir). See Item 6 Directors, Senior
Management and Employees  Compensation.

Agreements with Directors and Officers

Employment Agreements

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

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

Under
his employment agreement, in fiscal year 2006, Mr. Shamir received (1) an annual
base salary of $330,000, pro rated for the number of complete calendar months
during which Mr. Shamir was employed by us in 2006, (2) a cash bonus of $371,125, which is 150% of Mr. Shamirs annual salary,
pro rated for the number of complete calendar months during which Mr. Shamir
was employed by us in 2006, (3) a grant of options to purchase 300,000
of our ordinary shares at an exercise price of $17.78 per share, 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 commencement of Mr. Shamirs
employment, and (4) a grant of 100,000 restricted shares, vesting in four equal
installments beginning on the first anniversary of the date of commencement of
Mr. Shamirs employment. We have also agreed to pay Mr. Shamir a relocation
bonus of $50,000. Mr. Shamir is also entitled to other standard benefits, such
as a car allowance, medical and life insurance benefits and reimbursement of
expenses.

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

If
we terminate Mr. Shamirs employment following a change of control event (as defined
in the employment agreement) or if Mr. Shamir terminates his employment for
good reason following a change of control event, Mr. Shamir is entitled to
receive (1) all remuneration, including any earned but unpaid bonus, and
benefits payable during the 24-

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---



month period following
notice of termination, and (2) accelerated vesting with respect to those
options and shares of restricted stock that would have vested during the
24-month period following the effective date of such termination.

For
fiscal year 2007, our audit committee and board of directors approved for Mr.
Shamir (1) an annual base salary of $354,750, effective July 1, 2007, (2) a cash bonus of up to 200% of Mr. Shamirs
annual salary, subject to meeting certain personal and company performance
targets determined from time to time at the discretion of the board of
directors, and (3) a grant of options to purchase 80,000 of our ordinary
shares, the exercise price of which will be equal to the closing price of the
ordinary shares on the Nasdaq Global Market on the date the shareholders
approve the grant, vesting in four equal installments beginning on the first
anniversary of the date of the grant. The compensation of Mr. Shamir in 2007 as
described above is subject to approval by our shareholders at our next annual
shareholders meeting expected in July 2007.

Exculpation, Insurance and Indemnification

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

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

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

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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | a breach of duty of care
  committed intentionally or recklessly;                
| |   |                                                                                  
| |  | an act or omission
  committed with intent to derive illegal personal benefit; or
| |   |                                                                                  
| |  | a fine levied against the
  office holder.                                       

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

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

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

|                                |                                                        
|------------------------------- | -------------------------------------------------------
|C.                              | INTERESTS
  OF EXPERTS AND COUNSEL                     
|                                |                                                        
|                                | Not applicable.                                        
|                                |                                                        
|ITEM 8.
  FINANCIAL INFORMATION
|                               
|A.                              | CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION

Financial Statements

See
Item 18 for audited consolidated financial statements.

Export Sales

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

Legal Proceedings

Patent Disputes

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

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

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

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

We
believe we have reasonable chance of success in this case.  However, at the current time, prior to the
completion of discovery and prior to Olympuss sale of its capsule endoscopy
products in the United States., it is premature to predict the outcome of this
case.  We believe 2007 will be dedicated
to the discovery phase in this litigation and we are not expecting a ruling
before the end of 2008.  The ongoing
litigation and any unfavorable outcome in the litigation may have a material
adverse effect on our operating results.

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

Dividend Policy

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

Significant Changes

Except
as otherwise disclosed in this Form 20-F, there has been no significant change
in our financial position since December 31, 2006.

ITEM 9. THE OFFER AND LISTING

|   |                          
|-- | -------------------------
|A. | OFFER AND LISTING DETAILS

Nasdaq
Global Market

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

|                      |  |      |       |     |   |       | 
|--------------------- |  | ---- | ----- | --- | - | ----- | 
|Annual Highs and Lows |  | High |       | Low |  
|                      |  |      |       |     |  
|                      |  |      |       |     |   |       | 
|2006                  |  | $    | 28.37 |     | $ | 14.46 | 
|2005                  |  | $    | 36.04 |     | $ | 20.39 | 
|2004                  |  | $    | 44.08 |     | $ | 17.87 | 
|2003                  |  | $    | 18.80 |     | $ | 6.65  | 
|2002                  |  | $    | 18.05 |     | $ | 6.91  | 

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|                         |  |      |       |     |   |       | 
|------------------------ |  | ---- | ----- | --- | - | ----- | 
|Quarterly Highs and Lows |  | High |       | Low |  
|                         |  |      |       |     |  
|                         |  |      |       |     |   |       | 
|1st quarter 2007         |  | $    | 22.04 |     | $ | 19.25 | 
|                         |  |      |       |     |   |       | 
|1st quarter 2006         |  | $    | 28.37 |     | $ | 21.65 | 
|                         |  |      |       |     |   |       | 
|2nd quarter 2006         |  | $    | 24.07 |     | $ | 15.06 | 
|3rd quarter 2006         |  | $    | 19.85 |     | $ | 14.46 | 
|4th quarter 2006         |  | $    | 22.76 |     | $ | 18.85 | 
|                         |  |      |       |     |   |       | 
|1st quarter 2005         |  | $    | 36.04 |     | $ | 29.53 | 
|2nd quarter 2005         |  | $    | 29.66 |     | $ | 22.51 | 
|3rd quarter 2005         |  | $    | 26.41 |     | $ | 20.92 | 
|4th quarter 2005         |  | $    | 27.46 |     | $ | 20.39 | 

|                         |  |      |       |     |   |       | 
|------------------------ |  | ---- | ----- | --- | - | ----- | 
|Most
  Recent Six Months |  | High |       | Low |  
|                         |  |      |       |     |  
|                         |  |      |       |     |   |       | 
|April 2007               |  | $    | 21.22 |     | $ | 24.49 | 
|March 2007               |  | $    | 22.04 |     | $ | 19.79 | 
|February
  2007          |  | $    | 21.75 |     | $ | 20.21 | 
|January 2007             |  | $    | 21.69 |     | $ | 19.25 | 
|December
  2006          |  | $    | 21.81 |     | $ | 19.07 | 
|November
  2006          |  | $    | 22.76 |     | $ | 20.51 | 

On
March 31, 2007, the closing price of our ordinary shares on the Nasdaq Global
Market was $21.60 per share.  According
to our transfer agent, as of March 31, 2007, there were approximately 122
holders of record of our ordinary shares.

Tel
Aviv Stock Exchange

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

|                      |  |      |           |     |  |           | 
|--------------------- |  | ---- | --------- | --- |  | --------- | 
|Annual Highs and Lows |  | High |           | Low | 
|                      |  |      |           |     | 
|                      |  |      |           |     |  |           | 
|2006                  |  |      | NIS132.60 |     |  | NIS65.02  | 
|2005                  |  |      | NIS155.30 |     |  | NIS95.79  | 
|2004                  |  |      | NIS194.60 |     |  | NIS123.90 | 

|                         |  |      |           |     |  |           | 
|------------------------ |  | ---- | --------- | --- |  | --------- | 
|Quarterly Highs and Lows |  | High |           | Low | 
|                         |  |      |           |     | 
|                         |  |      |           |     |  |           | 
|1st quarter 2007         |  |      | NIS92.74  |     |  | NIS81.47  | 
|                         |  |      |           |     |  |           | 
|1st quarter 2006         |  |      | NIS132.60 |     |  | NIS101.60 | 
|2nd quarter 2006         |  |      | NIS109.80 |     |  | NIS 67.36 | 
|3rd quarter 2006         |  |      | NIS86.50  |     |  | NIS 65.02 | 
|4th quarter 2006         |  |      | NIS98.27  |     |  | NIS 80.54 | 
|                         |  |      |           |     |  |           | 
|1st quarter 2005         |  |      | NIS155.30 |     |  | NIS129.20 | 
|2nd quarter 2005         |  |      | NIS129.30 |     |  | NIS102.90 | 
|3rd quarter 2005         |  |      | NIS118.50 |     |  | NIS95.99  | 
|4th quarter 2005         |  |      | NIS126.00 |     |  | NIS95.79  | 

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|                         |  |      |          |     |  |          | 
|------------------------ |  | ---- | -------- | --- |  | -------- | 
|Most
  Recent Six Months |  | High |          | Low | 
|                         |  |      |          |     | 
|                         |  |      |          |     |  |          | 
|April 2007               |  |      | NIS96.20 |     |  | NIS86.14 | 
|March 2007               |  |      | NIS92.63 |     |  | NIS83.88 | 
|February
  2007          |  |      | NIS92.74 |     |  | NIS86.01 | 
|January 2007             |  |      | NIS91.44 |     |  | NIS81.47 | 
|December
  2006          |  |      | NIS92.95 |     |  | NIS80.54 | 
|November
  2006          |  |      | NIS98.27 |     |  | NIS90.34 | 

The
average exchange ratio of NIS to U.S. dollar in 2006 was NIS 4.4565 to $1.00.

|   |                       
|-- | ----------------------
|B. | PLAN OF
  DISTRIBUTION
|   |                       
|   | Not applicable.       
|   |                       
|C. | MARKETS               

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

|                                  |                                         
|--------------------------------- | ----------------------------------------
|D.                                | SELLING
  SHAREHOLDERS                  
|                                  |                                         
|                                  | Not applicable.                         
|                                  |                                         
|E.                                | DILUTION                                
|                                  |                                         
|                                  | Not applicable.                         
|                                  |                                         
|F.                                | EXPENSES
  OF THE ISSUE                 
|                                  |                                         
|                                  | Not applicable.                         
|                                 
|ITEM 10.
  ADDITIONAL INFORMATION
|                                  |                                         
|A.                                | SHARE
  CAPITAL                         
|                                  |                                         
|                                  | Not applicable.                         
|                                  |                                         
|B.                                | MEMORANDUM
  AND ARTICLES OF ASSOCIATION

Objects

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

Transfer of Shares and Notices

Fully
paid ordinary shares are issued in registered form and may be freely
transferred under our articles of association unless the transfer is restricted
or prohibited by another instrument, Israeli law or the rules of a stock
exchange on

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which
the shares are traded.  Our articles of
association provide that each shareholder of record is entitled to receive at
least 21 days prior notice of any shareholders meeting.

Election of Directors

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

Dividend and Liquidation Rights

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

Shareholder Meetings

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

Quorum

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

Voting

Holders
of our ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders at a shareholder meeting.  Shareholders may vote at shareholder
meetings either in person or by proxy. Israeli law does not provide for public
companies such as us to have shareholder resolutions adopted by means of a
written consent in lieu of a shareholder meeting.  Shareholder voting rights may be affected by the grant of any
special voting rights to the holders of a class of shares with preferential
rights that may be authorized in the future.
The Companies Law provides that a shareholder, in exercising his or her
rights and performing his or her obligations toward the company and its other

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shareholders,
must act in good faith and in an acceptable manner, and avoid abusing his or
her powers.  This is required when
voting at general meetings on matters such as changes to the articles of
association, increasing the companys registered capital, mergers and approval
of related party transactions.  A
shareholder must also avoid oppression of other shareholders.  In addition, any controlling shareholder,
any shareholder who knows that its vote can determine the outcome of a
shareholder vote and any shareholder who, under the companys articles of
association, can appoint or prevent the appointment of an office holder, is
required to act with fairness towards the company.  The Companies Law does not describe the substance of this duty
and there is no binding case law that addresses this subject directly. Any
voting agreement is also subject to these duties.

Resolutions

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

Under
the Companies Law, unless otherwise provided in the articles of association or
applicable law, 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 written
ballot and voting on the resolution.

Access to Corporate Records

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

Acquisitions under Israeli Law

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

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

Merger.  The Companies Law permits merger
transactions if approved by each partys board of directors and the majority of
each partys shares voted on the proposed merger at a shareholders meeting
called on at least 21 days prior notice.
Shareholder approval is not required in certain specified circumstances,
such as a merger between a company and its wholly-owned subsidiary.  Under the Companies Law, merger transactions
may be approved by holders of a simple majority of our shares present, in
person or by proxy, at a general meeting and voting on the transaction.  In determining whether the

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required
majority has approved the merger, if our shares are held by the other party to
the merger, or by any person holding at least 25% of the outstanding voting
shares or 25% of the means of appointing directors of the other party to the
merger, then a vote against the merger by holders of the majority of the shares
present and voting, excluding shares abstaining and shares held by the other
party or by such person, or anyone acting on behalf of either of them, is
sufficient to reject the merger transaction.
If the transaction would have been approved but for the exclusion of the
votes of certain shareholders as provided above, a court may still approve the
merger upon the request of holders of at least 25% of the voting rights of a
company, if the court holds that the merger is fair and reasonable, taking into
account the value of the parties to the merger and the consideration offered to
the shareholders.  Upon the request of a
creditor of either party to the proposed merger, the court may delay or prevent
the merger if it concludes that there exists a reasonable concern that, as a
result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger.  In addition, a merger may not be executed unless at least
50 days have passed from the time that a proposal for approval of the
merger has been filed with the Israeli Registrar of Companies and at least 30
days have passed from the approval of the shareholders of each of the parties.

Anti-Takeover Measures

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

Transfer Agent and Registrar

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

|   |                     
|-- | --------------------
|C. | MATERIAL
  CONTRACTS

Summaries
of the following material contracts and amendments to these contracts are
included in this Form 20-F in the places indicated:

|                                           |  |                                                                                                   
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------
|Material
  Contract                        |  | Location                                                                                          
|                                           |  |                                                                                                   
|Agreements with Micron
  Technology, Inc.  |  | Item 4.B: Information on
  the Company  Part B: Business Overview  Manufacturing.             
|Agreement with Zarlink
  Semiconductors AB |  | Item 4.B: Information on
  the Company  Part B: Business Overview  Manufacturing.             
|Agreement with Ethicon
  Endo-Surgery Inc. |  | Item 4.B: Information on
  the Company  Part B: Business Overview  Marketing and Distribution.

|   |                    
|-- | -------------------
|D. | EXCHANGE
  CONTROLS

In
1998, Israeli currency control regulations were liberalized significantly, so
that Israeli residents generally may freely deal in foreign currency and
foreign assets, and non-residents may freely deal in Israeli currency and
Israeli assets. There are currently no Israeli currency control restrictions on
remittances of dividends on the ordinary shares or the proceeds from the sale
of the shares provided that all taxes were paid or withheld; however,
legislation remains in effect pursuant to which currency controls can be
imposed by administrative action at any time.

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

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|   |         
|-- | --------
|E. | TAXATION

Israeli Tax Considerations and Government Programs

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

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

Taxation of Companies

General
Corporate Tax Structure.  In 2006, Israeli
companies were subject to corporate tax at the rate of 31% of taxable
income.  This tax rate has been reduced
to 29% in 2007 and is expected to decrease gradually to 25% by 2010.  However, the effective tax rate payable by a
company that derives income from an approved enterprise, as discussed further
below, may be considerably less.

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

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

A
company having an approved enterprise status may elect to receive an
alternative package of benefits.  Under
the alternative package of benefits, a companys undistributed income derived
from an approved enterprise will be exempt from 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 amount distributed.  The rate of the tax will be the rate which
would have been applicable had the company not been tax exempt.  This corporation tax rate is 10% to 25%,
depending on the percentage of the companys shares held by foreign shareholders.  The recipient of 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.

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

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

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

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

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

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

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

|                                       |  |                                                             |      | 
|-------------------------------------- |  | ----------------------------------------------------------- | ---- | 
|Manufacturing Volume Outside of Israel |  | Royalties to the Chief Scientist
  as a Percentage of Grant |     
|                                       |  |                                                             |     
|                                       |  |                                                             |      | 
|less
  than 50%                        |  |                                                             | 120% | 
|between
  50% and less than 90%        |  |                                                             | 150% | 
|90%
  and more                         |  |                                                             | 300% | 

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

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

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

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

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

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

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

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

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

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

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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 2006 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Where
  a companys depreciated cost of fixed assets exceeds its equity, then the
  excess multiplied by the applicable annual rate of inflation is added to
  taxable income.                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Depreciation
  deductions on fixed assets and losses carried forward are adjusted for
  inflation based on the increase in the consumer price index.                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Gains
  on traded securities are taxable in specified circumstances.                                                                                                                                                                                                                                                                                                                                        

Taxation of Our Shareholders

Capital
Gains on Sales of Our Ordinary Shares.  Israeli
law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between real gain and inflationary surplus.  The inflationary surplus is the portion of
the total capital gain that is equivalent to the increase of the relevant
assets purchase price which is attributable to the increase in the Israeli
consumer price index between the date of purchase and the date of sale.  Foreign residents who purchased an asset in
foreign currency may request that the inflationary surplus be computed on the
basis of the devaluation of the Shekel against such foreign currency.  The real gain is the excess of the total
capital gain over the inflationary surplus.
The inflationary surplus accumulated from and after December 31,
1993, is exempt from any capital gains tax in Israel while the real gain is
taxed at the applicable rate discussed below.

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

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

| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | who
  qualifies as a resident of the United States within the meaning of the
  U.S.-Israel tax treaty; and
| |   |                                                                                                           
| |  | who
  is entitled to claim the benefits available to the person by the U.S.-Israel
  tax treaty.          

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

For
residents of other countries, the purchaser of shares may be required to
withhold 25% capital gains tax on all amounts received for the sale of our ordinary
shares, for so long as the capital gain from such a sale is not exempt from
Israeli capital gains tax, and unless a different rate is provided in a treaty
between Israel and the sellers country of residence.

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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,
and (B) the shares were acquired by the foreign resident after the companys
shares had been listed for trading on the foreign exchange. In addition, capital gains from the sale of our
ordinary shares by non-Israeli residents who purchased or will have purchased
the shares between July 1, 2005 and December 31, 2008 and whose state of
residence has a double tax treaty with Israel will generally be tax exempt
irrespective of whether our shares are listed on any stock exchange. If the
shares were sold by Israeli residents, then (A) for the period ending December
31, 2002, their sale would be tax exempt so long as (1) the shares are listed
on a stock exchange, such as the Nasdaq Global Market, which is recognized by
the Israeli Ministry of Finance, and (2) we qualified as an industrial company
or industrial holding company under the Law for Encouragement of Industry (Taxes)
1969, and (B) for the period
commencing January 1, 2003, the sale of the shares would be subject to a 20%
tax, or 25% if the seller holds 10% or more of the means of control of our
company, as such term is defined by the law.
We believe that in 2006 we qualified as an Industrial Company under the
Law for Encouragement of Industry (Taxes) 1969.  We cannot provide any assurance that the Israeli tax authorities
will agree with the determination that we qualified as an industrial
company in the past or that we will maintain
this qualification or our status as an industrial company.  If we are delisted, gains from the sale of
our ordinary shares will be subject to capital gains tax at a rate of
20% or 25% if the seller holds 10% or more
of the means of control of our company, as such term is defined by the law,
unless an exemption or other lower tax rate applies in accordance with a tax
treaty between Israel and the shareholders country of residence.

Non-residents
of Israel are subject to tax on income accrued or derived from sources in
Israel.  These sources of income include
passive income such as dividends, royalties and interest, as well as
non-passive income, such as income received for services rendered in
Israel.  We are required to withhold
income tax at the rate of 25% with respect to passive income (or 15% for
dividends distributed from income generated by an approved enterprise) unless a
different rate or an exemption is provided in a tax treaty between Israel and
the shareholders country of residence.

Under
an amendment to the Inflationary Adjustments Law, non-Israeli corporations
might be subject to Israeli taxes on the sale of shares in an Israeli company
which are traded on certain stock markets, including The Nasdaq Global Market,
subject to the provisions of any applicable double taxation treaty.

Stamp Duty

Until
December 31, 2005, stamp duty applied in Israel to various types of documents
at various rates, depending primarily on the type of the document and the
amount specified therein, if any.  The
Israeli legislature has cancelled the stamp duty for any documents or
transactions, effective January 1, 2006.

United States Federal Income Taxation

The
following is a description of the material United States federal income tax
consequences of the ownership of our ordinary shares.  This description does not purport to address all of the tax
considerations that may be relevant to a decision to purchase, own or dispose
of our ordinary shares.  This description
assumes that holders of our ordinary shares will hold the ordinary shares as
capital assets.  This summary does not
address tax considerations applicable to holders who may be subject to special
tax rules, including:

| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | dealers
  or traders in securities or currencies;                                                        
| |   |                                                                                                          
| |  | tax-exempt
  entities;                                                                                   
| |   |                                                                                                          
| |  | banks,
  financial institutions or insurance companies;                                                  
| |   |                                                                                                          
| |  | real
  estate investment trusts, regulated investment companies or grantor trusts;                       
| |   |                                                                                                          
| |  | persons
  who received our ordinary shares as compensation for the performance of
  services;            
| |   |                                                                                                          
| |  | holders
  who own, or are deemed to own, at least 10% or more, by voting power or
  value, of our shares;

-85-

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| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | certain
  former citizens or residents of the United States;                                                                                                                         
| |   |                                                                                                                                                                                      
| |  | investors
  whose functional currency is not the United States dollar; or                                                                                                            
| |   |                                                                                                                                                                                      
| |  | holders
  who hold our ordinary shares as part of a position in a straddle or as part
  of a hedging or conversion transaction for United States federal income
  tax purposes.

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

This
description is based on the Internal Revenue Code of 1986, as amended, United
States Treasury Regulations and judicial and administrative interpretations
thereof, in each case as in effect and available on the date of this annual
report.   The United States tax laws and
the interpretation thereof are subject to change, which change could apply
retroactively and could affect the tax consequences described below.

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

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

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

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

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

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

Distributions

Subject
to the discussion below under Passive Foreign Investment Company
Considerations, the entire amount of any distribution made to you with respect
to ordinary shares, other than any distributions of our ordinary shares made to
all our shareholders, will constitute dividends to the extent of our current or
accumulated earnings and profits as
determined under United States federal income tax principles. For these
purposes, the amount of the distribution will not be reduced by the amount of
any Israeli tax withheld from the distribution.  Subject to the discussion below under Passive Foreign Investment
Company Considerations, non-corporate
U.S. Holders may be taxed on the dividend distributions made in taxable years
beginning on or before December 31, 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 be included in your gross income
as ordinary income and will not be eligible for the dividends received
deduction generally allowed to corporate United States holders.  Subject to the discussion below under
Passive Foreign Investment Company Considerations, if distributions with
respect to our ordinary shares exceed our current and accumulated earnings and
profits

-86-

---



as determined under United Stated federal income tax principles, the
excess distributed with respect to any ordinary share would be treated first as
a tax-free return of capital to the extent of your adjusted basis in that ordinary
share and thereafter as capital gain.
We do not maintain calculations of our earnings and profits under U.S.
federal income tax principles.

If
we pay a dividend or distribution in 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 United States federal income tax purposes
in the Shekels received equal to that dollar value, and any subsequent gain or
loss in respect of the Shekels arising from exchange rate fluctuations will
generally be taxable as U.S. source ordinary income or loss.

Dividends
received by you with respect to your ordinary shares generally will be treated
as foreign source income, which may be relevant in calculating your foreign tax
credit limitation.  You may generally
elect to claim the Israeli income tax withheld from dividends and distributions
you receive with respect to your ordinary shares as a foreign tax credit against
your United States federal income tax liability, subject to a number of
limitations.  Among the limitations, the
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. federal income tax payable with respect to each such
class.  Dividends we pay generally will
be included in the passive income class for these purposes, or, in the case
of certain financial services entity holders, financial services income.  U.S. Holders should note, however, that the
financial services income category will be eliminated for taxable years
beginning after December 31, 2006. Under the recently enacted legislation, the
foreign tax credit limitation categories are limited to passive category
income and general category income.

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

Sale or Exchange of Our Ordinary Shares

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

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

Passive Foreign Investment Company
Considerations

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

Based
on our estimated gross income, the average value of our gross assets
(determined by reference to the market value of our shares and valuing our
intangible assets using the methods prescribed for publicly traded
corporations) and the nature of our business, we believe that we will not be
classified as a PFIC for the taxable year ended December 31, 2006.  Our status in future years will depend on
our assets and activities in those years, although you will be treated as
continuing to

-87-

---



own an
interest in a PFIC if we are a PFIC in any year while you own your shares
unless you make certain elections. We have no reason to believe that our assets
or activities will change in a manner that would cause us to be classified as a
PFIC, but because the market price of our ordinary shares is likely to
fluctuate, we cannot assure you that we will not be considered a PFIC for any
taxable year. If we were a PFIC, you generally would be subject to imputed
interest charges and other disadvantageous tax treatment (including the denial
of the taxation of such dividends at the lower rates applicable to long-term
capital gains, as discussed above under Distributions) with respect to any
gain from the sale or exchange of, and excess distributions with respect to,
the ordinary shares.

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

Backup Withholding and Information
Reporting

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

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

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

|   |                              
|-- | -----------------------------
|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

-88-

---



writing to the Public
Reference Section of the Securities and Exchange Commission at 100 F Street,
N.E., Washington, DC 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference room.  The Commission also maintains a website at
http://www.sec.gov from which certain filings may be accessed.

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

|   |                         
|-- | ------------------------
|I. | SUBSIDIARY
  INFORMATION
|   |                         
|   | Not applicable.         

ITEM 11.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES

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

-89-

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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 15T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Managements Annual Report on Internal
Control Over Financial Reporting

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

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

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

-90-

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Management
assessed the effectiveness of the companys internal control over financial reporting
as of December 31, 2006.  In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based
on our assessment, management believes that, as of December 31, 2006, the
companys internal control over financial reporting is effective.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.

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

ITEM 16B. CODE OF ETHICS.

We
have adopted a code of ethics applicable to our chief executive officer, chief
financial officer, controller and persons performing similar functions.  The code of ethics was filed with the
SEC as Exhibit 11.1 to our Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 and is also available on our website, www.givenimaging.com.

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, 2005 and 2006, and fees
billed for other services rendered by Somekh Chaikin, including through other
offices of KPMG worldwide:

|                   |  |                |     |      |   |     | 
|------------------ |  | -------------- | --- | ---- | - | --- | 
|                   |  | 2005           |     | 2006 |  
|                   |  |                |     |      |  
|                   |  | (in thousands) |    
|                   |  |                |     |      |   |     | 
|Audit fees         |  | $              | 309 |      | $ | 316 | 
|Audit-related fees |  |                | 401 |      |   | 24  | 
|Tax fees           |  |                | 114 |      |   | 67  | 
|All other fees     |  |                | 92  |      |   | 162 | 
|                   |  |                |     |      |   |     | 
|Total              |  | $              | 916 |      | $ | 569 | 

| |     |                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Audit-related fees in
  2005 and 2006 consists principally on advice regarding U.S. sales tax.                                                         
| |     |                                                                                                                                                          
| | (2) | Tax fees includes fees
  for professional services rendered by our auditors for tax compliance and tax
  advice on actual or contemplated transactions.
| |     |                                                                                                                                                          
| | (3) | All other fees includes
  fees related to advice on international transfer prices and compliance with
  Sarbanes-Oxley Act requirements.               

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

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

None.

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

None.

-91-

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PART III

ITEM 17. FINANCIAL STATEMENTS

Not
applicable.

ITEM 18. FINANCIAL STATEMENTS

See
pages F-2 to F-33.

ITEM 19. EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|1.1     |  | Articles of Association,
  incorporated by reference to Exhibit 3.2 of the Registration Statement on
  Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001.                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.1     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.2     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.3     |  | Production Development,
  Manufacturing and Sales Agreement, dated as of November 26, 2002, by and
  between Micron Technology, Inc. and the Registrant, incorporated by reference
  to Exhibit 4.3 of the Annual Report on Form 20-F for the year ended December
  31, 2003, filed with the Commission on March 17, 2004.                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.4     |  | Addendum, dated as of June
  10, 2005, to Production Development, Manufacturing and Sales Agreement, dated
  as of November 26, 2002, by and between Micron Technology, Inc. and the
  Registrant.                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.5     |  | Technology Purchase and
  License Agreement, dated as of January 29, 1998, by and between Rafael
  Armament Development Authority of the Israeli Ministry of Defense and the
  Registrant, incorporated by reference to Exhibit 10.12 of the Registration
  Statement on Form F-1 (File No. 333-68142) filed with the Commission on
  August 22, 2001.
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.6     |  | Form of Indemnification
  Agreement between directors and officers of the Registrant and the
  Registrant, incorporated by reference to Exhibit 10.15 of the Registration
  Statement on Form F-1 (File No. 333-68142) filed with the Commission on
  August 22, 2001.                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.7     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.8     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.9     |  | Form of Standard
  Distribution Agreement of the Registration, incorporated by reference to
  Exhibit 10.19 of the Registration Statement on Form F-1 (File No. 333-81514)
  filed with the Commission on February 1, 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.10    |  | 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.                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.11    |  | 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.               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.12    |  | 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.                                                            

-92-

---



|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.13 |  | 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.                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.14 |  | Exclusive Sales,
  Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004,
  by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
  reference to Exhibit 4.12 of the Annual Report on Form 20-F for the year
  ended December 31, 2004, filed with the Commission on March 25, 2005.                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.15 |  | Amendment No. 1, dated
  June 2004, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.13 of the Annual Report on Form 20-F for the year ended December 31, 2004,
  filed with the Commission on March 25, 2005.      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.16 |  | Amendment No. 2, dated
  October 4, 2004, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.14 of the Annual Report on Form 20-F for the year ended December 31, 2004,
  filed with the Commission on March 25, 2005.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.17 |  | Amendment No. 3, dated
  October 27, 2005, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.16 of the Annual Report on Form 20-F for the year ended December 31, 2005,
  filed with the Commission on April 7, 2006. 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.18 |  | Amendment No. 4, dated
  November 14, 2005, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.17 of the Annual Report on Form 20-F for the year ended December 31, 2005,
  filed with the Commission on April 7, 2006.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.19 |  | Amendment No. 5, dated
  September 6, 2006, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant.                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.20 |  | Amendment No. 6, dated
  February 16, 2007, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery,
  Inc. and the Registrant.                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.21 |  | Second Addendum, dated
  July 5, 2004, to the Lease Agreement, dated as of November 26, 2001, by and
  between Shaar Yoqneam L.P. and the Registrant, incorporated by reference to
  Exhibit 4.15 of the Annual Report on Form 20-F for the year ended December
  31, 2004, filed with the Commission on March 25, 2005.                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|8.1  |  | List of subsidiaries of
  the Registrant, incorporated by reference to Exhibit 8.1 of the Annual Report
  on Form 20-F for the year ended December 31, 2004, filed with the Commission
  on March 25, 2005.                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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.*                                                                                                                                                                                                                                                         

-93-

---



|     |  |                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------
|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 KPMG Somekh Chaikin, 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.                                                                                                                                                                   

-94-

---



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 Shamir 
|                   |                                               |                   
|                   | Name: Nachum
  Shamir                        
|                   | Title:  President and Chief Executive Officer
|                   |                                               |                   
|                   | By:                                           | /s/ Yuval Yanai   
|                   |                                               |                   
|                   | Name: Yuval
  Yanai                          
|                   | Title: Chief
  Financial Officer             
|                   |                                              
|Date: May 16, 2007 |                                              

---



ANNUAL REPORT ON FORM 20-F

INDEX OF EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|1.1     |  | Articles of Association,
  incorporated by reference to Exhibit 3.2 of the Registration Statement on
  Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001.                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.1     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.2     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.3     |  | Production Development,
  Manufacturing and Sales Agreement, dated as of November 26, 2002, by and
  between Micron Technology, Inc. and the Registrant, incorporated by reference
  to Exhibit 4.3 of the Annual Report on Form 20-F for the year ended December
  31, 2003, filed with the Commission on March 17, 2004.                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.4     |  | Addendum, dated as of June
  10, 2005, to Production Development, Manufacturing and Sales Agreement, dated
  as of November 26, 2002, by and between Micron Technology, Inc. and the
  Registrant.                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.5     |  | Technology Purchase and
  License Agreement, dated as of January 29, 1998, by and between Rafael
  Armament Development Authority of the Israeli Ministry of Defense and the
  Registrant, incorporated by reference to Exhibit 10.12 of the Registration
  Statement on Form F-1 (File No. 333-68142) filed with the Commission on
  August 22, 2001.
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.6     |  | Form of Indemnification
  Agreement between directors and officers of the Registrant and the Registrant,
  incorporated by reference to Exhibit 10.15 of the Registration Statement on
  Form F-1 (File No. 333-68142) filed with the Commission on August 22, 2001.                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.7     |  | [Intentionally omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.8     |  | [Intentionally Omitted]                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.9     |  | Form of Standard Distribution
  Agreement of the Registration, incorporated by reference to Exhibit 10.19 of
  the Registration Statement on Form F-1 (File No. 333-81514) filed with the
  Commission on February 1, 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.10    |  | 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.                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.11    |  | 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.               
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.12    |  | 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.                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.13    |  | 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.                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                       
|4.14    |  | Exclusive Sales,
  Representation, Co-Promotion and Cooperation Agreement, dated May 10, 2004,
  by and between Ethicon Endo-Surgery, Inc. and the Registrant, incorporated by
  reference to Exhibit 4.12 of the                                                                                                                                     

---



|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | Annual Report on Form 20-F for the year
  ended December 31, 2004, filed with the Commission on March 25, 2005.                                                                                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.15 |  | Amendment No. 1, dated
  June 2004, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.13 of the Annual Report on Form 20-F for the year ended December 31, 2004,
  filed with the Commission on March 25, 2005.      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.16 |  | Amendment No. 2, dated
  October 4, 2004, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.14 of the Annual Report on Form 20-F for the year ended December 31, 2004,
  filed with the Commission on March 25, 2005.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.17 |  | Amendment No. 3, dated
  October 27, 2005, to the Exclusive Sales, Representation, Co-Promotion and Cooperation
  Agreement, dated May 10, 2004, by and between Ethicon Endo-Surgery, Inc. and
  the Registrant, incorporated by reference to Exhibit 4.16 of the Annual
  Report on Form 20-F for the year ended December 31, 2005, filed with the
  Commission on April 7, 2006. 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.18 |  | Amendment No. 4, dated
  November 14, 2005, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant, incorporated by reference to Exhibit
  4.17 of the Annual Report on Form 20-F for the year ended December 31, 2005,
  filed with the Commission on April 7, 2006.
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.19 |  | Amendment No. 5, dated
  September 6, 2006, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant.                                                                                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.20 |  | Amendment No. 6, dated
  February 16, 2007, to the Exclusive Sales, Representation, Co-Promotion and
  Cooperation Agreement, dated May 10, 2004, by and between Ethicon
  Endo-Surgery, Inc. and the Registrant.                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|4.21 |  | Second Addendum, dated
  July 5, 2004, to the Lease Agreement, dated as of November 26, 2001, by and
  between Shaar Yoqneam L.P. and the Registrant, incorporated by reference to
  Exhibit 4.15 of the Annual Report on Form 20-F for the year ended December
  31, 2004, filed with the Commission on March 25, 2005.                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|8.1  |  | List of subsidiaries of
  the Registrant, incorporated by reference to Exhibit 8.1 of the Annual Report
  on Form 20-F for the year ended December 31, 2004, filed with the Commission
  on March 25, 2005.                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                    
|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 KPMG Somekh Chaikin, independent
          registered public accountants.                                                                                                                                                                                                                                                                                               

---

---



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

---



Given
Imaging Ltd.
and its Subsidiaries

Consolidated

Financial Statements

As of
and for the
Year Ended December 31, 2006

---



Given
Imaging Ltd. and its subsidiaries

Index
to Consolidated Financial Statements

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

F-1

---



Report of Independent Registered Public Accounting Firm

The
Board of Directors and ShareholdersGiven Imaging Ltd.:

We have
audited the accompanying consolidated balance sheets of Given Imaging Ltd. (the
Company) and its subsidiaries as of December 31, 2006 and 2005, 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, 2006. These consolidated financial statements are the responsibility of the
Companys Board of Directors and of its management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

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

In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and its subsidiaries
as of December 31, 2006 and 2005, and the consolidated results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.

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

|                                       
|---------------------------------------
|/s/ Somekh
  Chaikin                   
|                                       
|Somekh
  Chaikin                       
|Certified
  Public Accountants (Israel)
|Member Firm
  of KPMG International    

Tel - Aviv,
Israel
April 12, 2007

F-2

---



Given
    Imaging Ltd. and its subsidiaries



Consolidated Balance Sheets

(In thousands except per share data)





|                                                             |                 | December
          31
|------------------------------------------------------------ | --------------- | ---------------------
|                                                             | Note            | 2005                 
|Assets                                                       |                 |                      
|                                                             |                 |                      
|Current
        assets                                       |                 |                      
|Cash
        and cash equivalents                            | 1D;
        2   | $
        65,356     
|Short-term
        investments                               | 5               | 288                  
|Accounts
        receivable:                                 |                 |                      
|Trade,
        net                                           | 1E              | 18,325               
|Other                                                        | 3               | 6,264                
|Inventories                                                  | 1F;
        4   | 16,172               
|Advances
        to suppliers                                |                 | 332                  
|Deferred
        taxes                                       | 1P;
        14C | 1,219                
|Prepaid
        expenses                                     |                 | 1,020                
|                                                             |                 |                      
|Total
        current assets                                 |                 | 108,976              
|                                                             |                 |                      
|Deposits                                                     |                 | 401                  
|                                                             |                 |                      
|Assets
        held for employees severance payments        | 1G;
        10  | 1,690                
|                                                             |                 |                      
|Marketable
        securities                                | 1H;
        5   | 21,664               
|                                                             |                 |                      
|Fixed
        assets, at cost, less accumulated depreciation | 1I;
        6   | 13,862               
|                                                             |                 |                      
|Other
        assets, at cost, less accumulated amortization | 1J;
        7   | 2,517                
|                                                             |                 |                      
|Total
        Assets                                         |                 | $
          149,110  



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



F-3





---



Given
Imaging Ltd. and its subsidiaries

Consolidated Balance Sheets(In thousands except share data)

|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ----------- | - | ------- | - | - | ------- | -
|                                                                                                                                                                                                                    |  |      |          | December 31 |  
|                                                                                                                                                                                                                    |  |      |          |             |  
|                                                                                                                                                                                                                    |  | Note |          | 2005        |   | 2006    |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |  
|Liabilities and shareholders equity                                                                                                                                                                                |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Current liabilities                                                                                                                                                                                                 |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Current installments of obligation under capital lease                                                                                                                                                              |  |      | 8B       |             | $ | 11      |   | $ | 13      |  
|Accounts payable:                                                                                                                                                                                                   |  |      |          |             |   |         |   |   |         |  
|Trade                                                                                                                                                                                                               |  |      |          |             |   | 5,529   |   |   | 5,550   |  
|Other                                                                                                                                                                                                               |  |      | 9        |             |   | 13,886  |   |   | 14,620  |  
|Deferred income                                                                                                                                                                                                     |  |      | 1N;
  8C |             |   | 3,333   |   |   | 3,871   |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Total current liabilities                                                                                                                                                                                           |  |      |          |             |   | 22,759  |   |   | 24,054  |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Long-term liabilities                                                                                                                                                                                               |  |      |          |             |   |         |   |   |         |  
|Deferred income                                                                                                                                                                                                     |  |      | 8C       |             |   | 22,172  |   |   | 20,411  |  
|Obligation under capital lease                                                                                                                                                                                      |  |      | 8B       |             |   | 34      |   |   | 20      |  
|Liability in respect of employees severance payments                                                                                                                                                               |  |      | 10       |             |   | 2,040   |   |   | 2,407   |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Total long-term liabilities                                                                                                                                                                                         |  |      |          |             |   | 24,246  |   |   | 22,838  |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Total liabilities                                                                                                                                                                                                   |  |      |          |             |   | 47,005  |   |   | 46,892  |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Commitments and contingencies                                                                                                                                                                                       |  |      | 8        |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Minority interest                                                                                                                                                                                                   |  |      |          |             |   | 61      |   |   | 3,499   |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Shareholders equity                                                                                                                                                                                                |  |      |          |             |   |         |   |   |         |  
|Share capital:                                                                                                                                                                                                      |  |      | 11       |             |   |         |   |   |         |  
|Ordinary Shares, NIS 0.05 par value each (90,000,000 shares
  authorized as of December 31, 2005 and 2006, 27,950,281 and 28,641,291 shares
  issued and fully paid as of December 31, 2005 and 2006, respectively) |  |      |          |             |   | 327     |   |   | 335     |  
|Additional paid-in capital                                                                                                                                                                                          |  |      |          |             |   | 148,955 |   |   | 156,197 |  
|Capital reserve                                                                                                                                                                                                     |  |      |          |             |   | 2,166   |   |   | 2,166   |  
|Accumulated deficit                                                                                                                                                                                                 |  |      |          |             |   | (49,404 | ) |   | (50,912 | )
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Total shareholders equity                                                                                                                                                                                          |  |      |          |             |   | 102,044 |   |   | 107,786 |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                                          |  |      |          |             | $ | 149,110 |   | $ | 158,177 |  
|                                                                                                                                                                                                                    |  |      |          |             |   |         |   |   |         |  

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

F-4

---



Given Imaging Ltd. and its subsidiaries

Consolidated
Statements of Operations


(In thousands except share and per share data)


|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ---- | -------- | ------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                                                                      |  |      |          | Year
  ended December 31, |  
|                                                                                                      |  |      |          |                           |  
|                                                                                                      |  | Note |          | 2004                      |   | 2005       |   | 2006 |           
|                                                                                                      |  |      |          |                           |   |            |   |      |           
|                                                                                                     
|Revenues                                                                                              |  |      | 1N;
  12 |                           | $ | 65,020     |   | $    | 86,776     |   | $ | 95,029     |  
|Cost of revenues                                                                                      |  |      |          |                           |   | 17,734     |   |      | 22,070     |   |   | 24,154     |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Gross profit                                                                                          |  |      |          |                           |   | 47,286     |   |      | 64,706     |   |   | 70,875     |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Operating expenses                                                                                    |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Research and development, gross                                                                       |  |      | 1Q       |                           |   | (7,363     | ) |      | (8,833     | ) |   | (12,678    | )
|Royalty bearing government grants                                                                     |  |      | 1O; 8A   |                           |   | 1,140      |   |      | 1,244      |   |   | 1,867      |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Research and development, net                                                                         |  |      |          |                           |   | (6,223     | ) |      | (7,589     | ) |   | (10,811    | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Sales and marketing                                                                                   |  |      |          |                           |   | (33,652    | ) |      | (43,281    | ) |   | (50,732    | )
|General and administrative                                                                            |  |      |          |                           |   | (6,916     | ) |      | (9,657     | ) |   | (16,027    | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Total operating expenses                                                                              |  |      |          |                           |   | (46,791    | ) |      | (60,527    | ) |   | (77,570    | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Operating profit (loss)                                                                               |  |      |          |                           |   | 495        |   |      | 4,179      |   |   | (6,695     | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Financial income, net                                                                                 |  |      | 13       |                           |   | 956        |   |      | 762        |   |   | 3,980      |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Profit (loss) before taxes on income and minority
  share                                             |  |      |          |                           |   | 1,451      |   |      | 4,941      |   |   | (2,715     | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Taxes on income                                                                                       |  |      | 1P, 14   |                           |   | 690        |   |      | 286        |   |   | (127       | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Profit (loss) before minority share                                                                   |  |      |          |                           |   | 2,141      |   |      | 5,227      |   |   | (2,842     | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Minority share in losses of
  subsidiary                                                              |  |      |          |                           |   | 747        |   |      | 1,116      |   |   | 1,334      |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Net profit (loss)                                                                                     |  |      |          |                           | $ | 2,888      |   | $    | 6,343      |   | $ | (1,508     | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Profit (loss) per share                                                                               |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Basic profit (loss) per Ordinary Share                                                                |  |      | 1L       |                           | $ | 0.11       |   | $    | 0.23       |   | $ | (0.05      | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Diluted profit (loss) per Ordinary Share                                                              |  |      |          |                           | $ | 0.10       |   | $    | 0.21       |   | $ | (0.05      | )
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Weighted average number of Ordinary Shares
  used to compute basic profit (loss) per Ordinary Share   |  |      | 1L       |                           |   | 26,633,964 |   |      | 27,781,223 |   |   | 28,053,849 |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  
|Weighted average number of Ordinary Shares
  used to compute diluted profit (loss) per Ordinary Share |  |      | 1L       |                           |   | 29,353,448 |   |      | 29,695,164 |   |   | 28,053,849 |  
|                                                                                                      |  |      |          |                           |   |            |   |      |            |   |   |            |  

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

F-5

---



Given Imaging Ltd. and its subsidiaries

Consolidated
Statements of Changes in Shareholders Equity


(In thousands except share data)


|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|--------------------------------------- |  | --------------- | ---------- | --------------------------- | - | ----------------- |  | ----------------------- | ------- | ------------------ | - | ----- |  | - | --- | - | - | ------- | - | - | ------- | -
|                                        |  | Ordinary shares |            | AdditionalPaid-In
  Capital |   | Capital
  Reserve |  | Unearned
  Compensation |         | AccumulatedDeficit |   | Total | 
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       | 
|                                        |  | Shares          |            | Amount                      |   |                   |  |                         |         |                    |   |       |  |   |    
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |    
|                                       
|Balance as of December 31, 2003         |  |                 | 25,649,188 |                             | $ | 301               |  | $                       | 100,996 |                    | $ | 2,166 |  | $ | (30 | ) | $ | (58,635 | ) | $ | 44,798  |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Changes during the year 2004:           |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Ordinary
  shares issued                |  |                 | 1,500,000  |                             |   | 17                |  |                         | 44,250  |                    |   |      |  |   |    |   |   |        |   |   | 44,267  |  
|Exercise
  of stock options             |  |                 | 472,198    |                             |   | 5                 |  |                         | 2,581   |                    |   |      |  |   |    |   |   |        |   |   | 2,586   |  
|Forfeiture
  of stock options           |  |                 |           |                             |   |                  |  |                         | (11     | )                  |   |      |  |   | 3   |   |   |        |   |   | (8      | )
|Non-employees
  stock options          |  |                 |           |                             |   |                  |  |                         | 62      |                    |   |      |  |   |    |   |   |        |   |   | 62      |  
|Amortization of unearned compensation   |  |                 |           |                             |   |                  |  |                         |        |                    |   |      |  |   | 24  |   |   |        |   |   | 24      |  
|Net
  profit                            |  |                 |           |                             |   |                  |  |                         |        |                    |   |      |  |   |    |   |   | 2,888   |   |   | 2,888   |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Balance as of December 31, 2004         |  |                 | 27,621,386 |                             | $ | 323               |  | $                       | 147,878 |                    | $ | 2,166 |  | $ | (3  | ) | $ | (55,747 | ) | $ | 94,617  |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Changes during the year 2005:           |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Exercise
  of stock options             |  |                 | 328,895    |                             |   | 4                 |  |                         | 1,077   |                    |   |      |  |   |    |   |   |        |   |   | 1,081   |  
|Amortization
  of unearned compensation |  |                 |           |                             |   |                  |  |                         |        |                    |   |      |  |   | 3   |   |   |        |   |   | 3       |  
|Net
  profit                            |  |                 |           |                             |   |                  |  |                         |        |                    |   |      |  |   |    |   |   | 6,343   |   |   | 6,343   |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Balance as of December 31, 2005         |  |                 | 27,950,281 |                             | $ | 327               |  | $                       | 148,955 |                    | $ | 2,166 |  | $ |    |   | $ | (49,404 | ) | $ | 102,044 |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Changes during the year 2006:           |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Exercise
  of stock options             |  |                 | 591,010    |                             |   | 7                 |  |                         | 2,029   |                    |   |      |  |   |    |   |   |        |   |   | 2,036   |  
|Restricted
  shares issued              |  |                 | 100,000    |                             |   | 1                 |  |                         |        |                    |   |      |  |   |    |   |   |        |   |   | 1       |  
|Stock based compensation                |  |                 |           |                             |   |                  |  |                         | 5,213   |                    |   |      |  |   |    |   |   |        |   |   | 5,213   |  
|Net
  loss                              |  |                 |           |                             |   |                  |  |                         |        |                    |   |      |  |   |    |   |   | (1,508  | ) |   | (1,508  | )
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  
|Balance as of December 31, 2006         |  |                 | 28,641,291 |                             | $ | 335               |  | $                       | 156,197 |                    | $ | 2,166 |  | $ |    |   | $ | (50,912 | ) | $ | 107,786 |  
|                                        |  |                 |            |                             |   |                   |  |                         |         |                    |   |       |  |   |     |   |   |         |   |   |         |  

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

F-6

---



Given Imaging Ltd. and its subsidiaries

Consolidated
Statements of Cash Flows(In thousands)

|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                                    |  | Year ended December 31, |       
|                                                                                                    |  |                         |       
|                                                                                                    |  | 2004                    |        | 2005 |   | 2006    |  
|                                                                                                    |  |                         |        |      |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                               |  |                         |        |      |   |         |   |   |         |  
|Net profit (loss)                                                                                   |  | $                       | 2,888  |      | $ | 6,343   |   | $ | (1508   | )
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Adjustments required to reconcile net profit (loss)
  to net cash provided by operating activities: |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Minority share in losses of subsidiary                                                              |  |                         | (747   | )    |   | (1,116  | ) |   | (1,334  | )
|Depreciation and amortization                                                                       |  |                         | 3,147  |      |   | 3,596   |   |   | 4,237   |  
|Deferred taxes                                                                                      |  |                         | (737   | )    |   | (482    | ) |   | (155    | )
|Employees stock option compensation                                                                |  |                         | 16     |      |   | 3       |   |   | 5,213   |  
|Non-employees stock option compensation                                                            |  |                         | 62     |      |   |        |   |   |        |  
|Other                                                                                               |  |                         | 48     |      |   | 98      |   |   | 18      |  
|Net increase in trading securities                                                                  |  |                         |       |      |   |        |   |   | (5,060  | )
|Increase in accounts receivable  trade                                                             |  |                         | (5,316 | )    |   | (6,064  | ) |   | (562    | )
|Decrease (increase) in other accounts receivable                                                    |  |                         | (804   | )    |   | (4,993  | ) |   | 4,801   |  
|Decrease (increase) in prepaid expenses                                                             |  |                         | 360    |      |   | (66     | ) |   | (320    | )
|Decrease (increase) in advances to suppliers                                                        |  |                         | (508   | )    |   | 223     |   |   | 250     |  
|Increase in inventories                                                                             |  |                         | (5,648 | )    |   | (2,378  | ) |   | (1,996  | )
|Increase in accounts payable                                                                        |  |                         | 7,107  |      |   | 5,769   |   |   | 500     |  
|Increase (decrease) in deferred income                                                              |  |                         | 12,000 |      |   | 12,555  |   |   | (1,223  | )
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Net cash provided by operating activities                                                           |  | $                       | 11,868 |      | $ | 13,488  |   | $ | 2,861   |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                               |  |                         |        |      |   |         |   |   |         |  
|Purchase of fixed assets and other assets                                                           |  | $                       | (3,245 | )    | $ | (7,948  | ) | $ | (5,876  | )
|Proceeds from sales of fixed assets                                                                 |  |                         | 57     |      |   |        |   |   |        |  
|Deposits, net                                                                                       |  |                         | (42    | )    |   | (16     | ) |   | (41     | )
|Proceeds from sales of marketable securities                                                        |  |                         |       |      |   |        |   |   | 13,120  |  
|Investments in marketable securities                                                                |  |                         |       |      |   | (21,919 | ) |   | (37,960 | )
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Net cash used in investing activities                                                               |  | $                       | (3,230 | )    | $ | (29,883 | ) | $ | (30,757 | )
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Cash flows from financing activities:                                                               |  |                         |        |      |   |         |   |   |         |  
|Principal payments on capital lease obligation                                                      |  | $                       | (37    | )    | $ | (12     | ) |   | (14     | )
|Proceeds from the issuance of Ordinary Shares                                                       |  |                         | 46,853 |      |   | 1,081   |   |   | 2,037   |  
|Issuance of shares by consolidated company                                                          |  |                         |       |      |   |        |   |   | 4,772   |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Net cash provided by financing activities                                                           |  | $                       | 46,816 |      | $ | 1,069   |   | $ | 6,795   |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Effect of exchange rate changes on cash                                                             |  | $                       | 40     |      | $ | (179    | ) | $ | 255     |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                                    |  | $                       | 55,494 |      | $ | (15,505 | ) | $ | (20,846 | )
|Cash and cash equivalents at beginning of year                                                      |  |                         | 25,367 |      |   | 80,861  |   |   | 65,356  |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                            |  | $                       | 80,861 |      | $ | 65,356  |   | $ | 44,510  |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|Supplementary cash flow information                                                                 |  |                         |       
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  
|                                                                                                    |  | Year ended December 31, |       
|                                                                                                    |  |                         |       
|                                                                                                    |  | 2004                    |        | 2005 |   | 2006    |  
|                                                                                                    |  |                         |        |      |   |         |  
|Income taxes paid                                                                                   |  | $                       | 107    |      | $ | 163     |   | $ | 300     |  
|                                                                                                    |  |                         |        |      |   |         |   |   |         |  

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

F-7

---



Given Imaging Ltd. and its subsidiaries

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

Note
1 - Organization and Summary of Significant Accounting Policies

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | General                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | Given Imaging Ltd. (the Company) was incorporated in Israel in
  January 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | The Company
  has developed the Given System, a proprietary wireless imaging system that
  represents a new approach to visual examination of the gastrointestinal
  tract. The system uses a miniaturized video camera contained in a capsule,
  referred to as the PillCam capsule, which is ingested by the patient and
  delivers high quality color images in a painless and noninvasive manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | The Given
  System consists of three principal components:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | a
  single-use, disposable PillCam color-imaging capsule that is ingested by the
  patient;                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | a portable
  data recorder and array of sensors that are worn by the patient; and                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | a computer
  workstation with a proprietary RAPID software for downloading, processing and
  analyzing recorded data.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | After
  receiving marketing clearance from the United States Food and Drug
  Administration (FDA) in August of 2001, the Company commenced the marketing
  of the Given System with its first video capsule, the PillCam Small Bowel
  Capsule, or PillCam SB, for detection of disorders of the small bowel. In
  November 2004, following receipt of FDA marketing clearance, the Company
  began marketing and sales of its second video capsule, PillCam ESO, for
  detection of disorders in the esophagus. The Company markets the PillCam ESO
  capsule through a strategic marketing alliance with InScope, a division of
  Ethicon Endo-Surgery, a Johnson & Johnson company (see Note 8C). In late 2006, the Company completed the
  development of its third video capsule, PillCam Colon, for visual examination
  of the colon and received the regulatory clearance that permits the Company
  to market and sell this capsule in Europe. The Company has also submitted
  this capsule for FDA clearance in the United States.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The medical
  device industry in which the Company is involved is characterized by the
  risks of regulatory barriers and reimbursement issues. Penetration into the
  world market requires the investment of considerable resources and continuous
  development efforts. The Companys future success is dependent upon several
  factors including technological quality, regulatory approvals, sufficient
  reimbursement for its products and the cost and diagnostic-effectiveness of
  its products compared to other methods for the examination of the gastrointestinal
  tract.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Basis of presentation                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                      
| | The
  accompanying consolidated financial statements have been prepared in
  accordance with accounting principles generally accepted in the United States
  of America and include the accounts of the Company and its wholly-owned
  subsidiaries in the United States, Germany, France, the Netherlands and
  Australia and its 51% owned subsidiary in Japan. The accounts of its
  subsidiaries are consolidated from the date of their inception. All the
  subsidiaries were established for the purpose of marketing and selling the
  Given System. All intercompany balances and transactions have been eliminated
  in consolidation. The Company considers that it operates in only one segment.                                                                                                                                                                                                                                                                                                                                   

F-8

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                | Functional and reporting currency         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
| | The
  Companys functional and reporting currency is the U.S. dollar.                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
| | Transactions
  denominated in foreign currencies other than the U.S. dollar are translated
  into the functional currency using current exchange rates. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                | Provision for doubtful accounts receivable
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
| | The
  provision 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 provision, management
  bases its opinion on the estimated risk, in reliance on available information
  with respect to the debtors financial position and an evaluation of the
  collateral received.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The activity
  in the provision for doubtful accounts for the three years ended December 31,
  2006 is as follows:                                                                                                                                                                                                                                                                                                               

|                            |  |                         |     |      |   |      |  |   |     | 
|--------------------------- |  | ----------------------- | --- | ---- | - | ---- |  | - | --- | 
|                            |  | Year ended December 31, |    
|                            |  |                         |    
|                            |  | 2004                    |     | 2005 |   | 2006 | 
|                            |  |                         |     |      |   |      | 
|                           
|Opening
  balance           |  | $                       |    |      | $ | 115  |  | $ | 431 | 
|Additions
  during the year |  |                         | 115 |      |   | 316  |  |   | 356 | 
|                            |  |                         |     |      |   |      |  |   |     | 
|                            |  |                         |     |      |   |      |  |   |     | 
|Closing
  balance           |  | $                       | 115 |      | $ | 431  |  | $ | 787 | 
|                            |  |                         |     |      |   |      |  |   |     | 

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

F-9

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                      
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------
| | 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 (Statement 115). Marketable
  securities consist of U.S. government bonds and corporate bonds, which the
  Company classified as held to maturity and auction rate securities and
  money market funds, which the Company classified as trading, all in
  accordance with the guidance of statement 115.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Held-to-maturity
  debt securities are securities that the Company has the ability and intent to
  hold until maturity and are recorded at amortized cost, adjusted for the
  amortization or accretion of premiums or discounts. Premiums and discounts
  are amortized or accreted over the life of the related held-to-maturity
  security as an adjustment to yield using the effective-interest method.                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Trading
  securities are bought and held principally for the purpose of selling them in
  the near term. Trading securities are recorded at fair value and changes in
  the fair value, based on closing market prices of the at balance sheet date,
  represent unrealized gains and losses which are included in earnings.                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | A decline in
  the market value of any held-to-maturity security below cost that is deemed
  to be other than temporary results in a reduction in the carrying amount to
  fair value. The impairment is charged to earnings and a new cost basis for
  the security is established.                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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               |  |   | 33    |  | 
|Instruments and laboratory equipment |  |   | 15    |  | 
|Leasehold improvements               |  |   | 10    |  | 
|Motor
  vehicles                     |  |   | 15    |  | 
|Machinery
  and equipment            |  |   | 15    |  | 
|Communication
  equipment            |  |   | 15    |  | 
|Office 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
  accounts for long-lived assets and certain intangible assets in accordance
  with the provisions of SFAS No. 144, Accounting for the Impairment of or
  Disposal of Long-Lived Assets (Statement 144). This Statement requires
  that long-lived assets and certain identifiable intangible assets be reviewed
  for impairment whenever events or changes in circumstances indicate that the
  carrying amount of an asset may not be recoverable. Recoverability of assets
  to be held and used is measured by a comparison of the carrying amount of an
  asset to undiscounted future net cash flows expected to be generated by the
  asset. If such assets are considered to be impaired, the impairment to be
  recognized is measured by the amount by which the carrying amount of the
  assets exceeds the fair value of the assets.

F-10

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | J.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The Company
  developed proprietary software for its computer workstations that permits
  downloading and viewing recorded data from the portable data recorder. The
  costs of developing this software were capitalized in accordance with SFAS
  No. 86, Accounting for Costs of Computer Software to be Sold, Leased or
  Otherwise Marketed (Statement 86). As such, capitalization of software
  development costs begins upon the establishment of technological feasibility
  as defined in Statement 86 and continues up to the time the software is
  available for general release to customers, at which time capitalized
  software costs are amortized on a straight-line basis over the expected life
  of the related product, which is generally five years.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Legal expenses related to patent and trademark registration have been
  capitalized and amortized over the remaining life of the asset, which is generally eight years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Technology
  and content costs are generally expensed as incurred, except for certain
  costs relating to the development of the Companys web site that are
  capitalized and amortized over their estimated useful lives which are
  generally three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Stock compensation plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Employees and directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 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 Statement of Operations for the
  year ended December 31, 2006 is based on awards ultimately expected to vest.
  As a result the expense has been reduced for estimated forfeitures. SFAS No.
  123R required forfeitures to be estimated at the time of grant and revised, in
  necessary, in subsequent periods if actual forfeitures differ from those
  estimates. In the Companys pro forma information required under SFAS No. 123, Accounting for Stock-Based
  Compensation (SFAS No. 123) for the periods prior to fiscal 2006,
  the Company accounted for forfeitures as they occurred.                                                                                                                                                                        

F-11

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Stock compensation plans (contd)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | The effect
  of the implementation of SFAS No. 123R was to increase expenses by $5,213,
  which changed the profit before taxes and net profit to losses by the same
  amount. The per share effect $(0.19) was to turn the basic and diluted
  earnings per share into loss per share.                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | Prior to January 1, 2006, the Company has followed SFAS No. 123,
  which permitted entities to recognize as an expense over the vesting period,
  the fair value on the date of grant of all stock-based awards. Alternatively,
  Statement 123 allowed entities to continue to apply the provisions of
  Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
  Employees and related interpretations (APB Opinion No. 25) and provide pro
  forma net income and pro forma earnings per share disclosures for employee
  stock option grants as if the fair-value based method defined in Statement
  123 had been applied.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | The Company elected to apply the intrinsic value-based method
  prescribed in APB Opinion No. 25 for its stock compensation to employees and
  directors and provide the pro forma disclosure provisions of SFAS No. 123, as
  amended by SFAS No. 148, Accounting for Stock-Based Compensation -
  Transition and Disclosure, an amendment of SFAS No. 123.                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | As such, the Company computed and recorded compensation expense for
  grants whose terms were fixed with respect to the number of shares and option
  price only if the market price on the date of grant exceeded the exercise
  price of the stock option. The compensation cost for the fixed plans was
  recorded over the period the employee performs the service to which the stock
  compensation relates.                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | The
  following table shows the effect on net profit and profit per Ordinary Share
  if the Company had applied the fair value recognition provisions of Statement
  123:                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | ------------------------------------------- | ------------------------------------------------------------------------------- | - | ----------------------- | ------- | ---- | ------ | ------- | -
| |                                             |                                                                                 |   | Year ended December 31, |        
| |                                             |                                                                                 |   |                         |        
| |                                             |                                                                                 |   | 2004                    |         | 2005 |       
| |                                             |                                                                                 |   |                         |         |      |       
| |                                            
| | Net profit
  as reported                    |                                                                                 | $ | 2,888                   |         | $    | 6,343  |        
| | -                                           | Compensation
  expenses according to APB 25 included in the reported net profit |   |                         | 16      |      |        | 3       |  
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | -                                           | Application
  of compensation expenses according to
  Statement 123             |   |                         | (13,432 | )    |        | (10,327 | )
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | Pro forma
  net loss                        |                                                                                 | $ | (10,528                 | )       | $    | (3,981 | )      
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | Basic profit (loss) per
  Ordinary Share:   |                                                                                 |   |                         |         |      |        |        
| | As reported                                 |                                                                                 | $ | 0.11                    |         | $    | 0.23   |        
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | Pro forma                                   |                                                                                 | $ | (0.39                   | )       | $    | (0.14  | )      
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | Diluted
  profit (loss) per ordinary share: |                                                                                 |   |                         |         |      |        |        
| | As reported                                 |                                                                                 | $ | 0.10                    |         | $    | 0.21   |        
| |                                             |                                                                                 |   |                         |         |      |        |         |  
| | Pro forma                                   |                                                                                 | $ | (0.39                   | )       | $    | (0.14  | )      
| |                                             |                                                                                 |   |                         |         |      |        |         |  

F-12

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Stock compensation plans (contd)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | Non-Employees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | Effective January 1, 2006, the Company applies the provisions of SFAS
  No. 123R to account for stock based compensation to non-employees. Prior to
  January 1, 2006, the Company applied the fair value-based method of
  accounting set forth in Statement 123 and Emerging Issues Task Force
  (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued
  to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
  or Services for such compensation
  expenses. Using the fair value method, the total compensation expense is
  computed based on the fair value of the options on the date the options are
  granted to the non-employees and are recognized over the vesting period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | The Company
  recorded compensation expense of $62 in the year ended December 31, 2004 related
  to the above options. There were no such expenses in 2005 or 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | L.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Profit (loss) per Ordinary Share 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | Basic and diluted profit (loss) per Ordinary Share is presented in
  conformity with SFAS No. 128, Earnings Per Share, for all years presented.
  Basic profit (loss) per Ordinary Share is calculated by dividing the net
  profit (loss) attributable to Ordinary Shares, by the weighted average number
  of Ordinary Shares outstanding. Diluted profit (loss) per Ordinary share
  calculation is similar to Basic Earnings Per Share except that the weighed
  average of common shares outstanding is increased to include the number of
  additional common shares that would have been outstanding if the dilutive
  potential common shares from options had been exercised.                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                  
| | The
  following table summarizes information related to the computation of basic
  and diluted profit (loss) per Ordinary Share for the years indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | ----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
| |                                                                                                                         |  | Year ended December 31, |           
| |                                                                                                                         |  |                         |           
| |                                                                                                                         |  | 2004                    |            | 2005 |   | 2006       | 
| |                                                                                                                         |  |                         |            |      |   |            | 
|
| | Net profit (loss) attributable to Ordinary
  Shares                                                                     |  | $                       | 2,888      |      | $ | 6,343      |  | $ | (1,508     | )
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Weighted average number of
  Ordinary Shares outstanding
  Used in basic profit (loss) per Ordinary Share calculation   |  |                         | 26,633,964 |      |   | 27,781,223 |  |   | 28,053,849 |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Add assumed exercise of outstanding
  dilutive potential Ordinary Shares                                                |  |                         | 2,719,484  |      |   | 1,913,941  |  |   |           |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Weighted average number of
  Ordinary Shares outstanding
  Used in diluted profit (loss) per Ordinary Share calculation |  |                         | 29,353,448 |      |   | 29,695,164 |  |   | 28,053,849 |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Basic profit (loss) per Ordinary Share                                                                                  |  | $                       | 0.11       |      | $ | 0.23       |  | $ | (0.05      | )
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Diluted profit (loss) per Ordinary Share                                                                                |  | $                       | 0.10       |      | $ | 0.21       |  | $ | (0.05      | )
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  
| | Number of options excluded from the diluted
  earning per share calculation because of anti-dilutive effect             |  |                         | 165,500    |      |   | 2,448,114  |  |   | 4,114,604  |  
| |                                                                                                                         |  |                         |            |      |   |            |  |   |            |  

F-13

---



Given Imaging Ltd. and its subsidiaries

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------
| | M.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Use of estimates                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | The
  preparation of the consolidated financial statements requires management of
  the Company to make a number of estimates and assumptions relating to the
  reported amounts of assets and liabilities and the disclosure of contingent
  assets and liabilities at the date of the consolidated financial statements
  and the reported amounts of revenues and expenses during the period. Actual
  results could differ from these estimates.                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | N.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Revenue recognition                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Revenues
  from sales of products are recognized upon delivery provided that the
  collection of the resulting receivable is reasonably assured, there is
  persuasive evidence of an arrangement, no significant obligations in respect
  of installation remain and the price is fixed or determinable.                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | For sales
  contracts, which include a Post Contract Customer Support (PCS) component, revenues allocated to
  PCS in accordance with EITF 00-21 Revenue Arrangements with Multiple
  Deliverables, are deferred and recognized ratably over the term of the
  support period, which is generally one year.                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | The Company
  accrues estimated warranty costs at time of shipment based on contractual
  rights and historical experience. The Companys policy is not to grant return
  rights.                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Taxes
  collected from customers and remitted to Governmental Authorities are
  presented in the financial statements on a net basis.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | The Company
  routinely evaluates its products for inclusion of any embedded software that
  is more than incidental thereby requiring consideration of AICPA Statements
  of Position 97-2, Software Revenue Recognition. Based on such evaluation,
  the Company has concluded that none of its products have such embedded
  software.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | O.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Government-Sponsored Research and Development
|
| | The Company
  records grants received from the Office of the Chief Scientist of the Israeli
  Ministry of Industry and Trade (the OCS)
  as a reduction of research and development expenses.                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Royalties
  payable to OCS are recognized pursuant to sale of related products and are
  classified under cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Taxes on income                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | The Company accounts for income taxes under SFAS No. 109 Accounting
  for Income Taxes (Statement 109).                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Under Statement 109 deferred tax assets or liabilities are recognized
  in respect of temporary differences between the tax bases of assets and
  liabilities and their financial reporting amounts as well as in respect of
  tax losses and other deductions which may be deductible for tax purposes in
  future years, based on enacted statutory tax rates applicable to the periods
  in which such deferred taxes will be realized. Valuation allowances are
  established when necessary to reduce deferred tax assets to the amount
  expected to be realized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Research and development costs               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                              
| | Research and development costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-14

---



Given Imaging Ltd. and its subsidiaries

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

|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                 
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------
|Note 1 - Organization and Summary
  of Significant Accounting Policies (contd)
|                                                                               
|                                                                                | R.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Allowance for product warranty  
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                 
|                                                                                | It is the
  Companys policy to grant a warranty for certain products. The balance sheet
  provision for warranties for all periods through December 31, 2006 is
  determined based upon the Companys experience regarding the relationship
  between sales and warranty expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                | S.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Concentration of credit risk    
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                 
|                                                                                | Financial instruments that may subject the Company to significant
  concentrations of credit risk consist principally of cash and cash
  equivalents, trade accounts receivable and marketable securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                | Cash and cash equivalents are deposited with major financial
  institutions in Europe, the United States, Japan, Australia and Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                | The Company performs ongoing credit evaluations of the financial
  condition of its customers. The risk of collection associated with trade
  receivables is reduced by the large number and geographical dispersion of the
  Companys customer base and the Companys policy of requiring collateral or
  security with respect to receivables due from distributors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                | T.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Recent accounting pronouncements
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                 
|                                                                                | In June 2006, the Financial Accounting Standards Board
  (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
  Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which
  clarifies the accounting for uncertainty in income taxes. This Interpretation
  prescribes a recognition threshold and measurement attribute for the
  financial statement recognition and measurement of a tax position taken or
  expected to be taken in a tax return. This Interpretation also provides
  guidance on de-recognition, classification, accounting in interim periods,
  disclosure, and transition. This Interpretation is effective for fiscal years
  beginning after December 15, 2006. The Company is currently evaluating the
  impact of FIN 48 on its consolidated financial position, results of
  operations and cash flows.
|                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Note 2 - Cash and Cash Equivalents                                             

| |                                      |  |                                     |           |             |   |        |  |   |        | 
| | ------------------------------------ |  | ----------------------------------- | --------- | ----------- | - | ------ |  | - | ------ | 
| |                                      |  | Interest rate
  as of
  December 31 |           | December 31 |  
| |                                      |  |                                     |           |             |  
| |                                      |  | 2006                                |           | 2005        |   | 2006   | 
| |                                      |  |                                     |           |             |   |        | 
| |                                      |  | %                                   |           |             |   |        | 
| |                                      |  |                                     |           |             |   |        | 
| |                                      |  |                                     |           |             |   |        | 
| | Denominated
  in U.S. dollars        |  |                                     | 5.15-5.26 |             | $ | 57,912 |  | $ | 25,794 | 
| | Denominated
  in New Israeli Shekels |  |                                     | 4.7-5.0   |             |   | 2,855  |  |   | 3,099  | 
| | Denominated
  in Euro                |  |                                     | 2.95      |             |   | 3,396  |  |   | 7,766  | 
| | Denominated
  in Australian dollars  |  |                                     |           |             |   | 732    |  |   | 469    | 
| | Denominated
  in Japanese Yen        |  |                                     |           |             |   | 461    |  |   | 7,382  | 
| |                                      |  |                                     |           |             |   |        |  |   |        | 
| |                                      |  |                                     |           |             |   |        |  |   |        | 
| |                                      |  |                                     |           |             | $ | 65,356 |  | $ | 44,510 | 
| |                                      |  |                                     |           |             |   |        |  |   |        | 

F-15

---



Given Imaging Ltd. and its subsidiaries

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

Note 3 -
Accounts Receivable - Other

| |                           |  |             |       |      |   |       | 
| | ------------------------- |  | ----------- | ----- | ---- | - | ----- | 
| |                           |  | December 31 |      
| |                           |  |             |      
| |                           |  | 2005        |       | 2006 |  
| |                           |  |             |       |      |   |       | 
| |                           |  |             |       |      |  
| | Government
  institutions |  | $           | 921   |      | $ | 1,389 | 
| | InScope
  (Note 8C)       |  |             | 5,000 |      |   |      | 
| | Other                     |  |             | 343   |      |   | 74    | 
| |                           |  |             |       |      |   |       | 
| |                           |  |             |       |      |   |       | 
| |                           |  | $           | 6,264 |      | $ | 1,463 | 
| |                           |  |             |       |      |   |       | 

Note 4 -
Inventories

| |                                |  |             |        |      |   |        | 
| | ------------------------------ |  | ----------- | ------ | ---- | - | ------ | 
| |                                |  | December 31 |       
| |                                |  |             |       
| |                                |  | 2005        |        | 2006 |  
| |                                |  |             |        |      |  
| |                                |  |             |        |      |  
| | Raw
  materials and components |  | $           | 7,399  |      | $ | 7,721  | 
| | Work in
  progress             |  |             | 3,251  |      |   | 3,533  | 
| | Finished
  goods               |  |             | 5,522  |      |   | 6,914  | 
| |                                |  |             |        |      |   |        | 
| |                                |  |             |        |      |   |        | 
| |                                |  | $           | 16,172 |      | $ | 18,168 | 
| |                                |  |             |        |      |   |        | 

Note 5 -
Marketable Securities

| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2006 and 2005, marketable securities consist U.S. government
  bonds and corporate bonds, which the Company classified as held-to-maturity
  (the Bonds). As of December 31, 2006, marketable securities also included auction
  rate securities and money market funds, which are classified as trading.
| |                                                                                                                                                                                                                                                                                                                                      
| | The
  amortized cost, gross unrealized losses and fair value of the
  held-to-maturity Bonds by major interest type were as follows:                                                                                                                                                                                               

| |                     |  |                     |        |                                     |   |              |   |   |        | 
| | ------------------- |  | ------------------- | ------ | ----------------------------------- | - | ------------ | - | - | ------ | 
| |                     |  | December
  31, 2006 |       
| |                     |  |                     |       
| |                     |  | Amortized
  cost    |        | Gross
  unrealized
  holding losses |   | Fair
  Value |  
| |                     |  |                     |        |                                     |   |              |  
| |                     |  |                     |        |                                     |   |              |  
| | Up to 5%            |  | $                   | 33,574 |                                     | $ | (601         | ) | $ | 32,973 | 
| | 5.1% - 6%,
  8.125% |  |                     | 13,380 |                                     |   | (212         | ) |   | 13,168 | 
| |                     |  |                     |        |                                     |   |              |   |   |        | 
| |                     |  |                     |        |                                     |   |              |   |   |        | 
| |                     |  | $                   | 46,954 |                                     | $ | (813         | ) | $ | 46,141 | 
| |                     |  |                     |        |                                     |   |              |   |   |        | 

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

F-16

---



Given Imaging Ltd. and its subsidiaries

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

Note 5 - Marketable Securities (contd)

Maturities
of the held-to-maturity Bonds were as follows at December 31, 2006 and 2005:

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

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2006, marketable securities also included $5,060 in bonds
  classified as trading (2005 - $0). These investments are subject to price
  volatility associated with any interest-bearing instrument. Net realized
  gains on trading securities during the year ended December 31, 2006 were
  $133, and are included in financial income. Net unrealized losses on trading
  securities held as of December 31, 2006 were $15 and are included in
  financial income.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Short-term
  investments are comprised of:                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                       |  |             |     |      |   |        | 
| | ----------------------------------------------------- |  | ----------- | --- | ---- | - | ------ | 
| |                                                       |  | December 31 |    
| |                                                       |  |             |    
| |                                                       |  | 2005        |     | 2006 |  
| |                                                       |  |             |     |      |  
| |                                                       |  |             |     |      |  
| | Current
  maturities of held-to-maturity securities |  | $           | 288 |      | $ | 12,185 | 
| | Trading
  securities                                  |  |             |    |      |   | 5,060  | 
| |                                                       |  |             |     |      |   |        | 
| |                                                       |  |             |     |      |   |        | 
| |                                                       |  | $           | 288 |      | $ | 17,245 | 
| |                                                       |  |             |     |      |   |        | 

F-17

---



Given Imaging Ltd. and its subsidiaries

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

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

|                                                                                                                                |  |             |         |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | -
|                                                                                                                                |  | December 31 |        
|                                                                                                                                |  |             |        
|                                                                                                                                |  | 2005        |         | 2006 |  
|                                                                                                                                |  |             |         |      |  
|                                                                                                                                |  |             |         |      |  
|Computers
  and software                                                                                                        |  | $           | 4,942   |      | $ | 6,234   |  
|Instruments
  and laboratory equipment                                                                                          |  |             | 682     |      |   | 791     |  
|Leasehold
  improvements                                                                                                        |  |             | 3,847   |      |   | 4,259   |  
|Motor
  vehicles                                                                                                                |  |             | 55      |      |   | 155     |  
|Machinery
  and equipment                                                                                                       |  |             | 12,702  |      |   | 14,952  |  
|Communication
  equipment                                                                                                       |  |             | 388     |      |   | 418     |  
|Office furniture
  and equipment                                                                                                |  |             | 1,273   |      |   | 1,248   |  
|                                                                                                                                |  |             |         |      |   |         |  
|Fixed assets                                                                                                                    |  |             | 23,889  |      |   | 28,057  |  
|                                                                                                                                |  |             |         |      |   |         |  
|Accumulated
  depreciation                                                                                                      |  |             | (10,027 | )    |   | (13,246 | )
|                                                                                                                                |  |             |         |      |   |         |  
|                                                                                                                                |  |             |         |      |   |         |  
|Fixed assets
  less accumulated depreciation                                                                                    |  | $           | 13,862  |      | $ | 14,811  |  
|                                                                                                                                |  |             |         |      |   |         |  
|                                                                                                                                |  |             |         |      |   |         |  
|Depreciation
  expenses for the years ended December 31, 2004, 2005 and 2006 were $ 2,561, $
  2,936 and $ 3,599, respectively.

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

|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------ | ---- | - | ------ | -
|                                                                                                                                                                                                                                                                   |  | December
  31 |       
|                                                                                                                                                                                                                                                                   |  |               |       
|                                                                                                                                                                                                                                                                   |  | 2005          |        | 2006 |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |  
|Software development
  costs                                                                                                                                                                                                                                       |  | $             | 647    |      | $ | 647    |  
|Patents and
  trademarks                                                                                                                                                                                                                                           |  |               | 3,425  |      |   | 4,594  |  
|Web site
  application                                                                                                                                                                                                                                             |  |               | 895    |      |   | 922    |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|Other assets                                                                                                                                                                                                                                                       |  |               | 4,967  |      |   | 6,163  |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|Accumulated
  amortization                                                                                                                                                                                                                                         |  |               | (2,450 | )    |   | (3,088 | )
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|Other
  assets, net                                                                                                                                                                                                                                                |  | $             | 2,517  |      | $ | 3,075  |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|                                                                                                                                                                                                                                                                   |  |               |        |      |   |        |  
|Amortization
  expenses for the years ended December 31, 2004, 2005 and 2006 were $586, $660
  and $ 638, respectively. . Estimated amortization expense for the next five
  years is: $573 in 2007, $560 in 2008, $516 in 2009, $453 in 2010, and $381 in
  2011.

F-18

---



Given Imaging Ltd. and its subsidiaries

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

Note 8 -
Commitments and Contingencies

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                     
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Office of the Chief Scientist Grants
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                     
| | The
  Companys research and development efforts have been partially financed
  through grants from the Office of the Chief Scientist of the Israeli Ministry
  of Industry and Trade (the OCS). In return for the OCSs participation, the
  Company is committed to pay royalties to the Israeli Government at the rate
  of 3% for each of the first three years and, from the fourth year onwards, at
  the rate of 3.5% of the sales of its product, up to 100% of the amount of the
  grants received, plus LIBOR interest. The grants are presented as an off-set
  to related research and development expenses. The Company is entitled to the
  grants only upon incurring research and development expenditures. There are
  no future performance obligations related to the grants received from the
  OCS. However, under certain limited circumstances, the OCS may withdraw its
  approval of a research program or amend the terms of its approval.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Upon
  withdrawal of approval, the grant recipient may be required to refund the
  grant, in whole or in part, with or without interest, as the OCS determines.
  As of December 31, 2006, the Company has received from the OCS office a total
  cumulative amount of $ 6,751 of which the Company has already repaid $ 2,534 as
  royalties. The total outstanding future obligation, for royalties, based on
  royalty-bearing government participation totaled, before interest,
  approximately $ 4,217 as of December 31, 2006. Royalties payable to the OCS
  are recognized pursuant to sale of related products and are classified under
  cost of revenues.                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Leases                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                     
| | Capital lease for motor vehicles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                     
| | The capital
  lease is to be repaid in five years and bears interest of 7.47%. The vehicles
  are pledged as collateral.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Operating leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  and its subsidiaries currently lease office space and manufacturing space for
  periods of up to 15 years (including options to extend the terms of the
  leases). The current lease for the Companys headquarters is in Yoqneam,
  Israel. This facility houses the Companys corporate headquarters, research
  and development and manufacturing facilities. Under this lease agreement, the
  Company will pay approximately $ 1,300 a year in rent and management fee.
  These payments are subject to adjustments based on changes in the Israeli
  Consumer Price Index. In addition, to secure its obligations under the lease,
  the Company provided a bank guaranty in the amount of approximately $ 750 in
  favor of the lessor. The lease expires on December 31, 2015. The Company has
  an option to extend the lease until December 31, 2020.                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  and its subsidiaries signed several motor vehicle lease agreements. The
  companies deposited a total amount of $ 196 to guarantee their performance
  under the terms of the lease agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-19

---



Given Imaging Ltd. and its subsidiaries

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

Note 8 -
Commitments and Contingencies (contd)

| |                                                                                            |                
| | ------------------------------------------------------------------------------------------ | ---------------
| | B.                                                                                         | Leases (contd)
| |                                                                                            |                
| | The Company
  is committed to minimum annual payments over the next five years as follows:

|                                                                                                                                                    |  |                |    |                  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -- | ---------------- | - | ------ | 
|                                                                                                                                                    |  | Capital leases |    | Operating leases |  
|                                                                                                                                                    |  |                |    |                  |  
|                                                                                                                                                    |  |                |    |                  |  
|2007                                                                                                                                                |  | $              | 13 |                  | $ | 2,884  | 
|2008                                                                                                                                                |  |                | 20 |                  |   | 2,432  | 
|2009                                                                                                                                                |  |                |   |                  |   | 1,880  | 
|2010                                                                                                                                                |  |                |   |                  |   | 1,439  | 
|2011 and
  thereafter                                                                                                                               |  |                |   |                  |   | 6,577  | 
|                                                                                                                                                    |  |                |    |                  |   |        | 
|                                                                                                                                                    |  | $              | 33 |                  | $ | 15,212 | 
|                                                                                                                                                    |  |                |    |                  |   |        | 
|                                                                                                                                                    |  |                |    |                  |   |        | 
|Rental
  expenses under the lease agreements for the years ended December 31, 2004,
  2005 and 2006 were $1,999, $ 2,353 and $ 2,914, respectively.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Agreement with InScope
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                       
| | On May 10,
  2004, the Company entered into an exclusive sales representation,
  co-promotion and cooperation agreement with InScope, a division of Ethicon
  Endo-Surgery, a Johnson & Johnson company. InScope has exclusive rights
  to market the Companys PillCam ESO capsule for visual examination of the
  esophagus. Under the terms of the agreement, the Company received, as of
  December 31, 2006, milestone payments of $25,000. The Company pays 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. According to a September 2006 amendment to the
  original agreement, the payment by InScope to the Company of the remaining
  $25,000 milestone payment originally due February 2007, plus 7% interest,
  will be made in six equal annual installments of $5,240 each, beginning in
  January 2008. Beginning in 2009, the remaining installments at any given time
  may be accelerated and paid sooner if one or more reimbursement or commission
  thresholds are achieved. In addition, pursuant to this amendment, the 10%
  commission the Company pays InScope on sales of capital equipment parts of
  the Given System will be paid only in respect of capital equipment sold to
  customers that use this equipment to perform procedures with the PillCam ESO
  capsule. InScope will fund certain reimbursement and clinical study
  activities concerning the PillCam ESO capsule.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Subject to
  achieving specified minimum sales targets and meeting certain conditions, the
  exclusive term of the agreement will continue for up to 11 years, followed by
  a four-year co-exclusive transition period with the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | All
  milestone payments received have been deferred and are being systematically
  recognized, on a straight-line basis, by the Company as a reduction of commission
  expense over the 15 year term of the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Milestone
  payments are included under deferred income in the Consolidated Balance
  Sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-20

---



Given Imaging Ltd. and its subsidiaries

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

Note 8 -
Commitments and Contingencies (contd)

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | D.  | Agreements with key single - source suppliers and commitments to
  suppliers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (1) | In 2004, the
  Company entered into an agreement with a Canadian company (Canadian Company)
  that supplies a component that is integrated into the PillCam capsules. Under
  the agreement, the Company has agreed to purchase a minimum quantity of
  components during the first 36 months following the development and testing
  phase, and if it fails to do so it must make certain payments to the Canadian
  Company in respect of the shortfall. 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. The initial term of the agreement
  was scheduled to expire in April 2007.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | In July 2005, the Company agreed with the Canadian Company that it
  will develop and manufacture an additional version of the component. The
  minimum purchase requirements will not apply to this version. 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 to 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 agreement permits the Supplier to disregard the exclusive sales
  requirement if the Company fails to purchase agreed-upon minimum quantities.                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (3) | The
  Companys annual commitments under agreements with suppliers for the next 5
  years are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                                                                                                                    |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
|2007                                                                                                                                                |  | $ | 3,808  | 
|2008                                                                                                                                                |  |   | 2,329  | 
|2009                                                                                                                                                |  |   | 2,250  | 
|2010                                                                                                                                                |  |   | 2,250  | 
|2011 and
  thereafter                                                                                                                               |  |   | 4,500  | 
|                                                                                                                                                    |  |   |        | 
|                                                                                                                                                    |  | $ | 15,137 | 
|                                                                                                                                                    |  |   |        | 
|                                                                                                                                                    |  |   |        | 
|Payments
  under such agreements with suppliers for the years ended December 31, 2004,
  2005 and 2006 were $3,723, $8,568 and $8,875 respectively.

F-21

---



Given Imaging Ltd. and its subsidiaries

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

Note 8 -
Commitments and Contingencies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Patent Litigation      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                        
| | On May 19,
  2006, Olympus Corporation, Olympus Medical Systems Corp. and Olympus America
  Inc., collectively referred to in this section as Olympus, filed a
  complaint against the Company in the District Court for the Eastern District
  of Pennsylvania. In the complaint, Olympus alleged that the Companys capsule
  endoscopes infringe one of its patents (Olympus Patent). The Olympus Patent
  will expire in December 2008. In addition, Olympus seeks a declaratory
  judgment that its endoscope product will not infringe the Companys first
  U.S. Patent, known as the 531 patent, and that the 531 patent is invalid.
  In its complaint, Olympus requested an injunction that will prevent the
  Company from selling in the United States any product that infringes on the
  Olympus Patent as well as damages in an unspecified amount.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  filed its answer and counterclaim on October 20, 2006. In this answer and
  counterclaim the Company denied infringement of the Olympus Patent and that
  the Olympus Patent is invalid. In addition, the Company alleged that the 531
  patent is valid and will be infringed by Olympus once it begins marketing and
  selling its capsule endoscopy product in the United States. The Company also
  alleged that Olympus will infringe three other Company patents.. In the
  complaint, the Company requested an injunction to prevent Olympus from
  selling in the United States any product that infringes on the Companys
  patents. If Olympus sells its capsule endoscopy system in the United States,
  the Company may also request the assessment of damages.                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | On March 30,
  2007 Olympus filed an amended complaint asserting that the Companys capsule
  endoscopes infringe three additional patents owned by it. The Company is
  examining the amended complaint and will file its answer with the court
  within the time period permitted by the applicable procedural rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  believes it has a reasonable chance of success in this case. However,
  litigation is in early stages and the outcome is uncertain at this time. The
  ongoing litigation and any unfavorable outcome may have an adverse effect on
  the Companys results of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Provision for Sales Tax
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                        
| | During the
  year ended December 31, 2005, the Company made a provision of $1,800 for
  potential uncollectible sales tax, interest and penalties resulting from the
  failure of the Companys U.S. subsidiary to appropriately collect and remit
  sales tax on sales in the U.S. since the fourth quarter of 2001. The
  provision represented the Companys estimate of the amounts it might not
  collect from its customers for remittance to the different jurisdictions, and
  any interest and penalties the Company may have to pay for failure to timely
  remit the sales tax. During 2005 and 2006 the Company has all required sales
  and use tax returns and collected tax amounts from its customers. As of
  December 31, 2006, accounts payable included $702 representing sales and use
  taxes, interest and penalties remaining to be resolved.    

F-22

---



Given Imaging Ltd. and its subsidiaries

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

Note 8 -
Commitments and Contingencies (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                      
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
| | G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Investment in the Japanese Subsidiary
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                      
| | In 2006, the
  Company and its Japanese partners completed additional equity financing of
  approximately $9.6 million (in Japanese YEN) to finance the operations of
  Given Imaging K.K., the Companys Japanese subsidiary, until it starts
  generating enough cash to finance its operations. The Companys portion of
  the funding of approximately $4.8 million was paid out of its cash reserves.
  Following completion of this additional equity financing, the Company
  continues to have a controlling interest of 51% of its Japanese subsidiary

Note 9 -
Accounts Payable - Other

|                                  |  |               |        |      |   |        | 
|--------------------------------- |  | ------------- | ------ | ---- | - | ------ | 
|                                  |  | December
  31 |       
|                                  |  |               |       
|                                  |  | 2005          |        | 2006 |  
|                                  |  |               |        |      |  
|                                  |  |               |        |      |   |        | 
|Government
  institutions         |  | $             | 3,693  |      | $ | 2,137  | 
|Liabilities
  regarding employees |  |               | 4,700  |      |   | 6,863  | 
|Advances
  from customers         |  |               | 39     |      |   | 58     | 
|Warranty                          |  |               | 71     |      |   | 102    | 
|Royalties to
  the OCS            |  |               | 306    |      |   | 214    | 
|Commissions                       |  |               | 2,161  |      |   | 2,057  | 
|Accrued
  expenses                |  |               | 2,916  |      |   | 3,189  | 
|                                  |  |               |        |      |   |        | 
|                                  |  |               |        |      |   |        | 
|                                  |  | $             | 13,886 |      | $ | 14,620 | 
|                                  |  |               |        |      |   |        | 

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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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 employee severance payments for the years ended
  December 31, 2004, 2005 and 2006 are $525, $664 and $862, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-23

---



Given Imaging Ltd. and its subsidiaries

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

Note 11
- Share Capital

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Ordinary shares                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                            
| | All of the
  issued and outstanding Ordinary Shares of the Company are authorized, issued,
  fully paid and non-assessable. The Ordinary Shares of the Company are not
  redeemable and have no preemptive rights. The ownership or voting of Ordinary
  Shares by non-residents of Israel is not restricted in any way by the
  Companys memorandum or articles of association or the laws of the State of
  Israel, except that citizens of countries which are, or have been, in a state
  of war with Israel may not be recognized as owners of Ordinary Shares.                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Employees and non employees stock options
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                            
| | In 2003, the
  Company adopted a stock option plan for directors, employees and consultants.
  The 2003 Plan replaced and superseded previous option plans adopted by the
  Company in 1998 and 2000. Under these plans, the Board of Directors (or a
  compensation committee appointed by the board) (the Board) has the
  authority to grant options to employees of the Company and its subsidiaries,
  directors or consultants. Each option entitles the holder to purchase one
  Ordinary Share of par value of NIS 0.05 and expires after 10 years from the
  date of grant. The Company has reserved for issuance a total of 2,500,000 Ordinary
  Shares under the plan. As of December 31, 2006, 21,516 options out of this
  plan had not been granted.                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The purchase
  price of each share pursuant to the options granted under the 2003 Plan shall
  be the fair market value on the date the Board approves the grant of the
  option or as otherwise determined by the Board.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Unless
  otherwise determined by the Board, where a grant of options under the 2003
  Plan is the first grant of options made to a person, 50% of the options vest
  and become exercisable on the second anniversary of the date of grant. An
  additional 25% of the options vest and become exercisable on each of the
  third and fourth anniversaries of the date of the grant. If, however, a grant
  under the 2003 Plan is made to a person who previously received stock options
  under the 2003 Plan or a previous plan of the Company, 25% of the options
  granted are immediately vested and exercisable and an additional 25% of the
  options vest and become exercisable on each of the first, second and third
  anniversaries of the date of the grant.                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In 2006, the
  Company adopted the 2006 Equity Incentive Plan (the Plan) permitting the
  grant of equity awards, including options and restricted stock of the
  Company, to eligible employees, directors and consultants of the Company and
  its subsidiaries. The Plan is administered by the Companys Board of
  Directors and Compensation and Nominating Committee. The Plan contains
  provisions concerning the vesting, price, exercise and other terms of awards;
  however, the Compensation and Nominating Committee has authority to grant
  awards under different terms at its discretion. The Company has reserved for
  issuance a total of 2,500,000 Ordinary Shares under the Plan. As of December
  31, 2006, there were 539,500 shares outstanding under this plan, and 100,000
  shares of restricted stock had been issued.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-24

---



Given Imaging Ltd. and its subsidiaries

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

Note 11
- Share Capital (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Employees and non employees stock options (contd)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                     
| | Generally,
  where a grant of an award under the plan is the first grant of equity to an
  employee or consultant, 50% of the award is exercisable on the second
  anniversary of the date of grant, and 25% becomes exercisable on each of the
  third and fourth anniversaries of the date of the grant. In cases of
  subsequent grants, awards vest in four equal installments beginning with the
  first anniversary of the grant. To the extent the awards have vested, they
  may be exercised in whole or in part from time to time until their
  expiration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In case of
  participating employees and consultants, all unvested awards are cancelled
  upon the termination of their employment or service. All vested awards may be
  exercised within 180 days following termination. All vested awards not
  exercised within this period are automatically forfeited and cancelled.
  Unvested awards to non-employee directors whose service is terminated or
  discontinued for any reason other than for cause after more than five years
  of service on the Companys board of directors, will automatically vest and
  become exercisable immediately prior to termination or discontinuation of
  service. These vested awards may be exercised within 180 days following
  termination or discontinuation of service, except in cases where termination
  or discontinuation of service is a result of statutory requirements, death,
  disability or other circumstances of forced cessation of service, in which
  case awards may be exercised at any time until their expiration date. In a
  case of termination for cause of a plan participant, all awards, whether
  vested or unvested, are automatically forfeited and cancelled.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Under this
  plan, in the event of an acquisition or merger in which the Company is not
  the surviving entity and the acquiring entity does not agree to assume the
  awards, all outstanding, but unvested, awards will be accelerated and
  exercisable, ten days prior to the acquisition or merger. In addition, if the
  employment of a holder of outstanding awards is terminated in anticipation of
  or during the 12 month period following an acquisition or merger, all awards
  that are scheduled to vest within two years of such acquisition or merger,
  will be automatically accelerated and exercisable, subject to certain
  adjustments and exceptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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-25

---



Given Imaging Ltd. and its subsidiaries

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

Note 11
- Share Capital (contd)

| |                                                                                                                                                                                                                  |                                                     
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------
| | B.                                                                                                                                                                                                               | Employees and non employees stock options (contd)
| |                                                                                                                                                                                                                  |                                                     
| | Prior to the
  adoption of Statement 123R, effective January 1, 2006, the fair value of each
  option granted is estimated on the date of grant, using the Black-Scholes
  model with the following assumptions:
| |                                                                                                                                                                                                                 
| | 1.                                                                                                                                                                                                               | Dividend
  yield of zero percent.                   
| |                                                                                                                                                                                                                  |                                                     
| | 2.                                                                                                                                                                                                               | Risk-free average interest rate as follows:         

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

| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.                                                                                                                                                    | Estimated
  expected lives of five years as of the date of grant.                                                                                                                                                                                                               
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                 
| | 4.                                                                                                                                                    | Expected
  average volatility of 74% and 62%, for the year ended December 31, 2004 and
  2005, respectively, which represents a weighted average standard deviation
  rate for the price of the Companys Ordinary Shares on the NASDAQ National
  Market.                      
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                 
| | The fair
  value of each option granted in 2006 was estimated on the date of grant using
  the Black - Scholes model, with the following assumptions:
| |                                                                                                                                                      
| | 1.                                                                                                                                                    | Dividend
  yield of zero percent.                                                                                                                                                                                                                                               
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                 
| | 2.                                                                                                                                                    | Risk free
  average interest rate of 4.89% which represents the risk free rate of US$zero
  - coupon Government Bonds.                                                                                                                                                          
| |                                                                                                                                                       |                                                                                                                                                                                                                                                                                 
| | 3.                                                                                                                                                    | Weighted
  average expected life of 3.69 years, 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. 107
  (SAB 107), giving consideration to the contractual term of the options and
  their vesting schedules.
| |                                                                                                                                                      
| | 4.                                                                                                                                                    | Expected
  average volatility of 53.17% 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, 2006:                                                                                                                              

F-26

---



Given Imaging Ltd. and its subsidiaries

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

Note 11
- Share Capital (contd)

| |    |                                                     
| | -- | ----------------------------------------------------
| | B. | Employees and non employees stock options (contd)

|               |  |                                           |           |                                                          |      |  | 
|-------------- |  | ----------------------------------------- | --------- | -------------------------------------------------------- | ---- |  | 
|               |  | Options outstanding                       |          
|               |  |                                           |          
|Exercise price |  | Number outstanding at
  December 31, 2006 |           | Weighted average remaining
  contractual life (in years) |     
|               |  |                                           |           |                                                          |     
|               |  |                                           |           |                                                          |      |  | 
|$1 - $10       |  |                                           | 855,368   |                                                          | 4.86 |  | 
|$10.01-$20     |  |                                           | 1,862,025 |                                                          | 5.65 |  | 
|$20.01-$30     |  |                                           | 889,920   |                                                          | 6.45 |  | 
|$30.01-$40     |  |                                           | 507,291   |                                                          | 7.90 |  | 
|               |  |                                           |           |                                                          |      |  | 
|               |  |                                           | 4,114,604 |                                                          |      |  | 
|               |  |                                           |           |                                                          |      |  | 

|               |  |                                           |           |                                                           |      |  | 
|-------------- |  | ----------------------------------------- | --------- | --------------------------------------------------------- | ---- |  | 
|               |  | Options exercisable                       |          
|               |  |                                           |          
|Exercise price |  | Number exercisable at
  December 31, 2006 |           | Weighted average remaining 
  contractual life (in years) |     
|               |  |                                           |           |                                                           |     
|               |  |                                           |           |                                                           |      |  | 
|$1 - $10       |  |                                           | 844,368   |                                                           | 4.84 |  | 
|$10.01-$20     |  |                                           | 1,294,525 |                                                           | 6.07 |  | 
|$20.01-$30     |  |                                           | 236,250   |                                                           | 7.71 |  | 
|$30.01-$40     |  |                                           | 410,674   |                                                           | 7.88 |  | 
|               |  |                                           |           |                                                           |      |  | 
|               |  |                                           | 2,785,817 |                                                           |      |  | 
|               |  |                                           |           |                                                           |      |  | 

| |                                                           
| | ----------------------------------------------------------
| | The stock
  option activity under the Plans is as follows:

|                             |  |                  |           |                                   |  |                                         |  |  |           | 
|---------------------------- |  | ---------------- | --------- | --------------------------------- |  | --------------------------------------- |  |  | --------- | 
|                             |  | Number of shares |           | Weighted average
  exercise price |  | Weighted average
  grant datefair value | 
|                             |  |                  |           |                                   |  |                                         | 
|                             |  |                  |           |                                   |  |                                         |  |  |           | 
|Balance at January 1, 2004   |  |                  | 3,881,396 |                                   |  |                                         |  |  |           | 
|Granted                      |  |                  | 1,011,340 |                                   |  | $   34.09                               |  |  | $   23.31 | 
|Forfeited                    |  |                  | (119,000  | )                                 |  | 14.84                                   |  |  | 10.36     | 
|Exercised                    |  |                  | (472,198  | )                                 |  | 5.44                                    |  |  | 4.11      | 
|                             |  |                  |           |                                   |  |                                         |  |  |           | 
|Balance at December 31, 2004 |  |                  | 4,301,538 |                                   |  |                                         |  |  |           | 
|Granted                      |  |                  | 266,000   |                                   |  | 25.06                                   |  |  | 13.93     | 
|Forfeited                    |  |                  | (205,483  | )                                 |  | 26.96                                   |  |  | 16.78     | 
|Exercised                    |  |                  | (328,895  | )                                 |  | 3.29                                    |  |  | 2.78      | 
|                             |  |                  |           |                                   |  |                                         |  |  |           | 
|Balance at December 31, 2005 |  |                  | 4,033,160 |                                   |  |                                         |  |  |           | 
|Granted                      |  |                  | 1,077,070 |                                   |  | 18.75                                   |  |  | 10.21     | 
|Forfeited                    |  |                  | (404,616  | )                                 |  | 25.87                                   |  |  | 15.29     | 
|Exercised                    |  |                  | (591,010  | )                                 |  | 3.45                                    |  |  | 2.95      | 
|                             |  |                  |           |                                   |  |                                         |  |  |           | 
|Balance at December 31, 2006 |  |                  | 4,114,604 |                                   |  |                                         |  |  |           | 
|                             |  |                  |           |                                   |  |                                         |  |  |           | 

The aggregate
intrinsic value of options outstanding as at December 31, 2006, is $ 19,673.
The aggregate intrinsic value of options excisable as at December 31, 2006, is
$ 18,778. The total intrinsic value of options exercised during the year ended
December 31, 2006, is $ 10,610.

F-27

---



Given Imaging Ltd. and its subsidiaries

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

Note 11
- Share Capital (contd)

| |                                                                                                                                                                                                                                                                                                            |                                                     
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------
| | B.                                                                                                                                                                                                                                                                                                         | Employees and non employees stock options (contd)
| |                                                                                                                                                                                                                                                                                                           
| | 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. The fair value of the restricted shares as of the date of
  issue is being amortized over the vesting period.
| |                                                                                                                                                                                                                                                                                                           
| | Unrecognized
  compensation costs related to the restricted shares, as of December 31, 2006,
  to be recognized over 3.4 years, were $1,516 and compensation expenses of
  $263 were recognized in 2006.                                                                                                  
| |                                                                                                                                                                                                                                                                                                           
| | The
  following summarizes the allocation of the stock-based compensation charge
  for both employees and non-employee stock option grants:                                                                                                                                                               

|                                      |  |                         |    |      |   |      |  |   |       | 
|------------------------------------- |  | ----------------------- | -- | ---- | - | ---- |  | - | ----- | 
|                                      |  | Year ended December 31, |   
|                                      |  |                         |   
|                                      |  | 2004                    |    | 2005 |   | 2006 | 
|                                      |  |                         |    |      |   |      | 
|                                      |  |                         |    |      |   |      |  |   |       | 
|Research and development costs        |  | $                       | 63 |      | $ |     |  | $ | 569   | 
|Selling and
  marketing expenses      |  |                         | 1  |      |   |     |  |   | 1,839 | 
|General and
  administrative expenses |  |                         | 14 |      |   | 3    |  |   | 2,805 | 
|                                      |  |                         |    |      |   |      |  |   |       | 
|                                      |  |                         |    |      |   |      |  |   |       | 
|                                      |  | $                       | 78 |      | $ | 3    |  | $ | 5,213 | 
|                                      |  |                         |    |      |   |      |  |   |       | 

As of December
31, 2006, there was approximately $10,200 of unrecognized compensation costs
related to non-vested options to be recognized over a weighted average period
of 2.67 years.
The total grant date fair value of options vested during the year ended
December 31, 2006, was $8,368

Note 12
- Revenues

| |    |                       
| | -- | ----------------------
| | A. | Revenues by activities

|                                |  |                         |        |      |   |        |  |   |        | 
|------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                |  | Year ended December 31, |       
|                                |  |                         |       
|                                |  | 2004                    |        | 2005 |   | 2006   | 
|                                |  |                         |        |      |   |        | 
|                                |  |                         |        |      |   |        |  |   |        | 
|Workstations
  and recorders    |  | $                       | 18,669 |      | $ | 16,145 |  | $ | 12,513 | 
|PillCam SB
  capsule            |  |                         | 41,622 |      |   | 62,528 |  |   | 76,360 | 
|PillCam ESO
  capsule           |  |                         | 1,829  |      |   | 4,384  |  |   | 1,438  | 
|Patency
  capsules and scanners |  |                         | 188    |      |   | 174    |  |   | 353    | 
|Service                         |  |                         | 2,712  |      |   | 3,545  |  |   | 4,365  | 
|                                |  |                         |        |      |   |        |  |   |        | 
|                                |  |                         |        |      |   |        |  |   |        | 
|                                |  | $                       | 65,020 |      | $ | 86,776 |  | $ | 95,029 | 
|                                |  |                         |        |      |   |        |  |   |        | 

F-28

---



Given Imaging Ltd. and its subsidiaries

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

Note 12
 Revenues (contd)

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

|                    |  |                         |        |      |   |        |  |   |        | 
|------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                    |  | Year ended December 31, |       
|                    |  |                         |       
|                    |  | 2004                    |        | 2005 |   | 2006   | 
|                    |  |                         |        |      |   |        | 
|                    |  |                         |        |      |   |        |  |   |        | 
|United
  States     |  | $                       | 46,694 |      | $ | 63,896 |  | $ | 66,415 | 
|Europe              |  |                         | 13,447 |      |   | 16,765 |  |   | 21,053 | 
|Rest of the
  world |  |                         | 4,879  |      |   | 6,115  |  |   | 7,561  | 
|                    |  |                         |        |      |   |        |  |   |        | 
|                    |  | $                       | 65,020 |      | $ | 86,776 |  | $ | 95,029 | 
|                    |  |                         |        |      |   |        |  |   |        | 

Note 13
- Financial Income, net

|                                    |  |                         |      |      |   |       |   |   |       |  
|----------------------------------- |  | ----------------------- | ---- | ---- | - | ----- | - | - | ----- | -
|                                    |  | Year ended December 31, |     
|                                    |  |                         |     
|                                    |  | 2004                    |      | 2005 |   | 2006  |  
|                                    |  |                         |      |      |   |       |  
|                                    |  |                         |      |      |   |       |   |   |       |  
|Currency
  gains (losses)           |  | $                       | 444  |      | $ | (837  | ) | $ | 778   |  
|Interest
  income                   |  |                         | 685  |      |   | 1,963 |   |   | 1,639 |  
|Income from
  marketable securities |  |                         |     |      |   | 422   |   |   | 1,849 |  
|Other                               |  |                         | (173 | )    |   | (786  | ) |   | (286  | )
|                                    |  |                         |      |      |   |       |   |   |       |  
|                                    |  | $                       | 956  |      | $ | 762   |   | $ | 3,980 |  
|                                    |  |                         |      |      |   |       |   |   |       |  

Note 14
- Taxes on Income

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A.  | Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (1) | Israeli
  income tax is computed on the basis of the Companys results in New Israeli
  Shekels (NIS) determined for statutory purposes. The Company is assessed
  for tax purposes under the Income Tax Law (Inflationary Adjustments 1985),
  the purpose of which is to prevent taxation on inflationary profits.                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Pursuant to
  the Israeli tax law, the Company was awarded Approved Enterprise status
  under the government alternative benefits track. The program is for
  investments in the development of infrastructure and for investments in
  locally produced and imported equipment. The main benefits to which the
  Company will be entitled, if it implements all the terms of an approved
  program, are the exemption from tax on income deriving from an approved
  enterprise, and reduced tax rates on dividends originating from this income.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The income
  derived from an approved enterprise will be exempt from tax for a ten year
  period, commencing on the date that taxable income is first generated by the
  approved enterprise (limited to the earlier of a maximum period of 12 years
  from the year of commencement of operations or 14 years from the year the
  approval letter was received). As of December 31, 2006, the benefit term had
  not commenced.                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Dividend
  distributions originating from income of the Approved Enterprise will be
  subject to tax at the rate of 15%, provided that the dividend is distributed
  during the period stipulated under Israeli law.                                                                                                                                                                                                                                                                                                                                

F-29

---



Given Imaging Ltd.
and its subsidiaries
Notes To The Consolidated Financial Statements(In thousands except share and per share data)

Note 14 - Taxes on Income (contd)

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A. | Company (contd)                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In the event
  of a dividend distribution (including withdrawals and charges that are deemed
  to be dividends) out of the income originating from the approved enterprise,
  and on which the Company received a tax exemption, the distribution is
  subject to corporate taxes at rates varying from 10% - 25% depending on the
  percentage of foreign investment holding in the Company as defined by the
  Law.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | If the
  Company derives income from sources other than the approved enterprise during
  the relevant period of benefits, such income will be taxable at regular
  corporate tax rates (see (4) below).                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | On March 30,
  2005, the Knesset approved a reform of the Encouragement of Capital
  Investments Law  1959.  The primary
  changes are as follows:                                                                                                                                                                                                                                                                  

| |    |                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Companies
  that meet the criteria of the Alternate Path of tax benefits will receive
  those benefits without prior approval.
  In addition there will be no requirement to file reports with the
  Investment Center.  Audit will take
  place via the Income Tax Authorities as part of the tax audits.  Request for pre-ruling is possible.
| |    |                                                                                                                                                                                                                                                                                                                                                
| | b. | Tax benefits
  of the Alternate Path include lower tax rates or zero tax depending on the
  investment zone and the path chosen, lower tax rates on dividends and
  accelerated depreciation.                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                
| | c. | In order to
  receive benefits in the Grant Path or the Alternate Path, the Industrial
  Enterprise must contribute to the economic independence of the Country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 market of at least 12 million
  residents.                                                                                    

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | The
  amendments to the Law do not retroactively apply for investment programs
  having an Approved Enterprise approval certificate from the Investment Center
  issued up to December 31, 2004 (even when investments under these programs
  are conducted after January 1, 2005). Consequently, the amendments should not
  impact an existing Approved Enterprise, which received written approval. The
  new tax regime shall apply for a new Approved Enterprise and for an Approved
  Enterprise expansion for which the first year of benefits may be as early as
  2004.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (2) | The Company
  has net operating loss carryforwards in Israel of approximately $ 13.9 million
  as of December 31, 2006.  These net
  operating loss carryforwards are linked to the Israeli Consumer Price Index
  and are available to offset future taxable income, if any, indefinitely.                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (3) | As explained
  above, the Israeli Company is exempt from tax for a ten-year period.  Therefore, the Israeli Company has not
  recorded deferred tax assets and liabilities.                                                                                                                                                                                                                                                                                                                                                                                                     

F-30

---



Given Imaging Ltd.
and its subsidiaries
Notes To The Consolidated Financial Statements(In thousands except share and per share data)

Note 14 - Taxes on Income (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Company (contd)                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| | (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                    | On July 25,
  2005 the Knesset passed the Law for the Amendment of the Income Tax Ordinance
  (No. 147 and Temporary Order) - 2005 (the Amendment).                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  Amendment provides for a gradual reduction in corporate tax rate in the
  following manner: in 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and
  from 2010 onward 25%. Furthermore, as from 2010, upon reduction of the
  corporate tax rate to 25%, capital gains will be subject to tax of 25%.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        | This change
  has no effect on the financial statements of the Company.                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Subsidiaries                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| | At December
  31, 2006 the subsidiaries had local, federal and state net operating loss
  carryforwards of approximately $ 26.6 million.  Federal and state losses carryforwards in the US subsidiary,
  totaling $ 9.1 million will be expired through 2026. Operating loss
  carryforwards in the Japanese subsidiary, totaling $ 6.4 million will be
  expired through 2013.  The remaining
  balance could be utilized with no limitation of time.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Profit (loss) before tax and tax expense (benefit) included in the
  statement of operations                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                           

|                                                           |  |                        |        |      |   |       |   |   |        |  
|---------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ----- | - | - | ------ | -
|                                                           |  | Year ended December 31 |       
|                                                           |  |                        |       
|                                                           |  | 2004                   |        | 2005 |   | 2006  |  
|                                                           |  |                        |        |      |   |       |  
|                                                           |  |                        |        |      |   |       |   |   |        |  
|Profit
  (loss) before taxes on income and minority share: |  |                        |        |      |   |       |   |   |        |  
|Israel                                                     |  | $                      | 4,494  |      | $ | 5,011 |   | $ | 3,459  |  
|Foreign jurisdiction                                       |  |                        | (3,043 | )    |   | (70   | ) |   | (6,174 | )
|                                                           |  |                        |        |      |   |       |   |   |        |  
|                                                           |  | $                      | 1,451  |      | $ | 4,941 |   | $ | (2,715 | )
|                                                           |  |                        |        |      |   |       |   |   |        |  
|Taxes on
  income:                                         |  |                        |        |      |   |       |   |   |        |  
|                                                           |  |                        |        |      |   |       |   |   |        |  
|Current
  taxes:                                           |  |                        |        |      |   |       |   |   |        |  
|Israel                                                     |  | $                      |       |      | $ |      |   | $ | 200    |  
|Foreign
  jurisdiction                                     |  |                        | 47     |      |   | 196   |   |   | 82     |  
|                                                           |  |                        |        |      |   |       |   |   |        |  
|                                                           |  | $                      | 47     |      | $ | 196   |   | $ | 282    |  
|                                                           |  |                        |        |      |   |       |   |   |        |  
|                                                           |  |                        |        |      |   |       |   |   |        |  
|Deferred
  taxes:                                          |  |                        |        |      |   |       |   |   |        |  
|Israel                                                     |  | $                      |       |      | $ |      |   | $ |       |  
|Foreign
  jurisdiction                                     |  |                        | (737   | )    |   | (482  | ) |   | (155   | )
|                                                           |  |                        |        |      |   |       |   |   |        |  
|                                                           |  | $                      | (737   | )    | $ | (482  | ) | $ | (155   | )
|                                                           |  |                        |        |      |   |       |   |   |        |  
|Tax expense
  (benefit)                                    |  | $                      | (690   | )    | $ | (286  | ) | $ | 127    |  
|                                                           |  |                        |        |      |   |       |   |   |        |  

F-31

---



Given Imaging Ltd.
and its subsidiaries
Notes To The Consolidated Financial Statements(In thousands except share and per share data)

Note 14 - Taxes on Income (contd)

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Deferred Taxes
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |               
| | 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, 2006. The amount of
  the deferred tax asset considered realizable, however, could be reduced in
  the near term if estimates of future taxable income during the carryforward
  period are reduced.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |               
| | The tax
  effects of significant items comprising the Companys deferred taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                                         |  |             |         |      |   |         |  
|------------------------------------------------------------------------ |  | ----------- | ------- | ---- | - | ------- | -
|                                                                         |  | December 31 |        
|                                                                         |  |             |        
|                                                                         |  | 2005        |         | 2006 |  
|                                                                         |  |             |         |      |  
|                                                                         |  |             |         |      |   |         |  
|Net
  operating tax assets regarding carryforward losses of subsidiaries |  | $           | 9,960   |      | $ | 10,137  |  
|Other timing
  difference                                                |  |             | 1,576   |      |   | 2,343   |  
|                                                                         |  |             |         |      |   |         |  
|Deferred tax
  asset                                                     |  |             | 11,536  |      |   | 12,480  |  
|Valuation allowance                                                      |  |             | (10,317 | )    |   | (11,106 | )
|                                                                         |  |             |         |      |   |         |  
|Net deferred
  tax asset                                                 |  | $           | 1,219   |      | $ | 1,374   |  
|                                                                         |  |             |         |      |   |         |  

| |                                                                                                                                                           |                                                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------
| | The net
  changes in the total valuation allowance for the years ended December 31,
  2004, 2005 and 2006 are $ 3,840, ($ 2,779) and $ 789, respectively.
| |                                                                                                                                                           |                                                                                  
| | E.                                                                                                                                                        | Reconciliation of the statutory tax expense (benefit) to actual taxes
  on income

|                                                                            |  |                         |        |      |   |        |   |   |        |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                            |  | Year ended December 31, |       
|                                                                            |  |                         |       
|                                                                            |  | 2004                    |        | 2005 |   | 2006   |  
|                                                                            |  |                         |        |      |   |        |  
|Profit
  (loss) before taxes on income and minority share                   |  | $                       | 1,451  |      | $ | 4,941  |   | $ | (2,715 | )
|Tax rate                                                                    |  |                         | 0      | %    |   | 0      | % |   | 0      | %
|                                                                            |  |                         |        |      |   |        |   |   |        |  
|Statutory
  income tax on the above amount                                  |  |                         |       |      |   |       |   |   |       |  
|Increase (decrease) in taxed on income resulting from:                      |  |                         |        |      |   |        |   |   |        |  
|Differences between the definition of capital and assets for tax
  purposes |  |                         |       |      |   |       |   |   | 200    |  
|Changes in valuation allowance                                              |  |                         | 3,840  |      |   | (2,779 | ) |   | 789    |  
|Foreign tax
  rate differential in subsidiaries                             |  |                         | (4,530 | )    |   | 2,493  |   |   | (862   | )
|                                                                            |  |                         |        |      |   |        |   |   |        |  
|Tax expense
  (benefit)                                                     |  | $                       | (690   | )    | $ | (286   | ) | $ | 127    |  
|                                                                            |  |                         |        |      |   |        |   |   |        |  

F-32

---



Given Imaging Ltd.
and its subsidiaries
Notes To The Consolidated Financial Statements(In thousands except share and per share data)

Note 15- Fair Value of Financial Instruments

| |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys
  financial instruments include cash and cash equivalents, accounts receivable,
  deposits, assets held for severance benefits, marketable securities and
  accounts payable.  Except for
  marketable securities considering the short term nature of these financial
  instruments, their carrying amounts approximate fair value.  The fair value of the Companys marketable
  securities is disclosed in Note 5.

F-33

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