UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
  FORM 20-F
  o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR
  x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2010
  OR
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ____ to _____
  OR
  o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Date of event requiring this shell company report: Not applicable
  Commission File No. 000-50867
  SYNERON MEDICAL LTD.
 (Exact name of Registrant as specified in its charter)
  N/A
 (Translation of Registrant’s name into English)
  ISRAEL
 (Jurisdiction of incorporation or organization)
  Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel
 (Address of principal executive offices)
  Asaf Alperovitz, CFO
 Telephone: 972-732-442200
 Email: CFO@syneron.com
 Facsimile: 972-732-442202
 Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel
 (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
  Securities registered or to be registered pursuant to Section 12(b) of the Act.
  Title of Each Class
Name of Each Exchange on which RegisteredOrdinary Shares, par value NIS 0.01 per share
Nasdaq Global Select Market
  
  Securities registered or to be registered pursuant to Section 12(g) of the Act.
  None
  Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
  None
  Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
  As of December 31, 2010, the Registrant had 34,674,889 Ordinary Shares outstanding (excluding treasury shares).
  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
  o   Yes   x   No
  If this report is an annual report 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.
  o   Yes   x   No
  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.
  x   Yes   o   No
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  o   Yes   o   No
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
  Large accelerated filer   o    Accelerated filer   x    Non-accelerated filer   o
  Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
  U.S. GAAP x International Financing Reporting Standards as issued by the International Accounting Standards Board  o Other   o
  If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
  Item 17 o   Item 18 o
  If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  o   Yes   x   No
 
  In this Annual Report on Form 20-F, unless the context suggests otherwise, the terms “Syneron,” “the Company,” “we,” “us,” “our” or “ours” refer to Syneron Medical Ltd. and its consolidated subsidiaries as of December 31, 2010, including Candela Corporation. All references in this Annual Report on Form 20-F to “U.S. dollars,” “dollars” or “$” are to the legal currency of the United States of America, and all references in this Annual Report on Form 20-F to “NIS” or “New Israeli Shekel” are to the legal currency of Israel.
  Any statements contained in this Annual Report on Form 20-F regarding future expectations, beliefs, goals, plans or prospects constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Further, any statements that are not statements of historical fact (including statements containing the words "believes," "anticipates," "plans," "expects," "may," "will," "would," "intends," "estimates" and similar expressions) should also be considered to be forward-looking statements. The forward-looking statements included herein are based on current expectations and beliefs that involve a number of known and unknown risks and uncertainties. These forward-looking statements are based on certain assumptions, including, but not limited to, the following: the assumption that we will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders; that our products will be approved by appropriate regulatory authorities; that we will launch new products or discontinue to market old products that our markets will continue to grow; that our products will remain accepted within their respective markets and will not be replaced by new technologies; that competitive conditions within our markets will not change materially or adversely; that we will retain key technical and management personnel; that our businesses and the business of our new indirect wholly owned subsidiary, Candela Corporation, will be integrated successfully; that our forecasts will accurately anticipate market demand and that, in light of the current economic crises, there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgment with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. If one or more of these assumptions will prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. This forward-looking statement does not reflect the potential impact of any future dispositions or strategic transactions that may be undertaken. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this Annual Report on Form 20-F at Item 3.D, “Key Information – Risk Factors.”
  In addition, the statements in this document reflect our expectations and beliefs as of the date of this Annual Report. However, while we may elect to update these forward-looking statements publicly in the future, we specifically disclaim any obligation to do so, unless otherwise required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report on Form 20-F might not occur.
  
  TABLE OF CONTENTS
  PagePART I

1ITEM 1.
IDENTITY OFDIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
1ITEM 3.
KEY INFORMATION
1ITEM 4.
INFORMATION ON THE COMPANY
19ITEM 4A.
UNRESOLVEDSTAFF COMMENTS
44ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
44ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
59ITEM7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
71ITEM8.
FINANCIALINFORMATION
73ITEM 9.
THE OFFER AND LISTING
77ITEM 10.
ADDITIONAL INFORMATION
78ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK
102ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
103PARTII

103ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
103ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
103ITEM 15.
CONTROLS AND PROCEDURES
103ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
104ITEM 16B.
CODE OF ETHICS
105ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
105ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
105ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
105ITEM16F.
CHANGE IN THE REGISTRANT'S CERTIFYING ACCOUNTANT
105ITEM 16G.
CORPORATE GOVERNANCE
105PARTIII

106ITEM 17.
FINANCIAL STATEMENTS
106ITEM 18.
FINANCIAL STATEMENTS
106ITEM 19.
EXHIBITS
107SIGNATURES
109
  
  
  PART I
  ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  Not applicable.
  ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
  Not applicable.
  ITEM 3.
KEY INFORMATION
  A.
SELECTED FINANCIAL DATA
  The following selected consolidated financial data is qualified by reference to and should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 20-F.
  The selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 and the selected consolidated statement of operations data for the fiscal years ended December 31, 2006 and 2007 have been derived from our audited financial statements not included in this Annual Report on Form 20-F. The selected consolidated balance sheet data as of December 31, 2009 and 2010 and the selected consolidated statement of operations data for each of the years ended December 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and audited by Kost, Forer, Gabbay & Kasierer, an independent registered public accounting firm and a member firm of Ernst & Young Global.
  Year ended December 31,2006


2007


2008


2009


2010(U.S. Dollars, in thousands, except per share and

weighted average shares data)Consolidated Statement of Operations Data:Revenues


116,976



140,996



114,979



54,726



189,528Cost of revenues (1)


17,921



26,995



29,670



18,903



101,099Gross profit


99,055



114,001



85,309



35,823



88,429Operating expenses:Research and development (1)


8,515



12,511



13,783



13,220



26,837Selling and marketing (1)


46,434



58,605



54,064



34,156



63,429General and administrative (1)


9,455



11,860



17,706



16,478



36,103
 Other income, net


-



-



-



(3,975
)


(4,538
)Total operating expenses (1)


64,404



82,976



85,553



59,879



121,831Operating (loss) income (1)


34,651



31,025



(244
)


(24,056
)


(33,402
)Financial income, net


6,492



3,254



3,862



2,097



717Other income


-



-



-



562



240Income (loss) before taxes on income


41,143



34,279



3,618



(21,397
)


(32,445
)Taxes on income (benefits)


1,489



3,035



(2,009
)


3,240



(5,110
)Consolidated net income (loss)


39,654



31,244



5,627



(24,637
)


(27,335
)Net loss attributable to non controlling interest


-



-



-



1,050



1,799
 Net income (loss) attributable to Syneron's shareholders

$
39,654


$
31,244


$
5,627


$
(23,587
)

$
(25,536
)
 Net (loss) earnings per share:
  Basic

$
1.46


$
1.13


$
0.21


$
(0.86
)

$
(0.74
)
  Diluted

$
1.44


$
1.12


$
0.20


$
(0.86
)

$
(0.74
)
  Weighted-average number of shares used in actual per share calculations:
 Basic


27,202



27,690



27,410



27,526



34,369Diluted


27,601



27,880



27,521



27,526



34,369
  1
  (1) Includes the following stock based compensation charges:
  Year ended December 31,2006


2007


2008


2009


2010Cost of revenues

$
267


$
278


$
51


$
28


$
28Research and development


644



883



295



528



808Selling and marketing


5,054



4,514



3,860



1,421



809General and administrative


2,291



2,134



3,386



2,287



1,551
  As of December 31,2006


2007


2008


2009


2010(U.S. Dollars, in thousands, except for share amounts data)Consolidated Balance Sheet DataCash and cash equivalents, deposits and securities

$
171,676


$
203,687


$
216,922


$
206,130


$
217,533Working capital


127,259



189,784



204,992



191,815



186,327Total assets


225,241



269,276



211,286



270,267



374,785Total liabilities


30,844



38,441



38,690



43,009



96,249Retained earnings


117,329



148,573



154,338



130,751



105,215Shareholders’ equity


194,397



230,835



242,596



227,258



278,536Number of outstanding ordinary shares,par value NIS 0.01 per share


27,530,129



27,375,010



27,472,775



27,601,264



34,674,889
  2
  B.
CAPITALIZATION AND INDEBTEDNESS
  Not applicable.
  C.
REASONS FOR OFFER AND USE OF PROCEEDS
  Not applicable.
  D.
RISK FACTORS
  This Annual Report on Form 20-F contains certain statements that are intended to be, and are hereby identified as, “forward-looking statements.” We have based these “forward-looking statements” on our current expectations and projections about future events, which are subject to risks and uncertainties. The Company’s actual future results may differ significantly from those stated or implied in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below.
  Risks Related to Our Business and Industry
  Recent difficult conditions in the global capital markets and the global economy materially affected our business and results of operations and may continue to harm our customers and our own ability to raise capital or debt.
  As widely reported, the global credit markets and financial services industry have been experiencing a period of upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. Our results of operations are materially affected by the current economic turmoil, mostly in the U.S. and Western Europe, but also elsewhere around the world. The global economic instability and uncertainty has had an adverse effect on our revenues and there can be no assurance that there will not be further deterioration in the global economy, credit and financial markets and confidence in economic conditions. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on us and our ability to borrow money or raise additional capital. Similarly, our customers (including doctors and patients who purchase our products) and suppliers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact our customers’ ability or decisions to purchase our products or to pay for our products that they do purchase on a timely basis, if at all.
  Our success depends upon market acceptance of our products, our ability to develop and commercialize new products and our ability to identify new markets for our technology.
  We have created products that allow physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions including hair removal on all skin types, skin rejuvenation skin resurfacing and wrinkle reduction, vascular lesions such as rosacea, facial spider veins, leg veins, port wine stains, angiomas and hemangiomas, tattoo removal, skin resurfacing scars, stretch marks and warts, removal of benign pigmented lesions such as sun spots, age spots, freckles, and Nevus of Ota/Ito, acne and acne scars, sebaceous hyperplasia, pseudofolliculitis barbae (beard bumps or PFB), psoriasis, treatment for the temporary reduction in the appearance of cellulite, reduction in thigh circumference and fat removal. Our failure to continue to penetrate current market and significantly penetrate new markets with our existing products and manage the manufacturing and distribution of multiple products could negatively impact our business, financial condition and results of operations. The success of our products depends on continued acceptance of our proprietary Electro-Optical Synergy, or ELOS TM technology and the adoption and acceptance of other technologies that we develop or acquire. The rate of adoption and acceptance may be affected adversely by actual or perceived issues relating to quality, reliability and safety, customers’ reluctance to invest in new technologies, and widespread acceptance of other technologies. Our business strategy is based, in part, on our expectation that we will continue to make novel product introductions and upgrades or acquire new products that we can sell to new and existing users of our products and that we will be able to identify new markets for our products.
  3
  To increase our revenues, we must:
  ·
develop or acquire new products that either add to or significantly improve our current products;
  ·
convince our target customers that our products or product upgrades would be an attractive revenue-generating addition to their practices;
  ·
sell our products to customers which have traditionally not engaged in aesthetics procedures, including primary care physicians, obstetricians, ear, nose and throat specialists, other specialists and non-medical professionals;
  ·
identify new markets and emerging technological trends in our target markets and react effectively to technological changes; and
  ·
maintain effective sales and marketing strategies.
  We may be unable, however, to continue to develop new upgrades, products and technologies at the rate we expect, or at all, which could adversely affect our expected growth rate. In addition, the market for aesthetic devices is highly competitive and dynamic, and marked by rapid and substantial technological development and product innovations. To be successful, we must be responsive to new technological developments and new applications of existing technologies. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors.
  Our financial results may fluctuate from quarter to quarter.
  Demand for our products varies from quarter to quarter, and these variations may cause revenue to fluctuate significantly from quarter to quarter. As a result, it is difficult for us to accurately predict sales for subsequent periods. In addition, we base our production, inventory and operating expenditure levels on anticipated orders. If orders are not received when expected in any given quarter, expenditure levels could be disproportionately high in relation to revenue for that quarter. A number of additional factors, over which we have limited control, may contribute to fluctuations in our financial results, including:
  ·
the willingness of individuals to pay directly for aesthetic medical procedures, in light of the lack of reimbursement by third-party payors;
  ·
availability of attractive equipment financing terms for our customers, which may be negatively influenced by interest rate increases and the current economic climate;
  ·
changes in our ability to obtain and maintain regulatory approvals;
  ·
increases in the length of our sales cycle;
  ·
performance of our direct sales force and independent distributors; and
  ·
delays in, or failure of, product and component deliveries by our subcontractors and suppliers.
  If we are unable to protect our intellectual property rights, our competitive position could be harmed.
  Our success and ability to compete depends in large part upon our ability to protect our proprietary technology. As of March 6, 2011, our patent portfolio consisted of 40 issued U.S. patents, and 89 patent applications pending in the U.S. (with an additional 123 applications pending internationally and 60 international patents), related to 117 patent families relating to our technology and products. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any issued patents may be challenged, invalidated or legally circumvented by third parties. We cannot be certain that our patents will be upheld as valid and enforceable or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could purchase one of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, design around our protected technology, or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be adversely affected, as could our business.
  4
  We rely on a combination of patent and other intellectual property laws and confidentiality, non-disclosure and assignment of inventions agreements, as appropriate, with our employees, consultants and customers, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements, and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. In addition, the laws of certain countries in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as the laws of the U.S. or Israel.
  Existing and future third-party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance.
  Third parties have claimed, and may from time to time claim, that our current or future products infringe their patent or other intellectual property rights, and seek to prevent, limit or interfere with our ability to make, use, sell or import our products. Patent applications are latent for the first eighteen months following their filing and cannot be discovered until such patents applications are published. Accordingly, we can conduct only limited searches to determine whether our technology infringes any patents or patent applications of others. Infringement claims in the past, have, among other things, led to license agreements pursuant to which we were required to pay license fees to third party claimants.
  Our subsidiary, Syneron Inc., and our indirect wholly owned subsidiary, Candela Corporation (Candela), are each currently defending separate patent infringement lawsuits brought by Palomar Medical Technologies, Inc. (Palomar) alleging willful infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s and Candela’s hair removal products, respectively. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and both the Candela action and the Syneron Inc. action were stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Syneron Inc. case on November 13, 2009, and in the Candela case on January 5, 2010. Palomar has dropped the ’568 Patent from the Candela lawsuit, and has elected to proceed solely on the ’844 Patent. In the Candela case, on August 12, 2010, Candela filed a motion for summary judgment of non-infringement with respect to all of the asserted claims and of invalidity with respect to two of the asserted claims. A hearing on the motion was held on September 14, 2010. The court has not yet ruled on the motion, and no trial date has been set. In the Syneron Inc. case, claim construction briefing occurred in September and October 2010, and a claim construction hearing was held on November 17, 2010. The court has not yet issued its claim construction decision. No trial date has been set.
  While Syneron Inc. and Candela each intend to vigorously contest Palomar’s allegations, each lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. and/or Candela would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc. and/or Candela, as applicable.
  5
  We may also become involved in intellectual property litigation in the future. Although we may try to resolve any potential future claims or actions as we have, from time to time, in the past, we may not be able to do so on reasonable terms, if at all. Following a successful third-party action for infringement, we may be required to pay substantial damages and if we cannot obtain a license or redesign our products, we may have to stop manufacturing, selling and marketing our products, and our business could significantly suffer as a result. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and could divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, and prohibit us from using and selling technologies essential to our products. Any of these events would have a material adverse effect on our business, results of operations and financial condition. Furthermore, we do not know whether necessary licenses would be available to us on satisfactory terms, or whether we could redesign our products or processes to avoid infringement.
  We may become involved in litigation to protect the trademark rights associated with our company name or the names of our products. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the name of our products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.
  We may also become involved in litigation not only as a result of alleged infringement of a third-party’s intellectual property rights, but also to protect our own intellectual property rights, which would divert our management’s attention from our core business and may be expensive and time consuming to litigate.
  Please see Item 8, “Financial Information – Consolidated Statements and Other Financial Information” for further details regarding legal proceeding and the risk arising under those proceedings.
  If we are not successful in coordinating our business with that of our subsidiaries, including Candela Corporation, and in establishing efficient arrangements and agreements with such subsidiaries, then the benefits of the merger with Candela and the other acquisitions that we completed in the last few years will not be fully realized and our business and the market price of our ordinary shares may be negatively affected.
  In the last three years we have acquired various companies. Prior to their acquisition, each of these companies operated independently with standalone principal offices in several locations. We entered into these acquisitions with the expectation that they will result in benefits arising out of the coordination and arrangements between the target companies. The difficulties of coordinating the operations of the businesses include, among others:
  ·
coordinating geographically separate organizations;
  ·
addressing inconsistencies between the subsidiaries in standards, controls, procedures and policies, any of which could adversely affect either company’s ability to maintain relationships with licensors, collaborators, partners, suppliers, customers and employees;
  ·
consolidating the subsidiaries’ business into our financial reporting system;
  ·
implementing internal controls over financial reporting in accordance with section 404 of the Sarbanes-Oxley Act of 2002;
  ·
coordinating sales, distribution and marketing functions; and
  ·
cultural differences.
  6
  As a result of these and other factors, we may not successfully coordinate our business with that of our subsidiaries or establish efficient arrangements and agreements with them in a timely manner, or at all, and we may not realize the benefits and synergies of these acquisitions to the extent, or in the timeframe, anticipated. It is also possible that such coordination and arrangements could lead to the loss of key employees, diversion of the attention of our management, or the disruption or interruption of, or the loss of momentum in our or the subsidiaries’ ongoing business. Any of these possible outcomes can affect our ability to maintain our research and development, supply, distribution, marketing, customer and other relationships and affect our business and financial results following the merger. The occurrence of such negative results could adversely affect the market price of our ordinary shares.
  In addition, we incurred and we expect to continue to incur significant costs and commit significant management time in coordinating our subsidiaries’ business operations, technology, development programs, products and personnel with our business. If we will not successfully coordinate our business with that of our subsidiaries, the expenditure of these costs will reduce our cash position.
  We compete against companies that also haveestablished products and significant resources, which may prevent us frommaintaining and increasingmarketshareor maintaining or improving operating results.
  Our products compete against products offered by public companies, including Cutera, Inc., Cynosure, Inc., Solta Medical, Inc., Lumenis Ltd., UltraShape Ltd. and Palomar Medical Technologies, Inc., as well as by private companies such as Sciton, Inc., Alma Lasers Ltd., and several other smaller specialized companies. Competition with these companies could result in reduced prices and profit margins and loss of market share, any of which could harm our business, financial condition and results of operations. We also face competition from medical products, including Botox and collagen injections, and aesthetic procedures, such as sclerotherapy, electrolysis chemical peels and microdermabrasion, that are unrelated to radio frequency and light or laser-based technologies. We also may face competition from manufacturers of pharmaceutical and other products that have not yet been developed. Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and includes the following factors:
  ·
product performance;
  ·
product pricing;
  ·
intellectual property protection;
  ·
quality of customer support;
  ·
success and timing of new product development and introductions; and
  ·
development of successful distribution channels.
  Some of our competitors have well established products and customer relationships, which could inhibit our market penetration efforts. Potential customers also may need to recoup the cost of expensive products that they already have purchased from our competitors and may decide not to purchase our products, or to delay such purchases. If we are unable to achieve continued market penetration, we will be unable to compete effectively and our business will be harmed.
  In addition, some of our current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. Our competitors could use their greater financial resources to acquire other companies, to gain enhanced name recognition and market share, as well as to develop new technologies or products that could effectively compete with our existing product lines.
  7
  We outsource the manufacturing of our products to a small number of manufacturing subcontractors. If our subcontractors’ operations are interrupted or if our orders exceed our subcontractors’ manufacturing capacity, we may not be able to deliver our products to customers on time.
  We outsource the manufacturing of our products which are manufactured under the brand name of Syneron to three subcontractors located in Israel. Our subsidiaries also outsource the manufacturing of their products to various subcontractors. These subcontractors have limited manufacturing capacity that may be inadequate if our customers place orders for unexpectedly large quantities of our products. In addition, the subcontractors located in Israel on occasion may feel the impact of potential economic or political instability in the region. If the operations of one or more of these subcontractors were halted or limited, even temporarily, or if they were unable or unwilling to fulfill large orders, we could experience business interruption, increased costs, damage to our reputation and loss of our customers. In addition, qualifying new subcontractors could take several months, and we will face learning curve regarding the quality of the products that they manufacture.
  We depend upon third-party suppliers, making us vulnerable to supply shortages and price fluctuations, which could harm our business.
  Many of the components that comprise our products are currently manufactured by a limited number of suppliers. Although most of our components are obtained from at least three separate suppliers, we do not have the ability to manufacture these components ourselves. A supply interruption or an increase in demand beyond current suppliers’ capabilities could harm our ability to manufacture our products until we identify and qualify a new source of supply, which could take several months.
  Any interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business.
  In addition, our indirect subsidiary, Candela, uses Alexandrite rods to manufacture the GentleMaxTM, GentleLASE® and the AlexTriVantageTM systems, which accounts for a significant portion of Candela’s total revenues. Candela depends exclusively on its contract manufacturer to supply these rods, for which no alternative supplier meeting its quality standards exists. We cannot be certain that Candela's contract manufacturer will be able to meet Candela's future requirements at current prices or at all. To date, Candela has been able to obtain adequate supplies of Alexandrite rods in a timely manner, but any extended interruption in its supplies could hurt its results.
  We sell our products in a number of countries and therefore our results of operations could suffer if we are unable to manage our international operations effectively.
  We are headquartered in Israel and have offices in five locations in the United States, five locations in Japan, and offices in Canada, Hong-Kong, Australia, Spain, Portugal, Germany, Italy, France and the United Kingdom. We depend on third-party distributors in territories in which we do not have offices, including in various countries in Europe, Asia, Africa and South America. We also depend on relatively new direct sales operations to sell our products in North America. Therefore, we are subject to risks associated with having worldwide operations. Substantially all of our revenues in 2008, 2009 and 2010, were generated outside of Israel, primarily in North America, Western Europe and Asia. Part of our strategy is to expand our sales in existing markets and to enter new foreign markets. Expansion of our international business will require significant management attention and financial resources.
  Our international sales and operations subject us to many risks inherent in international business activities, including:
  ·
foreign certification and regulatory requirements;
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lengthy payment cycles and difficulty in collecting accounts receivable;
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customs clearance and shipping delays;
  ·
import and export controls;
  ·
multiple and possibly overlapping tax structures;
  ·
changes in tax and other laws;
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regulatory practices and tariffs;
  ·
difficulties staffing and managing our international operations;
  ·
political instability; and
  ·
economic instability.
  If our international sales do not continue at the expected pace or suffer from higher challenges than expected, we will not experience our projected growth or have decreased revenue and our financial results will suffer.
  Exchange rate fluctuations could have a material adverse impact on our results of operations.
  A majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars. However, a portion of our revenues and a portion of our costs, including personnel and some marketing and facilities expenses, are incurred in New Israeli Shekels, Euros, Japanese Yen, Australian Dollar, Canadian Dollar and British Pound Sterling. Inflation in Israel or Europe or a weakening of the U.S. dollar against other currencies may have the effect of increasing the U.S. dollar cost of our operations in that jurisdiction, which may have a material adverse impact on our results of operations. During 2010, the U.S. dollar depreciated against the New Israeli Shekel by approximately 6%, the U.S. dollar strengthened against the Euro by approximately 8%, and the U.S. dollar depreciated against the Japanese Yen by approximately 11%. If the New Israeli Shekel continues to strengthen in value in relation to the U.S. dollar, it will become more expensive for us to fund our operations in Israel. If the Euro depreciates against the U.S. dollar it will decrease our revenues from operations.
  Although we use forward contracts and options to reduce the risk associated with fluctuations in currency exchange rates, we may not be able to eliminate the effects of currency fluctuations. Thus exchange rate fluctuations could have a material adverse impact on our results of operations.
  As a result of the merger with Candela Corporation and the acquisition of Pharos Life Corporation, we and our subsidiaries became a larger and more geographically diverse organization, and if our respective management teams are not able to continue to manage their businesses efficiently, our and our subsidiaries', operating results will suffer.
  Following the merger with Candela Corporation and the acquisition of Pharos Life Corporation, we and our subsidiaries have approximately 580 employees in a total of 22 facilities around the world. As a result, our management teams are facing challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. The inability to manage successfully our geographically diverse and substantially larger organization could have a material adverse effect on our operating results and those of our subsidiaries, and as a result, on the market price of our ordinary shares.
  9
  Any acquisition that we make could harm our business and hurt our financial condition.
  From time to time, we evaluate potential strategic acquisitions of technologies and products. We also consider entering into joint venture agreements and other collaborations. We may not be able to identify appropriate targets or strategic partners, or successfully negotiate, finance or integrate any such products or technologies. Any acquisition that we pursue could diminish our cash position and divert management’s time and attention from our core operations.
  If we fail to obtain and maintain necessary U.S. Food and Drug Administration clearances for our products and indications, if clearances for future products and indications are delayed or not issued, or if there are U.S. federal or state level regulatory changes, our commercial operations could be harmed.
  Most of our products are medical devices subject to extensive regulation in the U.S. by the Food and Drug Administration, or FDA, for manufacturing, labeling, sale, promotion, distribution, shipping and servicing. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the U.S., it must first receive either 510(k) clearance or pre-market approval, or PMA, from the FDA, unless an exemption applies. Either process can be expensive and lengthy. The FDA’s 510(k) clearance process usually takes from six to eighteen months, but it can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. To date, none of our devices have had to be approved via PMA and we believe that very few (if any) of our currently planned products are subject to PMA by the FDA. All products that we currently market in the U.S. have received 510(k) clearance for the uses for which they are marketed or are products with minor modifications from our cleared products and are therefore covered by a Letter to File.
  Medical devices may be marketed only for the indications for which they are approved or cleared. We have obtained 510(k) clearance for the current treatments for which we offer our products. However, our clearances can be revoked if safety or effectiveness problems develop. Any modifications to an FDA-cleared device that would significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly PMA. We may not be able to obtain additional 510(k) clearances or PMAs for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and future profitability.
  We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices. We also are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products cause or contribute to a death or serious injury, or malfunction in a way that would likely cause or contribute to a death or serious injury. Our products and/or their use are also subject to state regulations, which are, in many instances, in flux. Changes in state regulations may impede sales. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.
  The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:
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warning letters, fines, injunctions, consent decrees and civil penalties;
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repair, replacement, refunds, recall or seizure of our products;
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issuing an import alert to block entry of products the FDA has reason to believe violate applicable regulatory requirements;
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operating restrictions or partial suspension or total shutdown of production;
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refusing our requests for 510(k) clearance or PMA of new products, new intended uses, or modifications to existing products;
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withdrawing 510(k) clearance or PMAs approvals that have already been granted; and
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criminal prosecution.
  If any of these events were to occur, it could harm our business.
  If we or our subcontractors fail to comply with the FDA’s Quality System Regulation and performance standards, manufacturing operations could be halted, and our business would suffer.
  We and our subcontractors are required to demonstrate and maintain compliance with the FDA’s Quality System Regulation, or QSR. The QSR is a complex compliance scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products use optical energy, including lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We and our subcontractors are subject to such inspections. Although we place our own quality control employee at each of our subcontractors’ facilities, we do not have complete control over our subcontractors’ compliance with these standards. Any failure by us or our subcontractors to take satisfactory corrective action in response to an adverse QSR inspection or to comply with applicable laser performance standards could result in enforcement actions against us or our subcontractors, including a public warning letter, a seizure of our products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which could cause our sales and business to suffer. In addition, we are subject to standards imposed on our activities outside of the U.S., such as obtaining ISO 13485:2003 certification for the quality of our systems and products and CE certification from the European authorized notify body and electrical and safety certification from authorized laboratories. Failure to comply with such standards could adversely impact our business.
  We may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products, which could harm our business.
  Sales of our products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Complying with international regulatory requirements can be an expensive and time-consuming process and approval is not certain. The time required for obtaining clearance or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. Although we have obtained regulatory approvals in the European Union and other countries outside the U.S., we may be unable to maintain regulatory qualifications, clearances or approvals in these countries or to obtain approvals in other countries. We also may incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the U.S., or if we fail to receive those qualifications, clearances or approvals, we may be unable to market some of our products or enhancements in certain international markets effectively, or at all.
  New regulations may limit our ability to sell to non-physicians.
  We sell our products to physicians and “qualified practitioners”, outside the U.S., and to aestheticians. International regulations could change at any time, disallowing sales of our products to aestheticians, and limiting the ability of aestheticians and non-physicians to operate our products. We cannot predict the impact or effect of changes in U.S., state or international laws or regulations.
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  Becausemany of theusers of our productsare not trained, andbecausewe also sell our products to non-physicians,our productsmay be misused, which could harm our reputation and our business.
  In the U.S., federal regulations allow us to sell our products to or on the order of “qualified practitioners.” The definition of “qualified practitioners” varies from state to state. As a result, depending on state law, our products may be purchased or operated by physicians or other qualified practitioners, including nurse practitioners, chiropractors and technicians. Outside the U.S., many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, and we have no way to confirm that adequate supervision occurs. The lack of required training and the purchase and use of our products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to product liability claims and costly product liability litigation.
  Product liability suits could be brought against us due to defective material or design, or due to misuse of our products, and could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance rates.
  If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients. Misusing our products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue or organ damage. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability. We have been involved, and may in the future be involved, in claims related to the use of our products. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Since inception we have been involved in a number of disputes or legal claims between our customers and their patients that involved potential product liability claims. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves harming our financial condition and reducing our operating results.
  Components used in our products are complex in design, and defects may not be discovered prior to shipment to customers, which could result in warranty obligations, reducing our revenue and increasing our costs.
  In manufacturing our products, we and our subcontractors depend upon third-party suppliers for various components. Many of these components require a significant degree of technical expertise to produce. If our suppliers fail to produce components to specification, or if the suppliers, our subcontractors, or we, use defective materials or workmanship in the manufacturing process, the reliability and performance of our products will be compromised.
  If our products contain defects that cannot be repaired easily and inexpensively, we may experience:
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loss of customer orders and delay in order fulfillment;
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damage to our brand reputation;
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increased cost of our warranty program due to product repair or replacement;
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inability to attract new customers;
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diversion of resources from our manufacturing and research and development departments into our service department;
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product recalls; and
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legal action.
  The occurrence of any one or more of the foregoing could materially harm our business.
  We forecast sales to determine requirements for our products and if our forecasts are incorrect, we may experience either shipment delays or increased costs and inventory.
  Our subcontractors keep limited materials and components on hand. To help them manage their manufacturing operations and minimize inventory costs, we forecast anticipated product sales to predict our inventory needs up to six months in advance and enter into purchase orders on the basis of these requirements, subject to limitations on components lead time and long lead items. We also accept three months safety stock of long lead items above lead time. If our business expands, our demand would increase and our suppliers may be unable to meet our demand. If we overestimate our requirements, our subcontractors will have excess inventory, and may transfer to us any increase in costs. If we underestimate our requirements, our subcontractors may have inadequate components and materials inventory, which could interrupt, delay or prevent delivery of our products to our customers. Any of these occurrences would negatively affect our financial performance and the level of satisfaction our customers have with our business.
  In order to effectively manage our collaboration with Procter & Gamble Company, we may divert the attention of key technical personnel and management from the core business. If Procter & Gamble Company terminates the agreement, our share price could fall, and we may be unable to bring a home-use skin rejuvenation device to the market.
  Effective February 25, 2007, we entered into a Joint Development and Supply Framework Agreement with the Procter & Gamble Company, or Procter & Gamble, for the commercialization of patented and patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite. Under the agreement, significant resources and the attention of key technical personnel and management were directed to the development of such devices even though such devices may not be commercialized for several years, if ever. In addition, we cannot be sure that the agreement will result in marketable products or that we will receive payments for any products developed pursuant to the agreement. As of the date hereof, we have not sold any products under the agreement. Procter & Gamble has the option under certain circumstances to terminate the agreement, including following the failure by us to successfully complete two milestones, and may exercise that option. If Procter & Gamble terminates the agreement, the price of our ordinary shares could fall significantly, and we will not receive certain royalty and other payments provided for in the agreement. If Procter & Gamble terminates the agreement, we may decide to proceed to develop and commercialize the device on our own or with a third party. However, there can be no assurance that we will be able to successfully implement such a decision and successfully bring this home-use device to the market.
  The expense and potential unavailability of insurance coverage for our customers could adversely affect our ability to sell our products and negatively impact our financial condition.
  Some of our customers and prospective customers have had difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and, industry-wide, potential customers may opt against purchasing laser and other light-based products due to the cost of or inability to procure insurance coverage.
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  We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
  The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404, which started in connection with our Annual Report on Form 20-F for the fiscal year ended December 31, 2006, have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s annual review and evaluation of our internal control over financial reporting and (ii) a statement by management that its independent registered public accounting firm has issued an attestation report on our internal control over financial reporting, in connection with the filing of our Annual Report on Form 20-F for each fiscal year. We have documented and tested our internal control systems and procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of December 31, 2010, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares. Management assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Candela Corporation and its subsidiaries, which is included in Syneron Medical Ltd. 2010 consolidated financial statements and constituted $ 111.2 million and $ 70.1 million of total assets and net assets, respectively, as of December 31, 2010 and $ 129.8 million and ($4.0) million of revenues and net loss, respectively, for the year then ended.
  We are a foreign private issuer under the rules and regulations of the SEC and thus, we are exempt from a number of rules under the Exchange Act and we are permitted to file less information with the SEC than a full reporting company.
   As a foreign private issuer under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies with securities registered under the Exchange Act; and we are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. If we will lose our status as a foreign private issuer, we will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if we were a company incorporated in the U.S. The costs incurred in fulfilling these additional regulatory requirements could be substantial.
  The failure to attract and retain key personnel could adversely affect our business.
  Our success also depends in large part on our ability to continue to attract, retain and motivate highly skilled technical and professional personnel. Competition for certain employees, particularly sales representatives and development engineers, is intense. We may be unable to continue to attract and retain sufficient numbers of highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.
  14
  In various jurisdictions in which we operate, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
  We have entered into non-competition arrangements with all of our professional employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period following the expiration of their employment with us. In various jurisdictions in which we operate, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, in the past, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of such employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or intellectual property. In addition, pursuant to Israeli courts in order to enforce the non-compete undertakings, the employer need to prove that the employee received a special consideration in return for his commitment not to compete with his employer. If we are unable to demonstrate that harm would be caused to us or otherwise enforce these non-competition agreements, in whole or in part, we may be unable to prevent our competitors from benefiting from the expertise of our former employees, which could harm our business.
  Risks Related to Our Operations in Israel
  Political, economic and military instability in Israel may impede our ability to operate and harm our financial results.
  We are incorporated under the laws of the State of Israel and our principal executive offices and research and development facilities are located in Israel. In addition, all of the subcontractors of our products sold under the Syneron brand name are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. The Israeli economy has suffered in the past and may suffer in the future from instability, which may adversely affect our financial condition and results of operations.
  The global economic recession, instability and uncertainty of the last two years has affected the economic conditions in Israel. If the economic deterioration in Israel continues, it may adversely affect our financial conditions and results of operations.
  In addition, since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to sell our products in these countries.
  You may have difficulties enforcing a U.S. judgment against us and/or our executive officers and directors or asserting U.S. securities laws claims in Israel.
  A significant portion of our assets and the assets of our directors and executive officers are located outside the U.S. Therefore, a judgment obtained against us or any of them in the U.S., including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the U.S. and may not be enforced by an Israeli court. Further, if a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.
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  Our operations may be disrupted by the obligation of our personnel to perform military service.
  Many of our employees in Israel are obligated to perform annual military reserve duty in the Israeli Defense Forces and may be called to active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of our other employees due to reserve duty. Any disruption in our operations may harm our business.
  The tax benefits available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.
  We have generated income and are able to take advantage of tax incentives and reductions resulting from the “Approved Enterprise” and “Privileged Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet certain conditions, including making specified investments in property and equipment. If we fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we might already have received. In addition, these tax benefits may not be continued in the future at their current levels or at any level. The termination or reduction of these tax benefits may increase our expenses in the future, which would reduce our expected profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities generally will not be eligible for inclusion in Israeli tax benefit programs. Under our first tax benefit plan, we have invested approximately $720,000 in fixed assets of which $223,000 were invested from paid-in capital as required by the financing condition of the approved plan. Under our next three tax benefit plans, which were approved under the amendment to the law of the Engorgement of Capital Investment 1959, we invested approximately $529,000 during 2004 and 2005 under the second plan and approximately $1,138,000 during 2006 and 2007 under the third plan and approximately $ 1,769,278during 2008 and 2009. See Item 10.E, “Taxation – Israeli Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about these programs.
  Provisions of our articles of association, our shareholders' rights plan, and Israeli law may delay, prevent or make difficult to acquire us, which could prevent a change of control and negatively affect the price of our ordinary shares.
  Israeli corporate law regulates mergers, tender offers for acquisitions of shares above specified thresholds, special approvals for transactions involving directors, officers or significant shareholders, and other matters that may be relevant to these types of transactions. Our articles of association also contain provisions that may make it more difficult to acquire our company, such as classified board provisions. As noted above, the transfer of our technology (including by acquisition) is subject to certain restrictions and approvals of the Office of the Chief Scientist, which provided grants for the development of our technology.
  In addition, our board of directors adopted a shareholders' rights plan under which our board of directors declared a dividend of one right for each ordinary share held by shareholders of record as of the close of business on December 30, 2010. Initially, these rights are not exercisable and are traded with our ordinary shares. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15% or more of our ordinary shares or commences a tender or exchange offer for 15% or more of our ordinary shares, except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15% or more of our ordinary shares (except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) ordinary shares. In addition, if, after a person acquires such ownership, we engage in a merger in which we are not the survivor or our ordinary shares are changed or exchanged, or we sell or transfer more than 50% of our assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) times the shares of the acquiring company to which each of our shareholders is entitled to for each ordinary share. Our board of directors may redeem the rights at a price of $0.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15% or more of our ordinary shares. The rights plan will continue in effect until January 3, 2012, unless earlier redeemed or amended by our board of directors.
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  Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See Item 10.B, “Additional Information – Memorandum and Articles of Association.” for additional discussion about some anti-takeover effects of Israeli law.
  These provisions of Israeli law, our articles of association, and our shareholders’ rights plan, may delay or prevent our acquisition or make it difficult, which could prevent a change of control and therefore depress the price of our shares.
  The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.
  We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by the Israeli Companies Law, 5759-1999, or the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in the company, or has other powers toward the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
  Risks Related to Our Ordinary Shares
  The price of our ordinary shares has fluctuated substantially and we expect will continue to do so.
  The market price for our ordinary shares has been, and may continue to be, volatile. The market price for our ordinary shares has been, and we expect will continue to be, affected by a number of factors, including:
  ·
the gain or loss of significant orders or customers;
  ·
recruitment or departure of key personnel;
  ·
the announcement of new products or service enhancements by us or our competitors;
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possible delays in market acceptance of our new products;
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potential increases in the level and intensity of price competition between our competitors and us;
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announcements regarding clearance or non-clearance of regulatory approval;
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quarterly variations in our or our competitors’ results of operations;
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announcements related to litigation;
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changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earning estimates;
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developments in our industry;
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absence of significant product backlogs;
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our effectiveness in our manufacturing process;
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unsatisfactory performance of our distribution channels, service providers, or customer support organizations;
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timing of any acquisitions and related costs; and
  ·
general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors.
  The stock prices of many companies in the medical device industry have experienced wide fluctuations that often have been unrelated to the operating performance of those companies. These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares.
  We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our ordinary shares.
  We have never paid cash dividends on our ordinary shares and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. Furthermore, if a dividend is distributed from income attributed to an “Approved Enterprise” or a “Privileged Enterprise”, which was exempt from tax under the provisions of the Law for Encouragement of Capital Investments, the Company will be subject to tax at the applicable corporate tax rate on the amount of such dividend grossed up with such corporate tax rate. We may only pay dividends in any fiscal year out of “profits,” as defined by the Companies Law, and, provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if our share price appreciates. We have decided to reinvest the amount of tax exempt income derived from our “Approved Enterprise” or “Privileged Enterprise” status and not to distribute that income as dividends.
  U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
  If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, 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 to our shareholders. If we were classified as a passive foreign investment company, a U.S. shareholder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, any gain or excess distribution would be allocated ratably over the U.S. shareholder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest applicable ordinary income rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see Item 10.E, “Additional Information – Taxation – United States Federal Income Tax Considerations – Passive Foreign Investment Company Considerations.”
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  ITEM 4.
INFORMATION ON THE COMPANY
  A.
HISTORY AND DEVELOPMENT OF THE COMPANY
  Our History
  Syneron Medical Ltd. was incorporated in the State of Israel in July 2000. Our headquarters are located at Industrial Zone, Yokneam Illit, 20692, Tavor Building P.O.B. 550, Israel. Our phone number is (972-73) 24-42200. The agent for service of process in the United States is National Corporate Research – LTD. Our website address is www.syneron.com. The reference to our website is an inactive textual reference only, and the information contained on our website or available through our website is not incorporated by reference into this Annual Report on Form 20-F and should not be considered a part of this Annual Report on Form 20-F.
  We completed our initial public offering of our ordinary shares in August 2004. Upon the closing of our initial public offering, all of our then outstanding preferred shares automatically converted into ordinary shares and we effected a 3.4-for-one split of our ordinary shares.
  We design, develop and market innovative aesthetic medical products based on our various technologies, including our proprietary Electro-Optical Synergy, or ELOS, technology, which uses the synergy between electrical energy, including radiofrequency or RF energy, and optical energy to provide effective, safe and affordable aesthetic medical treatments. Our products, which we sell primarily to physicians and other qualified practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, acne treatment, treatment of leg veins, treatment for the temporary reduction in the appearance of cellulite and thigh circumference, ablation and resurfacing of the skin and one minimally invasive product for laser-assisted lipolysis. We believe ELOS provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption. Our proprietary ELOS technology, which combines optical and electrical energy, enhances the user’s ability to accurately target the tissue to be treated and enables real-time measurement of skin temperature, resulting in increased patient safety and comfort and improved treatment results.
  During 2004, we significantly expanded our direct sales and marketing organization in North America to approximately 50 employees, established a distribution network in eleven countries in the Asia-Pacific region and increased our sales and marketing efforts in Europe. We increased our sales and marketing effort in 2004 in connection with new product introductions and other marketing activities planned for 2004. In 2004, we introduced three new product platforms: the Galaxy, which combines the applications of the Aurora and the Polaris product platforms, the Vela, for the temporary reduction in the appearance of cellulite and the Comet, for hair removal. Our Galaxy and Comet platforms are covered by our present FDA clearances. In addition, in June 2005, the FDA granted 510(k) clearance to our Vela platform for the temporary reduction in the appearance of cellulite and for the relief of minor muscle aches, pain and spasms, as well as the temporary improvement of local blood circulation. As a result of this 510(k) clearance we are now permitted to sell the Vela in the United States to physicians.
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  On March 8, 2005, certain selling shareholders completed a secondary offering, in which such selling shareholders sold an aggregate of 7,937,809 of our ordinary shares, including an aggregate of 1,264,174 shares that were exercised by option holders.
  In July 2005, we entered into an agreement to invest $1.5 million in Light Instruments Ltd. (Light Instruments), an Israeli start-up specializing in the development of advanced dental laser devices, in consideration for approximately 51% of Light Instruments’ outstanding share capital. As part of the investment agreement, we received the exclusive North American marketing and sales rights for 10 years following FDA clearance of Light Instruments’ product used for the treatment of oral soft and hard tissue. In July 2007, we entered into a share purchase agreement to purchase an additional 44% of Light Instruments’ outstanding share capital in consideration for an aggregate amount of up to $4.5 million. In October 2008, we purchased an additional 5% of Light Instruments’ outstanding share capital, and we currently own 100% of Light Instrument.
  Effective February 25, 2007, we entered into an exclusive Joint Development and Supply Framework Agreement with Procter & Gamble Company, or Procter & Gamble, for the commercialization of patented and patent pending, ELOS-based, home-use devices and compositions for the enhancement of skin appearance through the treatment of fine lines, wrinkles, age and sun spots and cellulite. Under the terms of the agreement we will lead the research, development and manufacturing of the devices, while Procter & Gamble will focus on the development of the compositions that may be used in conjunction with our devices, marketing, and distribution of the devices. The agreement provides that Procter & Gamble will purchase the devices exclusively from us. The devices will be marketed under the Procter & Gamble family of skin care products and will be co-branded with our ELOS technology. The agreement contemplates further collaboration between Procter & Gamble that could lead to commercializing additional products in the future. Procter & Gamble may terminate the agreement in certain circumstances, including following the failure to comply with the terms of the agreement.
  On April 10, 2007, we entered into an agreement with Fluorinex Active Ltd. (Fluorinex), an Israeli-based start-up that develops advanced fluoridation and tooth whitening devices for dentists and consumers, under which we purchased 38.47% of Fluorinex’s then fully diluted share capital in consideration of $1.5 million and received a warrant to purchase an additional 3.85% of Fluorinex’s then fully diluted share capital to increase our holdings to 42.32% of Fluorinex's fully diluted share capital. In September 2008, Fluorinex received FDA approval for its product. In December 2008, we exercised the warrant granted to us by Fluorinex. On May 13, 2009, we entered into an agreement with Fluorinex for the purchase of additional 20% of Fluorinex’s then fully diluted share capital in consideration of $1.0 million. Following the additional investment on May 13, 2009, we have been consolidating Fluorinex results in our financial statements. On August 15, 2010, we entered into an additional agreement with Fluorinex for the purchase of additional 17.81% of Fluorinex's then fully diluted share capital in consideration of US$ 600,000 and, subject to Fluorinex reaching a certain milestone, for the purchase of an additional 10.64% of Fluorinex's then fully diluted share capital in consideration of US$ 600.000. On August 26, 2010, Fluorinex notified us of the achievement of the milestone and we subsequently transferred the remaining consideration and increased our holdings to 73.66% of Fluorinex's fully diluted share capital. On November 14, 2010, we transferred to Syneron Beauty Ltd. all of our holdings in Fluorinex and all of our rights and obligations with respect to exclusive, global contractual rights to manufacture and distribute Fluorinex's products. Fluorinex has developed a unique device that delivers fluoride ions directly to the tooth enamel via a sophisticated electro-chemical technique. The Fluorinex technology delivers the maximum amount of fluoride ions to the tooth, for the longest endurance known today. Unlike other electro-chemical based fluoride systems, no electric current passes through the patient’s tissue, thus enhancing the safety of the device.
  On November 8, 2007, we announced our first share repurchase program. Under this share repurchase program, we have repurchased, and may continue to repurchase our outstanding ordinary shares in consideration of up to an aggregate amount of $50.0 million. Our repurchases under this share repurchase program may be made from time to time in the open market and may be initiated and discontinued by us at any time. Under this share repurchase program, from November 1, 2007 to March 31, 2008 we repurchased 588,700 of our ordinary shares at an aggregate purchase price of $9.1 million.
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  In February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd. (RBT), an Israeli-based start-up that develops a skin complexion whitening treatment. Under the agreement, we agreed to purchase an aggregate of 31.57% of RBT’s fully diluted share capital (excluding the warrant as described below) in consideration for up to $3 million, and received a warrant to purchase an additional 5.94% of RBT fully diluted share capital. As part of the agreement, we have exclusive worldwide distribution rights to RBT’s currently developed product to the professional market. In November 2009, we entered into an agreement with certain shareholders of RBT for the purchase of additional 9.25% of RBT’s share capital in consideration for approximately $0.2 million plus a potential earn-out in the event RBT merges or is acquired. In accordance with accounting pronouncements and as we are the primary beneficiary in RBT since November 2009, we have been consolidating RBT's results, in our financial statements. In February 2011, we closed an additional investment of US$ 308,916 in consideration of 15,664 of RBT's Preferred A-1 shares constituting an aggregate of 2.55% of RBT's share capital on a fully diluted basis. Additionally, we also provided RBT a loan in the aggregate amount of US$ 308,916. As of March 6, 2011, we hold 41.91% of RBT’s fully diluted share capital. In November 2009, RBT announced the commercial launch of the elureTM topical whitening cream in several Asian markets. The elure advanced dermal whitening product is the first scientifically proven enzymatic skin whitening product treatment that targets and decomposes melanin to reveal a visibly lighter and exceptionally luminous skin tone. This product line is based on the unique scientific discovery of a naturally occurring bio-active substance, MelanozymeTM, which acts to decompose the melanin. It is combined with a bio-activator to diminish the dark colored pigment in the skin. Unlike several other whitening products in the market, the elure product does not include Hydequinine, which may cause side effects such as skin redness and a burning sensation.
  In November 2008, we entered into an agreement with Inlight Corp., a San Diego, California-based research and development company whereby we purchased 100% of Inlight Corp.’s outstanding capital stock. Inlight has developed a carbon dioxide laser for fractional skin rejuvenation, which was launched in the U.S. and internationally in 2010.
  In November 2008, we entered into a joint venture agreement for the formation of Syneron China. Our partner in Syneron China is EverCare Medical Group, a major aesthetic hospital chain in China. Evercare operates cosmetic surgery hospitals throughout China and has been our distributor in China since 2007. Through this Chinese joint venture, we are able to sell directly to medical and aesthetic professionals in China, including doctors, hospitals, medi-spas and cosmetic chains. Syneron China also provides training and after-sales service and support. Syneron China commenced its operations during 2010 and it currently has five offices in Beijing, Shanghai, Shengdu, Guangzhou and Xian and several product demonstration centers in different areas in China.
  On September 8, 2009, we entered into an agreement and plan of merger with Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela Corporation, a publicly traded company incorporated under the laws of the state of Delaware. Pursuant to the merger agreement, we acquired Candela through Acquisition Sub, which merged with and into Candela. The transaction was completed on January 5, 2010, and Candela survived the merger as our indirect wholly-owned subsidiary. Following the completion of the transaction, we have been consolidating Candela's results in our financial statements. Candela shareholders received 0.2911 shares of our ordinary shares for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela. Candela manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Candela’s current product line offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions.
  21
  In October 2009, we entered into a definitive agreement to acquire Primaeva Medical, Inc., an aesthetic technology firm based in Pleasanton, California (Primaeva), in consideration of $7 million in cash, with potential additional consideration of up to $23 million in cash contingent on the achievement of commercial milestones (see also Note 1 to our consolidated financial statements). The transaction was completed on October 26, 2009. Primaeva developed a minimally invasive RF aesthetic device for the treatment of skin wrinkles and laxity. The Primaeva product, the ePrime, which has received 510(k) clearance for wrinkle treatment, employs an innovative micro-needle electrode array housed in an advanced single-patient use applicator tip to deliver bipolar fractional radiofrequency (RF) energy directly within the reticular dermis. We expect to launch the ePrime during 2011.
  In November 2010, we formed a new wholly owned subsidiary, Syneron Beauty Ltd., to which we transferred our non professional aesthetic device activities related to our consumer market initiatives, including our joint Procter & Gamble initiative, our mē product and our holdings in Fluorinex Active Ltd. In addition, following the acquisition of Pharos Life Corporation (described below), Pharos became a wholly owned subsidiary of Syneron Beauty. Syneron Beauty holds the intellectual property dedicated to our home-use initiative, and it received a license to some of our other technologies, which are used for our other home-use products.
  In December 2010, we entered into a definitive agreement to acquire privately-held Pharos Life Corporation (Pharos), a leading manufacturer of home-use light therapy for aesthetic procedures. Under the terms of the agreement, we acquired Pharos through the potential performance-based earn-out payments of up to $15.75 million, payable in 2013. As part of the acquisition we also assumed $2.7 million in net debt.  Pharos' products are marketed directly to consumers through premium retailers under the tändaTM brand name and include products for skincare and wellness solutions for both the home-use and professional markets. Pharos will continue operating as our wholly-owned subsidiary and the tändaTM business will be integrated into our consumer home-use initiatives.
  Principal Capital Expenditures
  We had capital expenditures of approximately $10.1 million in 2010, approximately $9 million in 2009 and approximately $4.1 million in 2008. We expect that our capital expenditures will be approximately $2.2 million in 2011. We have financed our capital expenditures with cash generated from operations.
  Our capital expenditures in 2010 consisted of investment in affiliated company ($9.2 million), and purchase of general equipment ($0.9 million). We expect our capital expenditures in 2011 to consist of additional purchase of general equipment. Our capital expenditures in 2009 consisted of an acquisition of shares in subsidiaries ($7.7 million), investments in affiliated companies ($0.8 million), and purchase of general equipment ($0.5 million). Our capital expenditures in 2008 consisted of an acquisition of minority shares in subsidiaries ($1.3 million), investments in affiliated companies ($1.6 million), and purchase of general equipment ($1.2 million). Our capital expenditure in 2007 consisted of an acquisition of a minority share in a subsidiary ($ 3.6 million), investments in affiliated companies ($2.6 million), leasehold improvements ($ 1.3 million), and purchase of general equipment ($0.9 million).
  B.
BUSINESS OVERVIEW
  Overview.
  We design, develop and market innovative aesthetic medical products based on our proprietary various technologies, including our Electro-Optical Synergy, or ELOS, technology, which uses the synergy between electrical energy and optical energy to provide effective, safe and affordable aesthetic medical treatments. Our products, which we sell primarily to physicians and other qualified practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, acne treatment, treatment of leg veins, treatment for the temporary reduction in the appearance of cellulite and thigh circumference, and one minimally invasive product for laser-assisted lipolysis. We believe ELOS provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption. The addition of radiofrequency energy, an electrical energy, lessens absorption in the outer layer of skin, or epidermis, and allows for greater skin penetration. Using radiofrequency and optical energy together enhances the ability of the user to target, or select, accurately the tissue to be treated and enables real-time measurement of skin temperature, enhancing patient safety and comfort. Following the launch of our first product, the Aurora, based on our ELOS technology in December 2001, our revenues were $11.5 million in 2002, $35.0 million in 2003, $57.9 million in 2004, $87.4 million in 2005, $117.0 million in 2006, $141.0 million in 2007, $115 million in 2008, $54.7 million in 2009 and $189.5 million in 2010.
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 As of the fourth quarter of 2010, we are breaking out our financial results between the traditional combined Syneron and Candela business, which we have labeled Professional Aesthetic Devices, or PAD, and the results of our Emerging Business Units in order to provide increased transparency into our results. Our PAD segment includes research, development, marketing and sales of aesthetic medical equipment for the treatment of body and face for dermatologists, plastic surgeons and other qualified practitioners worldwide (professional market). Our Emerging Business Units includes RBT, Light Instruments, Pharos, Fluorinex and Syneron Beauty's home use products.
 
 Professional Aesthetic Devices
  A significant portion of our family of aesthetic products is based on our ELOS technology. Each product platform consists of one or more hand pieces and a console that incorporates the multiple energy sources, sophisticated software and a simple, user-friendly interface. Our consoles have a small footprint and are lightweight compared to competitive systems which are typically larger and heavier. Many of our products can be easily upgraded by the user to perform additional applications by adding hand pieces and installing a software module in the console. We seek to deliver to our users the ability to generate increased practice revenue through additional service offerings. We also seek to provide predictable costs of ownership by minimizing maintenance expenses and providing a parts and services warranty.
  During 2000 and 2001, our primary activity was the development and approval of our first product platform, the Aurora, which utilizes our ELOS technology. We received our CE Mark approval in Europe in November 2001, and launched sales of the Aurora product platform in December 2001. We received 510(k) clearance from the FDA for hair removal for the Aurora product platform in July 2002. In October 2002, we received 510(k) clearance from the FDA to market the Aurora product platform for the treatment of superficial benign vascular and pigmented lesions. In August 2002, we introduced the Aurora product platform commercially in the United States.
  We launched the Polaris product platform in May 2003, after receiving our CE Mark approval in Europe for the product in December 2002. In April 2003, we received 510(k) clearance from the FDA to market the Polaris product platform for leg vein treatment as well as other types of vascular lesions. In December 2003, we introduced the Polaris product platform commercially in the United States.
  We received our CE Mark approval in Europe for the Pitanga product platform in May 2003. During the fourth quarter of 2003, we launched the Pitanga product platform for the treatment of acne and hair removal in Europe and Canada.
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  We launched the Galaxy product platform in May 2004. We received our CE Mark approval in Europe for the Galaxy product platform in May 2004. The 510(k) clearances from the FDA also provide the regulatory basis for the marketing of the Galaxy product for all applications. We introduced the Galaxy product platform commercially in the United States in May 2004.
 
 In 2005, we introduced the VelaSmooth product platform in the United States. These products address traditional applications, including the rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, hair removal and the treatment of leg veins, as well as newer applications, including wrinkle reduction, the permanent reduction of hair, the temporary reduction in the appearance of cellulite and the reduction of body circumference. Also, in the first quarter of 2006, we launched three new platforms to address medical aesthetic applications based on our ELOS technology. The eLightTM platform combines broad spectrum light with bi-polar radio frequency energy. The system provides a full facial solution for skin rejuvenation, including the treatment of superficial vascular and pigmented lesions, and acne applications. It also supports hair removal applications. The eLaserTM platform combines diode laser technology with bi-polar radio frequency and offers ultra fast hair removal, as well as upgradeability to our leg vein and wrinkle reduction treatments. Finally, the eMaxTM platform combines bi-polar radio frequency with multiple forms of broad spectrum light energy and diode laser energy to deliver the complete range of our ELOS modalities in one multi-platform system. All the applications on the eLight, eLaser and eMax have received 510(k) clearance from the FDA.
  In the second quarter of 2007, we completed the development of a new Matrix IR applicator for use with our eMax and eLaser platforms. The Matrix IR combines fractional optical energy with radio frequency for deep dermal heating for effective treatment of wrinkles. The collagen remodeling caused by the Matrix IR treatment is designed for maximum effective penetration for consistent and effective treatment of wrinkles.
  In August 2007, our VelaTM platform received FDA 510(k) pre-market clearance in the United States and CE Mark certification in the European Union for the reduction of thigh circumference (FDA) and body contouring (CE). This announcement marked the first FDA clearance and CE mark certification for a product designed to reduce the circumference of the body.
  In the first quarter of 2008, we introduced our new Matrix RFTM applicator. The Matrix RF applicator utilizes our fractional radio frequency technology to provide fractional tissue heating at three ablation relative ratios, resulting in effective ablation and resurfacing of the skin. The tunable applicator equipped with our SelecPulseTM, allows the user to adjust the relative ratio of ablation, as well as direct heating, and to vary the treatment depth based upon desired clinical endpoints. The Matrix RF applicator is the first bi-polar non-laser and non-light-based aesthetic device capable of creating tunable ablation impact, simulating the effects of different types of ablative / coagulative lasers used for a range of aesthetic applications. These applications include resurfacing, with minimal or no patient downtime. Matrix RF is being sold as an applicator add-on to all existing eLight, eLaser and eMax platforms. The ergonomically designed headpiece increases ease-of-use for physicians performing treatments. The Matrix RF features a single-use disposable treatment tip, which can be purchased in boxes for ten treatments. Treatment will most often be performed around the eyes, mouth, and cheek, but can also be performed on the entire face, as well as other anatomical areas. The Matrix RF was the second product in our series of ELOS fractional treatments, which currently include the Matrix IR applicator. In September 2008, our Matrix RF applicator received CE Mark certification in the European Union and FDA clearance in the United States for use in dermatologic procedures for wrinkle reduction by means of skin ablation and coagulation (CE) and for use in dermatological procedures requiring ablation and resurfacing of the skin (FDA). In the third quarter of 2008, we commenced selling our Matrix RF applicator.
  In the first quarter of 2008, we also introduced our new LipoLite platform. Our LipoLite is a minimally invasive alternative and a complement to traditional liposuction fat-removing procedures. The procedure requires only local anesthetic and is designed to provide patients lasting results with little downtime and a high level of safety. For our customers, the LipoLite product is comfortable to use, upgradable to support future applications and fits easily on tabletops to save floor space in small operating rooms. In May 2008, our LipoLite platform received FDA 510(k) clearance in the United States for laser-assisted lipolysis and additional dermatological procedures. As a result of this clearance, we are currently permitted to sell our LipoLite platform in the United States. In the third quarter of 2008, we commenced selling our LipoLite platform in the United States.
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  In December 2008, we launched our new eMatrixTM treatment system, a portable touch-screen device that allows physicians to program dermatological procedures requiring skin resurfacing. The eMatrix utilizes our Matrix RF technology for fractional tissue heating to provide ablation and effective resurfacing. With the SelectPulse feature, our customers can “tune” eMatrix to any of three resurfacing programs, customizing the depth of ablation and degree of skin resurfacing to each patient’s needs.
 In June 2009, we introduced a new and unique treatment modality called Sublative RejuvenationTM. Sublative Rejuvenation utilizes a fractionated bi-polar radio frequency technology in which heat energy is effectively placed into the dermis, producing dermal remodeling with minimal amount of epidermal disruption. While traditional fractional technologies are most aggressive at the epidermal level, Sublative Rejuvenation delivers energy with minimal epidermis ablation.
 
 In June 2009, we also launched VelaShape IITM. The latest device on the market for cellulite and circumferential reduction resulting in body contouring, VelaShape II offers current and new practitioners added features and benefits, including increased power for shorter treatment sessions, a reduced number of sessions, and an advanced CleverTM terminal, a diagnostic digital user interface to improve both consistency in treatment results and patient comfort.
 
 In conjunction with the Sublative Rejuvenation treatment and the VelaShape II, we launched Syneron AdvantageTM, a new physician partnership program to support customers' needs in a challenging economic climate. The program enables physicians to gain access to our facial applications and body shaping technologies at a more affordable price point that are easier to finance in the current economic environment. The Syneron Advantage program delivers services and programs to further support the success of physicians long after purchase. The program is now available with purchases of new VelaShape IITM, LipoLiteTM and eMatrixTM devices.
  Our indirect subsidiary, Candela, researches, develops, manufactures, markets, sells, distributes, and services laser systems used to perform procedures addressing patients' aesthetic medical and cosmetic concerns. Candela offers a comprehensive range of products based on proprietary technologies focusing on the major aesthetic and cosmetic laser applications. Candela's products include:
  Dynamic Cooling Device (DCD) is a device which cools the top layer of the skin, while leaving the targeted underlying hair follicle, vein or other structure at normal temperature. As a result, higher levels of laser energy can be delivered during treatment, while minimizing thermal injury, pain, and the inconvenience associated with anesthetics while maintaining treatment efficacy. The design of the hand-held DCD enables the practitioner to clearly see thearea being treated, and the combined efficiency of the lasers and DCD reduces the risks of overtreatment. The DCD delivers the appropriate amount of cooling quickly and consistently. Currently, DCD is available as an option on several Candela laser systems.
  GentleMaxTM is an integrated aesthetic treatment workstation with multiple wavelength capability. It includes the Nd:YAG 1064 laser and the Alexandrite 755 nm laser in one device. It includes touch-screen technology for a user-friendly interface. It offers broad treatment versatility with as many as 36 different applications, including permanent hair reduction and skin rejuvenation and treating leg and facial veins. In addition, this workstation offers a choice of skin cooling options—from chilled air technology to Candela's integrated and patented DCD.
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  AlexTriVantageTM is a total all-color tattoo and pigmented lesion solution using multi-wavelength technology in conjunction with Candela's "laser-pumped-laser" hand piece technology. It also includes a new long pulse mode which offers advanced rejuvenation treatments for a wider variety of pigmented lesions. It is Candela's fastest, gentlest, most powerful q-switched alexandrite laser with a touch-screen technology for user friendly interface.
  The GentleLASETM family of alexandrite lasers offers a powerful, fast, efficient, and ease-of-use systems for treatment of permanent hair reduction, vascular lesions, wrinkle reduction and the treatment of pigmented lesions. It includes a large spot size of 18mm, resulting in faster treatment times. It treats most skin types and includes a delivery system that allows treatment of a patient from head-to-toe without repositioning laser. The GentleLASE features a lightweight, compact design with multiple spot sizes and applications. In addition, it includes DCD epidermal cooling which makes redundant the use of messy gels. We expect to stop manufacturing the GentleLASE in 2011, as it will be replaced by our CO2RE.
  The GentleYAGTM family of Nd: YAG lasers provide fast, effective permanent hair reduction for every skin type including tanned or dark skin, treatment of beard bumps and leg and facial veins. It is one of the fastest, most powerful Nd:YAG lasers on the market today. One of the largest spot (18mm) on any Nd:YAG laser, it includes multiple spot sizes for multiple applications and multiple configurations. In addition, it includes DCD epidermal cooling, which eliminate the use of messy gels.
  VbeamTM is the pulsed-dye technology which eliminates vascular lesions, including port wine stain birthmarks, rosacea, leg and facial veins, and post-operative bruising, and provides skin rejuvenation by the reduction of diffuse redness and pigmentation, scars, warts, psoriasis and hemangiomas. The Vbeam uses micro-pulse technology for purpura-free results and includes a smart user interface, which provides pre-set treatment parameters with a touch of the screen. In addition, it includes DCD epidermal cooling.
  SmoothbeamTM is a diode laser, for treatment of acne and acne scars, sebaceous hyperplasia and wrinkle reduction. It features 1450 nm wavelength, which stimulates new collagen growth to treat fine lines and wrinkles. The Smoothbeam offers a quick, effective, non-invasive treatment for patients. In addition, it includes DCD epidermal cooling.
  In December 2010, we launched the CO2RE Fractional CO2 Resurfacing System, whichis a versatile carbon dioxide system that offers the unique ability to treat both superficial and deep skin layers simultaneously with precision-control over the intensity, pattern and depth of ablation.
  Emerging Business Units
  In the first quarter of 2007, we launched the LiteTouch platform, which is a dental laser system that can be used for treatment of oral soft and hard tissue. The LiteTouch platform is a compact, lightweight and portable laser system which makes the use of the device very similar to mechanical drills. The LiteTouch system has a small footprint, which saves important floor space and allows it to easily integrate into any clinic. The LiteTouch offers both high energy and high frequency, thus providing a wide envelope of treatment parameters. The LiteTouch platform received 510(k) clearance from the FDA in October 2006.
 
 In November 2009, RBT announced the commercial launch of the elureTM topical whitening products in several Asian markets.The elure advanced dermal whitening product is the first scientifically proven enzymatic skin whitening treatment that targets and decomposes melanin to reveal a visibly lighter and exceptionally luminous skin tone. This product line is based on the unique scientific discovery of a naturally occurring bio-active substance, MelanozymeTM, which acts to decompose the melanin. It is combined with a bio-activator to diminish the dark colored pigment in the skin. Unlike several other whitening products in the market, the elure product line does not contain Hydroquinine, which may cause side effects such as skin redness and a burning sensation.
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 Our indirect subsidiary, Pharos, markets its products directly to consumers through premium retailers under the tändaTM brand name. The tända product lines include tända Prestige for home-use, which are sold through exclusive distribution agreements with premium retailers, and tända Professional for skincare and wellness professionals. These products are supplemented by specially formulated pre-treatment topical gels and system accessories. tända products are user-friendly and deliver a combination of clinically proven results, convenience and value. tända treatment categories include:
 
 tändaAcne Solutionproducts that offer an effective and natural solution for the treatment and prevention of mild to moderate inflammatory acne. The product works by using blue LED light to kill the P.acnes bacteria, the bacteria that cause acne. The product is cleared for OTC use by the US FDA and CE mark approval.
  tändaAnti-Aging Solution products that give patients plumper, firmer and more youthful-looking skin. The product works by using red LED light to address the signs of aging by boosting overall cellular energy, increasing the production of collagen and elastin, and increasing microcirculation.
  tändaProfessional Restore products that increase circulation to target areas to relieve aches, pains and stiffness in muscles and joints. The product works by delivering warm therapeutic light deep into targeted body tissue.
  The Syneron Solution
  Our ELOS technology combines electrical and optical energy, each of which has unique characteristics when used alone and, which, when used together, produce beneficial synergistic effects. We believe that our ELOS technology represents a paradigm shift in non-invasive aesthetic medicine because it is the first approach that combines conducted radiofrequency energy, an electrical energy, and light or laser-based energy, an optical energy. Most previously available technologies have relied solely on optical energy or solely on radiofrequency energy.
  Optical energy is absorbed in chromophores that may be blood or melanin in, for example, hair follicles and skin pigments. Water is a chromophore as well, depending on the optical energy wavelength used. Light has a typical depth of penetration of approximately 0.5 to 2.0 millimeters. Epidermal pigmentation may limit the amount of optical energy that can be used without burning or damaging the skin. Radiofrequency, or RF, energy differs from optical energy because it is not absorbed by the chromophore. Our products use two electrodes to deliver RF energy, or bipolar RF energy. The distance between the two electrodes controls the depth of penetration of the bipolar RF energy. In our products, we have selected the distance between the two electrodes to enable a depth of penetration of the bipolar RF energy of up to approximately 5.0 millimeters in facial applications and hair removal and up to approximately 25 millimeters in body contouring and cellulite applications, which permits the treatment of a broad range of dermal and subdermal aesthetic problems. Our products also contain a mechanism which simultaneously cools the skin’s surface and decreases the skin’s conductivity, pushing the RF energy even deeper into the skin. The use of RF energy enables real-time measurement of skin impedance, which allows our products to provide real-time feedback for every pulse, improving control of skin temperature and enhancing safety.
  When used together, RF and optical energy produce a unique synergistic effect. Optical energy is used first to heat the target and decrease its resistance to RF energy. The RF energy is attracted to the areas that have been preheated by the optical energy, which results in more selective heating of the target. Heating a target structure will require less total energy with RF and optical energy combined than with optical energy alone. Using less total energy translates into enhanced safety, decreases the risk of burning the skin and allows the treatment of darker skin.
  27
  Our ELOS technology is embedded in most of our aesthetic product platforms, which consist of multiple hand pieces and a console that incorporates the RF and optical energy sources, sophisticated software and a simple, user-friendly interface. The key benefits of our technology to our customers include: enhanced control of treatment depth and selectivity for enhanced safety and increased patient comfort, and continuous temperature measurement and automated parameter adjustment to reduce the risk of burns. Our ELOS technology is also embedded in our mē Product.
  Our indirect subsidiary, Candela, has a product line which offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions. Since Candela's foundation, it has continuously developed and enhanced applications for laser technology. In the mid-1980's Candela began developing laser technology for medical applications, and since that time has shipped approximately 14,500 systems to over 60 countries. Since the early 1990's Candela has focused its resources on developing laser and light-based technology for use solely in cosmetic, dermatological, and aesthetic applications.
  Our Products
 
 Our products address a wide variety of treatment alternatives. Our products range from professional aesthetic devices (PAD), which include Syneron's and Candela's traditional business and non-professional aesthetic devices (Emerging Business Units) that are primarily targeted at the home-use consumer market. Our Emerging Business Unit products include elure skin whitening, tända LED systems, mē hair removal system, and Light Instruments’ dental laser device, along with several pipeline products that include our strategic home-use device partnership with Procter & Gamble and Fluorinex teeth whitening and fluorination. Our products which we currently market or service are summarized in the table below.
 Product

Platform

Applications(1)

PAD/Emerging

Business Units

Intended Users

Energy Sources

Market IntroductionAurora

Hair Removal,

Improving the skin’s appearance(2), Acne treatment

PAD

Physicians

Light + RF

U.S.: Third Quarter 2002

Rest of World: Fourth Quarter 2001Pitanga

Hair Removal,

Acne treatment

PAD

Aestheticians Medical Spas

Light + RF

Rest of World: Fourth Quarter 2003Polaris

Wrinkles reduction,Leg Veins treatment,Other Vascular Lesions treatment

PAD

Physicians

Laser + RF

U.S.: Fourth Quarter 2003 Rest of World: Second Quarter 2003Galaxy

Hair Removal, Improving the skin’s appearance(2), Acne treatment,Wrinkles reduction,Leg Veins treatment,Other Vascular Lesions treatment

PAD

Physicians

Light + RF /

Laser + RF

U.S.: Second Quarter 2004 Rest of World: Second Quarter 2004  28
  Comet

Hair Removal

PAD

Physicians Aestheticians

Laser + RF

U.S.: Fourth Quarter 2004 Rest of World: Fourth Quarter 2004VelaSmooth

Appearance of Cellulite, Thigh circumference reduction (in 2007), Body contouring

PAD

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Second Quarter 2005 Rest of World: First Quarter 2005EStyle

Hair Removal, Improving the skin appearance, Acne  treatment, Wrinkles reduction (ST)

PAD

Aestheticians Spas

Light + RF

Rest of World: First quarter 2006ELight

Hair Removal, Improving the skin’s appearance(2), Acne treatment, Wrinkles reduction(ST)

PAD

Physicians

Light + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006ELaser

Wrinkles treatment, Leg Veins treatment, Other Vascular Lesions treatment; Hair removal

PAD

Physicians

Laser + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006EMax

Hair Removal, Improving the skin’s appearance(2), Acne treatment, Wrinkles reduction, Leg Veins treatment, Other Vascular Lesions treatment, and wrinkles with the ST applicator

PAD

Physicians

Light + RF / Laser + RF

U.S.: First quarter 2006

Rest of World: First quarter 2006  29
  VelaShape

Appearance of Cellulite, Reduction of thigh circumference

PAD

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Third Quarter 2007

Rest of World: Third quarter 2007VelaShapeII

Appearance of Cellulite, Reduction of thigh circumference

PAD

Physicians Aestheticians Medical Spas

Light + RF+ Vacuum + Massage

U.S.: Third Quarter 2009

Rest of World: Third Quarter 2009LipoLite

Laser-assisted lipolysis

PAD

Physicians

Laser

U.S.: Third Quarter 2008eMatrix

Ablation and resurfacing of the skin

PAD

Physicians

RF

U.S.: Fourth Quarter 2008

Rest of World: Fourth quarter 2008CO2RE

Skin Resurfacing,Wrinkle & Scar Reduction,Traditional Fractional Ablative Treatments

PAD

Physicians

Laser

US: Fourth quarter 2010

Rest of World: Fourth quarter 2010.Dynamic Cooling Device

Skin Cooling

PAD

Physicians

Cryogenic Cooling

U.S.: First Quarter 1998

Rest of World: First Quarter 1998GentleMax

Hair Removal, Skin Rejuvenation and Leg and Facial Veinstreatment

PAD

Physicians

Laser

U.S.: First Quarter 2007

Rest of World: First Quarter 2007AlexTriVantage

Tattoo and Pigmented Lesion Solution

PAD

Physicians

Laser

U.S.: First Quarter 2007

Rest of World: First Quarter 2007GentleYAG

Hair Removal, Beard Bumps Treatment, and Leg Vein Removal

PAD

Physicians



U.S.: First Quarter 2004

Rest of World: First Quarter 2004Vbeam

Vascular Lesions Elimination including Port Wine Stain Birthmarks, Rosacea, Leg and Facial Veins, Post-Operative Bruising and Skin RejuvenationTreatment

PAD

Physicians



U.S.: Second Quarter 2009

Rest of World: Second Quarter 2009  30
  Smoothbeam

Acne Treatment, and Acne Scars, Sebaceous Hyperplasia and Wrinkle Reduction

PAD

Physicians



U.S.: First Quarter 2004

Rest of World: First Quarter 2004GentleLASE

Hair Removal, Vascular Lesions, Wrinkle Reduction and Treatment of Pigmented Lesions

PAD

Physicians



U.S.: First Quarter 1998

Rest of World: First Quarter 1998LiteTouch

Dental Laser

Emerging Business Unit

Dentists

Laser

U.S.: First Quarter 2007

Rest of World: First Quarter 2007Elure

Skin Whitening

Emerging Business Unit

Physicians

Melanozyme

U.S.: Fourth Quarter, 2010 Rest of World: Fourth Quarter, 2010mē

Hair Removal

Emerging Business Unit

Consumers

Light + RF

Rest of World: Second Quarter, 2010tända Acne Solution

Acne Treatment and Prevention

Emerging Business Unit

Consumers

414nm Led Light

U.S.: First Quarter, 2008 Rest of World: Third Quarter, 2007tända Anti-Aging Solution

Wrinkle Reduction

Emerging Business Unit

Consumers

660nm Led Light

U.S.: First Quarter, 2008 Rest of World: Third Quarter, 2007tända Professional Restore

Relieve Aches, Pains and Stiffness in Muscle

Emerging Business Unit

Consumers

870nm Led Light

Canada: First Quarter, 2010
  (1)
Regulatory clearance has been received in the United States and Europe for each indicated application for all products. In each market in which our products are sold, other than the United States and most European countries, our distributors are responsible for obtaining regulatory approvals.
  (2)
Improving the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions.
  31
  Sales and Marketing
  Professional Aesthetic Devices
  Syneron's Product Line
  We market our professional aesthetic devices products to dermatologists, plastic surgeons and other cosmetic physicians in North America and to cosmetic physicians and other qualified practitioners outside North America. We also focus on additional aestheticians throughout the world. We believe our products represent a significant opportunity for practitioners to deliver improved patient treatment results and significantly increase their ability to generate additional revenue.
  We sell our products in more than 50 countries around the world through our subsidiaries in Spain, Portugal, France, Germany, Italy, United Kingdom, China, Hong Kong, Japan and Australia and through more than 50 distributors as well as salespeople employed by our distributors throughout the world. In the United States and Canada, we sell, market and distribute our products through a direct sales force of approximately 45 individuals. Our U.S. and Canadian sales efforts are headquartered in Irvine, California, and we manage several separate territories in the United Stated and Canada. In addition, we have agreements with distributors to market and sell our products throughout Europe, the Middle East, Africa, the Asia-Pacific region and South and Central America.
  Our customer support strategy in North America is to offer our customers predictable cost of ownership, including minimal ongoing maintenance. In North America, we offer a three-year, parts and services warranty that covers disposable applicator parts and regular system maintenance. The small size and weight of our system enables us to complement our warranty programs with a product maintenance program that offers next-day delivery of replacement products in North America in the case of any problems with the machine. This unique overnight delivery program eliminates unnecessary downtime at the user’s office and results in minimal loss of revenue for our customers. We now also offer in connection with the purchases of new VelaShape IITM, LipoLiteTM and eMatrixTM devices, the Syneron Advantage program, which enables physicians to gain access to our facial applications and body shaping technologies at a more affordable price point that are easier to finance in the current economic environment. The Syneron Advantage program also delivers services and programs to further support the success of physicians long after purchase.
  Candela's Product Line
  Our indirect subsidiary, Candela, markets and sells its products worldwide. Executives in North America, Latin America, Japan, Asia-Pacific, and Europe manage Candela's marketing, selling, and service activities through a combination of direct personnel and a network of independent distributors. The mix of direct sales and distributor sales varies by region. Generally, Candela's distributors enter into exclusive distribution agreements during which they typically agree not to sell Candela's competitors' products.
  Candela sells products in the United States primarily through a direct sales force to traditional customer base of dermatologists and plastic and cosmetic surgeons.
  Outside the United States, Candela sells its products in Spain, Portugal, Italy, United Kingdom, Germany, France, Japan and Australia through direct sales offices in other countries through more than 45 distributors. Candela has approximately 130 employees in its direct sales offices in Madrid, Lisbon, Rome, Frankfurt, Paris, Tokyo, Nagoya, Fukuoka, Osaka, Cwmbran, and Sydney. Candela has also established distribution relationships in China, Europe, Japan, Africa, Latin America, and the Middle East.
  32
  Emerging Business Units
  Our non professional aesthetic devices products are primarily targeted at the home-use consumers. In the United States we sell, market and distribute our products both directly and through prestigious retailers. Outside the United States, we sell, market and distribute our products through retailers and through a chain of distributors. Generally, we enter into distribution agreements for a period of one year with automatic extension to the extent that the distributor has satisfied all his obligations under the distribution agreement including with respect to purchasing targets.
  Revenues by Geographic Market
  Region
Year ended December 31,2008

2009

2010USD in

thousands



USD in

thousands



USD in

thousandsPercentage

Percentage

PercentageNorth America

$
60,202



52.4
%

$
27,978



51.1
%

$
66,123



34.9
%Europe


33,005



28.7



10,919



20.0



58,348



30.8Asia-Pacific


12,686



11.0



8,362



15.3



25,888



13.7Japan


4,281



3.7



3,000



5.4



27,604



14.5Israel


581



0.5



1,127



2.1



1,318



0.7Others


4,224



3.7



3,340



6.1



10,247



5.4Total


114,979



100



54,726



100



189,528



100
  Manufacturing
  Syneron's Product Line
  We use outsourced manufacturing to produce our devices while maintaining full control over every step of the production process. We believe that outsourcing allows us to carry low inventory levels and maintain fixed unit costs with minimal infrastructure and without incurring significant capital expenditures. We use three separate main manufacturers to produce our products. We believe their manufacturing processes are in compliance with all pertinent U.S. and international quality and safety standards, such as ISO 9001:2000, ISO 13485:2003 and EN46001 as well as the FDA’s quality system regulations. We conduct in-house prototype development and present detailed manufacturing documents to our subcontractors, who then purchase most of the necessary components and manufacture the product. These manufacturing subcontractors provide us fully assembled, or “turn-key,” services. We control and monitor the quality of our products by testing each product and through extensive involvement in the production process at the facilities of our subcontractors.
  The contracts we have with these manufacturers do not have minimum purchase requirements and allow us to purchase products from the manufacturers on a purchase order basis. The contracts have one-year terms that automatically renew for successive one-year terms. Either we or the manufacturer may terminate the contract by giving the other party four months’ written notice prior to the expiration of the term. The time required to qualify new subcontract manufacturers for our products could cause delays in our ability to provide products to our customers.
  We procure the diode laser component of our products on behalf of our third-party manufacturers from a limited number of suppliers. We have flexibility to adjust the number of diode lasers we procure as well as the delivery schedules. The forecasts we use are based on historical demands and future plans. Lead times may vary significantly depending on the size of the order, time required to fabricate and test the components, specific supplier requirements and current market demand for the components. We reduce the potential for delays of supply by maintaining relationships with multiple suppliers of diode lasers. The time required to qualify new suppliers for the diode laser components, or to redesign them, could cause delays in our manufacturing. To date, we have not experienced significant delays in obtaining our diode laser components.
  33
  Candela's Product Line
  Our indirect subsidiary, Candela, designs, assembles, and tests its branded products at its Wayland, Massachusetts facility.
  Candela's facility has ISO 13485 certification and has established and is maintaining a quality system that meets the requirements of ISO 13485:2003 from both the EC Directive 93/42/EEC and Canadian Medical Devices Regulation. The ISO 13485 certification provides evidence that Candela conforms to quality system requirements for the design, development, production, servicing and distribution of medical lasers and accessories.
  Candela's products are manufactured with standard components and subassemblies supplied by third party manufacturers to its specifications. Candela purchases certain components and subassemblies from a limited number of suppliers. If Candela's suppliers are unable to meet its requirements on a timely basis, Candela's production could be interrupted until it will obtain an alternative source of supply.
  Candela uses Alexandrite rods to manufacture the GentleMaxTM, GentleLASETMand the AlexTriVantageTM systems, which account for a significant portion of Candela’s total revenues. Candela depends exclusively on its contract manufacturer to supply these rods, for which no alternative supplier meeting its quality standards exists. To date, Candela has not experienced significant delays in obtaining dyes, optical and electro-optical components, electronic components, Alexandrite rods and other raw materials for its products. Candela believes that over time alternative component and subassembly manufacturers and suppliers can be identified if its current third party manufacturers and suppliers fail to fulfill its requirements.
  Research and Development
  Syneron's Research and Development
  Our research and development activities are conducted internally by a research and development staff consisting of 69 employees. Our research and development efforts are focused on the development of new products, as well as the extension of our existing products to new applications in the aesthetic medical market. We intend to develop products and product line extensions that leverage our ELOS technology, as well as other product platforms. We have a number of new projects and products under development, mainly focusing on additional non-invasive aesthetic treatments. We expect to develop several major product initiatives in 2011. We also expect to continue to develop products for the cosmetic market and products for home use using our proprietary ELOS technology under our Emerging Business Units segment.
  Until 2007, our research and development efforts have been focused on the development of products that leverage our ELOS technology. Since 2007, our research and development efforts also focus on the development of technologies, which are not based on our ELOS technology. Our gross research and development expenditures were $12.5 million in 2007, $13.8 million in 2008, $13.2 million in 2009 and $26.8 million in 2010, including Candela. We estimate our gross research and development expenditures for 2011 will be $26.3 million.
  Candela's Research and Development
  Our indirect subsidiary, Candela, is currently conducting research on a number of applications by its in-house research and development staff consisting of 27 employees. Candela's core competencies include: applied laser physics and technology; tissue optics; photochemistry; light-tissue interaction; clinical research; aesthetic laser applications; engineering and design of medical laser devices; and collaborative research with leading academic and medical institutions.
  34
  When Candela discovers new technologies or applications with commercial potential, it assembles a team to develop the new product or application in cooperation with leading physicians and medical and research institutions.
  Candela's research and development team works with its operations group to design its products for ease of manufacturing and assembly and with its marketing group to create and respond to market opportunities. This interaction between functional groups facilitates the introduction of new products with the right balance of features, clinical benefits, performance, quality, and cost.
  Historically, Candela's research and development effort has relied primarily on internal development building on its core technologies. Today, in addition to its internal team, Candela's regularly engages the services of independent engineering and development firms to assist in the acceleration of new product development.
  Candela also conducts joint research with physicians affiliated with various medical and research institutions. One example of technology developed through joint research is Candela's Dynamic Cooling Device, which was developed in conjunction with the Beckman Laser Institute at the University of California, Irvine. Candela anticipates continuing joint research and licensing arrangements with reputable medical research institutions as well as leading physicians in our field in future periods.
  Intellectual Property
  We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As of February 25, 2011, our patent portfolio consisted of 12 issued U.S. patents, and 58 patents applications pending in the U.S. (with an additional 117 applications pending internationally and 24 international patents), related to 66 patent families relating to our technology and products. We have filed and expect to file future patent applications in the United States. We have also filed, or intend to file, foreign counterpart applications in Europe, certain countries in South America, Canada, Israel, Australia, China, Korea, Japan, and certain other countries in Asia for at least certain applications. We intend to file for additional patents to strengthen our intellectual property rights.
  Our trademarks include among others, Syneron, the Syneron logo, ELOS, Active Dermal Monitoring, Aurora, Polaris, Pitanga, VelaSmooth, Syner-Cool, Galaxy, Comet, eLight, eLaser, eMax, elure, Refirme, VelaShape, LipoLite, Sublative Rejuvenation, VelaShapeII, Syneron Advantage, elure, Candela, GentleMax, AlexTriVantage, QuadraLASE, GentleYAG, Vbeam, Smoothbeam and GentleLASE. All other trademarks, trade names and service marks appearing in this Annual Report on Form 20-F are the property of their respective owners. We have a policy of seeking to register our trademarks in the United States, Canada and certain other countries.
  Candela's Intellectual Property
  Our indirect subsidiary, Candela, has numerous patents and has a number of patent applications pending to protect its rights in certain technical aspects of hair removal, wrinkle removal, acne treatment, benign vascular lesion, pigmented lesion, and other laser systems.As of February 25, 2011, Candela's patent portfolio consisted of 38 issued U.S. patents, 31 patents applications pending in the U.S. and additional 6 applications pending internationally and 36 international patents.In addition to Candela's portfolio of issued patents and patent applications, Candela licenses patented technology from third parties. Candela uses its patentedDynamic Cooling Device (DCD) under a license agreement from August 2000, to patent rights owned by the Regents of the University of California (Regents). The exclusive license rights to the DCD are subject to limited license rights of Cool Touch, Inc. (Cool Touch), in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch obtained a license to the DCD on a co-exclusive basis with Candela, in certain narrower fields of use. Cool Touch is restricted in its ability to assign its license rights to certain existing competitors of Candela. Candela is entitled to one-half of all royalty income payable to the Regents from Cool Touch. Under the agreement, Candela no longer is required by the Regents to negotiate sublicenses to third parties. However, Candela is entitled to one-half of all royalties due from any other entity that licenses the DCD technology from the Regents in other fields of use.
  35
  Intellectual PropertyLitigation
  Our subsidiary, Syneron Inc. is currently defending a patent infringement lawsuit brought by Palomar Medical Technologies, Inc. (Palomar) in the U.S. District Court for the District of Massachusetts, on November 14, 2008, alleging willful infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, confirming the patentability of all of the claims of the ’568 Patent at issue in the reexamination proceedings and most of the claims of the ’844 Patent at issue in the reexam proceedings. The stay was lifted on November 13, 2009. The action is still in its early stages. The complaint seeks compensatory damages, requests that these damages be trebled, and requests attorneys’ fees and injunctive relief. After the lifting of the stay, Syneron Inc. answered the complaint on November 30, 2009, denying Palomar’s claims and seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents. On December 10, 2009, Palomar filed a First Amended Complaint that added Massachusetts General Hospital (MGH) as a plaintiff, and on December 14, 2009, Palomar replied to Syneron Inc.’s counterclaims. Syneron Inc. answered the First Amended Complaint on December 23, 2009, and filed Amended Counterclaims that add MGH as a counterdefendant. The court held a scheduling conference in the case on January 6, 2010. The court set a claim construction hearing and other pre-trial dates. The claim construction hearing was held on November 17, 2010. The court has not yet rendered its claim construction decision. No trial date has been set.
  The Company is denying all allegations and is planning to vigorously defend this case. An adverse outcome in Palomar’s suit against Syneron Inc. could materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc.
 
 Candela's Intellectual PropertyLitigation
  Our indirect wholly owned subsidiary, Candela Corporation (Candela), is also currently defending a patent infringement lawsuit brought by Palomar alleging infringement of the ’568 and the ’844 Patents by Candela’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office (PTO), and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Candela case on January 5, 2010. Palomar's amended complaint, which added MGH as a plaintiff, alleges that Candela willfully infringed the ’568 and ’844 Patents. In addition to seeking compensatory damages, the amended complaint requests that the Court treble these damages, award attorneys’ fees, and provide injunctive relief. Candela’s amended answer and counterclaims denies Palomar’s claims, seeks a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents, and alleges unfair and deceptive business practices by Palomar in violation of Massachusetts General Laws Ch. 93A. Candela seeks compensatory damages, and requests the trebling of these damages, attorneys’ fees, and injunctive relief. Prior to the entry of the stay, a claim construction hearing was held, the Court issued an order on November 8, 2007, construing the claims, fact discovery was closed and expert reports were exchanged prior to entry of the stay. Palomar has dropped the ’568 Patent from this lawsuit, and has elected to proceed solely on the ’844 Patent. On February 10, 2010, after the stay was lifted, the Court held a scheduling conference and set June 30, 2010 as the cutoff for expert discovery, July 30, 2010, as the last date for filing summary judgment motions, and September 14, 2010, as the hearing date for summary judgment motions. The parties have served their supplemental expert reports and the expert depositions have been taken. On August 12, 2010, Candela filed a motion for summary judgment of non-infringement with respect to all of the asserted claims and of invalidity with respect to two of the asserted claims. A hearing on the motion was held on September 14, 2010. The court has not yet ruled on the motion. No trial date has been set.
  36
  While Candela intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Candela would materially hurt the business, financial condition, results of operations and cash flows of Candela.
  On February 19, 2008, Cardiofocus, Inc., or Cardiofocus, filed suit against Candela and eight other companies in the U.S. District Court for the District of Massachusetts, asserting willful infringement by Candela of U.S. Patents 6,457,780, 6,159,203 and 5,843,073. Cardiofocus was seeking compensatory and treble damages, as well as attorneys’ fees and injunctive relief. On April 21, 2008, Candela answered Cardiofocus’ complaint and asserted a variety of counterclaims against Cardiofocus. Based upon Candela’s request, on July 23, 2008, the PTO agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings. As a result of the reexamination process, the scope of the claims was substantially narrowed and the PTO rejected most of the claims asserted by Cardiofocus against Candela. On April 30, 2010, the U.S. District Court for the District of Massachusetts approved dismissal with prejudice of all claims made by Cardiofocus against Candela in the lawsuit.
  All our professional employees and technical consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. In most cases, we also require them to agree to disclose and assign to us all inventions conceived in connection with their services to us. However, there can be no assurance that these confidentiality and assignment agreements will be enforceable or that they will provide us with adequate protection.
  Competition
  Our industry is subject to intense competitionand technological developments are expected to continue at a rapid pace.We compete against products offered by public companies, including Cutera, Inc., Cynosure, Inc., Solta Medical, Inc., Lumenis Ltd., Palomar Medical Technologies, Inc., UltraShape Ltd., as well as by private companies such as Sciton, Inc., Alma Lasers Ltd., and several other smaller specialized companies. Our products compete against conventional non-light-based treatments, including Botox and collagen injections, sclerotherapy, electrolysis, liposuction, chemical peels and microdermabrasion. Our products also compete against laser and other light-based products.
  Competition among providers of laser and other light-based products for the aesthetic medical market is characterized by extensive research efforts and rapid technological progress. While we attempt to protect our products through patents and other intellectual property rights, there are few barriers of entry that would prevent new entrants or existing competitors from developing products that would compete directly with ours. There are many companies, both public and private, that are developing innovative devices that use laser, light-based and alternative technologies. Many of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels that are more effective than ours. Additional competitors may enter the market and we are likely to compete with new companies in the future. To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments by differentiating our products on the basis of performance, brand name, reputation and price. We have encountered and expect to continue to encounter potential customers who, due to existing relationships with our competitors, are committed to, or prefer the products offered by, these competitors. We expect that competitive pressures may over time result in price reductions and reduced margins for our products.
  37
  We believe that many factors will affect our competitive position in the future, including our ability to:
  ·
develop and manufacture new products that meet the needs of our markets;
  ·
respond to competitive developments and technological changes;
  ·
manufacture our products at lower cost;
  ·
retain a highly qualified research and engineering staff;
  ·
provide sales and service to a worldwide customer base; and
  ·
maintain and improve product reliability.
  Government Regulation
  Our products are medical devices subject to extensive and rigorous regulation by the U.S. Food and Drug Administration, as well as other regulatory bodies, to help ensure that medical products are safe and effective for their intended uses. FDA regulations govern the following activities that we perform and will continue to perform:
  ·
product design and development;
  ·
product testing;
  ·
software validation;
  ·
product manufacturing;
  ·
product safety;
  ·
product labeling;
  ·
product storage;
  ·
record keeping;
  ·
pre-market clearance or approval;
  ·
advertising and promotion;
  ·
production; and
  ·
product sales, distribution and service.
  Each of our products currently marketed in the United States has received 510(k) clearance or has Letter to File documentation for the uses for which it is being marketed.
  FDA’s Pre-market Clearance and Approval Requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either prior 510(k) clearance or pre-market approval (PMA) from the FDA.The FDA's 510(k) clearance process usually takes from three to twelve months, but it can last longer. The process of obtaining PMA approval is much more costly, lengthy, and uncertain and generally takes from one to three years or even longer. We cannot be sure that 510(k) clearance or PMA approval will ever be obtained for any product we propose to market. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a registration or a pre-market notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempt from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring PMA. All of our current products that are being marketed in the United States are class II devices.
  38
  A clinical trial may be required in support of a 510(k) submission or PMA application. Such trials generally require an Investigational Device Exemption (IDE) application approved in advance by the FDA for a limited number of patients, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. The IDE application must be supported by appropriate data, such as animal and laboratory testing results. Clinical trials may begin once the IDE application is approved by the FDA and the appropriate institutional review boards are at the clinical trial sites.
  510(k) Clearance Pathway. When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976, for which the FDA has not yet called for the submission of PMA applications. By regulation, the FDA is required to clear, negotiate or deny a 510(k) pre-market notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.
  After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance. 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 a manufacturer's decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to submit a pre-market notification requiring 510(k) clearance. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance is obtained. We have modified some of our 510(k) cleared devices but have determined that, in our view, new 510(k) clearances are not required. We cannot be certain that the FDA would agree with any of our decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k) clearance for any modification, we also may be required to cease marketing and/or recall the modified device until we obtain a new 510(k) clearance.
  Laser devices used for aesthetic procedures, such as hair removal, have generally qualified for clearance under 510(k) procedures. We received FDA clearances to market our Aurora platform of products for hair removal in July 2002 and for superficial vascular and pigmented lesions in October 2002. We received FDA clearance for the treatment of acne with the Aurora and the Pitanga products in February 2004. We received FDA clearances to market our Polaris product platform for leg vein treatment as well as other types of vascular lesions in April 2003. We received FDA clearance for wrinkle treatment with the Polaris products in December 2003. In June 2005, the FDA granted 510(k) clearance to our Vela platform for the temporary reduction in the appearance of cellulite and for the relief of minor muscle aches, pain and spasms, as well as the temporary improvement of local blood circulation. In March 2006, the FDA granted 510(k) clearance to our ST applicator for non-invasive wrinkle treatment a technique related to our ReFirmeTM procedure. We received FDA clearance to market our Q-switched alexandrite laser family in December 2006 for the treatment of pigmented lesions and tattoo removal. In July 2007, the FDA granted 510(k) clearance to our VelaSmooth product for temporary reduction of thigh circumferences, and in August 2007, the FDA granted 510(k) clearance to our VelaShape for all uses of our VelaSmooth product. In May 2008, the FDA granted 510(k) to our new LipoLite product for laser-assisted lipolysis and additional dermatological procedures. In September 2008, the FDA granted 510(k) clearance to our Matrix RF applicator for use in dermatological procedures requiring ablation and resurfacing of the skin. In October 2006, the FDA granted 510(k) clearance to our LiteTouch product for dental laser treatment. In September 2009, the FDA granted clearance to our ePrime 510(k) clearance for dermatologic and general surgical procedures for electrocoagulation and hemostasis, and the percutaneous treatment of facial wrinkles. In November 2010, the FDA granted 510(k) clearance to our CO2RE product for dermatological procedures requiring ablation, coagulation and resurfacing of soft tissue including skin. In January, 2011 the FDA granted 510(k) clearance to our tändaTM Light Emitting Diode (LED) system for skin rejuvenation with prescription.
  39
  Our subsidiary, Candela received FDA clearance to market the GentleLASE family of products in 1997 for the treatment of dermatological vascular lesions, hair removal in 1998, permanent hair reduction in 2001, and treatment of wrinkles and benign pigmented lesions in 2003. Candela received clearance to market Smoothbeam mid-IR diode laser in 2000 for dermatological procedures relating to the ablation, incision, excision, and vaporization of soft tissue, and for acne indications in 2002, atrophic acne scars and wrinkles in 2003 and sebaceous hyperplasia in 2004. Candela received its first clearance on the GentleYAG family of products in 2001 for hair removal from all skin types treatment of vascular and pigmented lesions and hemostasis of soft tissue, for the treatment of pseudofolliculitis barbae (PFB) in 2002, facial wrinkles in 2003, benign pigmented lesions and the reduction of hypertrophic and keloid scars, vascular lesions, and the hemostasis of soft tissue in 2003. Candela received clearance to market the VBeam pulsed dye laser family in 2002 for treating vascular lesions and cutaneous lesions and periocular wrinkles, although previous generations of Candela pulsed dye lasers had been cleared and on the market since 1986. Also in December 2006, Candela received FDA clearance to market its GentleMAX product for the treatment of temporary and permanent hair reduction for all skin types including tanned skin, benign pigmented lesions, PFB, vascular lesions, and wrinkles.
  Pre-market Approval Pathway. A PMA application must be submitted to the FDA if the device cannot be cleared through the 510(k) process or through registration. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
  Pervasive and Continuing Regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:
  ·
quality system regulations, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process (including an annual laser report);
  ·
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses;
  ·
medical device reporting regulations, which require 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 the malfunction were to recur; and
  ·
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
  The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our manufacturing subcontractors.
  40
  We also are regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, including design and operation requirements, and manufacturers to certify in product labeling and in reports to the FDA that their products comply with all such standards. The law also requires laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product.
  Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
  ·
fines, injunctions, consent decrees and civil penalties;
  ·
recall or seizure of our products;
  ·
issuing an import alert to block entry of products the FDA has reason to believe violate applicable regulatory requirements;
  ·
operating restrictions, partial suspension or total shutdown of production;
  ·
refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;
  ·
withdrawing 510(k) clearance or pre-market approvals that are already granted; and
  ·
criminal prosecution.
  The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our business.
  We also are subject to a wide range of federal, state and local laws and regulations, including those related to the environment, health and safety, land use and quality assurance. We believe that we are in compliance with these laws and regulations as currently in effect, and our compliance with such laws will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.
  International Regulations. International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different.
  The primary regulatory environment in Europe is that of the European Union, encompassing most of the major countries in Europe. Several member states of the European Free Trade Association have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet European Union requirements. The European Union has adopted numerous directives and European Standardization Committees have promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking (CE Mark), indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, the member states of the European Free Trade Association and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one member state of the European Union, the European Free Trade Association or one country which has entered into a Mutual Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these countries. In the second quarter of 2003, we received certification for ISO 13485:2003. An ISO 13485:2003 certificate reflects the voluntary adoption of harmonized standards; however, compliance with such standards establishes a presumption of conformity with the essential requirements for a CE Mark. In the third quarter of 2001, our facility was granted a CE Mark approval certification. The ISO 13485:2003 and the CE Mark approval are valid until 2013.
  41
  Federal Communications Commission and other governmental agencies governing the use of radio frequency energy. Our products generate and use radio frequency energy, and therefore may be subject to technical, equipment authorization and other regulatory requirements in the countries and regions where they are marketed or distributed. In the United States, our products are subject to the Federal Communications Commission’s equipment verification procedures, under which the manufacturer is required to determine, or verify, that the equipment complies with the applicable technical standards and to keep a record of test measurements demonstrating compliance before the equipment can be marketed or sold in the United States. Any modifications to our products may require re-verification before we are permitted to market and distribute the modified devices.
  We seek to obtain regulatory approvals in countries requiring advance clearance of our products before they are marketed or distributed in those countries. Our failure to comply with the technical, equipment authorization, or other regulatory requirements of a specific country or region could impair our ability to commercially market and distribute our products in that country or region.
  C.
ORGANIZATIONAL STRUCTURE
  We have 22 active subsidiaries as follows:
  ·
Syneron GmbH, which is a wholly-owned subsidiary of ours and was established in Germany in August 2001 to market and sell our products in Europe.
  ·
Syneron Inc. and Syneron Canada Corp., which are wholly-owned subsidiaries and were established in 2002 in Delaware and Toronto, Canada, respectively, to market and sell our products in North America.
  ·
Syneron Medical (HK) Ltd., which is a wholly-owned subsidiary and was established in Hong Kong in June 2004 and became active promoting, marketing and serving as an agent of the Company in Asia and Australia since January 2007.
  ·
Syneron (Beijing) Medical & Cosmetics Enterprise Ltd., in which we own 51% of its fully diluted share capital as of December 2008.
  ·
Light Instruments Ltd., an Israeli corporation which is a wholly-owned subsidiary of ours as of October 2008.
  ·
Inlight Corp., a California corporation, which is a wholly owned subsidiary of ours as of November 4, 2008.
  ·
Rakuto Bio Technologies Ltd. an Israeli company, in which we own 41.91% of its fully diluted share capital as of November 9, 2009.
  ·
Fluorinex Active Ltd., an Israeli company, in which we own indirectly 73.66% of its fully diluted share capital as of May 13, 2009.
  42
  ·
Primaeva Medical, Inc., a company based in Pleasanton, California which is an indirect wholly owned subsidiary of ours as of October 26, 2009.
  ·
Pharos Life Corporation – a Canadian corporation which is an indirect wholly-owned subsidiary of ours as of December 7, 2010.
  ·
Tanda Health & Beauty Inc. – A Delaware corporation which is an indirect wholly owned subsidiary of ours as of December 7, 2010.
  ·
Syneron Beauty Ltd. - an Israeli corporation which is a direct wholly-owned subsidiary of ours as of September 7, 2009.
  ·
Candela Corporation, a Delaware corporation, which is an indirect wholly owned subsidiary of ours as of January 5, 2010. Candela Corporation has 9 active subsidiaries as follows:
  ·
Candela KK – a Japanese corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela Iberica, S.A. – a Spanish corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela Deutschland GmbH - a German corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela France SARL – a French corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela Italia – an Italian corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela (U.K.) Limited – a U.K. corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela Corporation Australia PTY, Ltd. – an Australian corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  ·
Candela Portugal, Unipessoal Lda. – a Portugal corporation which is an indirect wholly-owned subsidiary of ours as of January 5, 2010.
  D.
PROPERTY, PLANTS AND EQUIPMENT
  We lease our main office and research and development facilities, located in the Industrial Zone in Yokneam Illit, Israel, pursuant to a lease that expires in December 2013. We have an option to extend our lease for an additional two year period. We and our subsidiaries, Light Instruments Ltd. and Fluorinex Active Ltd. and Syneron Beauty occupy approximately 37,254 square meters in this leased facility in Yokneam Illit. Our U.S. subsidiary also leases a 15,204 square foot facility in Irvine, California pursuant to a lease that expires in October 2011. Our Canadian subsidiary leases a 14,257 square foot facility in Richmond Hill, Ontario, Canada, pursuant to leases that expire in July 2012. Our Hong-Kong subsidiary leases a 2,575 square foot facility in Hong-Kong pursuant to a lease that expires in February 2012. Inlight Corp. leases a 840 square foot facility in Irvine, California, pursuant to a lease which is renewable on a monthly basis. Primaeva Medical, Inc. leases approximately 14,137 square foot for its operations in Pleasanton, California pursuant to a lease that expires in June 2013. Pharos Corp leases a 4,725 foot facility in Cambridge pursuant to a lease that expires in June 30, 2011.
  43
  Candela Corporation leases approximately 38,000 square foot for its operations in Wayland, Massachusettspursuant to a lease that expires inDecember 2011. Candela Corporation also leases approximately 12,000 square foot facility in South Plainfield, New Jersey for its diode operationpursuant to a lease that expires inOctober 2011.
  Candela’s subsidiaries currently lease the following facilities:
  ·
Candela KK – leases four offices in Japan in Tokyo, Osaka, Nagoya, and Fukuoka. These leases expire between November 14, 2009 and September 16, 2012.
  ·
Candela Iberica, S.A. – leases two locations in Lisbon, Portugal and Madrid, Spain. These leases expire on December 12, 2011 and December 31, 2011, respectively.
  ·
Candela Deutschland GmbH – leases a facility in Neu-Isenberg, Germany expiring on October 14, 2011.
  ·
Candela France SARL – leases a facility in Villebou Sur Yvette, France expiring on June 30, 2016.
  ·
Candela Italia – leases a facility in Formello, Italy expiring on November 3, 2011.
  ·
Candela (U.K.) Limited – leases a facility in Cwmbran, U.K. expiring on September 18, 2012.
  ·
Candela Corporation Australia PTY, Ltd. – leases a facility in Heidelberg West, Australia expiring on March 4, 2013.
  ·
Inolase (2002), Ltd. – leases a facility in Natanya, Israel expired on April 30, 2010. The lease agreement was not renewed as Candela closed the operation of Inolase.
  We believe that our properties are adequate to meet our current needs.
  ITEM 4A.
UNRESOLVED STAFF COMMENTS
  None
  ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  The following discussion of our financial condition and results of operations should be read in conjunction with Item 3.A, “Key Information – Selected Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 20-F. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 3.D, “Key Information – Risk Factors” and elsewhere in this Annual Report on Form 20-F.
  A.
OPERATING RESULTS
  Overview
  We research, develop, manufacture, market, sell, distribute, and service innovative aesthetic medical products addressing patients' aesthetic medical and cosmetic concerns. Our products, which we sell primarily to physicians and other practitioners, target a wide array of non-invasive aesthetic medical procedures, including hair removal, wrinkle reduction, rejuvenation of the skin’s appearance through the treatment of superficial benign vascular and pigmented lesions, and treatment for the temporary reduction in the appearance of cellulite thigh circumference, and one minimally invasive product for laser-assisted lipolysis.
  44
  We believe our ELOS technology provides performance advantages over existing technologies that rely solely on optical energy. We believe using optical energy alone limits the safety and efficacy of many aesthetic medical procedures due to limited skin penetration and unwanted epidermal absorption, and that our proprietary ELOS technology, which combines optical and electrical energy, enhances the user’s ability to accurately target the tissue to be treated and enables real-time measurement of skin temperature, resulting in increased patient safety and comfort and improved treatment results.
  We believe that the technology of our subsidiary, Candela,provides performance advantages over other existing aesthetic lasers and light-based systems. Candela has been developing and selling aesthetic lasers for over 30 years, and it has developed unique laser and light-based technology for use solely in cosmetic, dermatological, and aesthetic applications.
  During 2009 and 2010 we have introduced several new product platforms such as the eMatrix, VelaShape II, LipoLite and CO2RE under a new recurring revenue business model. We believe that our recurring revenue business model offers our customers an attractive total cost of ownership, a lower entry system cost and a better clinical outcome due to the replaceable treatment modules. Our goal is that the recurring business model, once fully implemented, will deliver attractive operating margins both from the sale of the system as well as the sale of the consumable modules. To the extent possible, we intend to offer this new recurring-revenue business model on most of our future product introductions and intend for our recurring-revenue stream to increase proportionally as the installed base for our newer units increases.
 
 We generate our revenues primarily from the sales of our professional aesthetic devices. We also generate a portion of our revenues from the recognition of service revenue and from the sale of consumables. We expect product service revenue to increase over time as our installed base continues to grow. We also generate a portion of our revenues from the sale of our products by our Emerging Business Units, which involve products that are primarily targeted at the home-use consumer market.
 
 As of the fourth quarter of 2010, we are breaking out our financial results between the traditional combined Syneron and Candela business, which we have labeled Professional Aesthetic Devices, or PAD, and the results of our Emerging Business Units in order to provide increased transparency into our results. We decided on such segment reporting as a result of a change in the manner in which the Company’s chief operating decision-makers evaluate the Company’s financial information. We believe this segment reporting will also allow shareholders to better gauge the growth and significant investments we are making as part of our overall growth strategy in our emerging technologies that are primarily targeted at the home-use consumer market. Our PAD segment includes research, development, marketing and sales of aesthetic medical equipment for the treatment of body and face for dermatologists, plastic surgeons and other qualified practitioners worldwide (professional market). Our Emerging Business Units includes RBT, Light Instruments, Pharos, Fluorinex and Syneron Beauty's home use products. Emerging Business Units products include elure skin whitening, tända LED systems, mē hair removal system, Light Instruments’ dental laser devices along with pipeline products that include our strategic home-use device partnership with Procter & Gamble and Fluorinex teeth whitening and fluorination.
 
 See also Note 19 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
  Revenues
  Generally, we recognize revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, collectability is probable and we do not have any obligation to customers after the date on which products are delivered.
  45
  Professional Aesthic Device (PAD)
 
 Our PAD segment generates revenues primarily from the sales of our medical aesthetic equipment. We also generate a portion of our revenue from the recognition of service revenue and from the sale of consumables. For the year ended December 31, 2010, our PAD revenues totaled $185.6 million. From inception through December 31, 2010, we sold over 31,480 professional aesthetic devices worldwide. For the year ended December 31, 2010, we derived approximately 30% of our revenues from the recognition of service revenue. We expect product service and consumables revenue to increase over time as a percentage of revenues and in absolute numbers as our installed base continues to grow.
 
 We sell our products primarily directly in the United States, Canada, Portugal, Spain, United Kingdom, France, Germany, Italy, Japan, China, Hong Kong and Australia, and we use distributors to sell our products in countries where we do not have a direct presence or to complement our direct sales force. For the year ended December 31, 2010, we derived 65.1% of our revenues from sales of our products outside North America through a combination of direct and distributor sales. As of December 31, 2010, we had approximately 45 salespeople in North America and distributors in more than 90 countries. While we continue to closely monitor the impact of the recent earthquake and tsunami in Japan on our business, we do not presently expect that these events will materially or adversely affect our revenues in Japan.
 
 Emerging Business Units
 
 For the year ended December 31, 2010, our Emerging Business Units revenues totaled $3.9 million. Our Emerging Business Units sells our products primarily outside of the United States through a combination of direct and distributor sales as well as sales in the United States directly and through high-end retailers.
 
 The following table provides information on a consolidated basis regarding the breakdown of our sales by geographical region for the years ended December 31, 2009 and 2010:
  Percent of SalesRegion

Year ended

December

31, 2009


Year ended

December

31, 2010North America


51.1
%


34.9
%Europe


20



30.8Asia-Pacific


15.3



13.7Japan


5.4



14.5Israel


2.1



0.7Others


6.1



5.4Total


100.0
%


100.0
%
  Cost of Revenues
  Professional Aesthetic Devices
  Our cost of revenues consists of the cost of manufacture and assembly of our products by third party manufacturers of the Syneron product line and in-house manufacture and assembly of the Candela product line. For the Syneron product line, these costs primarily include materials, components and costs of our third party manufacturers. We have been able to negotiate competitive terms with the subcontractors that manufacture our products. Also, because the Syneron product line technology, design and engineering do not require highly sophisticated, time-intensive labor for assembly and testing and these products use the off-the-shelf discrete components, the Syneron product line has relatively low manufacturing costs. For the Candela product line, these costs primarily include materials components and labor costs. Cost of revenues also includes royalties to third parties, service and warranty expenses, as well as salaries and personnel-related expenses for our operations management team, which includes subcontractor management (for the Syneron product line), purchasing and quality control.
 
 The cost of revenue as a percentage of revenues increased from 2009 to 2010, which is primarily attributable to the acquisition of Candela. The increase in the cost of revenues is also attributed to the different technology in the Candela product line, which carries a lower gross margin in comparison to the Syneron product line. We expect our cost of revenues as a percentage of revenues to decrease, as a result of our projected revenues mix between the Syneron and Candela product lines. Candela also contributed to the increase in our service revenues, which carry a lower gross margin compared to Syneron system sales.
 46
  Emerging Business Units
  The cost of revenues of our Emerging Business Units consists primarily of the cost of manufacture and assembly of our products by third party manufacturers of the Emerging Business Units product line. These costs primarily include materials, components and costs of our third party manufacturers. Cost of revenues also includes service and warranty expenses, as well as salaries and personnel-related expenses for our operations management team, which includes subcontractor management and purchasing.
 
 The cost of revenue as a percentage of revenues (for all Emerging Business Units products combined) decreased from 2009 to 2010 primarily due to the increase in the Emerging Business Units revenues. We expect our cost of revenues as a percentage of revenues to decrease (for all Emerging Business Units products combined), as a result of our projected increase in revenues of the Emerging Business Units.
 Research and Development Expenses
  Our research and development expenses both in the PAD and Emerging Business Units consist of salaries and other personnel-related expenses of employees primarily engaged in research and development activities, external engineering fees and materials used and other overhead expenses incurred in connection with the design and development of our products.
  Selling and Marketing Expenses
  Our selling and marketing expenses both in the PAD and Emerging Business Units consist primarily of salaries, commissions and other personnel-related expenses for those engaged in the sales, marketing and support of our products and trade show, promotional and public relations expenses, as well as management and administration expenses in support of sales and marketing in our subsidiaries. We expect our selling and marketing expenses to decrease as a percentage of revenues, as a result of a projected increase in our sales.
  General and Administrative Expenses
  Our general and administrative expenses both in the PAD and Emerging Business Units segments consist primarily of salaries and other personnel-related expenses for executive, accounting and administrative personnel, professional fees and other general corporate expenses.
  Financial Income, net
  Interest income and other income consists primarily of interest earned on cash, cash equivalents, deposits and marketable securities, as well as exchange differences resulting from remeasurement of our foreign currency transactions and balances into U.S. dollars.
  Taxes on Income
  Some of our facilities in Israel were granted the status of an “Approved Enterprise”, whereas others were granted the status of “Privileged Enterprise” under the Law for the Encouragement of Capital Investments, 1959, entitling us to an exemption from Israeli corporate tax on undistributed income for a certain period of time. The “Approved Enterprise” and the “Privileged Enterprise” status only allows corporate tax exemptions on profits generated from such operations but requires regular Israeli corporate tax on income generated from other sources, such as gains from sales of marketable securities and interest earned on cash, cash equivalents and marketable securities. We will seek to maintain the “Approved Enterprise” and the “Privileged Enterprise” status by meeting the necessary conditions with respect to our capital investment programs and to get benefits as "Preferred Enterprise" with respect to our future programs. Our effective tax rate is directly affected by the relative proportions of domestic and international revenue and proportions between revenue from Approved and Privileged Enterprises and revenue from other sources as discussed above. We are also subject to changing tax laws in multiple jurisdictions in which we operate. For additional description of Israeli Tax please see Item 10.E, “Additional Information – Taxation – Israeli Taxation.”
  47
  Critical Accounting Policies and Estimates
  Our discussion and analysis of our financial condition and results of our operations is based upon our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities. On a periodic basis, we evaluate our estimates, including those related to revenue recognition, allowances for doubtful accounts, slow moving inventory, warranty reserves, income taxes, litigation and stock-based compensation. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates. The following is a discussion of our critical accounting policies and the significant judgments and estimates affecting the application of those policies in our consolidated financial statements. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F for a summary of all of our significant accounting policies
  Marketable securities. Marketable securities consist of debt securities classified as available-for-sale and are recorded at fair value. The fair value of quoted securities is based on current quoted market prices. When securities do not have an active market, fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs. Changes in fair value, net of taxes, are reflected in other comprehensive income (loss) or in earnings if the decline is determined to be other than temporary in accordance with accounting guidance.
  Effective as of the second quarter of 2009, if an other-than-temporary impairment exists for debt securities, we separate the other-than-temporary impairment into the portion of the loss related to credit factors, or the credit loss portion, and the portion of the loss that is not related to credit factors, or the noncredit loss portion. The credit loss portion is the difference between the amortized cost of the security and our best estimate of the present value of the cash flows expected to be collected from the debt security. The non-credit loss portion is the residual amount of the other-than-temporary impairment. The credit loss portion is recorded as a charge to earnings, and the noncredit loss portion is recorded as a separate component of other comprehensive income (loss).
  Marketable securities are classified within Level 1 or Level 2 except for investments in Auction Rate Securities. This is because marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Investments in auction rate securities are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant. Due to the current economic environment in which there is a lack of market activity for auction rate securities, we have been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value. We estimated together with our third party advisor the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period. These estimated fair values could change significantly based on future market conditions, which could result in recognizing other-than-temporary impairment losses. The actual value at which such securities could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. Our management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date.
  48
  Revenue Recognition. We recognize revenues in accordance with SAB 104, when each of the following four criteria are met:
  ·
There is persuasive evidence of an arrangement;
  ·
delivery of product has occurred;
  ·
the fee is fixed or determinable;
  ·
collection is probable; and
  ·
No significant obligation to the customer.
  Revenue from some product sales to end users in North America usually includes multiple elements within a single contract. Our accounting policy complies with the requirements set forth in ASC 605-25, relating to the separation of multiple deliverables into individual accounting units with determinable fair values.
  The items included in the arrangements (deliverables) are evaluated pursuant to ASC 605-25 to determine whether they represent separate units of accounting. We perform this evaluation at the inception of an arrangement and as of the delivery of the items. We account for a deliverable separately if: (i) the delivered item has standalone value to the customer; (ii) there is objective evidence and reliable evidence of the fair value of the undelivered item; and (iii) if we have given the customer a general right of return relative to the delivered item, delivery of performance of the undelivered item is probable and substantially within our control. We are establishing fair value of the undelivered item mostly based on the price charged by third parties.
  In evaluating whether collection is reasonably assured, we review credit and operation histories and customers’ facilities and in the case of independent distributors, we will evaluate creditworthiness and other relevant factors.
  If changes in conditions cause management to determine that these criteria are not met for future transactions, revenue recognized for any reporting period could be adversely affected. Although we meet the requirements of SAB 104 upon shipment of product, and the recording of revenue, we continually evaluate our accounts receivable for any bad debts and make estimates for any bad debt allowances.
  We compute an allowance based upon a specific customer account review of our customers. Our assessment of the ability of our customers to pay generally includes direct contact with the customer, investigation into their financial status, as well as consideration of their payment history with us. If the financial condition of a customer were to deteriorate, resulting in an impairment of its ability to make payments, additional allowance may be required. If we determine, based on our assessment, that it is probable that a customer will be unable to pay, we will write off the account receivable.
  Inventory write-down. As a designer and manufacturer of high technology equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements and competitive pressures in products and prices. Our policy is to establish inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsolete based upon our assumptions about future demand for our products and market conditions. We regularly evaluate our ability to realize the value of our inventory based on combination of factors including the following: historical usage rates, forecasted sales or usage, estimated current and future values and new product instructions. Assumptions used in determining our estimates of future product demand may proved to be incorrect, in which case the provision required for excess and absolute inventory would have to be adjusted in the future. If inventory is determined to be overvalued, we would be required to recognize such as cost of goods sold at the time of such determination. When recorded, our reserves are intended to reduce the carting value of our inventory to its net realizable.
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  Taxes on Income. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.
 
 Accounting for uncertainty in income taxes requires that tax benefits recognized in the financial statements must be at least more likely than not of being sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.
 
 Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. We provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Our valuation allowance is based on our judgment on future taxable income that would allow or prevent us from benefiting from our loss carry forwards. Currently, our relatively short history of loss operations does not allow us to record any tax benefit resulting from our subsidiaries’ losses.
  Deferred taxes are determined utilizing the asset and liability method. Tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
  Stock-Based Compensation. ASC 718 requires stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant.
  We used the Binominal model to estimate the fair value of stock option grants. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, the post-vesting forfeiture rate, the suboptimal exercise factor and our expected annual dividend yield. Expected volatilities are based on historical volatilities of similar companies. As equity-based compensation expense recognized in the consolidated statement of income is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The post-vesting forfeiture rate and estimated forfeitures are based on our historical experience and the suboptimal exercise factor is based on our historical experience as well as on academic papers and the common practice which support our assumptions. Assumed dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends.
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  If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods the stock-based compensation expense we recognize in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and earnings per share. It may also result in a lack of comparability with other companies that use different models, methods and assumptions. Existing valuation models, including the Binominal model, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire with little or no intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, the value realized from these instruments may be significantly higher than the fair values originally estimated on the grant date and reported in our financial statements.
  Litigation.Management sets aside liabilities related to litigation brought against us when the amount of the potential loss is probable and can be estimated. Because of the uncertainties related to an unfavorable outcome of litigation, and the amount and range of loss on pending litigation, management is often unable to make an accurate estimate of the liability that could result from an unfavorable outcome. As litigation progresses, we continue to assess our potential liability and revise our estimates accordingly. Such revisions in our estimates could materially impact our results of operations and financial position. Estimates of litigation liability affect our accrued liability line item in our consolidated balance sheet and our general and administrative expense line item in our statement of income.
  Warranty Reserve. We generally provide a one to three years standard warranty with our products, depending on the type of product and the country in which we do business. After the warranty period, maintenance and support is provided on a service contract basis or on an individual call basis. We provide for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect our warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our estimated warranty obligation is affected by ongoing product failure rates, specific product class failures outside of our baseline experience, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. Assumptions and historical warranty experience are evaluated to determine the appropriateness of such assumptions. We assess the adequacy of the warranty provision once a year and we may adjust this provision if necessary.
  Fair Value Measurements. The performance of fair value measurements is an integral part of the preparation of financial statements in accordance with generally accepted accounting principles. Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants to sell or transfer such an asset or liability. Selection of the appropriate valuation techniques, as well as determination of assumptions, risks and estimates used by market participants in pricing the asset or liability requires significant judgment. Although we believe that the inputs used in our evaluations techniques are reasonable, a change in one or more of the inputs could result in an increase or decrease in the fair value of certain assets and certain liabilities and could have an impact on both our consolidated balance sheets and consolidated statements of operations.
  Business Combination. In accordance with ASC 805 "Business Combination", we are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as in-process research and development based on their estimated fair values. In allocating the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, we developed the required assumptions underlying the valuation work. Critical estimates in valuing certain of the intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. We were assisted by a third party appraiser in applying the required economic models (such as income approach and cost approach), in order to estimate the fair value of assets acquired and liabilities assumed in the business combination.
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  Principles of Accounting for Holdings in Group Companies
  The various holdings that we have in our group companies are accounted for under several methods, based among others, on our level of ownership and the type and form of our holdings in our group companies, as described below.
 
 The consolidated financial statements include our accounts and the accounts of our subsidiaries, in which we have a controlling voting interest and entities which are considered variable interest entities for which we are considered the primary beneficiary of their operations as such terms are determined in ASC 810. Inter-company balances and transactions have been eliminated upon consolidation. The noncontrolling interest amount adjusts the consolidated net loss to reflect only our share in the earnings or losses of any consolidated company.
 
 We apply the provisions of ASC 810 which provides a framework for identifying variable interest entities (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements.
  Upon consolidation, the primary beneficiary initially records all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on a majority voting interest.
  Recently Issued Accounting Pronouncements
  ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. The Company is currently evaluating the possible impact of the standard on its consolidated financial statements.
  ASU 2010-28 - In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts codified in ASC 350, "Intangibles - Goodwill and Other". Under ASC 350, testing for goodwill impairment is a two-step test, in which Step 1 compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, Step 2 is completed to measure the amount of impairment, if any. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 if it appears more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity would consider whether there are any adverse qualitative factors indicating that an impairment may exist (e.g., a significant adverse change in the business climate). The Company does not expect the adoption will have a material impact on its consolidated financial statements.
 
 52
  ASU 2010-29 - In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations codified in ASC 805, "Business Combinations". This ASU responds to diversity in practice about the interpretation of the pro forma disclosure requirements for business combinations. When a public entity's business combinations are material on an individual or aggregate basis, the notes to its financial statements must provide pro forma revenue and earnings of the combined entity as if the acquisition date(s) had occurred as of the beginning of the annual reporting period. The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for both periods presented (the year in which the acquisition occurred and the prior year) should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only and not as if it had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the business combination. The Company does not expect the adoption will have a material impact on its consolidated financial statements.
  Results of Operations
  Years Ended December 31, 2009 and December 31, 2010
  Revenues.Revenues in 2010 increased by $134.8 million, or 246%, from $54.7 million in 2009 to $189.5 million. This increase is primarily due to Candela’s revenues which were consolidated effective January 2010. Please see Note 1(i) to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
 Cost of Revenues.The cost of revenues increased by $82.2 million in 2010, or 435%, from $18.9 million (35% of revenues) in 2009 to $101.1 million (53% of revenues) in 2010. The increase was primarily due to Candela’s cost of revenues which was consolidated effective January 2010. Candela's different technology and manufacturing process of its product line carry lower gross margin compared to the Syneron’s product line. Additionally, Candela contributed to the increase in our service revenues, which carry a lower gross margin compared to our systems revenues.
  Research and development. Research and development expenses increased by $13.6 million, from $13.2 million in 2009 to $26.8 million in 2010. As a percentage of revenues, research and development expenses decreased from 24% in 2009 to 14% in 2010, primarily due to the increase in revenues driven by the acquisition of Candela and the lower percentage of Candela’s research and development expenses of its revenues. The increase in expenses was primarily attributable to the acquisition of Candela and Primaeva. Research and development expenses for the year ended December 31, 2010, included $0.8 million of stock-based compensation expenses, in comparison to $0.5 million of stock-based compensation expenses for the year ended December 31, 2009.
  Selling and Marketing Expenses.Selling and marketing expenses increased by $29.3 million, from $34.1 million in 2009 to $63.4 million in 2010. As a percentage of revenues, selling and marketing expenses decreased from 62% in 2009 to 33% in 2010, primarily due to the increase in revenues driven by the acquisition of Candela and the lower percentage of Candela’s selling and marketing expenses of its revenues. The increase in expenses was primarily attributable to the acquisition of Candela. Selling and marketing expenses, for the year ended December 31, 2010, included $0.8 million of stock-based compensation expenses in comparison to $1.4 million of stock-based compensation expenses for the year ended December 31, 2009.
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  General and Administrative Expenses.General and administrative expenses increased by $19.6 million, from $16.5 million in 2009 to $36.1 million in 2010. As a percentage of revenues, general and administrative expenses decreased from 30% in 2009 to 19% in 2010, primarily due to the increase in revenues driven by the acquisition of Candela and the lower percentage of Candela’s research and development expenses of its revenues. The increase in expenses was primarily attributable to the acquisition of Candela and the Company's patent litigation with Palomar Medical Technologies, Inc. General and administrative expenses for the year ended December 31, 2010, included $1.5 million of stock-based compensation expenses in comparison to $2.3 of stock-based compensation expenses for the year ended December 31, 2009.
 
 Other Income, net.Other Income, net increased by $0.5 million, from $4.0 million in 2009 to $4.5 million in 2010. As a percentage of revenues, Other Income, net decreased from 7.3% in 2009 to 2.4% in 2010. Other Income, net in 2010 was comprised mainly of bargain purchase price related to the acquisition of Candela in the amount of $8.5 million, which was partly offset by an impairment of Intangibles assets in the amount of $1.3 million, reevaluation of contingent consideration in the amount of $1.6 million and impairment of investment in an affiliated company in the amount of $0.9 million. Other Income, net in 2009 reflects a settlement agreement in the amount of $4.0 million, we reached with a financial institution resolving a dispute filed with FINRA in 2008 with regard to certain ARS securities managed by this institution.
  Financial Income.Financial income decreased by $1.4 million, from $2.1million in 2009 to $0.7 million in 2010. The decrease in financial income was primarily attributable to a lower yield earned on our cash balance. As a percentage of revenues, financial income decreased from 4% in 2009 to 0.4% in 2010.
  Taxes on Income.Income taxes decreased by $8.3 million, from an income tax expense in the amount of $3.2 million in 2009 to an income tax benefit in the amount of $5.1 million in 2010. The income tax benefit in 2010 was primarily attributable to the increase in Candela's deferred tax assets.
  As an “Approved Enterprise” and a “Benefited Enterprise” in Israel, we are exempt from tax on any income derived from our “Approved Enterprise” and “Benefited Enterprise,” and we pay taxes only on income from other sources, which are not integral to our “Approved Enterprise” and “Benefited Enterprise,” such as interest on marketable securities. Taxes on income in 2009 and 2010 reflect the taxes on our subsidiaries’ net income and the accrual recorded from our continuing exposures in according with ASC 740. ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company evaluated the net deferred tax assets for each separate tax entity. For certain entities, the Company concluded that it is not more likely than not that the net deferred tax assets will be realized and a valuation allowance has been recorded against these assets.
  Net loss attributable to Syneron’s shareholders.The Net loss attributable to our shareholders increased by $1.9 million in 2010, or 8.3%, from $23.6 million (43.1% of revenues) in 2009 to $25.5 million (13.5% of revenues) in 2010.
  See also Note 19 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
 
 Years Ended December 31, 2008 and December 31, 2009
  Revenues.Revenues in 2009 decreased by $60.3 million, or 52.4%, from $115 million in 2008 to $54.7 million. The decrease was primarily attributable to the global financial crisis, a weakness in the U.S. economy as well as in the rest of the world, combined with a tightening of credit terms available to our customers.
  Cost of Revenues.The cost of revenues decreased by $10.8 million in 2009, or 36.3%, from $29.7 million (25.8% of revenues) in 2008 to $18.9 million (35.5% of revenues). The decrease in cost of revenues was primarily attributable to the reduction in our revenues.
  Research and development. Research and development expenses decreased by $0.6 million, from $13.8 million in 2008 to $13.2 million in 2009. As a percentage of revenues, research and development expenses increased from 12% in 2008 to 24.2% in 2009. The decrease was primarily attributable to the strengthening of the U.S. dollar against the NIS. Research and development expenses for the year ended December 31, 2009, included $0.5 million of stock-based compensation expenses, in comparison to $0.3 million of stock-based compensation expenses for the year ended December 31, 2008.
  54
  Selling and Marketing Expenses.Selling and marketing expenses decreased by $19.9 million, from $54.1 million in 2008 to $34.2 million in 2009. As a percentage of revenues, selling and marketing expenses increased from 47% in 2008 to 62.4% in 2009. The decrease in selling and marketing expenses was primarily attributable to our corporate restructuring program implemented in 2009 and to the reduction in our revenues in 2009 resulting in lower commission to employees. Selling and marketing expenses for the year ended December 31, 2009, included $1.4 million of stock-based compensation expenses, in comparison to $3.9 million of stock-based compensation expenses for the year ended December 31, 2008.
  General and Administrative Expenses.General and administrative expenses decreased by $1.2 million, from $17.7 million in 2008 to $16.5 million in 2009. As a percentage of revenues, general and administrative expenses increased from 15.4% in 2008 to 30.1% in 2009. The decrease in general and administrative expenses was primarily attributable to the results of our corporate restructuring program. General and administrative expenses for the year ended December 31, 2009, included $2.3 million of stock-based compensation expenses, in comparison to $3.4 of stock-based compensation expenses for the year ended December 31, 2008, and a $2.0 million expense related to the merger with Candela Corporation.
  Financial Income.Financial income decreased by $1.8 million, from $3.9 million in 2008 to $2.1 million in 2009. The decrease in financial income was primarily attributable to interest earned on our increasing cash balance, offset partially by a low interest rate and by an impairment charge of $1.6 million and $0.2 million on our investment portfolio due to uncertainties in the capital markets regarding auction-rate securities in the year ended December 31, 2008, and 2009, respectively. As a percentage of revenues, financial income increased from 3.4% in 2008 to 3.8% in 2009.
  Taxes on Income.Income taxes increased by $5.2 million, from an income tax benefit in the amount of $2.0 million in 2008 to an income tax expense in the amount of $3.2 million in 2009. As a percentage of revenue, taxes on income changed from 1.7% in 2008 to 5.6% in 2009. In 2008, we recorded an income tax benefit resulting from the final tax assessment reached with the Israeli tax authorities. As an “Approved Enterprise” and a “Privileged Enterprise” in Israel, we are exempt from tax on any income derived from our “Approved Enterprise” and “Privileged Enterprise,” and we pay taxes only on income from other sources which are not integral to our “Approved Enterprise” and “Privileged Enterprise,” such as interest on marketable securities. Taxes on income in 2009 reflect the taxes resulting from our subsidiaries’ net income and the accrual recorded from our continuing exposures in accordance with ASC 740. We provided a valuation allowance with respect to our U.S. subsidiaries operating loss carry forward and our capital loss to reduce deferred tax assets to amounts which are more likely than not to be realized during 2010 (see also Note 14d to the consolidated financial statements).
  See also Note 19 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
  B.
LIQUIDITY AND CAPITAL RESOURCES
  From December 31, 2002, through August 10, 2004, we funded our operations principally from private placements of our preferred shares that resulted in aggregate net proceeds of approximately $3.3 million. On August 11, 2004, we completed our initial public offering, which resulted in net proceeds of approximately $54.0 million. Since August 10, 2004, we have been using the proceeds from our initial public offering and our working capital to fund our operations. On March 8, 2005, certain selling shareholders completed a secondary offering, in connection with which we received net proceeds of approximately $1.6 million from the exercise of options. On August 11, 2005, the one-year lock-up period for certain of our shareholders ended, and following that period, we raised $11.7 million from the exercise of options. As of March 1, 2011, we did not have any outstanding or available debt financing arrangements.
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  As of December 31, 2010, we had working capital of $186.3 million, and our primary source of liquidity was $217.5 million in cash, cash equivalents and marketable securities and cash flow from operations. Approximately $6.4 million of the marketable securities that we held as of December 31, 2010, were auction-rate securities consisting of interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds. While the auction-rate securities held by us had AAA/Aaa credit ratings at the time of our purchase of these securities, as part of the recent ongoing credit market crisis, the auction-rate securities held by us have experienced multiple failed auctions. As a result, we recorded a pre-tax impairment charge of $0.2 million during 2009 and an additional charge of approximately $0.1 million during 2010. We cannot predict when the liquidity of these auction-rate securities will improve.
  We believe that our cash balances and cash generated from operations will be sufficient to meet our anticipated cash requirements for the next twelve months. If existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. If we raise additional funds through the issuance of debt securities, these securities could have rights senior to those associated with our ordinary shares and could contain covenants that would restrict our operations. We cannot be sure that we will not require additional capital, nor that any such required additional capital will be available on reasonable terms, if at all.
  Net Cash Provided By (Used In) Operating Activities.Net cash provided by (used in) operating activities was $20.4 million in 2008, $(0.9) million in 2009, and $(2.1) million in 2010. The change in net cash provided by operating activities reflects an increase in net loss before non-controlling interest.
  Net Cash (Used In) Investing Activities.Net cash provided by (used in) investing activities was $10.7 million in 2008, $(47.6) million in 2009 and $38.8 million in 2010. Cash provided by investing activities in 2010 is primarily attributable to proceeds from sale and redemption of available-for-sale marketable securities and net cash received in the acquisition of subsidiaries. Cash used in 2009 in investing activities was primarily attributable to acquisition of marketable securities and net cash paid in connection with the acquisition of subsidiaries. For the year ended December 31, 2008, we invested $4.1 million in capital expenditures, which consisted primarily of a purchase of minority shares in our subsidiaries of $(1.3) million, investment in affiliated companies of $(1.6) million and a purchase of computers and general equipment of $(1.2) million. For the year ended December 31, 2009, we invested $9.0 million in capital expenditures, which consisted primarily of a purchase of shares in our subsidiaries of $(7.7) million, investment in affiliated companies of $(0.8) million and a purchase of computers and general equipment of $(0.5) million. For the year ended December 31, 2010, we have received $(11.3) million from capital expenditures, which consisted primarily of net cash received in acquisition of subsidiaries of $21.4 million, investment in affiliated company of $(9.2) million and a purchase of computers and general equipment of $(0.9) million. We expect our capital expenditures in 2011 will be approximately $2.2 million and will consist of computers and general equipment.
  Net Cash Provided By (Used In) Financing Activities.Net cash provided by (used in) financing activities was $(1.3) million in 2008, $0.5 million in 2009 and $1.9 million in 2010. Net cash provided by financing activities in 2008 was primarily attributable to our repurchase program under which we have repurchased our outstanding ordinary shares in the aggregate amount of $1.9 million, offset by reimbursement of share issuance expenses of $(0.6) million. Net cash provided by financing activities in 2009 and 2010 was attributable to net proceeds from exercise of options.
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  C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  Our research and development activities are conducted internally by a research and development staff consisting of approximately 89 employees (including Candela's employees). Our research and development efforts focus on the development of new products, as well as the extension of our existing products to new applications in the non-invasive aesthetic medical market. Our PAD segment has a number of new projects and products under development, mainly focusing on additional non-invasive aesthetic treatments. We expect to continue and develop several major product initiatives in 2011. We also expect to continue to develop products for the cosmetic market and products for home use using our proprietary ELOS technology under our Emerging Business Units segment.
  Prior to 2007, our research and development effort have been focused on the development of products that leverage our ELOS technology. Since 2007, our research and development efforts also have focused on the development of technologies that are not only based on our ELOS technology. Our research and development expenditures were $13.8 million in 2008, $13.2 million in 2009 and $26.8 million in 2010. We expect to continue to increase our expenditures on research and development.
  D.
TREND INFORMATION
 
 In October 2009 we purchased Primaeva, which developed the ePrime, a product that has already received 510(k) clearance for wrinkle treatment. We intend to launch this product in the first half of 2011. In November 2010, the FDA granted 510(k) clearance to our CO2RE product for dermatological procedures requiring ablation, coagulation and resurfacing of soft tissue including skin. We launched the CO2RE product in the fourth quarter of 2010. In January, 2011 the FDA granted 510(k) clearance to our tändaTM Light Emitting Diode (LED) system for skin rejuvenation with prescription.  We intend to launch this product in the second half of 2011.
 
 On January 5, 2010, we completed the merger with Candela Corporation (Candela). Pursuant to that certain agreement and plan of merger dated September 8, 2009, by and among us, Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela, we acquired Candela through Acquisition Sub which merged with and into Candela. Candela survived the merger as our indirect wholly-owned subsidiary. The merger with Candela involved the coordination and the establishment of contractual arrangements and agreements between us and Candela that have previously operated independently with principal offices in several distinct locations. Following the merger with Candela Corporation, we and our subsidiaries, including Candela, collectively, have approximately 580 employees in a total of 22 facilities around the world. As a result, our management teams are facing challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs. In addition, we incurred and we expect to continue to incur significant costs and commit significant management time in coordinating Candela’s business operations, technology, development programs, products and personnel with our business.
  Our subsidiaries, Syneron Inc. and Candela, are each currently defending separate patent infringement lawsuits brought by Palomar Medical Technologies, Inc. (Palomar) alleging infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s and Candela’s hair removal products, respectively. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and both the Candela action and the Syneron Inc. action were stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, and the stay was lifted in the Syneron Inc. case on November 13, 2009, and in the Candela case on January 5, 2010. Palomar has dropped the ’568 Patent from the Candela lawsuit, and has elected to proceed solely on the ’844 Patent. In the Candela case, on August 12, 2010, Candela filed a motion for summary judgment of non-infringement with respect to all of the asserted claims and of invalidity with respect to two of the asserted claims. A hearing on the motion was held on September 14, 2010. The court has not yet ruled on the motion, and no trial date has been set. In the Syneron Inc. case, claim construction briefing occurred in September and October 2010, and a claim construction hearing was held on November 17, 2010. The court has not yet issued its claim construction decision. No trial date has been set.
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  While Syneron Inc. and Candela each intend to vigorously contest Palomar’s allegations, each lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. and/or Candela would materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc. and/or Candela, as applicable.
 
 In November 2010, we formed a new wholly owned subsidiary, Syneron Beauty Ltd., to which we transferred some of our Emerging Business Units activities related to our consumer market initiatives, including our joint Procter & Gamble initiative, our mē product and our holdings in Fluorinex Active Ltd. In addition, following the acquisition of Pharos Life Corporation, Pharos became a wholly owned subsidiary of Syneron Beauty. Syneron Beauty holds the intellectual property dedicated to our home-use initiative, and it received a license to some of our other technologies, which are used in our consumer market initiatives.
  We intend to continue the development of new products and procedures in the medical aesthetic market in order to maintain the growth in revenue and net income.
  E.
OFF-BALANCE SHEET ARRANGEMENTS
  We do not have any material off-balance sheet arrangements (as such term is defined in Item E(2) of Form 20-F) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
  F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
  The following table summarizes our contractual commitments as of December 31, 2010, excluding royalty payments commitments, and the effect those commitments are expected to have on our liquidity and cash flow in future periods:
  Payments Due by PeriodContractual Commitments

Total

Less than 1

year

1-2 years

2-3 years


Thereafter(in thousands)Uncertain tax positions (1)

$
7,213Operating leases (2)

$
5,358


$
3,267


$
1,374


$
555


$
162Contingent consideration payments related to Primaeva and Pharos acquisitions

$
11,365










$
11,365Severance Pay

$
554Total

$
24,490


$
3,267


$
1,374


$
11,920


$
162
  (1)
Uncertain income tax position under ASC 740 guidelines for accounting for uncertain tax positions are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 14 in our Consolidated Financial Statements for further information regarding the Company’s liability under FIN 48.
  (2)
Consists of operating leases for our facilities and motor vehicles.
  (3)
Severance pay relates to accrued severance obligations to part of our Israeli employees as required under Israeli labor law. These obligations are payable only upon termination, retirement or death of the respective employee and there is no obligation if the employee voluntarily resigns. Of this amount, $0.2 million is unfunded.
  58
  ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
  A.
DIRECTORS AND SENIOR MANAGEMENT
  The following table sets forth information regarding our executive officers and directors as of March 6, 2011:
  Name

Age

Position(s)Dr. Shimon Eckhouse

66

Chairman of the Board of DirectorsLouis Scafuri

59

Chief Executive OfficerAsaf Alperovitz1

41

Chief Financial OfficerFabian Tenenbaum2

37

Former Chief Financial OfficerDr. Michael Anghel

72

External Director3Marshall Butler

84

DirectorYaffa Krindel

56

DirectorDavid Schlachet

66

DirectorDan Suesskind

67

External Director3Gerard E. Puorro

63

Director
 
 (1)Was appointed on September 1, 2010.
 (2) Served as our Chief Financial Officer until August 31, 2010.
 (3)The director is nominated for re-election for a three-year term, effective as of November 7, 2010, at our annual general meeting to be held on March 29, 2011.
 
 Dr. Shimon Eckhousehas served as the Chairman of our board of directors since May 2004. Dr. Eckhouse is the chairman of OrSense Ltd., CardioDex Ltd., NanoCyte Ltd., Tulip Ltd., and Navotek Ltd., Rapid Medical Ltd.,Opticul Ltd,and RealView Ltd. Dr.Eckhouse was a co-founder of ColorChip Inc. and served as its chairman from 2003 to January 2004 and again since 2007, and as its chief executive officer from 2001 to 2003. Dr. Eckhouse was the chairman and chief executive officer of ESC Medical Systems from its inception in 1992 until 1999. Prior to founding ESC Medical Systems, Dr. Eckhouse was head of product development and technical director at Maxwell Technologies in San Diego, California. Before that, Dr. Eckhouse was a scientist, team leader and head of a department in Rafael, Armament Development Authority of Israel and was active in various areas of research and development, including lasers and electro-optics. Dr. Eckhouse holds a B.Sc. in physics from the Technion Israeli Institute of Technology and a Ph.D. in physics from the University of California at Irvine. He has more than 20 registered patents and published more than 50 papers in leading reference journals and conferences. He is also a member of the board of directors of the Technion Israeli Institute of Technology.
  Louis Scafuriwas appointed as our Chief Executive Officer on February 2, 2009. From 1983 until 1999, Mr. Scafuri held various executive and management positions with Marquette Electronics, which was acquired by General Electric Medical Systems to become GE Marquette Medical Systems. In his last position with GE Marquette Medical Systems, Mr. Scafuri served as its COO and President. From 1999 to 2001, Mr. Scafuri served as the COO of ESC Medical Systems, where he was responsible for Commercial Activities, R&D and the Global Operations of the company. From 2002, Mr. Scafuri served in various consulting, advisory and investor roles in medical device and medical aesthetic companies. Mr. Scafuri holds a B.Sc. degree in biology from Cornell University in Ithaca, NY and is a graduate of the Tuck Executive Program at Dartmouth College School of Business.
  59
  Asaf Alperovitz was appointed as our CFO on September 1, 2010. Prior to joining Syneron, Mr. Alperovitz was Chief Financial Officer of OMRIX Biopharmaceuticals, a formerly listed NASDAQ company until it was acquired by Johnson & Johnson in December 2008. The last position Mr. Alperovitz held at OMRIX, which currently operates as a stand-alone entity reporting through Johnson & Johnson’s ETHICON, Inc. division, was the position of the Israeli Site Manager. From 2005 until 2008, Mr. Alperovitz served as the CFO of Tefron Ltd. which was listed on the New York and Tel-Aviv Stock Exchanges. From 2003 to 2005, Mr. Alperovitz was Chief Financial Officer of Corigin Ltd. Prior to that, Mr. Alperovitz worked as the Head of Israeli Desk and as High-Technology Senior Manager for Ernst & Young in both Israel and California. Mr. Alperovitz currently serves as a director in Syneron China. Mr. Alperovitz holds a Bachelor's degree in Accounting and Economics and a Master in Business Administration from Tel-Aviv University and is a Certified Public Accountant.
  Dr. Michael Anghel has served as a director since November 2004. Until 2005, Dr. Anghel served as the President and CEO of Israel Discount Capital Markets & Investments Corp., a subsidiary of the Israel Discount Bank. From 2000 to 2004, Dr. Anghel served as the Chief Executive Officer of CAP Ventures, an operating venture capital company he founded that has invested and established a number of information technology and communications enterprises. Since 1977, Dr. Anghel has been directly involved as a senior executive of a major Israeli holding company, in the founding, managing and directing a variety of industrial, technology and financial enterprises. Dr. Anghel served as a director of major publicly listed corporations and a number of financial institutions. Dr. Anghel is currently a director of Bioline Rx Ltd. (TASE: BLRX), Evogene Ltd. (TASE/Nasdaq: EVGN), Dan Hotels Ltd. (TASE: DANH), Partner Communications Company Ltd. (TASE/Nasdaq: PTNR), Strauss Group Ltd. (TASE: STRS), Orbotech Ltd. (Nasdaq: ORBK), and Chairman of the Board of Gravity Ltd. and several other private companies. Dr. Anghel is the Chairman of the Board of CET – the Israeli Center for Education Technology. From 1969 to 1977, Dr. Anghel was a full-time member of the faculty of the Graduate School of Business at the Tel-Aviv University. Dr. Anghel is currently the Chairman of the university’s executive program. Dr. Anghel served on various Israeli governmental policy committees in the areas of communications and public finance. Dr. Anghel received his B.A. in Economics from the Hebrew University in 1960, an M.B.A. in Economics and Finance from Columbia University in 1964, and a Ph.D. in International Finance from Columbia University in 1969.
  Marshall Butler Marshall Butler has served as a director since October 2003. He is a co-founder and has served as chairman of both First Israel Mezzanine Investors Fund and Israeli Infinity Venture Capital Fund from 1996 to 2006. Mr. Butler is a director of the Anti Defamation League and A.R.T. New York. Mr. Butler served as chairman of Nitzanim, AVX/Kyocera Corporation from 1994 to 2001. Mr. Butler served as Chief Executive Officer and chairman of AVX Corporation from 1974 to 1993 and as director of Kyocera Corporation from 1990 to 1994. He is on the board of governors of the Technion Institute in Haifa, Israel. In 1998, he received the Israeli Prime Minister's award for his contribution to Israeli industry. In 2001, he received an Honorary Doctorate from the Technion Institute.
  Yaffa Krindel has served as a director since November 2005. From 1997 until 2007, Ms. Krindel served as Partner and Managing Partner of Star Ventures, a private venture capital fund headquartered in Munich, Germany. Before joining Star Ventures, between 1992 and 1996, Ms. Krindel served as CFO and VP Finance of Lannet Data Communications Ltd., then a publicly traded company in Nasdaq (now part of Avaya Inc.), a LAN switching company. From 1993 to 1997, she served as a director and CFO of BreezeCOM Ltd. (now part of Alvarion Ltd. (TASE/Nasdaq: ALVR)), a leader in WiMax technology headquartered in Tel Aviv. Ms. Krindel currently serves on the boards of : Fundtech Ltd. (Nasdaq: FNDT) and OrSense Ltd. Throughout her career Ms. Krindel served on the boards of more than 30 companies. Ms. Krindel has earned M.B.A. from Tel Aviv University and a B.A. in Economics and Japanese Studies from the Hebrew University in Jerusalem.
  60
  David Schlachet served as our Chief Executive Officer from November 2005 until May 14, 2007, when he resigned as our Chief Executive Officer and was appointed to our board of directors. From July 2004 to November 2005, Mr. Schlachet served as our Chief Financial Officer. From 2000 to June 2004, Mr. Schlachet served as Managing Partner of Biocom, a venture capital fund specializing in the life sciences area. From 1995 to 2000, Mr. Schlachet served as a senior Vice President and Chief Financial Officer of Strauss Elite Holdings, a packaged food group. From June 1997 to June 2000 David Schlachet also served as an active chairman of Elite Industries, a coffee confectionary and salty snacks company which is a subsidiary of Strauss Group Ltd., in addition to his position in Straus Group Ltd. (TASE: STRS). From 1990 to 1995, Mr. Schlachet served as Vice President of Finance and Administration of the Weizmann Institute of Science. Mr. Schlachet serves as a director for Nasdaq listed Ezchip (formerly LanOptics Ltd.) (Nasdaq: EZCH). In addition, Mr. Schlachet serves as a director of Tel-Aviv Stock Exchange listed companies Taya Investments Ltd., Mazor Surgical Technologies Ltd and BioCancell Therapeutics Inc. As of November 2008, Mr. Schlachet was nominated to serve as a director in the Tel Aviv Stock Exchange (TASE) and as Chairman of TASE audit committee and also as a director and audit committee member of the TASE Clearing House. Mr. Schlachet also serves as a director of CellCure Therapeutics a privately owned Israeli company. Mr. Schlachet holds a B.Sc. degree in chemical engineering and an M.B.A. from Tel-Aviv University (Specialized in finance).
  Dan Suesskind has served as a director since November 2004. Until 2008, Mr. Suesskind has held numerous positions with Teva Pharmaceutical Industries Ltd. (TASE/Nasdaq: TEVA) since 1976. Mr. Suesskind served as Teva’s Chief Financial Officer from 1977 until 2008, as a director from 1981 until 2001 and as of January 2010. From 1970 until 1976, Mr. Suesskind was a consultant and securities analyst with I.C. International Consultants Ltd. Mr. Suesskind currently serves as a director of the Jerusalem Foundation, Board of Trustees of Hebrew University, Ness Technologies Inc., RedHill Biopharma Ltd. and Migdal Insurance Company Ltd. Mr. Suesskind received his B.A. in Economics and Political Science from the Hebrew University in 1965, a certificate in Business Administration from the Hebrew University in 1967, and an M.B.A. from the University of Massachusetts in 1969.
  Gerard E. Puorro was appointed to our board of directors in January 2010. Mr. Puorro served as the President and Chief Executive Officer of Candela Corporation from April 1993 to 2010. From 1991 to 1993, Mr. Puorro served as Candela’s Chief Operating Officer and from 1989 to 1991, he was Candela’s Chief Financial Officer. From 2004 to 2007Mr. Puorro also served as a director and audit committee member of Echo Therapeutics, a public transdermal drug delivery company. Mr. Puorro is a visiting lecturer at the University of Pennsylvania, Wharton School of Business in the “Business and Biotechnology” lecture series. He is also a visiting lecturer at the Massachusetts Institute of Technology, Sloan School of Management in the “Managing in Adversity” lecture series. Mr. Puorro has been an active member in his community. He has served as a Special Olympics Coach, as President of the Board of Trustees for the Deaf Community Center in his hometown of Framingham, Massachusetts, as a member of the President’s Commission on Americans with Disabilities, and the Massachusetts Governor’s Commission for Employment of Individuals with Disabilities. Mr. Puorro is a Member Emeritus and consultant to the board of directors of the Sturge-Weber Foundation, a non-profit organization whose mission is to improve the quality of life for individuals with Sturge-Weber Syndrome. Mr. Puorro is a graduate of Bentley University with dual majors in Accounting and Taxation.
  Our Chief Executive Officer serves at the discretion of our board of directors and hold office until his or her successor is elected or his or her earlier resignation or removal. Each other executive officer, in his or her capacity as such, serves at the discretion of our Chief Executive Officer and holds office until his or her successor is elected or his or her earlier resignation or removal.
  Termination of Office
  Fabian Tenenbaum served as our Chief Financial Officer until August 31, 2010. Mr. Tenenbaum currently serves as the CEO of our subsidiary, Syneron Beauty Ltd.
  61
  B.
COMPENSATION
  The aggregate direct compensation we paid to our directors who are not executive officers for their services as directors as a group for the year ended December 31, 2010, was approximately $0.45 million. This amount includes payment to our Chairman of the Board. Directors are reimbursed for expenses incurred in order to attend board or committee meetings.
  The aggregate direct compensation we and our subsidiaries paid to the executive officers as a group for the year ended December 31, 2010, was approximately $1.5 million (including our former CFO). This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separate compensation for their directorship during 2010, other than reimbursements for travel expenses.
  As of March 10, 2011, our directors and officers (10 persons, including Fabian Tenenbaum, the former chief financial officer of the Company) had outstanding options to purchase 1,447,270 ordinary shares with exercise prices ranging from $0.01 to $52.67. 13,375 of these options will expire in the year 2011, 4,000 of these options will expire in the year 2012, 252,000 of these options will expire in the year 2013, 37,840 of these options will expire in the year 2014, 226,242 of these options will expire in the year 2015, 506,621 of these options will expire will expire in 2016, 372,260 of these options will expire in the year 2017 and 34,932 of these options will expire in the year 2018.
  For a description of the plans pursuant to which such options were granted please see Item 6.E, “Share Ownership” below.
  C.
BOARD PRACTICES
  Board of Directors
  The Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Global Select Market, requires issuers to comply with various corporate governance practices. Our board of directors currently consists of seven directors, four of whom are independent, and our audit committee consists of four directors and until the upcoming annual general meeting of shareholders to be held on March 29, 2011 of five directors, all of whom are independent. In addition, Israeli law requires that we have at least two external directors, as described in greater detail below. Two of our audit committee members are nominated for re-election for a three-year term, effective as of November 7, 2010, at our annual general meeting to be held on March 29, 2011.
  In general, the number of members of our board of directors will be determined from time to time by a vote of at least 75% of the ordinary shares present and entitled to vote, provided that there shall be no more than seven and no fewer than three directors. Our board of directors consists of seven directors. Two of the directors, Dr. Anghel and Mr. Suesskind, are external directors under Israeli law and are independent for Nasdaq purposes. Other than external directors, who are subject to special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinary shares present, in person or by proxy, at a shareholders’ meeting. The directors of only one class are elected at each annual meeting, so that the regular term of only one class of directors expires annually. At our annual general meeting held in 2008, the term of the first class expired and Mr. Schlachet and Mr. Gerstel were elected for a three-year term. Mr. Gerstel has ceased to serve on our board in February 2009,andcreated a vacancy on our board of directors. Pursuant to our articles of association in such event, the remaining directors may appoint a director in place of the retiring director and such appointment shall be in effect until the end of the third annual general meeting of the shareholders following the meeting at which the retiring director was elected. Therefore, our board of directors has resolved to appoint Mr. Puorro as a Class I director, immediately upon the completion of the merger with Candela Corporation, to serve through the end of third annual general meeting of the shareholders following the meeting that was held in 2008, and until his successor is duly elected and qualified. At our annual general meeting held on March 2, 2010, the term of the second class, consisting of Mr. Butler and Ms. Krindel expired and Mr. Butler and Ms. Krindel were elected for a three-year term to serve through the end of the third annual general meeting of the shareholders following the meeting held in 2010. At our annual general meeting to be held on March 29, 2011, the term of the third class, consisting of Dr. Eckhouse, will expire and Dr. Eckhouse will be elected for a three-year term to serve through the end of the third annual general meeting of the shareholders following the meeting held in 2011. At our next annual general meeting, the term of the first class, consisting of Mr. Schlachet and Mr. Puorro, will expire and the directors elected at that meeting will be elected for a three-year term. After these initial terms, directors (other than the external directors) shall serve in office until the end of the third annual shareholders’ meeting following the one in which they were elected.
  62
  The external directors will not be assigned a class. At our annual general meeting to be held on March 29, 2011, our external directors, Dr. Michael Anghel and Mr. Dan Suesskind, will be nominated for re-election for a three-year term, effective as of November 7, 2010. The general meeting of our shareholders may dismiss a director during his or her term of office only by a vote of at least 75% of the ordinary shares present and entitled to vote (except for external directors, who may be dismissed only in the manner prescribed in the Israeli Companies Law, 5759-1999). We have employment and consultancy agreements with our principal executive officers. These agreements contain salary, benefit, non-competition and other provisions that we believe to be customary in our industry. In addition, these agreements provide for up to nine months of liquidation fees in certain events of termination of employment. Agreements with our directors (serving in that capacity) do not provide for benefits upon termination of service.
  Each of our executive officers serves at the discretion of our board of directors and holds office until his or her successor is elected or his or her resignation or removal.
  External Directors
  We are subject to the Israeli Companies Law, 5759-1999, or the Companies Law. Under the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a stock exchange in or outside of Israel, is required to appoint at least two external directors to serve on its board of directors. Our external directors are Dr. Anghel and Mr. Suesskind. At least one of the external directors is required to have “financial and accounting expertise,” unless another member of the audit committee, who is an independent director under the Nasdaq rules, has “financial and accounting expertise,” and the other external director or directors are required to have “professional expertise.” The above qualifications do not apply to external directors appointed prior to January 19, 2006. An external director may not be appointed to an additional term unless: (i) such director has “accounting and financial expertise;” or (ii) he or she has “professional expertise,” and on the date of appointment for another term there is another external director who has “accounting and financial expertise” and the number of “accounting and financial experts” on the board of directors is at least equal to the minimum number determined appropriate by the board of directors.
  A director has “professional expertise” if he or she satisfies one of the following:
  ·
the director holds an academic degree in one of these areas: economics, business administration, accounting, law or public administration;
  ·
the director holds an academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the board position; or
  ·
the director has at least five years’ experience in one or more of the following (or a combined five years’ experience in at least two or more of these: (a) senior management position in a corporation of significant business scope; (b) senior public office or senior position in the public sector; or (c) senior position in the main business sector of the company.
  63
  A director with “financial and accounting expertise” is a person that due to his or her education, experience and skills has high skills and understanding of business-accounting issues and financial reports which allow him to deeply understand the financial reports of the company and hold a discussion relating to the presentation of financial information. The company’s board of directors will take into consideration in determining whether a director has “accounting and financial expertise”, among other things, his or her education, experience and knowledge in any of the following:
  ·
accounting issues and accounting control issues characteristic to the segment in which the company operates and to companies of the size and complexity of the company;
  ·
the functions of the external auditor and the obligations imposed on such auditor;
  ·
preparation of financial reports and their approval in accordance with the Companies Law and the securities law.
  A person may not serve as an external director if at the date of the person’s appointment or within the prior two years the person, or his or her relatives, partners, employers or entities under the person’s control, have or had any affiliation with us or any entity controlling, controlled by or under common control with us. Under the Companies Law, “affiliation” includes:
  ·
an employment relationship;
  ·
a business or professional relationship maintained on a regular basis;
  ·
control; and
  ·
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering.
  An “office holder” is defined as any director, managing director, general manager, chief executive officer, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table under “Item 6A. – Directors and Senior Management” is an office holder.
  A person may not serve as an external director if that person’s position or other business activities create, or may create, a conflict of interest with the person’s service as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time any external director is appointed, all members of the board are the same gender, then the external director to be appointed must be of the other gender. A director of a company shall not be appointed as an external director of another company if at such time, a director of the other company is acting as an external director of the first company. Until the lapse of two years from the termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either director or indirectly, including through a corporation controlled by that person.
  External directors are elected by a majority vote at a shareholders’ meeting, as long as either:
  ·
the shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting (shares held by abstaining shareholders shall not be considered); or
  ·
the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights of our company.
  64
  An amendment to the Companies Law, enacted by the Israeli Knesset on March 7, 2011, will change the requirements for the election of external directors, effective as of May 14, 2011. Please see Item 10.B "Memorandum and Articles Association – Election of Directors."
  The Companies Law provides for an initial three-year term for an external director, which may be extended for one additional three-year term and thereafter for additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director’s term would be in the interest of our company. External directors may be removed only by the same special majority required for their election or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to our company. In the event of a vacancy created by an external director, our board of directors is required under the Companies Law to call a shareholders meeting to appoint a new external director. Dr. Michael Anghel and Dan Suesskind serve as our external directors.
  External directors may be compensated only in accordance with regulations adopted under the Companies Law. The regulations provide three alternatives for cash compensation to external directors: a fixed amount determined by the regulations, an amount within a range set in the regulations, or an amount that is equal to the average compensation to other directors who are not controlling shareholders of the company or employees or service providers of the company or its affiliates. A company also may issue shares or options to an external director at the average amount granted to directors who are not controlling shareholders of the company or employees or service providers of the company or its affiliates. Cash compensation at the fixed amount determined by the regulations does not require shareholder approval. Compensation determined in any other manner requires the approval of the company’s audit committee, board of directors and shareholders. Compensation of an external director must be determined prior to the person’s consent to serve as an external director.
  Committees of the Board of Directors
  Our board of directors has established three standing committees, the audit committee, the compensation committee and the nominating and governance committee.
  Audit Committee.Under the Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors. The audit committee may not include the chairman of the board, any director employed by the company or providing services to the company on an ongoing basis, a controlling shareholder or any of the controlling shareholder’s relatives. In addition, under the listing requirements of the Nasdaq Global Select Market, we are also required to maintain an audit committee of at least three members, all of whom are independent directors under the Nasdaq Global Select Market listing requirements. The rules of the Nasdaq Global Select Market also require that at least one member of the audit committee be a financial expert.
  In addition, under an amendment to the Companies Law, enacted by the Israeli Knesset on March 7, 2011, and which will come into effect on May 14, 2011, the majority of members of the audit committee shall be independent directors, and the audit committee chairman shall be an external director. Please also see Item 10.B "Memorandum and Articles Association – Election of Directors."
  65
  Our audit committee, acting pursuant to a written charter, is comprised of Ms. Krindel, Mr. Schlachet, Mr. Butler who was appointed by our Boardto serve on the audit committee until the upcoming annual general meeting of the shareholders to be held on March 29, 2011, Dr. Anghel, who has been designated as the audit committee financial expert and Mr. Suesskind. Dr. Anghel and Mr. Suesskind are nominated for re-election for a three-year term, effective as of November 7, 2010, at our annual general meeting to be held on March 29, 2011. All of the audit committee members have been determined to be independent as defined by the applicable Nasdaq and SEC rules.
  The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor deficiencies in the administration of the company, including by consulting with the internal auditor, and to review and approve related party transactions.
  Compensation Committee. Our compensation committee, acting pursuant to a written charter, is comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The composition and functions of the compensation committee meet the requirements of the applicable Nasdaq rules, with which we comply voluntarily. All of the compensation committee members have been determined to be independent as defined by the applicable Nasdaq rules. The compensation committee makes recommendations to the board of directors regarding the issuance of employee share incentives under our share option and benefit plans and determines salaries and bonuses for our Chief Executive Officer and incentive compensation for our other employees.
  Nominating and Governance Committee. Our nominating and governance committee, acting pursuant to a written charter, is comprised of Dr. Anghel, Ms. Krindel and Mr. Butler. The committee is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. The composition and function of our nominating and governance committee meets the requirements of the applicable Nasdaq rules, with which we comply voluntarily. All of the nominating committee members have been determined to be independent as defined by the applicable Nasdaq rules.
  Internal Auditor
  Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Ezra Yehuda, C.P.A. (Isr). The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is not our employee, but the managing partner of an accounting firm which specializes in internal auditing.
  66
  D.
EMPLOYEES
  The breakdown of our employees by department and geographic location is as follows:
  As of December 312008


2009


2010Management, administration and operations


58



47



327Research and development


63



46



96Selling and marketing


179



120



157Total


300



213



580Israel


141



110



121North America


140



93



290Asia-Pacific


10



10



79Europe


9



0



90
  Some provisions of the collective bargaining agreement between the Histadrut, which is the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialist’s Association of Israel, apply to our Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Commerce & Employment.
  These provisions concern the length of the workday and the work-week, recuperation pay and commuting expenses. Furthermore, these provisions provide that the wages of most of our employees are adjusted automatically based on changes in Israel’s Consumer Price Index. The amount and frequency of these adjustments are modified from time to time. In addition, Israeli law determines minimum wages for workers, minimum vacation pay, sick leave, determination of severance pay and other conditions of employment. We have never experienced a work stoppage, and we believe our relations with our employees are good.
  Israeli law generally requires the payment of severance pay by employers upon the retirement or death of an employee or termination of employment without cause. As of December 31, 2010, our liability for severance pay totaled $0.6 million (out of which $0.3 is funded). We fund our ongoing severance obligations by making monthly payments to insurance policies. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 18% of wages, up to a specified amount of which the employee contributes approximately 12% and the employer contributes approximately 6%.
  In Israel, we are subject to the instructions of the Extension Order in the Industrial Field for Extensive Pension Insurance, 2006, according to the Israeli Collective Bargaining Agreements Law, 1957, or the Extension Order. The Extension Order ensures the pension insurance of certain employees which fall under its criteria.
  In accordance with our policy and the provisions of the Extension Order, we make contributions to a pension fund and/or insurance policy. Therefore, the majority of our obligations to pay severance pay are covered by the aforementioned contributions, in accordance with Section 14 of the Israeli Severance Pay Law, 1963, and the Extension Order or any other applicable law.
 67
 E.
SHARE OWNERSHIP
  The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 6, 2011, by our executive officers and directors:
 
 Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisable within 60 days of the date of March 6, 2011, are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
  Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 35,079,438 ordinary shares outstanding on March 6, 2011 (excluding treasury shares).
  Executive Officers and Directors:

Number


PercentDr. Shimon Eckhouse(1)


2,729,147



7.78
%Yaffa Krindel


*



*
%Marshall Butler


*



*
%Dan Suesskind


*



*
%Dr. Michael Anghel


*



*
%David Schlachet(2)


*



*
%Louis Scafuri


*



*
%Asaf Alperovitz(3)


*



*
%Fabian Tenenbaum(4)


*



*
%Gerard E. Puorro(5)


*



*
%All directors and executive officers as a group (10 persons)


4,176,417



11.91
%
  
 * equals less than 1%
  (1)
Includes 2,287,331 shares held by Starlight Capital Ltd. and 341,816 shares held by European High-Tech Capital S.A., which are corporations wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family. Dr. Eckhouse disclaims beneficial ownership of these shares.
  (2)
Mr. Schlachet ceased to serve as our Chief Executive Officer on May 14, 2007.
  (3)
Mr. Alperovitz was appointed as our Chief Financial Officer on September 1, 2010.
  (4)
Mr. Tenenbaum ceased to serve as our Chief Financial Officer on August 31, 2010 and he currently serves as the Chief Executive Officer of our subsidiary Syneron Beauty Ltd.
  (5)
Mr. Puorro was appointed as a director effective as of January 5, 2010.
  Employee Benefit Plans
  On July 12, 2004, our board of directors and shareholders adopted separate 2004 plans for Israel and for the United States, Canada and the rest of the world. On November 11, 2004, our shareholders approved the 2004 United States, Canada and Rest of World Plan. Under the 2004 Plans, as of December 31, 2010, we had 3,811,838 options, stock appreciation rights, and Restricted Stock Units outstanding.
  Prior to the adoption of the 2004 Plans, we maintained one equity incentive plan adopted in 2003, which served as an umbrella plan for all of our employees, directors, officers and other eligible persons worldwide. Prior to the 2003 Plan, we granted options according to individual agreements with the grantees, without adopting a specific plan. We adopted both the 2003 Plan and the 2004 Israel Plan under Section 102 of the Israeli Income Tax Ordinance.
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  Options granted to employees under the 2003 Plan generally vest over three to four years from the grant date. Any option not exercised within seven years of the grant date will expire unless extended by the board of directors. If we terminate the engagement with a grantee for cause, all of his or her vested and unvested options expire immediately. If we terminate the engagement with a grantee for any other reason or the grantee resigns, the grantee may exercise his or her vested options within six months of the date of termination. A grantee who terminates his or her engagement with us due to death or disability may exercise his or her options (or in case of death, by the estate or the legal successor of the grantee) within 12 months of the date of death or disability. In case of retirement, the post-retirement period of exercise is set at the discretion of the board of directors or the compensation committee. Any expired or terminated options return to the plan and are automatically cancelled.
  Under the 2003 Plan, we have granted to our directors, officers, employees and consultants and those of any of our subsidiaries, options to purchase our ordinary shares. Since May 12, 2004, all option grants to our Israeli employees have been issued under the 2004 Israel Plan and, unless we adopt a new plan, all such grants in the future will be issued under the 2004 Israel Plan. The 2004 Israel Plan also allows for beneficial tax treatment for options issued through a trustee. Based on Israeli law currently in effect and elections made by us, and provided that options granted or, upon their exercise, the underlying shares, issued under the plan are held by the trustee for at least two years following the end of the calendar year in which the options are granted, Israeli employees are (i) entitled to defer any taxable event with respect to the options until the underlying shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares. We may not recognize expenses pertaining to the options for Israeli tax purposes.
  Israeli tax law allows us to choose from among three alternative sets of tax treatment for our 2004 Israel Plan or future plans. In approving the 2004 Israel Plan, the board of directors selected the capital gains tax treatment described above.
  Under the 2004 United States, Canada and Rest of World Plan, we may grant to our non-Israeli directors, officers, employees and consultants, options and other incentive awards to purchase our ordinary shares. These plans were adopted to allow favorable tax treatment for our United States and Canadian directors, officers, employees and consultants. Since May 12, 2004, all options to our non-Israeli employees have been granted under the 2004 United States, Canada and Rest of World Plan and, unless we adopt a new plan, all such options in the future will be granted under the 2004 United States, Canada and Rest of World Plan.
  Options granted under the 2004 Plans generally vest over a period of one to three years of employment. Any options that are cancelled or forfeited before expiration become available for future grants. In addition to granting stock options during 2006, the Company from time to time grants Restricted Stock Units (RSUs) under the 2004 United States, Canada and Rest of World Plan. RSUs usually vest over a period of employment of up to three years. Upon vesting, the RSU beneficiary is entitled to receive a share per one RSU for $0.01 per share. RSUs that are cancelled or forfeited become available for future grants. The Company can also issue a variety of other equity incentives under the 2004 Plans, but no such other equity incentives were outstanding as of December 31, 2010.
  Each of the 2004 Plans expires in 2014 and has an evergreen provision. The evergreen provision calls for the annual increase of shares reserved for issuance under the 2004 Plan by the lesser of 2,000,000 options or 3% of the share capital, provided however that the board of directors may, at its sole discretion, decrease, at any given year, the yearly incremental increase of options to whatever number it deems appropriate.
  In January 2010, upon the consummation of the merger agreement with Candela Corporation, we assumed Candela's Third Amended and Restated 1998 Candela Corporation Stock Option Plan (1998 Plan), Candela's 2008 Candela Corporation Stock Plan (2008 Plan)and each of the following options to purchase Candela's common stock, stock appreciation rights or similar rights granted on Candela's common stock that were outstanding at such time, whether vested or unvested (Candela Awards):
  ·
Candela Awards with an exercise or strike price less than or equal to $3.16, which is the product of (x) the price per our ordinary share on Nasdaq immediately prior to the effective time of the merger, which was $10.86, and (y) the exchange ratio ofour ordinary share for each share of Candela common stock, which was 0.2911; and
  69
  ·
all Candela Awards subject to, and in accordance with the existing terms of, Candela’s executive retention agreements.
  All such options and stock appreciation rights became fully vested and continued in effect in all material respects on the same terms and conditions as in effect immediately prior to the effective time of the merger. As of March 6, 2011, there were 747,904 outstanding options and stock appreciation rights (SARs), granted under the 1998 Plan and the 2008 Plan, or Candela Plans.
  Options and SARs granted under the 1998 Plan become exercisable on the date of grant or vest over a period of time, as specified by the committee established by Candela's board of directors, and expire ten years from the date of the grant. Upon exercise of a SAR, only the net number of ordinary shares issued in connection with such exercise shall be deemed "issued" for this purpose. The SARs granted to employees under the 1998 Plan vest over one to four years, while the SARs granted to directors vest over two years.
  Under the 1998 Plan, there were 545,280 outstanding options/SARs at March 6, 2011, with a weighted-average exercise price of $26.11 per share. The 1998 Plan expired pursuant to its terms on September 18, 2008. As such, there were no options/SARs available for grant under this plan at March 6, 2011.
  On October 27, 2008, the board of directors of Candela adopted the 2008 Plan. The 2008 Plan was approved by Candela's stockholders on December 12, 2008. Under the 2008 Plan, Candela was permitted to grant incentive stock options, non-qualified stock options, SARs, restricted stock awards and RSUs (collectively, Stock Rights). The SARs granted to employees under the 2008 Plan vest over one to two years. Under the 2008 Plan incentive stock options were granted to employees of Candela and non-qualified options, SARs, restricted stock and RSUs were granted to employees, officers, directors and consultants of Candela. Following the merger with Candela, our board of directors administers the 2008 Plan.
  Under the 2008 Plan, there were 202,624 outstanding options/SARs at March 6, 2011, with a weighted-average exercise price of $2.48 per share.
  Each option or SAR granted under this plan, expires on the date specified by the compensation committee of Candela, but not more than (i) ten years from the date of grant in the case of options and SARs generally, and (ii) five years from the date of grant in the case of incentive stock options granted to an employee possessing more than ten percent of the total combined voting power of all classes of stock of Candela. Options and SARs are subject to early termination in certain circumstances.
  Pursuant to the 2008 Plan, our board of directors may take any action as may be necessary to ensure that Stock Rights granted under the 2008 Plan qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code. Any Stock Right granted under the 2008 Plan which is intended to qualify as "performance-based compensation" may be conditioned on the attainment of one or more of the following performance goals: earnings, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, earnings per share, economic value created, market share, net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets, return on capital (based on earnings or cash flow), return on equity, return on investment, revenue, cash flow, operating margin, share price, total stockholder return, total market value, and strategic business criteria, consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation or information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures.
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  Unless otherwise specified in the instrument relating to the grant of an incentive stock options, if an incentive stock option optionee ceases to be employed other than reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of three months after the date of termination of employment or the specified expiration date. If an incentive stock option optionee ceases to be employed by reason of death or disability, all unvested incentive stock options shall terminate and the vested incentive stock options shall terminate on the earlier of one hundred and eighty days after the date of termination of employment or the specified expiration date. The compensation committee of Candela specified in the instrument relating to the grant of nonqualified options, SARs, restricted stock and RSUs the treatment of such Stock Rights upon a grantee's termination of employment.
  The 2008 Plan shall automatically expire on October 27, 2018, except as to options and SARs outstanding on that date. We currently grant options only under the 2004 Plans.
  ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  A.
Major Shareholders
  The following table sets forth information regarding the beneficial ownership of our ordinary shares as of March 6, 2011, by each person or entity that we know beneficially owns 5% or more of our outstanding ordinary shares.
  Beneficial ownership of shares is determined in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisable within 60 days of the date of March 6, 2011, are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.
 
 Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and sole investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 35,079,438 ordinary shares outstanding as of March 6, 2011 (excluding treasury shares).
 Number of

Shares

Beneficially

Owned


Percentage

of

outstanding

Ordinary

SharesStarlight Capital Ltd.(1)


2,287,331



6.52
%FMR LLC (2)


3,563,200



10.16
%Visium Balanced Master Fund, Ltd.(3)


1,855,191



5.29
%
  (1)
A corporation wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family. Dr. Eckhouse disclaims beneficial ownership of these shares. Excludes 341,816 shares held by European High-Tech Capital S.A., which is also a corporation wholly owned by foundations that were created for the benefit of members of Dr. Eckhouse’s family.
  (2)
The information is solely based upon Amendment No. 2 to Schedule 13G filed with the SEC on February 14, 2011, by FMR LLC (“FMR”), Edward C. Johnson 3rd (chairman of FMR), Fidelity Management & Research Company ("Fidelity") and Fidelity Low Priced Stock Fund (“FLPS”). Fidelity a wholly owned subsidiary of FMR and an investment adviser is the beneficial owner of 3,563,200 ordinary shares. FLPS, an investment company, is the owner of 3,558,700 of these ordinary shares. Edward C. Johnson 3rd and FMR, through its control of Fidelity, and the funds each has the sole power to dispose these shares. Members of the Johnson family through their ownership of voting common shares and the execution of the shareholders' voting agreement, may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC.Neither FMR nor Mr. Johnson has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds' Boards of Trustees.
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  (3)
The information is solely based upon Amendment No. 2 to Schedule 13G filed with the SEC on February 11, 2011, by Visium Asset Management, LP (“VAM”), Visium Balanced Master Fund, Ltd. (“VBMF”), JG Asset, LLC (“JG Asset”) and Jacob Gottlieb (“Gottlieb”). VAM as the investment manager of VBMF may be deemed to beneficially own shares beneficially owned by VBMF. JG Asset as the General Partner to VAM may be deemed to beneficially own shares beneficially owned by VAM. Gottlieb as the Managing Member of JG Asset may be deemed to beneficially own the shares beneficially owned by JG Asset. VAM, JG Asset and Gottlieb disclaim beneficial ownership as to these shares, except to the extent of his or its pecuniary interests therein.
  To our knowledge, the only significant changes in the percentage ownership held by our major shareholders during the past three years have been: (i) the sale by Cititrust Bahamas Ltd., which is a trust that was created for the benefit of our retired Chief Technology Officer and director, Dr. Michael Kreindel, of part of its holdings pursuant to 10b5-1 plans, (ii) the increase in the percentage ownership held by the Baupost Group, LLC from 5.52% (based on a Schedule 13G filed on February 13, 2007) to 11.23% (based on a Amendment No. 3 to Schedule 13G filed on February 12, 2009) and then the decrease to 5.45% (based on a Amendment No. 4 to Schedule 13G filed on December 9, 2009), (iii) the purchase by Brandywine Global Investment Management, LLC of 6.11% of our ordinary shares (based on a Amendment No.1 to Schedule 13G filed on February 17, 2009) and the sale of such ordinary shares (based on Amendment No.2 to Schedule 13G filed on February 16, 2010), (iv) the purchase by Fidelity Management & Research Company of 11.214% of our ordinary shares (based on Schedule 13G filed on November 10, 2009) and the sale of 258,500 of these ordinary shares (based on Amendment No.1 to Schedule 13G filed on February 16, 2010), (v) the purchase by Royce & Associates, LLC of 5.32% of our ordinary shares (based on a Schedule 13G filed on February 9, 2010), (vi) the purchase by Paradigm Capital Management, Inc. of 5.05% of our ordinary shares (based on a Schedule 13G filed on February 12, 2010), and (vii) the purchase by Steinberg Asset Management, LLC of 6.33% of our ordinary shares (based on a Schedule 13G filed on February 16, 2010).
  Our major shareholders have the same voting rights with respect to their respective ordinary shares as other shareholders have with respect to their respective ordinary shares.
  To our knowledge, as of March 6, 2011, we had 113 shareholders of record who were registered with addresses in the United States. These holders in the United States were as of such date, the holders of record of approximately 93.5% of our outstanding ordinary shares (excluding treasury shares).
  B.
Related Party Transactions
  Agreements with Directors and Officers
  Our articles of association permit us to exculpate, indemnify and insure our directors and officers to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our office holders, including our directors, undertaking to exculpate, indemnify and insure them to the fullest extent permitted by law, to the extent that these liabilities are not covered by insurance. See “Item 10.B Memorandum And Articles Association – Exculpation, Indemnification and Insurance of Directors and Officers.”
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  Registration Rights
  Prior to our initial public offering, we issued preferred shares to Starlight Capital Ltd., European High-Tech Capital S.A. and Marshall Butler. Starlight Capital Ltd. and European High-Tech Capital S.A. are controlled by foundations which have been established for the benefit of family members of Dr. Shimon Eckhouse, the chairman of our board of directors. Dr. Eckhouse disclaims beneficial ownership of the shares held by these companies. Marshall Butler is a member of our board of directors. All of these preferred shares were subject to registration rights, and all of these preferred shares were automatically converted into ordinary shares at the closing of our initial public offering. As of March 6, 2011, we believe that these shareholders continue to hold a certain amount of ordinary shares issued upon conversion of our preferred shares subject to such registration rights. Pursuant to these registration rights, in the event we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, these and other holders who may hold shares subject to registration rights are entitled to notice of such registration and are entitled to include their remaining ordinary shares subject to the registration rights in such registration, subject to certain marketing cutbacks and other limitations. The holders of at least 50% of the ordinary shares with registration rights will have the right to require us, on not more than one occasion, to file a registration statement on the appropriate form under the Securities Act in order to register the resale of their ordinary shares. We may, in certain circumstances, defer such registration and the underwriters have the right, subject to certain limitations, to limit the number of shares included in such registrations. Further, these holders may require us to register the resale of all or a portion of their shares on a Registration Statement on Form F-3, subject to certain conditions and limitations.
  Shareholders’ Rights Plan
  Our board of directors adopted a shareholders' rights plan, under which our board of directors declared a dividend of one right for each ordinary share held by shareholders of record as of the close of business on January 3, 2011. This plan replaces our previous rights plan dated November 11, 2008, which has expired. Initially, these rights are not exercisable and are traded with our ordinary shares. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares or commences a tender or exchange offer for 15 percent or more of our ordinary shares, except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares (except if such person or group has become an “Acquiring Person” pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) ordinary shares. In addition, if, after a person acquires such ownership, we engage in a merger in which it is not the survivor or its ordinary shares are changed or exchanged, or sells or transfers more than 50 percent of our assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $0.01 per share (subject to adjustment as provided in the plan), one and a quarter (1.25) times the shares of the acquiring company to which each of our shareholders is entitled to for each ordinary share. Our board of directors may redeem the rights at a price of $.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15 percent or more of our ordinary shares. The rights plan will continue in effect until January 3, 2012, unless earlier redeemed or amended by our board of directors.
  C.
INTERESTS OF EXPERTS AND COUNSEL
 
 Not applicable.
  ITEM 8.
FINANCIAL INFORMATION
  A.
Consolidated Statements and Other Financial Information
  Our audited consolidated financial statements for the year ended December 31, 2010, are included in this Annual Report on Form 20-F under Item 18, “Financial Statements.”
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  Legal Proceedings.
  Our subsidiary, Syneron Inc. is currently defending a patent infringement lawsuit brought by Palomar Medical Technologies, Inc. (Palomar) in the U.S. District Court for the District of Massachusetts, on November 13, 2008, alleging willful infringement of U.S. Patent Nos. 5,595,568 (the ’568 Patent) and 5,735,844 (the ’844 Patent) by Syneron Inc.’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, confirming the patentability of all of the claims of the ’568 Patent at issue in the reexamination proceedings and most of the claims of the ’844 Patent at issue in the reexam proceedings. The stay was lifted on November 13, 2009.  The action is still in its early stages. The complaint seeks compensatory damages, requests that these damages be trebled, and requests attorneys’ fees and injunctive relief. After the lifting of the stay, Syneron Inc. answered the complaint on November 30, 2009, denying Palomar’s claims and seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents. On December 10, 2009, Palomar filed a First Amended Complaint that added Massachusetts General Hospital (MGH) as a plaintiff, and on December 14, 2009, Palomar replied to Syneron Inc.’s counterclaims. Syneron Inc. answered the First Amended Complaint on December 23, 2009, and filed Amended Counterclaims that add MGH as a counterdefendant. The court held a scheduling conference in the case on January 6, 2010. The court set a claim construction hearing and other pre-trial dates. The claim construction hearing was held on November 17, 2010. The court has not yet rendered its claim construction decision. No trial date has been set.
  While Syneron Inc. intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Syneron Inc. could materially hurt the business, financial condition, results of operations and cash flows of Syneron Inc.
  We recorded a onetime income of $3.975 million for the year ended December 31, 2009, in connection with a legal settlement that we reached in March 2009.
  On or about December 23, 2008, we received a letter from Tensor Technologies LLC claiming that we were in breach of our royalty payment obligations to Tensor pursuant to a License Agreement dated June 24, 2004, between us and Tensor (as amended). On February 19, 2009, we sent Tensor a letter denying Tensor's claims and denying any royalty payment obligations to Tensor whatsoever. We submitted the matter for arbitration, have agreed upon an arbitrator and have started the arbitration process. On August 30, 2009, a statement of claim was served by Tensor against us in the amount of $2,617,706. On November 1, 2009, we submitted a statement of defense and a countersuit in the amount of $4,367,089 for the restitution of the royalties already paid by us to Tensor. Tensor has submitted its statement of defense to the countersuit we submitted. We have begun discovery proceedings. On March 16, 2010, Tensor has submitted its primary testimony affidavit.On May 2, 2010, we submitted its primary testimony affidavits. On June 2, 2010, Tensor submitted its supplementary affidavits. The parties have completed cross examinations hearings and are in the process of submitting summations to the arbitrator.
  On March 10, 2009, a complaint was filed against Syneron, Inc. The complaint arises out of a fatal accident involving a contractor. The plaintiff, who tripped and fell back through a skylight on the roof of the building leased by Syneron Inc. The complaint also names the building owners, skylight manufacturer and various other parties and alleges a cause of action of negligence negligent treatment maintenance of the building and failing to protect others from the dangerous condition of the roof and skylight. The complaint does not specify the amount of damages claimed by the plaintiffs. The case is scheduled for trial on April 4, 2011.
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  On May 15, 2009, a former distributor of the Company filed a claim against the Company for unlawful termination of its exclusive distribution agreement with the Company in the amount of approximately $ 2,225,000 (the claim amount is NIS 8,400,000). On August 9, 2009, the Company filed a statement of defense and a counterclaim against the plaintiff in an amount of $ 667,000 (claim amount is NIS 2,517,627). The Company claims that the plaintiff has a debt concerning equipment and services it has received from the Company, and seeking reimbursement to the Company for damages caused to the Company's reputation and market share losses caused by the plaintiff. On September 1, 2010, the Company paid the distributor a sum of approximately $200,000 and the parties released their claims with prejudice.
  Candela's Legal Proceedings
  Our new indirect wholly owned subsidiary, Candela Corporation, is also currently defending a patent infringement lawsuit brought by Palomar in the U.S. District Court for the District of Massachusetts, alleging infringement of the ’568 and ’844 Patents by Candela’s hair removal products. The ’568 and ’844 Patents were subject to reexaminations by the U.S. Patent and Trademark Office, and the action was stayed pending completion of the reexaminations. The PTO issued Reexamination Certificates with respect to the ’568 and ’844 Patents, confirming the patentability of all of the claims of the ’568 Patent at issue in the reexamination proceedings and most of the claims of the ’844 Patent at issue in the reexam proceedings. The stay was lifted on January 5, 2010. Palomar's amended complaint, which added MGH as a plaintiff, alleges that Candela willfully infringed the ’568 and ’844 Patents. In addition to seeking compensatory damages, the amended complaint requests that the Court treble these damages, award attorneys’ fees, and provide injunctive relief. Candela’s amended answer and counterclaims denies Palomar’s claims, seeks a declaratory judgment of noninfringement, invalidity, and unenforceability of the ’568 and ’844 Patents, and alleges unfair and deceptive business practices by Palomar in violation of Massachusetts General Laws Ch. 93A. Candela seeks compensatory damages, and requests the trebling of these damages, attorneys’ fees, and injunctive relief. Prior to the entry of the stay, a claim construction hearing was held, the Court issued an order on November 8, 2007 construing the claims, fact discovery was closed, and expert reports were exchanged. Palomar has dropped the ’568 Patent from this lawsuit, and has elected to proceed solely on the ’844 Patent. On February 10, 2010, after the stay was lifted, the Court held a scheduling conference and set June 30, 2010 as the cutoff for expert discovery, July 30, 2010, as the last date for filing summary judgment motions, and September 14, 2010, as the hearing date for summary judgment motions. The parties have served their supplemental expert reports and the expert depositions have been taken. On August 12, 2010, Candela filed a motion for summary judgment of non-infringement with respect to all of the asserted claims and of invalidity with respect to two of the asserted claims. A hearing on the motion was held on September 14, 2010. The court has not yet ruled on the motion. No trial date has been set.
  While Candela intends to vigorously contest Palomar’s allegations, the lawsuit is inherently uncertain and unpredictable as to its ultimate outcome. An adverse outcome in Palomar’s suit against Candela would materially hurt the business, financial condition, results of operations and cash flows of Candela.
  On February 19, 2008, Cardiofocus, Inc., or Cardiofocus, filed suit against Candela and eight other companies in the U.S. District Court for the District of Massachusetts, asserting willful infringement by Candela of U.S. Patents 6,457, 780, 6,159,203 and 5,843,073. Cardiofocus was seeking compensatory and treble damages, as well as attorneys’ fees and injunctive relief. On April 21, 2008, Candela answered Cardiofocus’ complaint and asserted a variety of counterclaims against Cardiofocus. Based upon Candela’s request, on July 23, 2008, the PTO agreed to re-examine the validity of the Cardiofocus patents. On October 14, 2008, the Court agreed to stay this matter for a minimum of one year, up to a maximum of two years, but no later than the PTO’s decision with respect to the re-examination proceedings. As a result of the reexamination process, the scope of the claims was substantially narrowed and the PTO rejected most of the claims asserted by Cardiofocus against Candela. On April 30, 2010, the U.S. District Court for the District of Massachusetts approved dismissal with prejudice of all claims made by Cardiofocus against Candela in the lawsuit.
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  On September 24, 2009, and October 30, 2009, after the announcement of our proposed merger with Candela, two putative class action lawsuits were filed in the Suffolk CountySuperior Court of Massachusetts against Candela, the members of Candela’s board of directors, among others (one of the lawsuits included us as a defendant). The two actions were thereafter consolidated. Plaintiffs alleged that members of Candela’s board of directors breached fiduciary duties owed to Candela stockholders by, among other things, using an unfair or flawed process in connection with the proposed merger between Candela and us, agreeing to an all-stock transaction at an unfair price, and omitting material information and/or providing materially misleading information concerning the merger. The consolidated action further alleged that Candela and us aided and abetted the purported breaches of fiduciary duties. The complaint seeks, among other relief: an injunction against the merger; rescission of the transaction (or damages) if consummated; and an award of all costs of the actions, including reasonable attorneys’ fees and expenses. While Candela and the other defendants believe the allegations in the complaints are entirely without merit and that they have valid defenses to all claims, in an effort to minimize the cost and expense of litigation, the defendants entered into a proposed settlement with the plaintiffs. The proposed settlement provides for plaintiff's release of any and all claims and causes of action alleged in the complaints, or arising out of or relating in any manner thereto, in exchange for adding in the proxy statement/prospectus relating to the proposed merger certain additional limited disclosures and reducing the termination fee payable by Candela to us under the circumstances outlined in the merger agreement from $2.6 million to $2.1 million. The defendants have also agreed not to oppose any fee application by plaintiffs’ counsel that does not exceed $260,000.On September 8, 2010, the court approved the settlement, and dismissed the case. The court also ordered Candela to pay to plaintiffs' counsel attorneys' fees and expenses in the amount of $260,000, in accordance of the proposed settlement. Candela's insurer has paid plaintiff's counsel the full settlement amount.
  Candela received correspondence form BioCell, L.P. both directly and through its attorneys claiming that it improperly terminated a distribution agreement between the parties. BioCell claims damages in the amount of $390,000 to compensate BioCell for Candela's allegedly improper termination. Candela has issued a response contesting the claim of improper termination and any resulting damages.
  For other legal proceedings see also Note 12 to our consolidated financial statements. Please also see Item 3.D, “Risk Factors – Existing and future third-party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could impact our future business and financial performance.”
  Policy on Dividend Distribution
  We have never declared or paid cash dividends to our shareholders, and we do not intend to pay cash dividends in the foreseeable future. We intend to reinvest any future earnings in developing and expanding our business. We have decided to reinvest the amount of tax-exempt income derived from out “Approved Enterprise” status and not to distribute that income as dividends.
  B.
SIGNIFICANT CHANGES
 
 On January 5, 2010, the merger with Candela was completed. Pursuant to that certain agreement and plan of merger dated September 8, 2009, by and among us, Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela , we acquired Candela through Acquisition Sub which merged with and into Candela. Candela survived the merger as our indirect wholly-owned subsidiary. Candela shareholders received 0.2911 shares of our ordinary shares for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela. Candela manufactures, and distributes innovative clinical solutions that enable physicians, surgeons, and personal care practitioners to treat selected cosmetic and medical conditions using lasers, aesthetic laser systems, and other advanced technologies. Candela’s current product line offers comprehensive and technologically sophisticated cosmetic and aesthetic lasers and light-based systems used by physicians and personal care practitioners to treat a wide variety of cosmetic and medical conditions.
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  In November 2010, we formed a new wholly owned subsidiary, Syneron Beauty Ltd., to which we transferred some of our Emerging Business Units activities related to our consumer market initiatives, including our joint Procter & Gamble initiative, our mē product and our holdings in Fluorinex Active Ltd. In addition, following the acquisition of Pharos Life Corporation, Pharos became a wholly owned subsidiary of Syneron Beauty. Syneron Beauty holds the intellectual property dedicated to our home-use initiative, and it received a license to some of our other technologies, which are used in our consumer market initiatives.
 
 As of the fourth quarter of 2010, we are breaking out our financial results between the traditional combined Syneron and Candela business, which we have labeled Professional Aesthetic Devices, or PAD, and the results of our Emerging Business Units in order to provide increased transparency into our results. We decided on such segment reporting as a result of a change in the manner in which the Company’s chief operating decision-makers evaluate the Company’s financial information.  We believe this segment reporting will also allow shareholders to better gauge the growth and significant investments we are making as part of our overall growth strategy in our emerging technologies that are primarily targeted at the home-use consumer market. Our PAD segment includes research, development, marketing and sales of aesthetic medical equipment for the treatment of body and face for dermatologists, plastic surgeons and other qualified practitioners worldwide (professional market). Our Emerging Business Units includes RBT, Light Instruments, Pharos, Fluorinex and Syneron Beauty's home use products. Products in the Emerging Business Units segment include elure skin whitening, tända LED systems, hair removal system and Light Instruments’ dental laser devices, along with pipeline products that include our strategic home-use device partnership with Procter & Gamble and Fluorinex teeth whitening and fluorination.
 
 See also Note 19 to our consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
  ITEM 9.
THE OFFER AND LISTING
  A.
OFFER AND LISTING DETAILS
  Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS.”
  The following table sets forth, for the periods indicated since August 5, 2004, which was the date on which our ordinary shares began trading on the Nasdaq Global Select Market (formerly known as the Nasdaq National Market), the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Market.
  Nasdaq Global Market

Price per share (US$)High


LowYearly highs and lows2006

$
32.72


$
17.812007


28.12



13.372008


18.04



5.882009


12.44



4.552010


12.02



7.60Quarterly highs and lows2009First quarter


8.74



4.55Second quarter


8.52



5.28Third quarter


12.04



6.50Fourth quarter


12.44



9.332010First quarter


11.44



8.91Second quarter


12.02



9.08Third quarter


10.46



7.6Fourth quarter


11.18



9.352011First quarter (through March 1, 2011)


14.92



9.98Monthly highs and lowsSeptember 2010


10.00



8.03October 2010


10.99



9.35November 2010


11.18



9.64December 2010


11.00



9.73January 2011


11.12



9.98February 2011


14.92



10.67
  On March 17, 2011, the closing price of our ordinary share as quoted on Nasdaq Global Select Market was $12.93.
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  B.
PLAN OF DISTRIBUTION
  Not applicable.
  C.
MARKETS
  Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS.”
  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
  Set forth below is a summary of certain provisions of our amended and restated articles of association, as adopted by our shareholders on November 7, 2007, and Israeli law affecting our shareholders. This summary does not purport to be complete and is qualified in its entirety by reference to our amended and restated articles of association and such law. On November 7, 2007, our shareholders adopted the amended and restated articles of association of the Company (for the purposes of this Item, the “Amended Articles”)
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  Register Number and Purposes of the Company
  Our registration number with the Israeli Companies Registrar is 51-298651-4. Pursuant to Section 4 of our Amended Articles we may engage in any type of lawful business as may be determined by our board of directors from time to time.
  Dividend and Liquidation Rights
  Holders of our ordinary shares are entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared with respect to our ordinary shares. We may declare dividends out of profits legally available for distribution. Under the Israeli Companies Law, 1999-5759, or the Companies Law, a company may distribute a dividend only if the distribution does not create a reasonably foreseeable risk that the company will be unable to meet its existing and anticipated obligations as they become due. A company may only distribute a dividend out of the company’s profits, as defined under the Companies Law. If a company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court is convinced that there is no reasonable risk that a distribution might prevent the company from being able to meet its existing and anticipated obligations as they become due.
  Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our Amended Articles provide that the board of directors may declare and distribute dividends without the approval of the shareholders. In the event of our liquidation, holders of our ordinary shares have the right to share ratably in any assets remaining after payment of liabilities, in proportion to the paid-up par value of their respective holdings.
  These rights may be affected by the grant of preferential liquidation or dividend rights to the holders of a class of shares that may be authorized in the future.
  Voting, Shareholder Meetings and Resolutions
  Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. This right may be changed if shares with special voting rights are authorized in the future.
  Under the Companies Law, an annual general meeting of our shareholders should be held once every calendar year, but no later than 15 months from the date of the previous annual general meeting. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy holding at least 40.0% of the voting power. 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 any number of shareholders present in person or by proxy.
  Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, one fourth of the nominated directors, one or more shareholders having at least 5% of outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. The chairman of the board of directors presides at each of our general meetings. The chairman of the board of directors is not entitled to a vote at a general meeting in his capacity as chairman.
  Most shareholders’ resolutions, including resolutions to:
  ·
amend our articles of association (except for amendments relating to the election of directors and the powers, composition and size of the board of directors);
  ·
make changes in our capital structure such as a reduction of capital, increase of capital or share split, merger or consolidation;
  ·
authorize a new class of shares, elect directors, other than external directors;
  79
  ·
appoint auditors; or
  ·
approve transactions with certain office holders.
  Will be deemed adopted if approved by the holders of a majority of the voting power represented at a shareholders’ meeting, in person or by proxy, and voting on that resolution. In most cases these actions will not require the approval of a special majority.
  Ownership of Shares; Transfer of Shares; Notices
  Our Amended Articles and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel, except with respect to individuals and entities that are residents of countries in a state of war with Israel, and except with respect to entities which are controlled by residents of countries in a state of war with Israel.
  Our fully paid ordinary shares are issued in registered form and are freely transferable under our Amended Articles.
  The Companies Law and regulations determine that shareholders’ meetings require prior notice of at least 21 days. In the event that the issue to be resolved is an issue subject to the Israeli proxy rules, a notice of no less than 35 days should be given to the company’s shareholders. In some cases a prior notice of not less than 14 days may be given to the company’s shareholders.
  Under the Companies Law, we are required to maintain a major shareholder register listing shareholders holding 5% or more of our outstanding ordinary shares.
  Modification of Class Rights
  The Companies Law provides that the rights of a particular class of shares may not be modified without the vote of a majority of the affected class.
  Election of Directors
  Our ordinary shares do not have cumulative voting rights in the election of directors. Therefore, the holders of ordinary shares representing more than 50% of the voting power at the general meeting of the shareholders, in person or by proxy, have the power to elect all of the directors whose positions are being filled at that meeting, to the exclusion of the remaining shareholders. External directors are elected by a majority vote at a shareholders’ meeting, provided that either:
  ·
at least one third (33.33%) of the shares held by shareholders who are not controlling shareholders attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders shall not be considered); or
  ·
the aggregate number of shares voting against the proposal held by such shareholders has not exceeded 1% of the company’s voting shareholders.
  Our directors are elected in three staggered classes. The directors of only one class are elected at each annual meeting, so that the regular term of only one class of directors expires annually. Each of our directors holds office until the third annual general meeting of the shareholders following the meeting at which he was appointed. In accordance with the Companies Law, our external directors serve for three years, which may be renewed for additional three year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution of the external director, the extension of such external director's term would be in the interest of our company (such requirement is not applicable to the first three-year renewal). The Companies Law requires that the offices of the Chief Executive Officer and the Chairman of the Board of Directors be held by different persons. However, the Companies Law further provides that those positions may be held by the same person for a period not exceeding three years if approved by a majority of the company’s shareholder, including at least two thirds of the voting shareholders present (shares held by abstaining shareholders are not considered) which are not controlling shareholders or the aggregate number of shares of non controlling shareholders voting against the proposal shall not exceed 1% of company voting shareholders.
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  The Companies Law provides that Israeli public companies must have at least two external directors. External directors may be elected at our annual general meeting or a special meeting of our shareholders in a number and manner stipulated by law, namely, for a term of three years which may be renewed for additional three year terms and requires the affirmative vote as described above. External directors may be removed from office only under the following circumstances: (i) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the company and a resolution to remove such external director is made by the shareholders at a meeting at which such external director is granted a reasonable opportunity to express his position (such a resolution requires the same majority of votes that elected the external director); (ii) an external director ceases to meet the legal requirements for appointment as an external director or breaches his or her fiduciary duty to the Company and a court orders that such director be removed; or (iii) an external director is unable to perform his or her duties or is convicted of certain felonies and a court orders that such director be removed.
  An external director is qualified for nomination as an external director, only if he/she has either professional qualifications or accounting and financial expertise. At least one of the external directors must have accounting and financial expertise. However, a company whose shares are traded in certain exchanges outside of Israel, including the Nasdaq Global Select Market, such as our company, is not required to nominate at least one external director who has accounting and financial expertise as long as another independent director for audit committee purposes who has such expertise serves on the board of directors pursuant to the applicable foreign securities laws. In such case all external directors will have professional qualification.
  Regulations adopted under the Companies Law provide that a director with accounting and financial expertise is a director that due to his education, experience and skills has high expertise and understanding in business-accounting matters and financial statements in a way that enables him to deeply understand the financial statements of the company and to facilitate discussion with respect to the way the financial data should be presented. The assessment of the accounting and financial expertise of a director shall be made by the board of directors, who shall take into consideration, inter alia, the education, experience and knowledge of the director in the following subjects:
  (1)
Accounting matters and audit accounting matters, which are typical to the sector in which the company works and of companies with the same size and complexity as of the company;
  (2)
The duties and obligations of the auditing accountant; and
  (3)
Preparing of financial statements and their approval according to applicable law, including securities law.
  The regulations also provide that a director with professional qualifications is a director who meets one of the following conditions:
  (1)
A holder of an academic degree in one of the following: economics, business administration, accounting, law, or public administration;
  (2)
A holder of another academic degree or is otherwise a graduate of higher education in a major field of business of the company or in other field which is relevant to the role;
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  (3)
He has experience of at least five years in one of the following, or that he has cumulative experience of at least five years in two or more of the following:
  (a)
A senior position in the business management of a corporation which has a significant scope of business;
  (b)
A senior public position or in a senior role in the public service; or
  (c)
A senior position in the company's major fields of business.
  According to the Companies Law, the board of directors of a public company must establish the minimum number of board members that are to have accounting and financial expertise while considering, inter alia, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the Amended Articles.
  Our board of directors resolved that the minimum number of board members that need to have accounting and financial expertise, including the external director with accounting and financial expertise is one.
  Our board of directors determined that Dr. Michael Anghel has accounting and financial expertise as described in the regulations promulgated pursuant to Companies Law, and that, therefore, the requirements of the minimum number of board members that need to have accounting and financial expertise, as set by the board of directors, has been met.
  On September 29, 2008, Amendment No. 8 to the Companies Law came into effect. The amendment states that a publicly traded company will be able to determine the number of independent directors that will serve on the company's board of directors. The amendment also sets a recommendation as to the number of independent directors a public company should appoint to their board: (i) companies with a controlling shareholder – one third; and (ii) other companies – a majority of the board. A Majority of our board members are independent as required by Nasdaq rules, which are different than the independence standard of the Companies Law.
  On March 7, 2011 Amendment No. 16 to the Companies Law was enacted by the Israeli Knesset. The amendment, which will come into effect on May 14, 2011, places a special emphasis on the autonomy of the board of directors and the external directors and on the composition and responsibilities of the audit committee.
  Under the amendment, among others: (i) the approval of certain interested party transactions will require the affirmative vote of a majority of the shares and in addition either that (a) the majority (rather than one third) of the shares held by shareholders who do not have a personal interest in the transaction attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders shall not be considered) or (b) that the total number of disinterested shares voted against the proposal does not exceed 2% (rather than 1%) of the aggregate voting rights; (ii) the approval of the appointment of an external director will require the affirmative vote of a majority of the shares and in addition either that (a) the majority (rather than one third) of the shares held by shareholders who are not controlling shareholders attending in person or represented by proxy have voted in favor of the proposal (shares held by abstaining shareholders shall not be considered) or (b) that the total number of disinterested shares voted against the proposal does not exceed 2% (rather than 1%) of the aggregate voting rights; (iii) the majority of members of the audit committee shall be independent directors (as defined under the amendment), and the audit committee chairman shall be an external director (which is currently the composition of our audit committee); (iv) the quorum required to determine a decision of the audit committee shall be not less than a majority of the independent directors, including at least one external director; and (v) the audit committee shall determine whether certain related party transactions are considered extraordinary transactions for the purpose of the Companies Law and should be approved as such.
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  Under regulations promulgated under the Companies Law regarding payment of compensation to external directors, compensation of external directors shall be comprised of annual compensation and a per meeting payment ranging as stated in the regulations. These amounts are adjusted twice a year in accordance with the Israeli consumer price index. With regard to a company, which shares are traded in an exchange outside of Israel, and is subject to laws which impose upon the external directors duties which exceed the duties imposed upon them under Israeli law, the maximum amount payable to the external directors is NIS 100,000 per annum (approximately $28,080) and NIS 3,000 (approximately $840) per meeting. The approval of the shareholders of the company is required for such compensation, unless it is between the maximum and fixed amounts set forth in these regulations. Alternatively, the compensation of external directors may be linked to the compensation of other directors subject to certain restrictions. Additionally, external directors may be entitled to compensation in stock (including by way of granting options to purchase the company’s stock), provided that such compensation is granted within the framework of a stock incentive plan applicable to all other directors and further provided the amount of stock granted or purchasable shall not fall below the lowest amount granted to any other director and shall not exceed the average amount of stock granted to all other directors. In 2008, these regulations were amended to allow an increased compensation to external directors who are considered “expert external directors” under these regulations.
  See Item 6.C, “Directors, Senior Management and Employees – Board Practices” regarding our staggered board.
  Anti-Takeover Provisions; Mergers and Acquisitions
  Merger. The Companies Law permits merger transactions with the approval of each party’s board of directors and shareholders. In accordance with the Companies Law, a merger may be approved at a shareholders meeting by a majority of the voting power represented at the meeting, in person or by proxy, and voting on that resolution. In determining whether the required majority has approved the merger, shares held by the other party to the merger, any person holding at least 25% of the outstanding voting shares or means of appointing the board of directors of the other party to the merger, or the relatives or companies controlled by these persons, are excluded from the vote.
  Under the Companies Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 30 days have passed from the time that the shareholders of each company approved the merger proposal and 50 days have passed from the time that a merger proposal was filed with the Israeli Registrar of Companies.
  In addition, the Companies Law preserves provisions of its predecessor, the Companies Ordinance, dealing with arrangements between a company and its shareholders. These arrangements may be used to affect squeeze out transactions in which the target company becomes a wholly owned subsidiary of the acquirer. These provisions generally require that the merger be approved by at least 75% of the shares of participating shareholders and a majority of the shareholders voting at a shareholders meeting. In addition to shareholder approval, court approval of the transaction is required, which entails further delay.
  A merger, the acquisition of a controlling stake or any transaction in which all or substantially all the assets of a company are de facto transferred to another company, may require the approval of the Israeli Commissioner of Restrictive Trade Practices, in the event that the aggregate annual sales volume in Israel of all the companies which are parties to such transaction in the year preceding the merger, exceeds NIS 150,000,000 (approximately $42,123,000, an amount which is adjusted on an annual basis)andthe annual sales volume in Israel of at least two of the companies which are parties to such transaction exceeds NIS 10,000,000 each (approximately $2,739,000, an amount which is adjusted on an annual basis),and also if after the consummation of such transactions, the joint market, in Israel, or at any identified geographic part of Israel will be in excess of 50% with respect to such products and services.
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  Tender Offer. The Companies Law requires a purchaser to conduct a tender offer in order to purchase shares in publicly held companies, if as a result of the purchase the purchaser would hold more than 25% of the voting rights of a company in which no other shareholder holds more than 25% of the voting rights, or the purchaser would hold more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights. Under the Companies Law, a person may not purchase shares of a public company if, following the purchase of shares, the purchaser would hold more than 90% of the company’s shares or of any class of shares unless the purchaser makes a tender offer to purchase all of the target company’s shares or all the shares of the particular class, as applicable. If, as a result of the tender offer, the purchaser would hold more than 95% of the company’s shares or a particular class of shares, the ownership of the remaining shares will be transferred to the purchaser. However, if the purchaser is unable to purchase 95% or more of the company’s shares or class of shares, the purchaser may not own more than 90% of the shares or class of shares of the target company.
  Tax Law. Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Please see Item 10.E, “Additional Information – Taxation – Israeli Taxation.”
  Transfer Agent and Registrar
  American Stock Transfer & Trust Company is the transfer agent and registrar for our ordinary shares.
  Listing
  Our ordinary shares are quoted on the Nasdaq Global Select Market under the symbol “ELOS”.
  Approval of Related Party Transactions under Israeli Law
  Office Holders
  The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder is defined as any director, managing director, general manager, chief executive officer, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table under Item 6.A, “Directors, Senior Management and Employees – Directors and Senior Management” is an office holder under the Companies Law.
  Fiduciary duties. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care. The duty of loyalty requires the office holder to avoid any conflict of interest between the office holder’s position in the company and personal affairs, and proscribes any competition with the company or the exploitation of any business opportunity of the company in order to receive personal advantage for himself or others. This duty also requires him or her to reveal to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder. The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information pertaining to these actions.
  Compensation. Under the Companies Law, all compensation arrangements for office holders who are not directors require approval of the board of directors, unless the articles of association provide otherwise. Our compensation committee is required to approve the compensation of all office holders. Arrangements regarding the compensation of directors require audit committee, board and shareholder approval.
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  Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. “Personal interest”, as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporate body in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager. “Personal interest” does not apply to a personal interest stemming merely from the fact of that the office holder is also a shareholder in the company.
  The office holder must make the disclosure of his personal interest no later than the first meeting of the company’s board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary transaction”. The Companies Law defines an extraordinary transaction as a transaction not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities, and defines a relative as a spouse, sibling, parent, grandparent, descendent, spouse’s descendant and the spouse of any of the foregoing.
  Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest may not be approved if it is adverse to the company’s interest. In addition, such a transaction generally requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. If the transaction is an extraordinary transaction, or if it concerns exculpation, indemnification or insurance of an office holder, then in addition to any approval stipulated by the articles of association, approval of the company’s audit committee and the board of directors is required. Exculpation, indemnification, insurance or compensation of a director also would require shareholders approval. A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may not attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee also has a personal interest in the matter. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval also would be required.
  Shareholders
  The Companies Law imposes the same disclosure requirements, as described above, on a controlling shareholder of a public company that it imposes on an office holder. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.
  Approval of the audit committee, the board of directors and our shareholders is required for:
  ·
extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; and
  ·
employment of a controlling shareholder.
  The shareholder approval must include the majority of shares voted at the meeting. In addition, either:
  ·
the majority must include at least one-third of the shares of the voting shareholders who have no personal interest in the transaction; or
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  ·
the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent more than 1% of the aggregate voting rights in the company.
  Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his or her power in the company including, among other things, when voting in a general meeting of shareholders or in a class meeting on the following matters:
  ·
any amendment to the articles of association;
  ·
an increase in the company’s authorized share capital;
  ·
a merger; or
  ·
approval of related party transactions that require shareholder approval.
  A shareholder has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty of fairness.
  Exculpation, Indemnification and Insurance of Directors and Officers
  Our Amended Articles allow us to indemnify, exculpate and insure our office holders to the fullest extent permitted by the Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders where the office holder is a director. Our Amended Articles also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor who is not an office holder.
  Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance of an event, the indemnification must be limited to foreseeable types of events and reasonable amounts, as determined by the board of directors.
  Under the Companies Law, a company may indemnify an office holder against any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court. A company also can indemnify an office holder against reasonable litigation expenses including attorneys’ fees, incurred by him or her in his or her capacity as an office holder, 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. The additional case in which a reimbursement of expenses is allowed according to the Companies Law is reasonable legal fees, including attorneys fees, incurred by an Office Holder in an investigatory proceeding or other proceeding filed by a governmental authority, which has terminated without the filing of criminal charges and without imposing a fine, or with imposing a fine in lieu of a criminal charge which does not require proof of criminal intent.
  Under the Companies Law, a company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder. These liabilities include a breach of duty of care to the company or a third-party, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party.
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 A company may exculpate an office holder for a breach of duty of care, but only in advance of that breach. A company may not exculpate an office holder from a breach of duty of loyalty towards the company nor from a breach of duty of care with respect to a distribution.
  Under the Companies Law, however, an Israeli company may only indemnify or insure an office holder against a breach of duty of loyalty to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, an Israeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly unless it was carried our negligently, or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.
  Our audit committee, board of directors and shareholders have resolved to indemnify our directors and officers to the extent permitted by law and by our Amended Articles for liabilities not covered by insurance and that are of certain enumerated types of events, subject to an aggregate sum equal to 50.0% of the shareholders equity outstanding at the time a claim for indemnification is made.
  C.
MATERIAL CONTRACTS
  For a short description of the material terms of our agreements with our manufacturers, please see Item 4.B, “Information on the Company – Business Overview – Manufacturing.”
  On April 10, 2007, we entered into an agreement with Fluorinex Active Ltd. (Fluorinex), an Israeli-based start-up that develops advanced fluoridation and tooth whitening devices for dentists and consumers, under which we purchased 38.47% of Fluorinex’s then fully diluted share capital in consideration of $1.5 million and received a warrant to purchase an additional 3.85% of Fluorinex’s then fully diluted share capital to increase our holdings to 42.32% of Fluorinex's fully diluted share capital. In September 2008, Fluorinex received FDA approval for its product. In December 2008, we exercised the warrant granted to us by Fluorinex. On May 13, 2009, we entered into an agreement with Fluorinex for the purchase of additional 20% of Fluorinex’s then fully diluted share capital in consideration of $1.0 million. Following the additional investment on May 13, 2009, we have been consolidating Fluorinex results in our financial statements. On August 15, 2010, we entered into an additional agreement with Fluorinex for the purchase of additional 17.81% of Fluorinex's then fully diluted share capital in consideration of US$ 600,000 and, subject to Fluorinex reaching a certain milestone, for the purchase of an additional 10.64% of Fluorinex's then fully diluted share capital in consideration of US$ 600.000. On August 26, 2010, Fluorinex notified us of the achievement of the milestone and we subsequently transferred the remaining consideration and increased our holdings to 73.66% of Fluorinex's fully diluted share capital.
  In February 2008, we entered into an agreement with Rakuto Bio Technologies Ltd. (RBT), an Israeli-based start-up that develops and advances a whole skin complexion whitening treatment. Under the agreement, we agreed to purchase an aggregate of 31.57% of RBT’s fully diluted share capital (excluding the warrant as described below) in consideration for up to $3 million, and received a warrant to purchase an additional 5.94% of RBT fully diluted share capital. As part of the agreement, we have exclusive worldwide distribution rights to RBT’s currently developed product. In November 2009, we entered into an agreement with shareholders of RBT, pursuant to which we purchased an additional 9.25% of RBT’s fully diluted share capital in consideration for approximately $0.2 million. In February 2011, we closed an additional investment of US$ 308,916 in consideration of 15,664 of RBT's Preferred A-1 shares constituting an aggregate of 2.55% of RBT's share capital on a fully diluted basis. Additionally, we also provided RBT a loan in the aggregate amount of US$ 308,916. As of March 6, 2011, we hold 41.91% of RBT’s fully diluted share capital.
  On September 8, 2009, we entered into an agreement and plan of merger with Syneron Acquisition Sub, Inc., a Delaware corporation and our indirect, wholly-owned subsidiary (Acquisition Sub), and Candela Corporation, a publicly traded company incorporated under the laws of the state of Delaware. Pursuant to the merger agreement we acquired Candela through Acquisition Sub which merged with and into Candela. The transaction was completed on January 5, 2010, and Candela survived the merger as our indirect wholly-owned subsidiary. Candela shareholders received 0.2911 shares of our ordinary shares for each share of Candela common stock they owned. We issued approximately 6.7 million shares to acquire Candela.
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  In October 2009, we entered into a definitive agreement to acquire Primaeva Medical, Inc., an aesthetic technology firm based in Pleasanton, CA, in consideration for $7 million in cash, with potential additional consideration of up to $23 million in cash contingent on the achievement of commercial milestones. The transaction was completed on October 26, 2009. Primaeva developed a minimally invasive RF aesthetic device for the treatment of skin wrinkles and laxity. The Primaeva product, which has already received FDA clearance for wrinkle treatment, employs an innovative micro-needle electrode array housed in an advanced single-patient use applicator tip to deliver bipolar fractional radiofrequency (RF) energy directly within the reticular dermis. We expect to introduce the Primaeva product in the next 12 months.
  In November 2010, we formed a new wholly owned subsidiary, Syneron Beauty Ltd., to which we transferred some of our activities related to our consumer market initiatives, including our joint Procter & Gamble initiative, our mē product and our holdings in Fluorinex Active Ltd. In addition, following the acquisition of Pharos Life Corporation, Pharos became a wholly owned subsidiary of Syneron Beauty. Syneron Beauty holds the intellectual property dedicated to our home-use initiative, and it received a license to some of our other technologies, which are used in our consumer markets initiatives.
  In December 2010, we entered into a definitive agreement to acquire privately-held Pharos Life Corporation (Pharos), a leading manufacturer of home-use light therapy for aesthetic procedures. Under the terms of the agreement, we acquired Pharos through the potential performance-based earn-out payments of up to $15.75 million, payable in 2013. As part of the acquisition we also assumed $2.7 million in net debt.  Pharos' products are marketed directly to consumers through premium retailers under the tändaTM brand name and include products for skincare and wellness solutions for both the home-use and professional markets. Pharos will continue operating as our wholly-owned subsidiary and the tändaTM business will be integrated into our consumer home-use initiatives.
  Candela's Material Contracts
  In August 2000, Candelaentered into an agreement to amend its license agreement with The Regents of the University of California (Regents) whereby in exchange for an exclusivity fee of approximately $1.7 million,Candela obtained exclusive license rights to the Dynamic Cooling Device (DCD) subject to certain limited license rights of Cool Touch, Inc. (Cool Touch) in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, a subsidiary of New Star Technology, Inc. obtained a license to the DCD on a co-exclusive basis with Candela in certain narrower fields of use. Cool Touch is restricted in its ability to assign its license rights to certain existing competitors of Candela. Pursuant to the agreement, Candela is entitled to one-half of all royalty income payable to the Regents from Cool Touch. Under the amended agreement, Candela is no longer required by the Regents to negotiate sublicenses to third parties. However, Candela is entitled to one-half of all royalties due from any other entity that licenses the DCD technology from the Regents in other fields of use. Effective as of July 3, 2005, Candela amended certain portions of its agreement with the Regents whereby for the annual license fee of $0.3 million, Candela's royalty obligation was reduced to 3% from its prior level of 6%. The annual fee of $0.3 million was paid by a lump sum of $3.0 million and is being amortized over the remaining life of the patent agreement, which as of March 6, 2011 was approximately four years.
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  In November 2007, Candela entered into Senior Officer Executive Retention Agreements with certain of its officers (Retention Agreements). The existing terms of each Retention Agreement provide, among other things, that the officer will be entitled to certain benefits in the event that (i) a change in control occurs and (ii) the executive officer's employment with Candela terminates under the conditions described below within 24 months following the date of the change in control. The consummation of the merger with Candela constituted a change in control under the terms of the Retention Agreements. Pursuant to the terms of the Retention Agreements and the merger agreement, the Retention Agreements were assumed by us upon the completion of the merger. Pursuant to the terms of the Retention Agreements, if, within 24 months following the merger, Candela (or us) terminates the officer's employment without "cause" (as defined in the Retention Agreements) or the officer terminates his employment in connection with an "involuntary termination" (which includes (i) a material diminution in the officer's authority, duties or responsibilities, (ii) a material diminution in the officer's base compensation, (iii) a material diminution in the authority, duties or responsibilities of the supervisor to whom the officer is required to report, (iv) a change by more than 50 miles in the geographic location at which the officer must perform his duties, or (v) a material breach of the terms of the officer's Retention Agreement), then:
  (i) the officer will be entitled to equal monthly payments for a period of 12 or 24 months of the officer's annual base salary multiplied by two or three;
  (ii) the officer will be entitled to equal monthly payments for a period of 12 or 24 months of the officer's target annual bonus (irrespective of the level of attainment to that date of any target bonus benchmarks) multiplied by two or three;
  (iii) the officer will be entitled to receive any accrued obligations owing to him by Candela, including any unpaid base salary and prorated bonus (irrespective of the level of attainment to that date of any target bonus benchmarks);
  (iv) any then-unvested equity awards will immediately become exercisable and vested in full;
  (v) the officer will be provided with benefits for 18 months following the officer's termination or such longer period as may be provided by the terms of the appropriate plan, program, practice, or policy;
  (vi) Candela will be obligated to make a one-time payment of $5,000 to the officer to cover some or all of the lease payments remaining due on the automobile leased by Candela for use by the officer or, for one officer, Candela will continue to cover all lease payments until the end of the lease term; and
  (vii) Candela will provide outplacement services with a value of up to $10,000 or $25,000 to the officer, subject to certain limitations.
  The severance payments and benefits described above supersede the severance payable to each e officer under his existing Employment Agreement. Accordingly, should a termination of employment (without cause or an involuntary termination) occur within 24 months of the merger, severance payments will be made under the Retention Agreements, and not the Employment Agreements.
  After the announcement of our proposed merger with Candela, on September 24, 2009 and October 30, 2009, two putative class action lawsuits were filed against Candela, the members of Candela’s board of directors and us. The Court has consolidated the two actions. The plaintiffs alleged that members of Candela’s board of directors breached fiduciary duties owed to Candela stockholders by, among other things, using an unfair or flawed process in connection with the proposed merger between Candela and us, agreeing to an all-stock transaction at an unfair price, and omitting material information and/or providing materially misleading information concerning the merger. The consolidated action further alleged that Candela and us aided and abetted the purported breaches of fiduciary duties. The complaint seeks, among other relief: an injunction against the merger; rescission of the transaction (or damages) if consummated; and an award of all costs of the actions, including reasonable attorneys’ fees and expenses. While Candela and the other defendants believe the allegations in the complaints are entirely without merit and that they have valid defenses to all claims, in an effort to minimize the cost and expense of litigation, the defendants entered into a proposed settlement with the plaintiffs, which is subject to the Court approval. The proposed settlement provides for plaintiff's release of any and all claims and causes of action alleged in the complaints, or arising out of or relating in any manner thereto, in exchange for adding in the proxy statement/prospectus relating to the proposed merger certain additional limited disclosures and reducing the termination fee payable by Candela to us under the circumstances outlined in the merger agreement from $2.6 million to $2.1 million. The defendants have also agreed not to oppose any fee application by plaintiffs’ counsel that does not exceed $260,000.
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  D.
EXCHANGE CONTROLS
  Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.
  E.
TAXATION
  The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes.
  ISRAELI TAXATION
  The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel, traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
  Shareholders and potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
  General Corporate Tax Structure in Israel
  Israeli companies are generally subject to corporate tax on their taxable income at the rate of 25% for the 2010 tax year. This rate was reduced to 24% in 2011 and is scheduled to be gradually reduced to 18% by 2016 (2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and thereafter – 18%). Israeli companies are generally subject to capital gains tax at the corporate tax rate. However, the effective corporate tax rate payable by a company that derives income from an Approved Enterprise/Privileged Enterprise (as further discussed below) may be considerably less.
  Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
  Tax benefits prior to the 2005 Amendment
  The Law for the Encouragement of Capital Investments, 1959, generally referred to as the "Investments Law", provides that a 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 the ("Investment Center"), be granted the status of 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, e.g., the equipment to be purchased and utilized pursuant to the program.
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 A company owning an Approved Enterprise is eligible for a combination of grants and tax benefits (the “Grant Track”). The tax benefits under the Grant Track include accelerated depreciation and amortization for tax purposes, as well as the taxation of income generated from an Approved Enterprise at the maximum corporate tax rate of 25%, for a certain period of time. The benefit period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefit period is limited to twelve years from the earlier of the commencement of production by the Approved Enterprise or 14 years from the date of approval of the Approved Enterprise.
  The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed pursuant to the Approved Enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the ordinary course of business of the company investing in the Approved Enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The Tax Benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the Tax Benefits available to a company investing in an Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and related regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a consumer price index linked adjustment and interest.
  A company which qualifies as a foreign investment company (a “FIC”) will be eligible for a three-year extension of tax benefits following the expiration of the seven-year period referenced above. In addition, in the event that the level of foreign ownership in an Approved Enterprise reaches 49% or higher, the corporate tax rate applicable to income earned from the Approved Enterprise is reduced as follows:
  % of Foreign Ownership

Tax Rate49% or more but less than 74%

20%74% or more but less than 90%

15%90% or more

10%
  A company qualifies as a FIC if (i) it has received at least NIS 5 million in loans (for a minimum period of three years) or as investment in share capital from a foreign resident who is consequently entitled to at least 25% of the “rights” in the company (consisting of profit sharing rights, voting rights and appointment of directors), or (ii) if a foreign resident has purchased the company’s shares from an existing shareholder, consequently entitling the foreign shareholder to at least 25% of such rights in the company provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million.
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  Additionally, a company owning an Approved Enterprise on or after April 1, 1986 may elect to forgo its entitlements to grants and tax benefits under the Grant Track and apply for alternative package of tax benefits for a benefit period of between seven and ten years (the "Alternative Track"). Under the Alternative Track, a company’s undistributed income derived from the Approved Enterprise will be exempt from corporate tax for a period of between two and ten years, starting from the first year the company derives taxable income under the Approved Enterprise program. The length of time of this exemption will depend on the geographic location of the Approved Enterprise within Israel and the type of the approved enterprise. After the exemption period lapses, the company will be eligible for the reduced tax rate of 25% (or a lower rate in the case of a FIC) for the remainder of the benefit period.
  The Company has elected to be taxed under the Alternative Track. A company that has elected the Alternative Track and subsequently pays a dividend out of income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax on the amount which is determined by the distributed amount grossed up with the effective corporate tax rate which would have been applied had the company not elected the Alternative Track, which is at referred above ranged between 10%-25%. Dividends paid out of income derived from an Approved Enterprise are generally subject to withholding tax at source at the reduced rate of 15%., if the dividend is distributed during the tax exemption period or within twelve years thereafter. In the event, however, that the company qualifies as a FIC, there is no such time limitation.
  Under the Alternative Track, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the Alternative Track is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends. We currently intend to reinvest any income derived fromourApproved Enterpriseprogram and not to distribute such income as a dividend.
  Tax benefits under the 2005 Amendment
  An amendment to the Investments Law, which effective as of April 1, 2005, has changed certain provisions of the Investments Law. An eligible investment program under the Amendment qualifies for benefits as a "Privileged Enterprise" (rather than as an Approved Enterprise which status is still applicable for investment programs approved prior to December 31, 2004 and/or investment programs under the Grant Track). According to the amendment, only Approved Enterprises receiving cash grants require the prior approval of the Investment Center.
  The duration of the tax benefits described herein is limited to the shorter of seven or ten years (depending on the geographic location of the Approved Enterprise within Israel) from the Commencement Year (as described below) or twelve years from the first day of the Year of Election. Commencement Year is defined as the later of the first tax year in which a company had derived liable income for tax purposes from the Privileged Enterprise, or the year of election which is the year in which a company requested to have the tax benefits apply to the Privileged Enterprise. The tax benefits granted to a Privileged Enterprise are determined, depending on the geographic location of the Privileged Enterprise within Israel, according to one of the following, which may be applicable to us:
  (i) Similar to the currently available Alternative Track, exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the geographic location of the Privileged Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Privileged Enterprise during the tax exemption period, such income will be subject to deferred corporate tax with respect to the amount distributed (grossed up with the effective corporate tax rate which would have applied had the company not enjoyed the exemption) at the rate which would have applied had such company had the status of a Privileged enterprise. The company is required to withhold tax on such distribution at a rate of 15%; or
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  (ii) A special track which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at a flat rate of 11.5% on income the Privileged Enterprise ((the “Ireland Track”)). The benefit period is for ten years. Upon payment of dividends, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.
  Generally, a company that is Abundant in Foreign Investment (owned by at least 74% foreign shareholders and has undertaken to invest a minimum sum of $20 million in the Privileged Enterprise) is entitled to an extension of the benefit period by an additional five years, depending on the rate of its income that is derived in foreign currency.
  As a result of the amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income.
  Currently we have three approved programs under the Investments Law, which entitle us to some tax benefits. The first program under the Investments Law prior to the amendment (Approved Enterprise) and the second and third amendment (PrivilegedEnterprise). The above mentioned approved programs are subject to the Alternative Track provisions, which allows a ten year period of exemption of taxes for undistributed income.
  A substantial portion of our taxable operating income is derived from our Approved Enterprise program and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such program.
  The tax benefits attributable to our current Approved Enterprise and PrivilegedEnterprise are scheduled to expire in phases by 2018.
  On December 29, 2010, the Israeli Parliament approved an amendment to the Investment Law (the "New Amendment"). The New Amendment significantly revising the tax incentive regime in Israel, commencing on January, 1 2011.Under this New Amendment, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).
  Under the transition provisions of the new legislation, the Company may elect to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law. Changing from the current law to the new law is permitted at any time. We do not expect the new law to have a material effect on our tax payable on the Israeli operations in the foreseeable future.
  In addition, the New Amendment introduced a new status of "Special Preferred Enterprise" which is an Industrial company meeting, in addition to the conditions prescribed for “Preferred Enterprise" certain additional conditions (including that the total preferred enterprise income of the preferred enterprise is at least NIS 1.5 billion in the given tax year). The tax rate applicable for a period of 10 years to income generated by such an enterprise will be reduced to 5%, if located in Development Region "A", or to 8%, if located in other area within the State of Israel.
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  Dividend distributed from income which is attributed to "Preferred Enterprise"/"Special Preferred Enterprise" will be subject to withholding tax at source at the following rates: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% (iii) non-Israeli resident - 15%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
 
 The New Amendment also revised the grant track under to apply only to approved programs located in Development Region "A" and shall provide not only cash grants (as prior to the Amendment) but also the granting of loans. The rates for grants and loans shall not be fixed but up to 20% of the amount of the approved investment (may be increased with additional 4%).
  Under the transition provisions of the new legislation, the Company may elect to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law. Changing from the current law to the new law is permitted at any time.
  The provisions of the New Amendment shall not apply to current "Privileged Enterprise" or "Approved Enterprise" which will continue to be entitled to the tax benefits according to the provisions of the Investment Law prior to the Amendment unless the company owning such enterprise has elected by filing with the Israeli Tax Authority not later than the date prescribed for the filing of the company's annual tax return for the respective year to apply the provisions of the New Amendment (such election cannot be later rescinded). A company owning a Privileged Enterprise or Approved Enterprise which made such election by July 30, 2015, will be entitled to distribute income generated by the Approved/Privileged Enterprise exempt from withholding to its Israeli company shareholders.
  Law for the Encouragement of Industry (Taxes), 1969
  We believe that we qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as an Israeli resident company, of which 90% or more of its income in any tax year (exclusive of income from certain defense loans), capital gains, interest and dividends, is generated from an “Industrial Enterprise” that it owns. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial manufacturing.
  An Industrial Company is entitled to certain tax benefits, including: (i) a deduction of the cost of purchases of patents, know-how and certain other intangible property rights (other than goodwill) used for the development or promotion of the Industrial Enterprise over a period of eight years, beginning from the year in which such rights were first used, (ii) the right to elect to file consolidated tax returns with additional Israeli Industrial Companies controlled by it, and (iii) the right to deduct expenses related to public offerings in equal amounts over a period of three years beginning from the year of the offering.
  Eligibility for benefits under the Encouragement of Industry Law is not contingent upon the approval of any governmental authority.
  There is no assurance that we qualify or will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
  Taxation of the Company Shareholders
  Capital Gains
  Capital gain tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non- Israel resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.
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  The capital gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 20% on the real capital gain accrued from January 1, 2003. However, if the individual shareholder is a “Significant Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with other, 10% or more of one of the Israeli resident company's means of control) at the time of sale or at any time during the preceding 12 months period such gain will be taxed at the rate of 25%. The real gain is based on the difference between the adjusted average value of the shares during the last three trading days before January 1, 2003 (or the adjusted original cost if it is higher than the adjusted average value) and the value of the share at the date of sale.
  The real capital gain derived by corporation will be generally subject to a corporate tax rate (25% in 2010, 24% in 2011).
  Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income - 24% tax rate in 2011 (25% in 2010) for a corporation and a marginal tax rate of up to 45% in 2010 and 2011 for individual. Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under the Israeli Income Tax Ordinance from Israeli taxation provided the following cumulative conditions are met: (i) the shares were purchased upon or after the registration of the securities on the stock exchange (this condition shall not apply to shares purchased on or after January 1, 2009), (ii) the seller doesn't have a permanent establishment in Israel to which the derived capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its means of control are held, directly and indirectly, by Israeli resident shareholders. In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided (i) the U.S. resident owned, directly or indirectly, less than 10% of an Israeli resident company's voting power at any time within the 12 month period preceding such sale; (ii) the seller, being an individual, is present in Israel for a period or periods of less than 183 days at the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.
  Either the purchaser, the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the above mentioned exemptions, to withhold tax upon the sale of securities from the real capital gain at the rate of 25% in respect of a corporation and 20% in respect of an individual.
  At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, should be filed and an advanced payment should be paid on January 31 and June 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Income Tax Ordinance and regulations promulgated thereunder the aforementioned return should not be filed and no advance payment should be paid. Capital gain is also reportable on the annual income tax return.
  Dividends
  We have never paid cash dividends and we do not intend to pay cash dividends in the foreseeable future. A distribution of dividend by our company from income attributed to an Approved Enterprise/Privileged Enterprise (either to individual or corporation) will be generally subject to withholding tax in Israel at the rate of 15% (or 4% under the Ireland track to foreign residents), subject to a reduced rate under the provisions of any applicable double tax treaty. A distribution of dividend by our company from income attributed to a Preferred Enterprise will subject to tax in Israel at the following rates: Israeli resident individual - 15%, Israeli resident company – 0% and exempted for an Israeli resident company, foreign resident – 15%, subject to a reduced rate under the provisions of any applicable double tax treaty. A distribution of dividend from income, which is not attributed to an Approved Enterprise/Privileged Enterprise to an Israeli resident individual, will generally be subject to income tax at a rate of 20%. However, a 25% tax rate will apply if the dividend recipient is a “Controlling Shareholder” at the time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such dividend will be exempt from income tax provided the income from which such dividend is distributed was derived or accrued within Israel.
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  Under the Israeli Income Tax Ordinance, a non-Israeli resident (either individual or corporation) is generally subject to an Israeli income tax on the receipt of dividends at the rate of 20% (25% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax treaty. Thus, under the U.S.-Israel Double Tax Treaty the following rates will apply in respect of dividends distributed by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends – the tax rate is 12.5%, (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid from an Israeli resident company's income which was entitled to a reduced tax rate applicable to an Approved Enterprise/Privileged Enterprise – the tax rate is 15%, and (iii) in all other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S. Double Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.
  Our company is obligated to withhold tax, upon the distribution of a dividend attributed to an Approved Enterprise's/Privileged Enterprise's income, from the amount distributed, at the following rates: (i) Israeli resident corporation – 15%, (ii) Israeli resident individual – 15%, and (iii) non-Israeli resident – 15% (4% under the Ireland Track), subject to a reduced tax rate under the provisions of an applicable double tax treaty. If a dividend is distributed from an income attributed to the Preferred Enterprise, the following withholding tax rates will apply: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 15% (iii) non-Israeli resident - 15%, subject to a reduced tax rate under the provisions of an applicable double tax treaty. If the dividend is distributed from an income not attributed to the Approved Enterprise/Privileged Enterprise, the following withholding tax rates will apply: (i) Israeli resident corporation – 0%, (ii) Israeli resident individual – 20% (iii) non-Israeli resident - 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
  Foreign Exchange Regulations
  Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding up of our affairs, freely repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.
  UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
  The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of ordinary shares. The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
  96
  This discussion does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares. See “Israeli Taxation” above.
  This summary is for general information only and does not address all aspects of the U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks; financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; persons subject to the alternative minimum tax; persons holding ordinary shares as part of a straddle, hedge, conversion transaction, or other integrated transaction; persons who acquired ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting stock; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.
  This discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of our ordinary shares. The tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable U.S. state or local tax laws. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ordinary shares, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.
  This summary is directed solely to holders that hold their ordinary shares as capital assets within the meaning of Section 1221 of the Code, which generally means as property held for investment. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of ordinary shares that is any of the following:
  §
a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;
  §
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
  §
an estate, the income of which is subject to U.S. federal income taxation regardless of its source;
  §
a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or
  §
a trust in existence on August 20, 1996, that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
  The term “Non-U.S. Holder” means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.
  If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares that is a partnership and partners in such partnership should consult their own tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.
  97
  Distributions Paid on the Ordinary Shares
  We have never paid cash dividends and we do not intend to pay cash dividends in the foreseeable future. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will be required to include in gross income as ordinary dividend income the amount of any distributions paid on the ordinary shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” distributions in excess of our earnings and profits will be applied against and will reduce (but not below zero) the U.S. Holder’s tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from a sale or exchange of those ordinary shares. Our dividends will not qualify for the dividends-received deduction applicable in some cases to U.S. corporations. Dividends paid in NIS, including the amount of any Israeli taxes withheld, will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day they are received by the U.S. Holder. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date that payment is converted into U.S. dollars generally will be treated as ordinary income or loss.
  For tax years beginning before January 1, 2013, a non-corporate U.S. Holder’s “qualified dividend income” is subject to tax at reduced rates not exceeding 15%. “Qualified dividend income” generally includes dividends paid by a foreign corporation if either:
  ·
The stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or
  ·
That corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this purpose.
  In addition, under current law a U.S. Holder must generally hold his ordinary shares for more than 60 days during the 121 day period beginning 60 days prior to the ex-dividend date.
  Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. We do not believe that we will be classified as a “passive foreign investment company” for U.S. federal income tax purposes for our current taxable year. However, see the discussion under “Passive Foreign Investment Company Considerations” below.
  Subject to the discussion below under “Information Reporting and Back-up Withholding,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received on ordinary shares unless that income is effectively connected with the conduct by that Non-U.S. Holder of a trade or business in the United States.
  Foreign Tax Credit
  Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed with respect to the ordinary shares will generally constitute “passive category income” or, in the case of certain U.S. Holders, “general category income”. Any dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary shares generally will be treated as foreign source income for U.S. foreign tax credit purposes; however, special rules will apply if we are a “United States-owned foreign corporation.” In that case, distributions of current or accumulated earnings and profits will be treated as U.S. source and foreign source income in proportion to our earnings and profits in the year of the distribution allocable to U.S. and foreign sources. We will be treated as a U.S.-owned foreign corporation as long as stock representing 50% or more of the voting power or value of our ordinary shares is owned, directly or indirectly, by U.S. persons. Foreign taxes allocable to the portion of our distributions treated as from U.S. sources under these rules may not be creditable against a U.S. Holder’s U.S. federal income tax liability on such portion. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and availability of a foreign tax credit depends on numerous factors. Each U.S. Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that U.S. Holder would be entitled to the credit.
  98
  Disposition of Ordinary Shares
  Upon the sale or other disposition of ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S. Holders should consult their own advisors with respect to the tax consequences of the receipt of a currency other than U.S. dollars upon such sale or other disposition.
  In the event there is an Israeli income tax on gain from the disposition of ordinary shares, such tax should generally be the type of tax that is creditable for U.S. tax purposes; however, because it is likely that the source of any such gain would be a U.S. source, a U.S. foreign tax credit may not be available. U.S. Holders should consult their own tax advisors regarding the ability to claim such credit.
  Gain or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. For tax years beginning before January 1, 2013, long-term capital gains realized by non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income, other than qualified dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of income.
  Subject to the discussion below under “Information Reporting and Back-up Withholding”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of ordinary shares unless:
  ·
that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States, or
  ·
in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange, and other conditions are met.
  99
  Passive Foreign Investment Company Considerations
  Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company. A non-U.S. corporation will be considered a passive foreign investment company for any taxable year in which, after applying look-through rules, 75% or more of its gross income consists of specified types of passive income, or 50% or more of the average value of its assets consists of passive assets, which generally means assets that generate, or are held for the production of, passive income. Passive income may include amounts derived by reason of the temporary investment of funds. If we were classified as a passive foreign investment company, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In addition, holders of stock in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. U.S. Holders who hold ordinary shares during a period when we are a passive foreign investment company will be subject to the foregoing rules even if we cease to be a passive foreign investment company.
  We believe that we are not a passive foreign investment company for U.S. federal income tax purposes, but we cannot be certain whether we will be treated as a passive foreign investment company for the current year or any future taxable year. Our belief that we will not be a passive foreign investment company for the current year is based on our estimate of the fair market value of our intangible assets, including goodwill, not reflected in our financial statements under U.S. GAAP, and our projection of our income for the current year. If the IRS successfully challenged our valuation of our intangible assets, it could result in our classification as a passive foreign investment company. Moreover, because passive foreign investment company status is based on our income and assets for the entire taxable year, it is not possible to determine whether we will be a passive foreign investment company for the current taxable year until after the close of the year. In the future, in calculating the value of our intangible assets, we will value our total assets, in part, based on our total market value determined using the average of the selling price of our ordinary shares on the last trading day of each calendar quarter. We believe this valuation approach is reasonable. While we intend to manage our business so as to avoid passive foreign investment company status, to the extent consistent with our other business goals, we cannot predict whether our business plans will allow us to avoid passive foreign investment company status or whether our business plans will change in a manner that affects our passive foreign investment company status determination. In addition, because the market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile, and because that market price may affect the determination of whether we will be considered a passive foreign investment company, we cannot assure that we will not be considered a passive foreign investment company for any taxable year.
  The passive foreign investment company rules described above will not apply to a U.S. Holder if the U.S. Holder makes an election to treat us as a qualified electing fund. However, a U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We currently do not provide this information, and we do not intend to take actions necessary to permit you to make a qualified electing fund election in the event we are determined to be a passive foreign investment company. As an alternative to making this election, a U.S. Holder of passive foreign investment company stock which is publicly traded may in certain circumstances avoid certain of the tax consequences generally applicable to holders of a passive foreign investment company by electing to mark the stock to market annually and recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the passive foreign investment company stock and the U.S. Holder’s adjusted tax basis in the passive foreign investment company stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. This election is available for so long as our ordinary shares constitute “marketable stock,” which includes stock of a passive foreign investment company that is “regularly traded” on a “qualified exchange or other market.” Generally, a “qualified exchange or other market” includes a national market system established pursuant to Section 11A of the Securities Exchange Act of 1934. A class of stock that is traded on one or more qualified exchanges or other markets is “regularly traded” on an exchange or market for any calendar year during which that class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We believe that the Nasdaq Global Select Market will constitute a qualified exchange or other market for this purpose. However, no assurances can be provided that our ordinary shares will continue to trade on the Nasdaq Global Select Market or that the shares will be regularly traded for this purpose.
  100
  The rules applicable to owning shares of a passive foreign investment company are complex, and each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor regarding the consequences of investing in a passive foreign investment company.
  Legislative Developments
  Signed into law March 30, 2010, the Health Care and Education Reconciliation Act provides, among other things, with respect to taxable years beginning after December 31, 2012, certain U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax on unearned income. For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income.
  You should consult your tax advisors regarding the implications of the additional Medicare tax resulting from your ownership and disposition of ordinary shares.
  Information Reporting and Back-up Withholding
  Generally, information reporting requirements will apply to distributions on ordinary shares or proceeds on the disposition of ordinary shares paid within the United States (and, in certain cases, outside the United States) to U.S. Holders other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Holder fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
  Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing certification of non-U.S. status on an appropriate IRS Form W-8.
  Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment to you may be credited against your U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
  F.
DIVIDENDS AND PAYING AGENTS
  Not applicable.
  G.
STATEMENT BY EXPERTS
  Not applicable.
  H.
DOCUMENTS ON DISPLAY
  A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices. In addition, our filings with the Securities and Exchange Commission may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov.
  101
  A copy of each document (or a translation thereof to the extent not in English) concerning Syneron Medical Ltd. that is referred to in this Annual Report on Form 20-F, is available for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our principal executive offices.
  I.
SUBSIDIARY INFORMATION
  Not applicable.
  ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Exchange Rate Risk.
  A major part of our operations is carried out by us and our subsidiaries in the United States and Israel. The functional currency of these entities is the U.S. dollar as the revenues and a substantial portion of the costs are incurred in U.S. dollars. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate. The functional currency of our remaining subsidiaries and associated companies in most instances is their relevant local currency. The financial statements of those companies are included in consolidation, based on translation into U.S. dollars. Assets and liabilities are translated at year-end exchange rates, while revenues and expenses are translated at monthly average exchange rates during the year in accordance with ASC 830 "Foreign Currency Matters". Differences resulting from translation are presented as a separate component, under accumulated other comprehensive income (loss) in stockholders' equity.
  Interest Rate Risk. We do not have any outstanding loans and therefore, our exposure to market risk for changes in interest rate relates primarily to our investments in cash, marketable securities and bank deposits. The primary objective of our investment activities is to preserve principal while maximizing the interest income we receive from our investments, without increasing risk. We invest approximately 30% of our cash balances in bank deposits and the remainder primarily in securities issued by the United States, by non-U.S. governments and by high quality U.S and non U.S corporations featuring high credit rating of A and up. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in the future as a result of changes in the financial markets; however we believe any such potential loss would be immaterial to us.
  Our investment portfolio of cash equivalents, corporate securities, and governmental debt securities is subject to interest rate fluctuations. At December 31, 2010, we held $9.7 million of par value in auction-rate securities (ARS) for which the fair value was $6.4 million. The ARS we invest in are mainly high quality securities. At December 31, 2007, because of the short-term nature of our investment in these securities, they were classified as available-for-sale and included in short-term investments on our consolidated balance sheets. Subsequent to December 31, 2007, our securities failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As our investments in ARS currently lack short-term liquidity, we have reclassified these investments as non-current as of December 31, 2010. During the year ended December 31, 2010 we sold approximately $5.3 million par value of the ARS held by us for a total consideration of $0.8 million which reflects a gain of $0.3 million over the amount in which those ARS securities were recorded in our balance sheet.
  102
  ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  Not applicable.
  PART II
  ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  Not applicable.
  ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  At the closing of our initial public offering of our ordinary shares on August 11, 2004, all of our outstanding preferred shares were converted into ordinary shares. Amendments to articles of incorporation (relating only to ordinary shares and allowing, for example, free transferability of shares) became effective upon the closing of our initial public offering. Since our initial public offering, no instruments defining the rights of our ordinary shares’ holders have been modified.
  Pursuant to our initial public offering, we sold an aggregate of 5,000,000 ordinary shares at a per share offering price of $12.00. Our net aggregate proceeds (after underwriting discount and expenses) amounted to approximately $54 million. The amount of the underwriting discount paid by us in the initial public offering was approximately $4.2 million and the expenses of the offering, not including the underwriting discount, were approximately $2.0 million, consisting of, among other things, SEC registration fees, NASD filings fees, Nasdaq Global Select Market listing fees, Israel stamp duty and legal and accounting fees. The payments of these expenses did not constitute direct or indirect payments to our directors, officers, major shareholders or affiliates.
  To date, the net proceeds of the offering were invested in term deposits in U.S. banks, government bonds and corporate bonds in accordance with our investment guidelines as adopted by our audit committee. We still intend to use the proceeds in the manner set forth in our prospectus of August 5, 2004.
  ITEM 15.
CONTROLS AND PROCEDURES
  (a)        Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010, pursuant to Rule 13a-15 under the Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer (the principal executive and principal financial officer, respectively) have concluded that our disclosure controls and procedure are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
  103
  (b)        Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that:
  ·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
  ·
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles;
  ·
provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and
  ·
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
  Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2010, based on the framework for Internal Control-Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2010.
  Our management’s evaluation of the effectiveness of internal control over financial reporting did not include the internal controls over financial reporting of Candela Corporation, which we acquired in 2010 and which is included in our 2010 consolidated financial statements, as permitted by the Securities and Exchange Commission. The total assets of Candela's business represents approximately 30% of the consolidated total assets and a significant majority of total consolidated revenues as reported in the consolidated financial statements for the year ending December 31, 2010.
  (c)        Our independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer an independent registered public accounting firm and a member firm of Ernst & Young Global has issued an attestation report on our internal controls over financial reporting, and is incorporated herein by reference.
  (d)        There were no changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 20-F that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting.
  ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
  Our board of directors has determined that Dr. Michael Anghel, who is an independent director (as defined under Rule 5605(a)(2) of The Nasdaq Marketplace Rules) and serves on our audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F.
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  ITEM 16B.
CODE OF ETHICS
  In 2004, we adopted a Code of Business Conduct and Ethics, which applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, and persons performing similar functions. In February 2008, the Code of Business Conduct and Ethics was reapproved by our board of directors. The Code of Business Conduct and Ethics is posted on our website, www.syneron.com.
  ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
  During the years 2009 and 2010, we were billed the following aggregate fees for the professional services rendered by Ernst & Young, independent registered public accounting firm:
  2009

(in thousands)


2010

(in thousands)Audit Fees(1)


614



636Tax Fees(2)


82



199Audit Related Fees(3)


295



244Total


991



1,079
  (1)
Audit fees are fees for audit services for each of the years shown in this table, including fees associated with the annual audit (including audit of our internal control over financial reporting), consultations on various accounting issues and audit services provided in connection with other statutory or regulatory filings.
  (2)
Tax services rendered by our auditors were for tax compliance and for tax consulting associated with international transfer pricing.
  (3)           Audit related services rendered by Ernst & Young during 2010 were mostly in connection with due diligence review conducted with respect to potential acquisitions.
  Our audit committee has adopted a policy for pre-approval of audit and non-audit services provided by our independent auditor. Under the policy, such services must require the specific pre-approval of our audit committee followed by ratification of our full board of directors. Any proposed services exceeding the pre-approval amounts for all services to be provided by our independent auditor require an additional specific pre-approval by our audit committee.
  ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  Not applicable.
  ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  In 2010, neither the Company nor any affiliated purchaser (as defined in the Exchange Act) purchased any of the Company’s ordinary shares.
 ITEM 16F.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
  None.
 ITEM 16G.
CORPORATE GOVERNANCE
 
 There are no significant ways in which our corporate governance practices differ from those followed by domestic companies listed on The NASDAQ Global Market.
  105
  PART III
  ITEM 17.
FINANCIAL STATEMENTS
  Not applicable.
  ITEM 18.
FINANCIAL STATEMENTS
  Our and our subsidiary’s Consolidated Financial Statements beginning on pages F-1 through F-75, as set forth in the following index, are hereby incorporated herein by reference. These Consolidated Financial Statements are filed as part of this Annual Report on Form 20-F.
  Report of Independent Registered Public Accounting Firm
F - 2Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting
F - 3 - F - 4Consolidated Balance Sheets
F - 5 - F - 6Consolidated Statements of Income
F - 7Consolidated Statements of Changes in Shareholders’ Equity
F - 8 - F - 9Consolidated Statements of Cash Flows
F - 10 - F - 12Notes to Consolidated Financial Statements
F - 13 - F - 75
  106
  
 ITEM 19.
EXHIBITS1.1
Articles of Association of Registrant, as amended (incorporated by reference to Exhibit 1.1 to our Annual Report on Form 20-F for the year ended December 31, 2007, filed May 7, 2008).2.1
Form of Share Certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form F-1 filed July 14, 2004).4.1
Turn-Key Manufacturing Agreement by and between Syneron Medical Ltd. and U.S.R. Electronics Systems (1987) Ltd. (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1/A filed August 3, 2004)**.4.2
Turn-Key Manufacturing Agreement by and between Syneron Medical Ltd. and Fibernet Ltd. (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1/A filed August 3, 2004)**.4.3
Amended and Restated License Agreement between Candela Corporation and The Regents of the University of California for Dynamic Skin Cooling Method and Apparatus effective as of August 11, 2000(incorporated by reference to Exhibit 4.3 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010)**.4.4
Settlement Agreement dated August 11, 2000 by and among Candela Corporation, the Regents of the University of California, and Cool Touch, Inc.(incorporated by reference to Exhibit 4.4 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010)**4.5
Patent License and Settlement Agreement dated March 4, 2004 by and between (a) Lumenis Inc. and Lumenis Ltd. and (b) Syneron Inc. and Syneron Medical Ltd. (incorporated by reference to Exhibit 10.4 to our Registration Statement on Form F-1/A filed August 3, 2004)**.4. 6
Candela Corporation's 1998 Third Amended and Restated Stock Plan (incorporated by reference to Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).4.7
2003 Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form F-1 filed July 14, 2004).4.8
2004 Israel Stock Option Plan (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form F-1 filed July 14, 2004).4.9
2004 United States and Canada Stock Option Plan (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form F-1 filed July 14, 2004).4.10
Candela Corporation's 2008 Stock Plan(incorporated by reference to Exhibit 4.10 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).4.11
Form of Candela Corporation 2008 Stock Plan Notice of Stock Appreciation Right Grant (incorporated by reference to Exhibit 4.11 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).4.12
Lease for premises at 530 and 534 Boston Post Road, Wayland, Massachusetts(incorporated by reference to Exhibit 4.12 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).  107
  4.13
Patent License and Settlement Agreement dated as of June 3, 2005 by and between Thermage, Inc. and Syneron Medical Ltd. (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F for the year ended December 31, 2004 filed July 30, 2005).4.14
First Amendment to the Amended and Restated License Agreement dated as of July 3, 2005, by and between the Regents of the University of California and Candela Corporation (incorporated by reference to Exhibit 4.14 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).4.15
Candela Corporation's Senior Officer Executive Retention Agreement(incorporated by reference to Exhibit 4.16 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2010).4.16
Joint Development and Supply Framework Agreement dated as of February 25, 2007, by and between The Procter & Gamble Company and Syneron Medical Ltd. (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 20-F for the year ended December 31, 2006 filed June 15, 2007)**.4.17
Shareholders' Rights Agreement dated as of November 11, 2008, by and between Syneron Medical Ltd. and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 99.1 to our Report of Foreign Private Issuer on Form 6-K, filed November 12, 2008) .4.18
Shareholders' Rights Agreement dated as of November 11, 2008, by and between Syneron Medical Ltd. and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.19 to our Annual Report on Form 20-F for the year ended December 31, 2009 filed March 25, 2009)4.19
Agreement and Plan of Merger, dated as of September 8, 2009, among Syneron Medical Ltd., Syneron Acquisition Sub, Inc. and Candela Corporation (incorporated by reference to Annex A to the proxy statement/prospectus included in our Registration Statement on Form F-4 filed November 23, 2009).4.20
Amendment No. 1 to Agreement and Plan of Merger, dated as of November 23, 2009, by and among Syneron Medical Ltd., Syneron Acquisition Sub, Inc. and Candela Corporation (incorporated by reference to Annex A-1 to the proxy statement/prospectus included in our Registration Statement on Form F-4 filed November 23, 2009).8.1*
List of Subsidiaries of the Registrant.12.(a).1*
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.(a).2*
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.(a).1*
Certifications of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.15.(a).1*
Consent of Independent Registered Public Accounting Firm.
 
 *
Filed herewith.
  **
Portions of this exhibit have been omitted and filed separately with the secretary of the Securities and Exchange Commission pursuant to a confidential treatment request.
  108
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
  CONSOLIDATED FINANCIAL STATEMENTS
 
 AS OF DECEMBER 31, 2010
  U.S. DOLLARS IN THOUSANDS
 
 INDEX
 
 
 PageReport of Independent Registered Public Accounting Firm
F-2Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
F-3 - F-4Consolidated Balance Sheets
F-5 - F-6Consolidated Statements of Operations
F-7Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
F-8 - F-9Consolidated Statements of Cash Flows
F-10 - F-12Notes to Consolidated Financial Statements
F-13 - F-75
   
 
  Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax: 972(3)5633443

www.ey.com.il
  REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and Shareholders of
 
 SYNERON MEDICAL LTD.
 
 We have audited the accompanying consolidated balance sheets of Syneron Medical Ltd. (the "Company") and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's 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 also 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 and evaluating the overall financial statement 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 consolidated financial position of the Company and its subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2011 expressed an unqualified opinion thereon.
 
 Haifa, Israel

KOST FORER GABBAY & KASIERERMarch 28, 2011

A Member of Ernst & Young Global
 
 F - 2
 
 Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax: 972(3)5633443

www.ey.com.il
 REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and Shareholders of
 
 SYNERON MEDICAL LTD.
  We have audited Syneron Medical Ltd.'s (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Form 20-F. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
 We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
 A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 F - 3
  Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Tel:  972 (4)8654000

Fax: 972(3)5633443

www.ey.com.il
 
 As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Candela Corporation and its subsidiaries, whichis  included in Syneron Medical Ltd. 2010 consolidated financial statements and constituted $111.2 million and $70.1 millionof total assets and net assets, respectively, as of December 31, 2010 and $129.8 million and ($4.0) million of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Syneron Medical Ltd. also did not include an evaluation of the internal control over financial reporting of Candela.
 
 In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Syneron Medical Ltd. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations,changesinshareholders'equity and cash flows for each of the three years in the period ended December31, 2010 and our report dated 28, 2011 expressed an unqualified opinion thereon.
 Haifa, Israel

KOST FORER GABBAY & KASIERERMarch 28, 2011

A Member of Ernst & Young Global
 
 F - 4
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 U.S dollars in thousands
 
 
 December 31,Note


2010


2009ASSETSCURRENT ASSETS:Cash and cash equivalents




$
63,821


$
24,372Short-term bank deposits





1,192



1,000Available-for-sale marketable securities

3



114,799



169,309Trade receivables (net of allowance for doubtful accounts of $ 5,891

and $ 7,561 at December 31, 2010 and 2009, respectively)





42,440



13,758Other accounts receivable and prepaid expenses

5



13,868



2,753Inventories

6



22,720



8,592Total current assets





258,840



219,784LONG-TERM ASSETS:Severance pay fund





334



246Long-term deposits and others





2,744



221Long-term available-for-sale marketable securities

3



37,721



11,449Investments in affiliated companies

7



7,969



1,050Property and equipment, net

8



4,029



2,885Intangible assets, net

9



39,639



19,522Goodwill

10



18,579



15,110Deferred taxes

17



4,930



-Total long-term assets





115,945



50,483Total assets




$
374,785


$
270,267
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 5
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands, except share and per share data
 
 
 December 31,Note


2010


2009LIABILITIES AND EQUITYCURRENT LIABILITIES:Short term bank credit

11


$
2,737


$
-Trade payables





16,644



3,735Deferred revenues

12



14,941



4,206Other accounts payable and accrued expenses

13



38,191



20,028Total current liabilities





72,513



27,969LONG-TERM LIABILITIES:Deferred revenues

12



4,528



902Warranty accruals





1,074



558Contingent consideration liability

1g, 1j



11,365



7,331Accrued severance pay





554



330Deferred taxes

17



6,215



5,919Total long-term liabilities





23,736



15,040Total liabilities





96,249



43,009Commitments and contingencies

14EQUITY:

15Syneron Medical Ltd. shareholders' equityOrdinary shares of NIS 0.01 par value:Authorized - 100,000,000 Ordinary shares; Issued and outstanding- 34,674,889 and 27,601,264 shares at December 31, 2010 and 2009, respectively





84



65Additional paid-in capital





180,410



102,937Treasury shares -1,251,574 Ordinary shares at December 31, 2010 and 2009





(9,587
)


(9,587
)Accumulated other comprehensive income (loss)





867



(9
)Retained earnings





105,215



130,751Total Syneron shareholders' equity





276,989



224,157Non-controlling interest

1f, 1h, 1e



1,547



3,101Total equity





278,536



227,258Total liabilities and equity




$
374,785


$
270,267
  The accompanying notes are an integral part of the consolidated financial statements.
 F - 6
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 U.S. dollars in thousands, except share and per share data
 
 Year ended December 31,Note


2010


2009


2008RevenuesLasers and other products




$
132,568


$
49,429


$
112,317Product-related service





56,960



5,297



2,662Total revenue





189,528



54,726



114,979Cost of revenuesLasers and other products





67,027



16,401



28,418Product-related service





34,072



2,502



1,252Total cost of revenues





101,099



18,903



29,670Gross profit





88,429



35,823



85,309Operating expenses, net:Research and development





26,837



13,220



13,783Selling and marketing





63,429



34,156



54,064General and administrative





36,103



16,478



17,706Other income, net

16



(4,538
)


(3,975
)


-Total operating expenses, net





121,831



59,879



85,553Operating  loss





(33,402
)


(24,056
)


(244
)Financial income, net

18



717



2,097



3,862Other income

1f, 1h



240



562



-Income (loss) before taxes on income (tax benefit)





(32,445
)


(21,397
)


3,618Taxes on income (tax benefit)

17



(5,110
)


3,240



(2,009
)Consolidated net income (loss)





(27,335
)


(24,637
)


5,627Net loss attributable to non-controlling interest

1f, 1h,1e



1,799



1,050



-Net income (loss) attributable to Syneron's shareholders




$
(25,536
)

$
(23,587
)

$
5,627Net earnings (loss) per share:Basic net earnings (loss) per share attributable to Syneron shareholders




$
(0.74
)

$
(0.86
)

$
0.21Diluted net earnings (loss) per share attributable to Syneron shareholders




$
(0.74
)

$
(0.86
)

$
0.20Weighted average number of shares used in per share calculations (in thousands):Basic





34,369



27,526



27,410Diluted





34,369



27,526



27,521
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 7
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
 U.S. dollars in thousands
 
 Syneron Medical Ltd. ShareholdersOrdinary

Shares


Additional

paid-in

capital


Accumulated

other

comprehensive

loss (**)


Treasury

Shares


Retained

earnings


Non-controlling

interest


Total

equity


Total

comprehensive

income (loss)Balance as of  January 1, 2008

$
64


$
89,941


$
(83
)

$
(7,660
)

$
148,573


$
-


$
230,835Exercise of stock options


*)   -



2



-



-



-



-



2Issuance of shares as a result of exercise of  restricted stock units (RSU)


*)  -



2



-



-



-



-



2Equity based compensation expenses


-



7,592



-



-



-



-



7,592Repurchase of Ordinary shares at cost


-



-



-



(1,927
)


-



-



(1,927
)Accretion to redemption of value of put option


-



-



-



-



138



-



138Reimbursement of share issuance expenses (see also Note 13a(4))


-



588



-



-



-



-



588Other comprehensive income:Unrealized loss on available-for-sale securities


-



-



(558
)


-



-



-



(558
)

$
(558
)Reclassification to income statement for loss realized


-



-



297



-



-



-



297Net income


-



-



-



-



5,627



-



5,627



5,627Total comprehensive income





























$
5,069Balance as of December 31, 2008


64



98,125



(344
)


(9,587
)


154,338



-



242,596Exercise of stock options


1



547



-



-



-



-



548Issuance of shares as a result of exercise of  restricted stock units (RSU)


*)   -



1



-



-



-



-



1Equity based compensation expenses


*)   -



4,264



-



-



-



-



4,264Non-controlling  interest recorded as a result of business combination (see also Note 1f and h)


-



-



-



-



-



4,151



4,151Other comprehensive income:Unrealized gain on available-for-sale securities


-



-



342



-



-



-



342


$
342Reclassification to income statement for loss realized


-



-



(7
)


-



-



-



(7
)Net loss


-



-



-



-



(23,587
)


(1,050
)


(24,637
)


(24,637
)Total comprehensive loss





























$
(24,295
)Balance as of December 31, 2009


65



102,937



(9
)


(9,587
)


130,751



3,101



227,258
 
 *)
Represents an amount lower than $ 1.
 **)
Accumulated other comprehensive loss on account of unrealized losses on available-for-sale marketable securities.
 
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 8
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
 U.S. dollars in thousands
 
 Syneron Medical Ltd. ShareholdersOrdinary

shares


Additional

paid-in

capital


Accumulated

other

comprehensive

(loss) income (**)


Treasury

Shares


Retained

earnings


Non-controlling

interest


Total

equity


Total comprehensive

income (loss)Balance as of December 31, 2009


65



102,937



(9
)


(9,587
)


130,751



3,101



227,258Exercise of stock options


1



1,931







-



-



-



1,932Issuance of shares as a result of exercise of  restricted stock units (RSU)


*)  -



*)  -







-



-



-



-Issuance of shares in connection with business combination, net of issuance costs of $660 (see also Note 1i)


18



72,346



-







-



-



72,364Equity based compensation expenses


-



3,196



-







-



-



3,196Establishment of subsidiary (see also Note 1e)


-



-



-



-



-



245



245Other comprehensive income:Unrealized  loss on available-for-sale securities


-



-



(286
)


-



-



-



(286
)

$
(286
)Currency translation adjustment


-



-



1,011



-



-



-



1,011



1,011Reclassification to income statement for loss realized, net










151



-



-



-



151Net loss


-



-



-



-



(25,536
)


(1,799
)


(27,335
)


(27,335
)Total comprehensive loss





























$
(26,610
)Balance as of December 31, 2010

$
84


$
180,410


$
867


$
(9,587
)

$
105,215


$
1,547


$
278,536
 
 *)
Represents an amount lower than $ 1.
 **)
Accumulated other comprehensive loss on account of unrealized losses on available-for-sale marketable securities and on account of translation adjustment.
 
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 9
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
  Year ended December 31,2010


2009


2008Cash flows from operating activities:Net (loss) income before non-controlling interest

$
(27,335
)

$
(24,637
)

$
5,627Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:Depreciation and amortization


9,381



1,927



2,137Deferred taxes


(3,339
)


1,549



(1,812
)Increase (decrease) in accrued severance pay, net


136



(9
)


41Decrease in trade receivables, net


2,445



18,879



8,104Decrease in other accounts receivable and prepaid expenses


9,667



64



2,048Decrease (increase) in inventories


13,180



4,320



(3,691
)Decrease (increase) in trade payables


4,201



(5,039
)


941Decrease in long and short term deferred revenues


(3,770
)


(3,608
)


(2,020
)Increase (decrease) in warranty accruals


199



(4
)


641Impairment of intangible assets


1,319



-



-Decrease (increase)in other account payable and accrued     expenses


(6,187
)


167



(552
)Impairment of available-for-sale marketable securities


119



173



1,553Impairment of investment in affiliated company


850



-



-Decrease (increase) in accrued interest amortization of premium and accretion to discount and gain from sale of marketable securities


716



1,578



(489
)Gain on investments in affiliated companies as a result of a business combination


-



(562
)


-Bargain purchase price related to acquisition of a subsidiary


(8,525
)


-



-Revaluation of contingent liability related to acquisition of a subsidiary


1,625



-



-Equity based compensation


3,196



4,264



7,592Others


-



(7
)


297Net cash provided by (used in) operating activities


(2,122
)


(945
)


20,417Cash flows from investing activities:Investment in short-term deposits, net


(192
)


(1,000
)


-Maturities of held-to-maturity marketable securities


460



-



-Purchase of available-for-sale marketable securities


(186,414
)


(294,345
)


(183,103
)Proceeds from sale and redemption of available-for-sale marketable securities


213,681



256,735



196,988Payments for investments in affiliated and other companies


(9,169
)


(750
)


(1,653
)Withdrawal  (investment in) long-term deposits and others


(119
)


(22
)


950Purchase of property and equipment


(887
)


(487
)


(1,247
)Acquisition of shares held by non-controlling  shareholders of a subsidiary


-



-



(500
)Net cash received (paid) in acquisition of subsidiaries (a)


21,427



(7,729
)


(775
)Others


26



-



-Net cash provided by (used in) investing activities


38,813



(47,598
)


10,660
 
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 10
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 
 
 Year ended December 31,2010


2009


2008Cash flows from financing activities:Exercise of stock options and RSU's

$
1,932


$
549


$
4Repurchase of Ordinary shares from shareholders at cost


-



-



(1,927
)Reimbursement of share issuance expenses


-



-



588Net cash provided by (used in) financing activities


1,932



549



(1,335
)Translation adjustment  on cash and cash equivalents


826



-



-Increase (decrease) in cash and cash equivalents


39,449



(47,994
)


29,742Cash and cash equivalents at the beginning of the year


24,372



72,366



42,624Cash and cash equivalents at the end of the year

$
63,821


$
24,372


$
72,366Supplemental disclosure of cash flow information:Cash paid during the year for Income taxes

$
491


$
625


$
905Supplemental disclosure of non-cash financing and investing activities:Purchase of property and equipment on credit

$
113


$
-


$
347Change in designation of inventory to property and equipment (reclassification of property and equipment to inventory)

$
-


$
(252
)

$
496
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 11
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 
 
 Year ended December 31,2010


2009


2008(a)
Net cash paid in acquisition of subsidiaries (see Note 1(c-j)):Consideration:Cash

$
430


$
8,658


$
775Fair value of Syneron's interest held before the business combination


-



4,487



-Fair value of Syneron's equity instruments issued upon acquisition


73,024



-



-Total consideration


73,454



13,145



775Identifiable assets acquired and liabilities assumed:Cash acquired


21,857



929



-Current assets


73,045



-



-Non current assets


5,201



-



-In process research and development


510



983



-Intangible assets


26,423



15,405



1,826Deferred taxes assets (liabilities)


8,635



(5,236
)


-Liabilities assumed


(54,607
)


(142
)


(712
)Others


100



400



-Contingent consideration


(2,409
)


(7,331
)


(614
)Non-controlling interest in the subsidiary


(245
)


(4,151
)


-Goodwill (bargain purchase price)


(5,056
)


12,288



27573,454



13,145



775Net cash paid (received) for acquisition

$
(21,427
)

$
7,729


$
775
 
 The accompanying notes are an integral part of the consolidated financial statements.
 
 F - 12
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 1:-
GENERAL
 
 a.
Syneron Medical Ltd. ("the Company" or "Syneron") commenced its operations in July 2000. The Company and its subsidiaries (together "the Group") are principally engaged in research, development, marketing and sales, directly to end-users and also to distributors of advanced equipment for the aesthetic medical industry and systems for dermatologists, plastic surgeons and other qualified practitioners worldwide.
 
 b.
The Company has various wholly owned subsidiaries throughout the world that are engaged in the research, development, marketing and selling of the Company's products in different geographic areas.
  c.
Light Instruments Ltd.:
 
 In 2005, 2007 and 2008 the Company invested in Light Instruments Ltd. ("LI"), an Israeli development stage company engaged in the development of advanced dental laser devices. The Company invested $6,340, in consideration of 100% of LI outstanding share capital. As of December 31, 2010 and 2009, the Company has a liability related to this acquisition of $60 and $160.  During 2010 and 2009, the Company paid $ 100 and $ 400, respectively on account of the above mentioned liability.
 
 As part of the investment agreements with LI, each of the two founders is also entitled to 0.5% of all of LI net sales for a period of up to seven years starting from the closing date, up to an aggregate amount of $ 500 without regard to their continued employment with the Company (i.e., the founders are entitled to such amounts as sellers and not in their role as employees). This amount will be recorded as part of the purchase price and will be allocated to Goodwill. Through December 31, 2010, the Company paid to the two founders approximately $ 184 out of which $ 75 were paid during the year ended December 31, 2010.
 
 d.
Inlight Corp.
 
 1.
In November 2008, the Company entered into a share purchase agreement ("SPA") with Inlight Corp. shareholders' ("Inlight"), a company incorporated under the laws of the State of California pursuant to which Syneron acquired all of Inlight's share capital. The Company is expecting to utilize Inlight's technology to develop and release additional products.
 
 2.
In consideration of 100% of Inlight's share capital, the Company undertook to pay total consideration of up to $ 4,000. The consideration is conditioned upon Inlight's compliance with certain milestones detailed in the SPA. At the closing, the Company paid Inlight's shareholders total consideration of $ 500 and deposited an additional amount of $ 500 in escrow. Amounts deposited in escrow were recorded as part of other receivables.



During 2010 the company transferred an amount of $ 250 from the escrow on behalf of Inlight's shareholders, and the remaining amount was transferred in February 2011. The payments were recorded against the contingent liability.
 
 F - 13
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 d.
Inlight Corp. (Cont.):
 
 3.
The excess amounts paid for the above mentioned Inlight shares over their book value was calculated as follows:
 
 Assets

Fair value


Expected

useful lives

of excess costTangible asset:Contingent payment liability

$
(614
)

-Intangible assets:Developed technology


1,826


6 yearsDeferred tax liability


(712
)

-Total purchase price

$
500
 
 e.
Syneron China:
 
 During November 2008, the Company signed a joint venture ("JV") agreement for establishing Syneron China. According to the agreement, the Company holds 51% of the JV for a total investment of $ 255. Through this new Chinese subsidiary, Syneron sells directly to medical and aesthetic professionals in China. The JV became active and started promoting and marketing the Company's products in January 2010. The Company consolidated the JV's results from the date of commencement of operations of the JV and recorded the non controlling interest in accordance with the provisions of ASC 810.
 
 f.
Fluorinex Active Ltd.:
 
 1.
On May 13, 2009 ("the Acquisition Date"), the Company invested an additional $ 1,000 in Fluorinex Active Ltd. ("Fluorinex") in consideration of 603,687 Preferred B1 shares. Following the additional investment, the Company had obtained control over Fluorinex and held 53% of Fluorinex's outstanding voting shares. Prior to the acquisition date, the Company's investment in Fluorinex was accounted for based on the cost method as further described in (4) below.



The results of Fluorinex's operations have been included in the Company's consolidated financial statements since the date Company obtained control over Fluorinex. Fluorinex is an Israeli company near the commercialization phase which is engaged in the development of a new tooth whitening, tooth decay and dental care prevention method and devices.



The Company has accounted for the acquisition and the control gained in accordance with ASC 805.
 
 F - 14
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 f.
Fluorinex Active Ltd. (Cont.):
  1.
Cont.



The acquisition date fair value of the consideration transferred totaled $ 2,787 which consisted of the following:
  
 Cash

$
1,000Fair value of previous  cost basis investment


1,787Total

$
2,787
 
 2.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (reflects 100% of Fluorinex).
 Assets

Fair value


Expected

useful livesCash

$
959


-Developed technology(1)


1,141


6.5 yearsIn-process technology (2)


983


-Total identifiable assets acquired


3,083Current liabilities


(144
)Deferred tax liability


(376
)

-Total liabilities assumed


(520
)

-Net identifiable assets acquired


2,563Goodwill (3)


1,389Net assets acquired (4)

$
3,952
 
 (1)
Developed technology is amortized using the straight-line method over its useful life, which is estimated at 6.5 years.
 
 (2)
The Company recorded an in-process research and development asset which currently considered indefinite lived until the completion or abandonment of the associated project. The in-process research and development asset recorded will be amortized when revenues are generated from such technology and will be subject to impairment testing.
 
 (3)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
 
 F - 15
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 f.
Fluorinex Active Ltd. (Cont.):
  3.
The fair value of the 47% non-controlling interest in Fluorinex is $ 1,277 and was estimated using the income approach.
 
 4.
Prior to the acquisition date, the Company accounted for its 43% interest in Fluorinex as a cost method investment. The investment was stated at cost, since the investment was in series B Preferred shares which was determined to be not in-substance Ordinary shares in accordance with ASC 323-10-15. The acquisition-date fair value of the previous equity interest was $ 1,787, and is included in the measurement of the consideration transferred. The Company recognized a total gain of $ 112 as a result of remeasuring its prior equity interest in Fluorinex held before the business combination and recorded such gain as other income in its statement of income.
 
 5.
On August 15, 2010, the company entered into an additional agreement with Fluorinex for the purchase of additional 17.81% of Fluorinex's then fully diluted share capital in consideration of $600 and, subject to the Fluorinex reaching a certain milestone, for the purchase of an additional 10.64% of Fluorinex's then fully diluted share capital in consideration of $600. On August 26, 2010, Fluorinex notified the company of the achievement of the milestone. Subsequently, the company transferred the remaining consideration and increased its holdings to 71% of Fluorinex's share capital. The increase in the percentage held in Fluorinex was accounted for according to the provisions of ASC 810.
 
  g.
Primaeva Inc.
 
 1.
On October 14, 2009 ("the acquisition date"), the Company acquired Primaeva Medical, Inc. ("Primaeva"), an aesthetic technology firm based in the United States in consideration of $ 14,331. Following the acquisition, the Company obtained control over Primaeva and holds 100% of Primaeva's outstanding voting shares.



The Company has accounted for the acquisition and the control gained in accordance with ASC 805 "Business Combinations"
 
 F - 16
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 g.
Primaeva Inc.(Cont.):
 
 2.
The acquisition date fair value of the consideration transferred totaled $ 14,331 which consisted of the following:

Fair value of consideration transferred:
 
 
 Cash

$
7,000Contingent consideration


7,331Total

$
14,331
  The contingent consideration arrangement requires the Company to pay up to $ 23,000 of additional consideration to Primaeva's former shareholders subject to reaching certain net revenue milestones over a three years period ending December 31, 2012.



The fair value of the contingent consideration arrangement at the acquisition date was $ 7,331. The Company estimated the fair value of the contingent consideration using a probability weighted discounted cash flow model with a discount rate of 18%. As of December 31, 2010 the Company reevaluated such contingent consideration resulting in an increase of $ 1,625 which was recorded as an expense in Company's statements of operations in other income, net as part as operating expenses. The Company measured the fair value of the contingent consideration in accordance with ASC 820 "Fair Value Measurements and Disclosures", at level 3.
  3.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
  Assets

Fair value


Expected

useful livesCash

$
-


-Current assets


140Developed technology(1)


10,038


7 yearsTotal identifiable assets acquired


10,178Current liabilities


(38
)Deferred tax liability


(4,015
)

-Total liabilities assumed


(4,053
)

-Net identifiable assets acquired


6,125Goodwill (2)


8,206Net assets acquired

$
14,331
 
 F - 17
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 g.
Primaeva Inc.(Cont.):
 
 3.
Cont.
  (1)
The developed technology will be amortized using the straight-line method over its useful life which is estimated as 7 years.
 
 (2)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
 
 h.
Acquisition of Rakuto Bio Technologies Ltd. (RBT):
 
 1.
On November 9, 2009 ("the acquisition date"), the Company entered into a share purchase agreement ("SPA") with RBT's shareholders. Pursuant to the SPA, the Company acquired 17.8% of RBT's common shares for total consideration of $ 205, from three existing shareholders. Following the investment, the Company held 41% (in the combination of 10% common shares and 31% in preferred shares) of RBT's shares on an as if converted basis (the Company holds 100% of the preferred voting shares) and the total cash amount invested on cumulative basis is approximately $ 2,454 (see also 5 below).



The acquisition date fair value of the consideration transferred totaled $ 2,905 which consisted of the following:
  Cash

$
205Fair value of previous equity investment


2,700Total

$
2,905
 
 2.
The results of RBT's operations have been consolidated from the acquisition date as it was deemed to be a variable interest entity and the Company became the primary beneficiary in accordance with ASC 810. Prior to the acquisition date, the Company's investment in RBT was accounted for based on the cost method as further described in (5) below.
 
 F - 18
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 h.
Acquisition of Rakuto Bio Technologies Ltd. (RBT) (Cont.):
 
 3.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (reflects 100% of the RBT).
 
 Assets

Fair value


Expected useful livesCash

$
(30
)

-Current assets


59Long term assets


12Fixed assets


108Developed technology (1)


4,226


7 yearsTotal identifiable assets acquired


4,375Current liabilities


(275
)Deferred tax liability


(845
)

-Total liabilities assumed


(1,120
)

-Net identifiable assets acquired


3,255Goodwill (2)


2,945Net assets acquired

$
6,200
 
 (1)
Developed technology is amortized using the straight-line method over its useful life, which is estimated as 7 years.
 
 (2)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
 
 4.
The fair value of the non-controlling interest in RBT is $ 2,874 and was estimated using the income approach.
 
 5.
Prior to the acquisition date, the Company accounted for its 31% interest in RBT as a cost method investment. In February 2008, the Company entered into an agreement with RBT, whereby the Company will invest up to $ 3,000 if and when RBT will meet certain milestones in consideration of 38% of RBT in preferred shares. As of the acquisition date, in 2009 the Company had already invested $ 2,250. The investment was stated at cost, since the investment was in series A Preferred shares which was determined to be not in-substance common shares as this term is defined in ASC 323-10. The acquisition-date fair value of the previous equity interest was $ 2,700, and is included in the measurement of the consideration transferred. The Company recognized a total gain of $ 450 as a result of remeasuring its prior equity interest in RBT held before the business combination and recorded such gain as other income in its statement of income.
 
 6.
For an investment in RBT see also Note 21.
 
 F - 19
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 i.
Candela Corporation:
 
 On September 9, 2009, Syneron, Syneron Acquisition Sub, Inc. ("Acquisition Sub"), an indirect wholly-owned subsidiary of Syneron, and Candela Corporation, Inc. ("Candela"), a U.S. public company listed on the Nasdaq under the symbol CLZR, entered into an Agreement and Plan of Merger ("the Merger Agreement"). Under the Merger Agreement, Acquisition Sub merged with and into Candela ("the Merger"), with Candela continuing after the Merger as the surviving company and Candela became an indirect wholly owned subsidiary of Syneron. Upon the terms and subject to the conditions set forth in the Merger Agreement, on January 5, 2010, the effective date of the Merger, each issued and outstanding share of Common stock of Candela was converted into the right to receive Company's ordinary shares.
 
 At the effective time of the Merger, 6,670,477 of Syneron Ordinary shares were issued based on conversion ratio of 0.2911 Syneron Ordinary share for each Candela share of Common stock. In addition, Syneron assumed certain outstanding stock options and stock appreciation rights of Candela, and the number of Syneron Ordinary shares issuable upon exercise of each assumed Candela stock option or stock appreciation right was determined by multiplying the exchange ratio in the transaction, 0.2911, by the number of shares of Candela Common stock underlying the assumed option or stock appreciation right, as the case may be. Immediately following the effective time of the Merger and issuance of Syneron's shares to Candela's shareholders, Candela's shareholders own approximately 19.4%, and Syneron's shareholders own approximately 80.6%, of Syneron's Ordinary shares.
 
 The Merger had no effect on the number of Ordinary shares of Syneron owned by existing Syneron shareholders.
 
 On January 5, 2010 the Company completed the merger with Candela Incorporation and acquired 100% of the outstanding common shares and voting interest of Candela.. The results of Candela's operations have been included in the consolidated financial statements since that date. The transaction was accounted for under ASC 805 "Business Combinations". The Company expects to achieve significant synergies and cost reductions thereby eliminating redundant processes and facilities.
 
 The acquisition date fair value of the consideration transferred totaled $ 73,024 which consisted of the following:
 
 Ordinary Shares (6,670,477 shares)

$
69,306Stock options


3,718Total

$
73,024
 
 F - 20
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 i.
Candela Corporation (Cont.):
 
 The fair value of the 6,670,477 Ordinary shares issued was determined based on the closing market price of the Company's Ordinary shares on the acquisition date and the fair value of the stock options issued was determined based on the binomial option pricing model.
 
 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
 
 Fair valueAssets:Current assets

$
89,450Other assets (includes mainly deferred tax assets)


24,792Net fixed assets


2,391Intangible assets (*)


24,010Total identifiable assets acquired


140,643Current liabilities


45,427Deferred taxes


8,778Long-term liabilities


4,889Total identifiable liabilities assumed


59,094Net identifiable assets acquired


81,549Bargain purchase price (**)


(8,525
)Net assets acquired

$
73,024
 
 (*)
Of the $ 24,010 intangible assets acquired, $ 10,070 was assigned to developed technology (10 years useful life), $ 510 was assigned to in-process research and development asset which is not subject to amortization, $ 8,930 was assigned to customer relationship (6 years useful life), $ 3,300 was assigned to trade name (11 years useful life) and the remaining $ 1,200 was assigned to covenant not to compete (3 years useful life).
 
  (**)
The excess of fair value of the net assets acquired over the amount of consideration transferred was recorded in other income, net as part of operating expenses in Company's statements of operations (see also Note 16).
 
 F - 21
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 i.
Candela Corporation (Cont.):
 
 The Company recognized $ 2,564 and $ 1,920 of acquisition related costs that were expensed during the years ended December 31, 2010 and 2009, respectively. These costs are included in the consolidated income statement in the general and administrative expenses. The Company also recognized $ 660 in costs associated with issuing and registering the shares issued as consideration in the business combination. Those costs were deducted from the recognized proceeds of issuance within the stockholders' equity.
 
 Unaudited pro formacondensedresults of operations:
 
 The following represents the unaudited pro forma condensed results of operations for the year ended December 31, 2009 assuming that the acquisition of Candela occurred on January 1, 2009. The pro forma information is not necessarily indicative of the results of operations, which actually would have occurred had not the acquisitions been consummated on those dates, nor does it purport to represent the results of operations for future periods.
  Year ended

December 31,2009(*)UnauditedPro forma revenues

$
174,032Pro forma net loss


(23,062
)Pro forma Basic and diluted net loss per share

$
(0.67
)
 
 (*)
Pro forma figures for the year ended December 31, 2010 was not provided as the acquisition occurred on January 5, 2010.
 
 j.
Pharos Life Corporation:
 
 1.
On December 7, 2010 ("the acquisition date"), the Company acquired Pharos Life Corporation ("Pharos"), an aesthetic technology company based in Canada in consideration of $ 2,409. Following the acquisition, the Company has obtained control over Pharos and holds 100% of Pharos's outstanding voting shares.



The Company has accounted for the acquisition and the control gained in accordance with ASC 805 "Business Combinations". The results of Pharos's operations have been included in the consolidated financial statements since the acquisition date.
 
 F - 22
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 j.
Pharos Life Corporation (Cont.):
 
 2.
The acquisition date fair value of the consideration transferred totaled $ 2,409 which consisted of the following:



Fair value of consideration transferred:
 
 
 Contingent consideration to be settled in cash

$
1,639Contingent consideration settled in Syneron's shares


770Total

$
2,409
  The contingent consideration arrangement requires the Company to pay up to $ 15,750 of consideration to Pharos's former shareholders subject to reaching certain net revenue milestones in the twelve months period ending May 31, 2013 and based on a specific mechanism agreed as part of the share purchase agreement.



The fair value of the contingent consideration arrangement at the acquisition date was $ 2,409. The Company estimated the fair value of the contingent consideration using a probability weighted discounted cash flow model with a discount rate of 19% and based on various probabilities for Pharos to meet the net revenues milestone. As of December 31, 2010 there were no significant changes to the fair value assigned to the contingent consideration.
  3.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
 
 Assets

Fair value


Expected

useful livesCash

$
69Current assets


1,224Property and equipment, net


225Developed technology (1)


1,437


6 yearsDistribution channels (2)


1,314


6 yearsTotal identifiable assets acquired


4,269Current liabilities


(4,369
)Deferred tax liability


(885
)Total liabilities assumed


(5,254
)Net identifiable assets acquired (liabilities assumed)


(985
)Goodwill (3)


3,394Net assets acquired

$
2,409
 
 
 F - 23
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 1:-
GENERAL (Cont.):
 
 j.
Pharos Life Corporation (Cont.):
 3.
cont.
  (1)
The developed technology will be amortized using the straight-line method over its useful life which is estimated at 6 years.
 
 (2)
The distribution channels will be amortized using a method which will reflect of the consummation of such asset which is estimated at 6 years.
 
 (3)
Goodwill represents the excess acquisition price over assets acquired and liabilities assumed. Goodwill is not amortized and will be tested for impairment at least annually.
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
 
 a.
Use of estimates:
 
 The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant assumptions are employed in estimates used in determining the fair value of goodwill and identifiable intangible assets, revenue recognition, tax assets and tax positions, legal contingencies, and stock-based compensation costs. Actual results could differ from those estimates.
 
 b.
Financial statements in U.S. dollars:
 
 A major part of the Group's operations is carried out by the Company and its subsidiaries in the United States and Israel. The functional currency of these entities is the U.S. dollar ("dollar" or "$") as the revenues and a substantial portion of the costs are incurred in dollars.
 
 Accordingly, monetary accounts maintained in currencies other than the dollar are re-measured into dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses of the re-measurement of monetary balance sheet items are reflected in the statements of income as financial income or expenses, as appropriate.
 
 F - 24
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 b.
(Cont.):
 
 The functional currency of the remaining subsidiaries and associated companies in most instances is their relevant local currency. The financial statements of those companies are included in consolidation, based on translation into U.S. dollars. Assets and liabilities are translated at year-end exchange rates, while revenues and expenses are translated at monthly average exchange rates during the year in accordance with ASC 830 "Foreign Currency Matters" Differences resulting from translation are presented as a separate component, under accumulated other comprehensive income (loss) in stockholders' equity.
 
 c.
Principles of consolidation:
 
 The consolidated financial statements include the accounts of the Company and its subsidiaries, in which the Company has a controlling voting interest or entities which are considered variable interest entities for which the Company is considered the primary beneficiary as such terms are determined in ASC 810. Inter-company balances and transactions have been eliminated upon consolidation.
 
 Commencing from January 1, 2009, if the non controlling interest does not have commitments for granting loans, losses are attributed to non-controlling interests based on the relative share of the non-controlling shareholder in the consolidated company, even if they result in a negative balance of non-controlling interests in the consolidated statement of financial position
 
 The Company applies the provisions of ASC 810 which provides a framework for identifying variable interest entities ("VIE") and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements. See also Note 1h.
 
 Upon consolidation, the primary beneficiary initially records all of the VIE's assets, liabilities and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on a majority voting interest.
  The Company is considered to be the primary beneficiary of RBT since the Company holds the power to direct the activities which significantly impact the economic performance of these entity and has either an obligation to absorb losses or the right to receive benefits from them that could potentially be significant to their operations.
 
 d.
Cash and cash equivalents:
 
 Cash equivalents are short-term highly liquid investments that are readily convertible into cash with original maturities of three months or less at the date acquired.
 
 F - 25
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 e.
Bank deposits:
 
 Bank deposits with original maturities of more than three months but less than one year are presented as part of short-term investments. Deposits are presented at their cost including accrued interest. Interest on deposits is recorded as financial income. As of December 31, 2010 and 2009, the Company held a short time interest bearing deposits in the amount of $1,192 and $1,000 respectively, with a weighted average interest of 3.5% and 0.5%, respectively.
 
 f.
Marketable securities:
 
 The Company classifies all of its marketable securities as available-for-sale securities in accordance with ASC 320, "Investment in Debt and Equity Securities". Such marketable securities consist primarily of U.S. government treasury bonds, U.S. agencies and government guaranteed debts which are stated at fair value. Unrealized gains and losses are comprised of the difference between market value and amortized costs of such securities and are reflected as "accumulated other comprehensive loss" in equity.
 
 Accumulated other comprehensive income (loss) includes accumulated unrecognized gains and losses on investments in marketable securities. Realized gains and losses on marketable securities are included in earnings.
 
 The Company applied FASB ASC 320-10 effective April 1, 2009, which requires the Other-Than-Temporary Impairment ("OTTI") for debt securities to be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The Company holds its marketable securities as available-for-sale and accounts for them at fair value. The Company typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company's intent to sell, or whether it is more likely than not that it will be required to sell, the investment before recovery of the investment's amortized cost basis.
 
 The Company used a discounted cash flow analysis to determine the portion of the impairment that relates to the credit loss. To the extent that the net present value of the estimate of the present value of cash flows expected to be collected from the debt security discounted at the at the effective interest rate implicit in the security at the date of acquisition is less than the amortized cost basis of the security, the difference is considered credit loss and is recorded through earnings. Based on the above factors, the Company concluded that unrealized losses on its available-for-sale securities except for certain investments in Auction Rate Securities were not other-than-temporary and no credit loss was present for any of its other investments.
 
 F - 26
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 f.
Marketable securities (Cont.):
 
 As such, the Company did not recognize any impairment charges on outstanding securities other than on certain investments in Auction Rate securities during the three years period ended December 31, 2010 (see also Notes 3 and 4). The total amount ofcredit losses recognized in earnings as of December 31, 2010 and 2009 was 119 and 0, respectively.
 
 g.
Derivatives:
 
 The Company's derivatives are not designated as hedging accounting instruments under ASC 815, Derivatives and Hedging. Those derivatives consist primarily of forward and options contracts the Company uses to hedge the Company's exposures to currencies other than the U.S. dollar. The Company recognized derivative instruments as either assets of liabilities and measures those instruments at fair value. Since the derivative instruments that the Company holds do not meet the definition of hedging instruments under ASC 815, the Company recognizes changes in the fair values in its statement of income in financial income, net, in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities.
 
 As of December 31, 2010, the Company had outstanding forward contracts to buy NIS and sell U.S dollar with a notional amount of $800 and outstanding options contract to buy NIS and sell U.S. dollar with a notional amount of $3,100. At December 31, 2010, the fair value of the Company's derivatives was $162 and is recorded as other accounts receivable and prepaid expenses in the Company's balance sheet. Such forward and option contracts are with maturity dates within the next 5 months.
 
 The Company measured the fair value of the forward contracts in accordance with ASC 820 "Fair Value Measurements and Disclosures", at level 2.



During 2010, the Company recorded net gain of $427 in its statements of operations as part of the finance income, net line item.
  The fair value of the open forward and option contracts recorded by the Company on its consolidated balance sheets as of December 31, 2010 and December 31, 2009, as an asset is as follows:
 
 December 31,


December 31,2010


2009Derivatives not designated as hedging instruments:Other accounts receivable and prepaid expenses

$
162


$
20Total

$
162


$
20
 
 
 F - 27
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 h.
Inventories:
 
 Inventories are stated at the lower of cost or market value. Inventory write-offs are provided for slow-moving items.
 
 Cost is determined as follows:
 
 Raw materials: first in, first out ("FIFO") method.
 
 Finished products: Based on standard cost which includes material, labor and manufacturing overhead. Standard costs are monitored and updated as necessary, to reflect the changes in raw material costs and labor and overhead rates.
 
 The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure. When recorded, the reserves are intended to reduce the carrying value of inventory to its net realizable value. Inventory of $ 22,720 and $ 8,592 as of December 31, 2010 and 2009, is stated net of inventory reserves of $ 4,827 and $ 504 in each year, respectively. If actual demand for the Company's products deteriorates, or market conditions are less favorable than those projected, additional inventory reserves may be required.
 
 i.
Property and equipment, net:
 
 Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:
 
 %Computers, software, manufacturing and laboratory equipment

10 - 40 (mainly 33)Office furniture, equipment

7 - 30 (mainly 15)Leasehold improvements

The shorter of term of the lease or the

useful life of the asset
 
 F - 28
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 j.
Impairment of long-lived assets:
 
 The Company's long-lived assets and identifiable intangibles subject to amortization are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. During 2010 the Company recorded an impairment charge on account of Fluorinex's intangibles assets in the amount of $ 1,319. During 2009 and 2008, no impairments losses have been identified.
 
 k.
Investments in affiliated companies:
 
 All investments in affiliates are stated at cost since the Company does not have the ability to exercise significant influence over their operating and financial policies. The Company followed ASC 323 "Investments – Equity and Joint Ventures", to determine whether it should apply the equity method of accounting to investments in other than common stock, with regard to certain investments in preferred shares, and determined that they are not in substance common stock.
 
 The Company's investment in the affiliated companies is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with ASC 323-10. As of December 31, 2009, no impairment losses had been identified. During 2010, based on management's most recent analysis, the Company recognized an impairment loss of $ 850 relating to its investment in QRay (see also Note 7).
 
 l.
Goodwill and intangible assets:
 
 Goodwill and intangible assets have been recorded as a result of acquisitions. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired.
 
 The Company applies ASC 350, "Intangibles – Goodwill and Other". Under ASC 350, goodwill is not amortized but instead it is tested for impairment at least annually (or more frequently if impairment indicators arise). The Company determined June 30 as the date of the annual impairment test.
 
 ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment while the second phase (if necessary) measures impairment.
 
 F - 29
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 l.
Goodwill and intangible assets (Cont.):
 
  In the first phase of impairment testing, goodwill attributable to the reporting units is tested for impairment by comparing the fair value of the reporting unit with its carrying value. The Company performs an annual impairment test or more frequently if impairment indicators are present. The Company operates in two operating and reportable segments, with five reporting units which comprise its two segments. Goodwill is allocated to the reporting units. Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting units. As of December 31, 2010, 2009 and 2008, no impairment charge was recorded.
 
 m.
Revenue recognition:
 
 Revenues are recognized in accordance with ASC 605, "Revenue Recognition" and SAB 104 when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is probable and no further obligations exist. The Company does not grant a right of return for its products.
 
 Other than pricing terms which may differ due to the different volume of purchases between distributors and end-users, there are no material differences in the terms and arrangements involving direct and indirect customers.
 
 All of the Company's products sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, the Company considers all the distributors as end-users.
 
 Deferred revenue includes unearned amounts received in respect of service contracts and amounts received from customers but not yet recognized as revenues.
 
 Revenue from the sale of service contracts are recognized on a straight-line basis over the contract period. Revenue from service administered by the Company that is not covered by a service contract is recognized as the services are provided.
 
 Revenue from some product sales to end users mainly in North America includes multiple elements within a single contract. The Company's accounting policy complies with the requirements set forth in ASC 605-25, relating to the separation of multiple deliverables into individual accounting units with determinable fair values.
 
 F - 30
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 m.
Revenue recognition (Cont.):
 
 The items included in the arrangements (deliverables) are evaluated pursuant to ASC 605-25 to determine whether they represent separate units of accounting. The Company performs this evaluation at the inception of an arrangement and as of the delivery of the items. Generally, the Company accounts for a deliverable separately if: a) the delivered item has standalone value to the customer, and b) there is objective evidence and reliable evidence of the fair value of the undelivered item, and c) if the Company has given the customer a general right of return relative to the delivered item, delivery of performance of the undelivered item is probable and substantially within the Company's control. The company establishes fair value of the undelivered item based on price charged by third parties and data available from which to estimate the volume of services provided during the term of the arrangement.
 
 n.
Research and development costs:



Research and development costs are charged to the income statement as incurred.
 
 
 o.
Stock-based compensation:
 
 The Company measures and recognizes the compensation expense for all equity-based payments to employees and directors based on their estimated fair values in accordance with ASC 718, "Compensation-Stock Compensation". The Company estimates the fair value of employee stock options at the date of grant using a binomial valuation model and values restricted stock based on the market value of the underlying shares at the date of grant.
 
 The Company recognizes compensation expenses for the value of its awards based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
 
 p.
Basic and diluted net earnings (loss) per share:
 
 Basic net earnings (loss) per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earning per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus the dilutive effect of options RSU's and SAR's considered to be outstanding during each year, in accordance with ASC 260, "Earnings Per Share".
 
 q.
Fair value of financial instruments:
 
 The carrying amounts of financial instruments, including cash and cash equivalents, short-term bank deposits, marketable securities, accounts receivable, short term bank credit, accounts payable and accrued liabilities, approximate fair value because of their generally short maturities.
 
 F - 31
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 q.
Fair value of financial instruments (Cont.):
 
 The Company applies ASC 820, "Fair value and disclosure". Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
 Level 1 -
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets;
 
 Level 2 -
significant other observable inputs based on market data obtained from sources independent of the reporting entity;
 
 Level 3 -
Unobservable inputs which are supported by little or no market activity (for example cash flow modeling inputs based on assumptions).
 
 The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.
 
 Assets and liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency financial instruments and contingent consideration (See Note 4).
 
 r.
Income taxes:
 
 The Company accounts for income taxes in accordance with ASC 740, "Income Taxes" . ASC 740 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.
 
 Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting.
 
 F - 32
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 r.
Income taxes (Cont.):
 
 The Company accounts for uncertain tax positions in accordance with ASC 740. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income tax.
 
 s.
Severance pay:
 
 The Company's liability for severance pay to its Israeli employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its Israeli employees is covered by monthly deposits for insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet.
 
 The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits accumulated up to balance sheet dates.
 
 The majority of the Company's agreements with its employees in Israel are in accordance with section 14 of the Severance Pay Law -1963. Upon contribution of the full amount of the employee's monthly salary, and release of the policy to the employee, no additional legal obligation exists between the parties and no additional payments shall be made by the Company to the employee; therefore related assets and liabilities are not presented on the balance sheet.
 
 Severance expenses for the years ended December 31, 2010, 2009 and 2008 amounted to approximately $ 638, $ 652 and $ 761, respectively.
 
 t.
Advertising expenses:
 
 Advertising expenses are charged to the statements of income, as incurred. Advertising expenses for the years ended December 31, 2010, 2009 and 2008 were $ 2,727, $ 2,421 and $ 2,672, respectively.
 
 F - 33
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 u.
Concentration of credit risk:
 
 Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, derivative instruments, marketable securities, and trade receivables.
 
 The majority of the Group's cash and cash equivalents are invested in dollar instruments of major banks in Israel and in the United States. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing and, accordingly, low credit risk exists with respect to these investments.
 
 The Company's marketable securities include investments in highly rated debentures of Israeli and U.S., Corporations and governmental bonds. Based on the above and the fact that the portfolio is well diversified, management believes that low credit risk exists with respect to these marketable securities. As a result of the recent turmoil in capital markets, the Company has implemented additional measures with respect to its investment policy. Such measures included among others: reducing credit exposure to corporate sector securities and increasing the overall credit quality of the portfolio.
 
 The Company and its subsidiaries have no material off-balance sheet concentration of financial instruments subject to credit risk such as foreign exchange contracts, option contracts or other hedging arrangements.
 
 The Company's trade receivables are derived from sales to large independent distributors and to end-users world wide. The Company performs ongoing credit evaluations of its customers. An allowance for doubtful accounts is determined with respect to those specific amounts that the Company has determined to be doubtful of collection.
 
 The following table provides the detail of the change in the Company provision for doubtful debts for the years ended December 31, 2010, 2009 and 2008:
 
 Year ended December 31,2010


2009


2008Balance at the beginning of the year

$
7,561


$
5,876


$
1,777Charged to expenses


2,783



3,336



4,099Write off


(4,453
)


(1,651
)


-Balance at end of the year

$
5,891


$
7,561


$
5,876
  F - 34
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 v.
Concentration of operational risk (Cont.):
 
 The Company is subject to risks common to companies in the aesthetic laser industry, including (i) the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and adequate patent and other proprietary rights protection of its products and services, (ii) the content and timing of decisions made by the Food & Drug Administration and other agencies regarding the procedures for which the Company's products may be approved, (iii) the ability of the Company to manufacture adequate supplies of its products for development and commercialization activities, (iv) the accuracy of the Company's estimates of the size and characteristics of markets to be addressed by the Company's products and services, (v) market acceptance of the Company's products and services, (vi) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, and (vii) the accuracy of the Company's information concerning the products and resources of competitors and potential competitors.
 
 In addition part of the groups companies (mainly Syneron) outsources the manufacturing of its products to three subcontractors located in Israel. These subcontractors have limited manufacturing capacity that may be inadequate if customers place orders for unexpectedly large quantities of products. In addition, because the Company's subcontractors are located in Israel, they on occasion may feel the impact of potential economic or political instability in the region. If the operations of one or more of these subcontractors were halted or limited, even temporarily, or if they were unable or unwilling to fulfill large orders, the Company could experience business interruption, increased costs, damage to the Company's reputation and loss of customers. In addition, qualifying new subcontractors could take several months. Management believes that the above mentioned risk is mitigated by diversification of production where each product is manufactured by more than one subcontractor. In addition, most of the subcontractors are affiliated with international firms and if needed a temporary solution could be found by shifting manufacturing out of Israel.
 
 Many of the components that comprise the Company's products are currently manufactured by a limited number of suppliers. Although most of the components are obtained from at least three separate suppliers, the Company does not have the ability to manufacture these components. A supply interruption or an increase in demand beyond current suppliers' capabilities could harm the Company's ability to manufacture its products until it identifies and qualifies a new source of supply, which could take several months.
 
 Any interruption in the supply of components or materials, or the Company's inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair the ability to meet the demand of the Company's customers, which would have an adverse effect on the Company's business.
 
 F - 35
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 w.
Warranty:
 
 The Company generally provides a one year to three year standard warranty for its products, depending on the type of product and the country in which the Company does business. The Company records a provision for the estimated cost to repair or replace products under warranty at the time of sale. Factors that affect the Company's warranty reserve include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair.
 
 The following table provides the detail of the change in the Company's product warranty accrual, which is a component of other accrued liabilities on the consolidated balance sheets for the years ended December 31, 2010 and 2009.
 
 December 31,2010


2009Warranty provision, beginning of year

$
2,679


$
2,683Warranty accounts related to the acquisition of Candela


3,980



-Charged to costs and expenses relating to new sales


8,202



1,073Costs of product warranty claims


(8,007
)


(1,077
)Warranty provision, end of year

$
6,854


$
2,679
 
 At December 31, 2010, the short-term and long-term accrued warranty provision amounted to $ 5,780 and $ 1,074, respectively. At December 31, 2009, the short-term and long-term warranty provision amounted to $ 2,121 and $ 558, respectively.
 
 x.
Comprehensive income (loss):
 
 The Company reports comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that items of other comprehensive income relate to unrealized gains and losses on available-for-sale securities and currency translation adjustment.
 
 y.
Treasury shares:
 
 The Company repurchases its Ordinary shares from time to time on the open market and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction in shareholders' equity.
 
 F - 36
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.):
 
 z.
Reclassifications:
 
 Certain comparative figures have been reclassified to conform to the current year presentation.
 
 aa.
Impact of recently issued accounting standards:
 
 ASU 2009-13 - In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition of multiple deliverable revenue arrangements codified in ASC 605-25. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and require companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. Additionally, the amendments eliminate the residual method for allocating arrangement considerations. The Company is currently evaluating the possible impact of the standard on its consolidated financial statements.
 
 ASU 2010-28 - In December 2010, the EITF issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts codified in ASC 350, "Intangibles - Goodwill and Other". Under ASC 350, testing for goodwill impairment is a two-step test, in which Step 1 compares the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is less than its carrying value, Step 2 is completed to measure the amount of impairment, if any. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 if it appears more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity would consider whether there are any adverse qualitative factors indicating that an impairment may exist (e.g., a significant adverse change in the business climate). The Company does not expect the adoption will have a material impact on its consolidated financial statements.
 
 ASU 2010-29 - In December 2010, the EITF issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations codified in ASC 805, "Business Combinations". This ASU responds to diversity in practice about the interpretation of the pro forma disclosure requirements for business combinations. When a public entity's business combinations are material on an individual or aggregate basis, the notes to its financial statements must provide pro forma revenue and earnings of the combined entity as if the acquisition date(s) had occurred as of the beginning of the annual reporting period. The ASU clarifies that if comparative financial statements are presented, the pro forma disclosures for both periods presented (the year in which the acquisition occurred and the prior year) should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only and not as if it had occurred at the beginning of the current annual reporting period. The ASU also expands the supplemental pro forma disclosure requirements to include a description of the nature and amount of any material non-recurring adjustments that are directly attributable to the business combination. The Company does not expect the adoption will have a material impact on its consolidated financial statements.
 
  F - 37
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 3:-
AVAILABLE-FOR-SALE MARKETABLE SECURITIES
 
 December 31, 2010Amortized cost


Gross unrealized gains


Gross unrealized losses


Market

valueMoney market funds

$
5,541


$
-


$
-


$
5,541Available-for-sale - matures within one year:Government debentures - fixed interest rate


2,074



-



-



2,074Government sponsored enterprises- fixed interest rate


84,107



48



(20
)


84,135Corporate debentures - fixed interest rate


1,226



19



-



1,24587,407



67



(20
)


87,454Available-for-sale - matures after one year through three years:Government debentures - fixed interest rate


2,230



156



-



2,386Government sponsored enterprises - fixed interest rate


24,787



7



(41
)


24,753Corporate debentures - fixed interest rate


9,514



92



(26
)


9,58036,531



255



(67
)


36,719Available-for-sale - matures after three years through five years:Government debentures - fixed interest rate


1,521



134



-



1,655Government sponsored enterprises - fixed interest rate


14,875



29



(170
)


14,73416,396



163



(170
)


16,389Available-for-sale - matures after five years:Auction rate securities


6,790



-



(373
)


6,4176,790



-



(373
)


6,417$
152,665


$
485


$
(630
)


152,520Reclassification of certain securities to long-term














37,721$
114,799
 
 F - 38
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 3:-          AVAILABLE-FOR-SALE MARKETABLE SECURITIES (CONT.):
 
 December 31, 2009Amortized cost


Gross unrealized gains


Gross unrealized losses


Market

valueMoney market funds

$
3,737


$
-


$
-


$
3,737Available-for-sale - matures within one year:Government debentures - fixed interest rate


80,621



5



(188
)


80,438Government sponsored enterprises - fixed interest rate


63,456



309



(29
)


63,736Corporate debentures - fixed interest rate


430



-



(6
)


424144,507



314



(223
)


144,598Available-for-sale - matures after one year through three years:Government debentures - fixed interest rate


249



-



(2
)


247Government sponsored enterprises - fixed interest rate


15,684



177



-



15,861Corporate debentures - fixed interest rate


2,388



1



(37
)


2,35218,321



178



(39
)


18,460Available-for-sale - matures after three years through five years:Government debentures - fixed interest rate


3,511



285







3,796Government sponsored enterprises - fixed interest rate


599







(65
)


534Corporate debentures - fixed interest rate


686



42



-



7284,796



327



(65
)


5,058Available-for-sale - matures after five years:Auction rate securities


9,406



82



(583
)


8,9059,406



82



(583
)


8,905$
180,767


$
901


$
(910
)


180,758Reclassification of certain securities to long-term














11,449$
169,309
 
 
 F - 39
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 3:-          AVAILABLE-FOR-SALE MARKETABLE SECURITIES (Cont.):
 
 The table below shows the fair value of investments in available for sale securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of December 31, 2010:
 
 Less than 12 months


12 months or longer


Total (*)Fair

value


Unrealized losses


Fair

value


Unrealized losses


Fair

Value


Unrealized lossesGovernment sponsored enterprises

$
66,244


$
230


$
-


$
-


$
66,244


$
230Corporate debentures


5,110



26



-



-



5,110



26Auction rate securities


-



-



6,417



373



6,417



373$
71,354


$
256


$
6,417


$
373


$
77,771


$
629
 
 (*)
As of December 31, 2010 there were 23 securities in a loss position.
  NOTE 4:-
FAIR VALUE MEASUREMENT
 
 In accordance with ASC 820, the Company measures marketable securities, auction rate securities, foreign currency derivative contracts and liabilities recognized with respect to contingent consideration in business combination, at fair value. Available for sale marketable securities are classified within Level 1 or Level 2. This is because marketable securities and foreign currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Investments in auction rate securities and liabilities with respect to contingent consideration are classified within Level 3 because they are valued using valuation techniques. Some of the inputs to these models are unobservable in the market and are significant.
 
 Due to the current economic environment in which there is a lack of market activity for auction rate securities, the Company has been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value. The Company, with its third party advisor, estimated the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period. These estimated fair values could change significantly based on future market conditions, which could result in recognizing other-than-temporary impairment losses.
 
 F - 40
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 4:-
FAIR VALUE MEASUREMENT (Cont.):
 
 The Company adopted during the year ended December 31, 2010 ASU 2010-06 in which, the FASB updated the "Fair Value Measurements Disclosures" codified in ASC 820. More specifically, this update require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). As applicable to the Company, this update became effective during the year ended December 31, 2010, the adoption of the new guidance did not have a material impact on its consolidated financial statements.
 
 The Company's financial assets measured at fair value on a recurring basis, consisted of the following types of instruments as of December 31, 2010:
 
 Level 1


Level 2


Level 3


TotalCorporate debentures

$
-


$
10,825


$
-


$
10,825Auction rate securities


-



-



6,417



6,417Government debentures


6,115



-



-



6,115Government sponsored enterprises


-



123,622



-



123,622Money markets funds


5,541



-



-



5,541Foreign currency derivatives


-



162



-



162Total

$
11,656


$
134,609


$
6,417


$
152,682
 
 The Company's financial assets measured at fair value on a recurring basis, consisted of the following types of instruments as of December 31, 2009:
 
 Level 1


Level 2


Level 3


TotalCorporate debentures

$
-


$
3,504


$
-


$
3,504Auction rate securities


-



-



8,905



8,905Government debentures


84,481



-



-



84,481Government sponsored enterprises


-



80,130



-



80,130Money markets funds


3,737



-



-



3,737Foreign currency derivatives


-



20



-



20Total

$
88,218


$
83,654


$
8,905


$
180,777
 
 The below table presents the changes in Level 3 instruments measured on a recurring basis for the twelve months period December 31, 2010. The Company's Level 3 instruments consist of Auction Rate Securities (ARS) classified as available-for-sale with the unrealized losses, reported in accumulated other comprehensive income (loss) equity and in earnings. Fair value measurements using significant unobservable inputs (Level 3).
 
 F - 41
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 4:-          FAIR VALUE MEASUREMENT (CONT.):
 
 Consistent with the Company's investment policy guidelines, the ARS investments held by the Company all had AAA/Aaa credit ratings at the time of purchase. With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at December 31, 2010 and at December 31, 2009 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders.
 
 The estimated fair value of the Company's ARS holdings in collateralized debt obligations and a certain ARS as of December 31, 2010 and 2009 was $ 10 and $ 620, respectively, which reflects cumulative impairment of $ 2,740 and $ 7,502, respectively, to the carrying value of $ 10 and $ 620, respectively. Based on respective valuation models and an analysis of other-than-temporary cumulative impairment factors, the Company has recorded a impairment charge of $ 119 in the year ended December 31, 2010, and $ 173 for the year ended December 31, 2009 reflecting the portion of ARS holdings that the Company has concluded have other-than-temporary decline in value (for legal claims regarding investments in ARS, see also Note 14c).
 
 Auction Rate SecuritiesYear ended December 31,2010


2009Beginning balance

$
8,905


$
9,505Transfer into Level 3


-



-Redemption at par value


(1,900
)


(800
)Changes in realized and unrealized gains and losses included in earnings


265



(157
)Credit loss on securities for which other than temporary impairment was not previously recognized


(119
)


-Sales (*)


(771
)


-Changes in unrealized losses included in Other Comprehensive Income


37



357Ending balance

$
6,417


$
8,905
 
 (*)
During the year ended December 31, 2010 the Company sold approximately $ 5,300 par value of the ARS held by it for a total consideration of $ 771 which reflects a gain of $ 265 over the amount in which those ARS securities were recorded in the Company's balance sheet.
 
 F - 42
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 5:-
OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
 
 December 31,2010


2009Government authorities

$
641


$
549Prepaid expenses


5,053



1,202Deferred taxes


7,603



263Deposits with escrow agent


250



500Other receivables


321



239$
13,868


$
2,753
 
  NOTE 6:-
INVENTORIES
 
 December 31,2010


2009Raw materials

$
9,581


$
2,673Work in process


419



-Finished products


12,720



5,919$
22,720


$
8,592
  NOTE 7:-
INVESTMENTS IN AFFILIATED COMPANIES
 
 December 31,2010


2009Investment in QRay Ltd. (1)

$
200


$
1,050Investment in a strategic partner (2)


7,769



-$
7,969


$
1,050
 
 (1)
During 2007, the Company entered into a Share Purchase Agreement with Shaldot and QRay whereby the Company invested $ 1,050 in QRay in consideration of 9% of QRay's share capital. If QRay will meet certain milestones within three and a half years as from the closing of the transaction, the Company is obligated to invest an additional $ 450 in QRay. As of March, 2011, the period of the three and a half years elapsed and thus the Company is not obligated to invest additional funds in QRay.  The investment is stated at cost.
 
 F - 43
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 7:-
INVESTMENTS IN AFFILIATED COMPANIES (Cont.):
  (1)
Cont.:



The company evaluates the recoverability of the carrying value of its investments in affiliates when there are indications that a decline in value below carrying amount may be other than temporary in accordance with ASC 323-10. As a result of such evaluations, the company written down the carrying amount of the investment in QRay from $ 1,050 to its fair value of $ 200 resulting in impairment charges for other-than-temporary declines during the year ended December 31, 2010 in the amount of $ 850. The impairment charges are included in "Other income, net" in operating expenses in the accompanying statements of operations. The Company has determined that the estimated fair value of QRay of as of December 31, 2010 is not less than its related carrying value. The fair value of the investment in QRay was calculated by a third party appraisal using various valuation techniques and significant unobservable inputs (level 3).
 
  (2)
On November 22, 2010, the Company entered into an exclusive supply agreement (herein "the agreement") with an existing customer of the Company (herein "the customer"). In connection with such agreement the Company invested $9,169 in exchange for preferred units which constitute an immaterial percentage of the customer's equity. The Company recorded the fair value of the preferred units received as part of the investments in affiliated companies and the fair value of the exclusive supply right in the amount of $1,400 was recorded as part of the intangible assets (see also note 9) based on its fair value as was calculated by a third party appraisal.
 
 NOTE 8:-          PROPERTY AND EQUIPMENT, NET
  December 31,2010


2009Cost:Computers, software, manufacturing and laboratory equipment

$
8,460


$
5,341Leasehold improvements


1,705



1,529Office furniture and equipment and vehicles


1,325



56311,490



7,433Accumulated depreciation:Computers, software, manufacturing and laboratory equipment


5,683



3,273Leasehold improvements


1,263



994Office furniture and equipment and vehicles


515



2817,461



4,548Depreciated cost

$
4,029


$
2,885
 
 Depreciation expenses for the years ended December 31, 2010, 2009 and 2008 were $ 2,473, $ 1,233 and $ 1,545, respectively.
 
 F - 44
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 9:-
INTANGIBLE ASSETS, NET
  Weighted average


December 31,useful lives


2010


2009Original cost:Patent


2.2


$
1,899


$
1,716Distribution agreements


3.5



1,600



286Brand name


2.0



295



295In process R&D in accordance with ASC 350 (1)


2.0



773



983Developed technologies (1)


4.1



29,533



18,625Trade name


5.5



3,300



-Covenant not to compete


1.5



1,200



-Customer relationships


2.3



8,930



-Exclusivity (see also Note 7(2))


1.7



1,400



-$
48,930


$
21,905Accumulated amortization:Patent





$
1,670


$
1,620Distribution agreements






286



84Brand name






161



65Developed technology






2,901



614Trade name






300



-Covenant not to compete






400



-Customer relationships






3,573



-9,291



2,383$
39,639


$
19,522
 
 (1)
During the year ended December 31, 2010 the Company recorded an impairment charge in the total amount of $ 1,319 related to the assets acquired as part of the Fluorinex acquisition that occurred during 2009. The impairment charge was attributed to the following assets: In process R&D and Developed technology in the amount of $ 720 and $ 599, respectively.
 
 During the years ended in 2010, 2009 and 2008, the Company recorded amortization expenses in the amount of $ 6,908, $ 694 and $ 592, respectively. The annual amortization expense relating to intangible assets existing as of December 31, 2010 is estimated to be as follows:
 
 2011

$
7,8032012


6,8992013


5,7032014


4,4402015


4,709Thereafter


10,085Total

$
39,639
 
 F - 45
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 10:-        GOODWILL
 
 Changes in goodwill for the years ended December 31, 2010 and 2009 according to Company's reporting units are as follows:
 
 Syneron


LI


Fluorinex


RBT


Pharos


TotalAs of January 1, 2009

$
-


$
2,822


$
-


$
-


$
-


$
2,822Acquisitions and others


8,206



53



1,501



2,528



-



12,288As of December 31, 2009


8,206



2,875



1,501



2,528



-



15,110Acquisitions and others


-



75



-



-



3,394



3,469As of December 31, 2010

$
8,206


$
2,950


$
1,501


$
2,528


$
3,394


$
18,579
  NOTE 11:-
SHORT TERM BANK CREDIT
  As part of the acquisition of Pharos (see also Note 1j) the Company assumed Pharos's short term bank credit lines. The credit lines were obtained at an average interest rate of 3.0%. During February, 2011, the Company repaid the entire amounts under the bank credit lines.
  NOTE 12:-        DEFERRED REVENUES
 
 The Company offers extended service contracts that may be purchased after a standard warranty has expired. Service contracts may be purchased for periods from one to five years. The Company recognizes service contract revenue ratably over the life of the contract.
 
 The following table reflects changes in the Company's deferred revenue during the years ended December 31, 2010 and 2009:
 
 December 31,2010


2009Beginning balance

$
5,108


$
8,717Accounts related to the acquisition of Candela


18,211



-Deferral of new sales


21,869



2,882Recognition of previously deferred revenue


(25,719
)


(6,491
)Ending balance

$
19,469


$
5,108
 
 
 F - 46
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 12:-       DEFERRED REVENUES (Cont.):
 
 The following table reflects the Company's current and long-term portions of deferred revenues for the years ended December 31, 2010 and 2009.
 
 December 31,2010


2009Total deferred revenue

$
19,469


$
5,108Less: current portion


(14,941
)


(4,206
)Long-term portion of deferred revenue

$
4,528


$
902
 
 
 NOTE 13:-
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 December 31,2010


2009Warranty accruals

$
5,780


$
2,121Accrued expenses


11,408



6,300Accrued commission


3,172



1,427Employees and related expenses


9,517



3,569Tax authorities


7,213



6,342Other payables


1,101



269$
38,191


$
20,028
 
 F - 47
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 14:-
COMMITMENTS AND CONTINGENCIES
  
 a.
Royalties:
 
 1.
In June 2004, the Company has entered into an agreement effective from December 1, 2003 and until 2021, for using know-how of a Tensor Technologies LLC, for the usage of the know-how, the Company is obligated to pay royalties, at a rate of 4.5%, on sales of certain products to its distributors and subsidiaries.



Expenses in respect of royalties amounted to $ 602, $ 461 and $ 1,287 for the years ended December 31, 2010, 2009 and 2008, respectively, and were recorded as part of cost of revenues. See c below for legal proceedings with Tensor Technologies LLC.
  2.
Candela has an agreement with the Regents of the University of California ("Regents") for exclusive license rights to the Dynamic Cooling Device ("DCD"), subject to certain limited license rights of Cool Touch, Inc. ("Cool Touch"), in the following fields of use: procedures that involve skin resurfacing and rejuvenation, vascular skin lesions, and laser hair removal. Cool Touch, a subsidiary of New Star Technology, Inc., obtained a license to the DCD on a co-exclusive basis with the Company, in certain narrower fields of use.



Candela's agreement with the Regents called for an annual license fee, for calendar years up to 2010, of $ 300 and a minimum annual royalty obligation of $ 1,000 or 3%, whichever is greater. The multi-year annual fee of $ 300 was paid to the Regents in a lump sum of $ 3,000 and is being amortized over the remaining life of the patent agreement, which as of December 31, 2010 was approximately five years. The royalty and the amortization of the annual license fee payment are reflected in the Company's consolidated statement of operations. The unamortized portion of the license fee payment is reflected in other receivables and in other assets at December 31, 2010.



At December 31, 2010, approximately $300 is included in other receivables and approximately $ 1,050 is included in long term assets. Expenses in respect of royalties amounted to $ 2,552 (greater of 3% or $ 1,000) for the year ended December 31, 2010, and were recorded as part of cost of revenues.



Commencing in 2011 the minimum royalty is $ 500 (agreement states the prepayment is the lower of $ 500 or 30% of prior year royalties but in no case can it be lower than $ 250).
 
 F - 48
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 14:-
COMMITMENTS AND CONTINGENCIES (Cont.):
  b.
Leases:



The Company leases several facilities and automobiles under non cancelable lease agreements. The facility leases can be adjusted for increases in maintenance and insurance costs above specified levels. In addition, certain facility leases contain escalation provisions based on certain inflationary indices. These operating leases expire in various years through fiscal year 2016. These leases may be renewed for periods ranging from one to five years.



The future minimum lease commitments of the Company under various non-cancelable operating lease agreements in respect of premises and motor vehicles, that are in effect as of December 31, 2010, are as follows:
  Year ended December 31,2011

$
3,2672012


1,3742013


555Thereafter


162$
5,358
 
 Rent expenses amounted to $ 3,391, $ 989 and $ 1,248 for the years ended December 31, 2010, 2009 and 2008, respectively.
 
 c.
Legal claims:
 
 1.
Palomar Medical Technologies, Inc. ("Palomar") filed a patent infringement action against Candela.  The complaint alleges infringement of U.S. Patent Nos. 5,595,568 (the '568 Patent) and 5,735,844 (the '844 Patent) by Candela's hair removal devices. In addition to seeking compensatory damages, the amended complaint, which added Massachusetts General Hospital as a plaintiff, requests that the court treble these damages, award attorney's fees, and provide injunctive relief. Candela's amended answer and counterclaims denies Palomar's claims, seeks a declaratory judgment of noninfringement, invalidity, and unenforceability of the '568 and '844 Patents, and alleges unfair and deceptive business practices by Palomar in violation of Massachusetts General Laws Ch. 93A. Candela seeks compensatory damages, and requests the trebling of these damages, attorneys' fees and injunctive relief. The case was stayed pending reexamination of the '568 and '844 Patents. Prior to the entry of the stay, a claim construction hearing was held, the court issued an order on November 8, 2007 construing the claims, fact discovery was closed, and expert reports were exchanged. The PTO subsequently issued Reexamination Certificates with respect to the '568 and '844 Patents, and the stay was lifted on January 5, 2010.
 
 F - 49
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 14:-
COMMITMENTS AND CONTINGENCIES (CONT.):
  c.
Legal claims (Cont.):
  1.
Cont.



Palomar has dropped the '568 Patent from this lawsuit, and has elected to proceed solely on the '844 Patent. The parties exchanged supplemental expert reports on May 19, 2010. All of the expert depositions have been taken. Candela filed a motion for summary judgment of non-infringement with respect to all of the asserted claims, and of invalidity with respect to two of the claims, on August 12, 2010. Palomar filed an opposition to the motion on September 1, 2010, and Candela filed a reply on September 10, 2010. A hearing on the motion was held on September 14, 2010. The court has not yet decided the motion, and no trial date has been set.



In accordance with ASC 450, "Contingencies", as of December 31, 2010, the Company estimates the range of the loss contingency associated with the Palomar litigation claims to be in the range of $0 to $50 million. As the Company assessed that contingent losses related to Palomar proceedings are only reasonably possible, pursuant to ASC 450, an accrual has not been recorded for the loss contingencies.
 2.
On November 14, 2008, Palomar Medical Technologies, Inc. filed a complaint against the Company's subsidiary, Syneron Inc. The complaint alleges infringement of U.S. Patent Nos. 5,735,844 and 5,595,568 by hair removal products sold in the United States. These patents are the subject of reexaminations by the U.S. Patent Office, which has issued Notices of Intent to Issue Reexamination Certificates with respect to both patents. The case brought by Palomar against Syneron Inc. has been stayed pending the completion of the reexaminations. Palomar has moved to lift the stay and the stay had been lifted. The court held a scheduling conference in the case on January 6, 2010. At the conference, the court set the Markman hearing for November 17, 2010, and set other pre-trial dates. No trial date was set. The Company is denying all allegations and is planning to vigorously defend this case.
 
 3.
On or about December 23, 2008, the Company received a letter from Tensor Technologies LLC (herein "Tensor") claiming that the Company was in breach of its royalty payment obligations to Tensor pursuant to a License Agreement dated June 24, 2004 between the Company and Tensor (as amended). On February 19, 2009, the Company sent Tensor a letter denying Tensor's claims and denying any royalty payment obligations to Tensor whatsoever. The Company submitted the matter for arbitration, agreed upon an arbitrator and started the arbitration process. On August 30, 2009, a statement of claim was served by Tensor against the Company in the amount of $ 2,618. On November 1, 2009, the Company submitted a statement of defense and a countersuit in the amount of $ 4,367 for the restitution of the royalties already paid by it to Tensor. Tensor has submitted its statement of defense to the counterclaim submitted by the Company. The parties have begun discovery proceedings. On March 16, 2010, Tensor submitted its primary testimony affidavit. On May 2, 2010, the Company submitted its primary testimony affidavits. On June 2, 2010, Tensor submitted its supplementary affidavits. The parties have completed cross examinations hearings and are in the process of submitting summations to the arbitrator. The Company intends to vigorously defend this case.
 
 F - 50
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 14:-       COMMITMENTS AND CONTINGENCIES (CONT.):
  c.
Legal claims (Cont.):
  4.
On March 10, 2009, a complaint was filed against Syneron, Inc. The complaint arises out of a fatal accident involving a contractor. The plaintiff, tripped and fell through a skylight on the roof of the building leased by Syneron Inc. The complaint also names the building owners, skylight manufacturer and various other parties and alleges a cause of action of negligenent maintenance of the building and failing to protect others from the dangerous condition of the roof and skylight. The complaint does not specify the amount of damages claimed by the plaintiff. The case is scheduled for trial on April 4, 2011. The Company intends to vigorously defend this case.
 
 5.
During 2010, one of the Company's subsidiaries, Candela, received correspondence form BioCell, L.P. both directly and through its attorneys claiming that it improperly terminated a distribution agreement between the parties. BioCell claims damages in the amount of $390 to compensate BioCell for Candela's allegedly improper termination. Candela has issued a response contesting the claim of improper termination and any resulting damages.
 
 6.
On September 15, and 24, 2009, two putative class action lawsuits were filed in the Superior Courts for Middlesex County and Suffolk County Massachusetts, respectively, against Candela and each of the members of Candela's Board of Directors, among others (the "Colp action" and the "Colombo action") alleging that members of the board breached fiduciary duties owed to Candela's stockholders through, among other things, the failure to maximize shareholder value and the use of unfair process in connection with the proposed merger between Candela and Syneron, and that Candela, with others, aided and abetted the purported breaches of fiduciary duties. The court consolidated the Colombo and the Colp actions. On November 23, 2009, the parties executed a memorandum of understanding ("MOU") expressing their agreement in principle to settle the actions. Pursuant to the MOU, Candela and Syneron agreed to reduce the termination fee in the merger agreement between Candela and Syneron from $ 2.6 million to $ 2.1 million and Candela agreed to make certain revisions to its proxy statement. The parties in April 2010 entered into a Stipulation and Agreement of Settlement incorporating many of the MOU terms (the "Stipulation"). No holder objected to the settlement, and after a final settlement hearing on September 8, 2010, the court approved the settlement, and dismissed the case. The court also ordered Candela to pay to plaintiffs' counsel attorneys' fees and expenses in the amount of $ 260, in accordance of the Stipulation. Candela's insurer has paid plaintiff's counsel the full settlement amount of $ 260.
 
 7.
On February 19, 2008, Cardiofocus, Inc. filed suit against Candela in the United States District Court for the District Court of Massachusetts, asserting infringement of U.S. Patent Nos. 5,843,073; 6,159,203; and 6,547,780. On April 30, 2010, the court approved Cardiofocus' dismissal with prejudice of all claims against Candela.
 
 F - 51
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 14:-      COMMITMENTS AND CONTINGENCIES (CONT.):
  c.
Legal claims (Cont.):
  8.
From time to time, the Company is party to various legal proceedings incidental to its business. The Company has accrued an amount which it deems sufficient to cover probable losses from these and other claims. In addition, Company believes that none of the legal proceedings, other than the lawsuit initiated by Palomar against Candela, that are presently pending, if adversely decided against the Company, will have a material adverse effect upon the Company's financial position, results of operations, or liquidity. While the Company believes that the likelihood of loss in each of the disclosed proceedings is reasonably possible, the possibility of loss or range of loss for each matter, except for the claim involving Palomar against Candela, is not estimable. During the year ended December 31, 2010 the Company settled various legal claims and paid an amount of approximately $ 235.
  NOTE 15:-      SHAREHOLDERS' EQUITY
  a.
Share capital:
  
 1.
Ordinary shares confer upon their holders voting rights, the right to receive dividends and the right to share in equity upon liquidation of the Company.
 
 2.
In November, 2007, the Company announced that its Board of Directors authorized additional repurchases of up to $ 50,000 of its Ordinary shares. The repurchase program has no time limit and maybe suspended from time to time or discontinued. Under the above program, the Company repurchased during 2007 and 2008, 466,000 and 122,700 shares, respectively. The average purchase price per share was $ 15.50. Such purchases of Ordinary shares are accounted for as treasury stock and resulted in a reduction in shareholders' equity.
 
 3.
Certain of the Company's officers, directors and major shareholders that hold Ordinary shares have the right to require the Company, on not more than one occasion, to file a registration statement on the appropriate form under the Securities Act in order to register the resale of their Ordinary shares.
 
 4.
During 2004 and pursuant to Israeli regulations, the Company paid stamp duty and recorded it as part of the initial public offering issuance expenses. During 2008, following a Supreme Court verdict, it was determined by the Court that such stamp duty should be paid by domestic companies which are traded in a foreign stock exchange and thus each entity may appeal to the tax authorities for reimbursement. The Company with its legal counsel approached the tax authorities and received during November 2008 the amounts originally paid. During 2008, the Company recorded an amount of $ 588 in additional paid-in capital as a result of the reimbursement of stamp duty in Israel.
 
 F - 52
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 15:-     SHAREHOLDERS' EQUITY (Cont.):
  a.
Share capital (Cont.):
  
 5.
On November 11, 2008, the Company's board of directors adopted a shareholder rights plan. The shareholder rights plan is designed to protect against any potential future use of coercive or abusive takeover techniques designed to gain control of the Company and its capital without full and fair value being paid to all of the Company's shareholders. The shareholder rights plan was adopted following evaluation and consultation with outside advisors in consideration of the Company's current low valuation and strong cash position.



In connection with the adoption of the shareholder rights plan, the Company's board of directors declared a dividend of one right for each Ordinary share of the Company held by shareholders of record as of the close of business on November 9, 2008. Initially, these rights will not be exercisable and will trade with the Ordinary shares of the Company. Under the plan, these rights will generally be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares or commences a tender or exchange offer for 15% or more of the Company's Ordinary shares, except if such person or group has become an "Acquiring Person" pursuant to an offer approved by the majority of the board of directors. If a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares (except if such person or group has become an "Acquiring Person" pursuant to an offer approved by the majority of the board of directors), each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $ 0.01 per share (subject to adjustment as provided in the plan), one and a quarter Ordinary shares of the Company. In addition, if, after a person acquires such ownership, the Company engages in a merger in which it is not the survivor or its Ordinary shares are changed or exchanged, or sells or transfers more than 50 percent of its assets or earning power, each right will generally entitle the holder, other than the acquiring person or group, to acquire, for the exercise price of $ 0.01 per share (subject to adjustment as provided in the plan), one and a quarter times the shares of the acquiring company to which each of the shareholders of the Company is entitled to for each Ordinary share.



The Company's board of directors may redeem the rights at a price of $ 0.0001 per right at any time up to ten days after a person or group acquires beneficial ownership of 15% or more of the Company's Ordinary shares. The rights plan originally was in effect until November 9, 2009 and was amended and extended during 2009 to be in effect until November 30, 2010 and once again extended on December 30, 2010 by the Company's board of directors to be in effect until December 30, 2011.



Shareholders are not required to take any actions to receive the rights distribution. Until the rights become exercisable, outstanding share certificates will represent both Ordinary shares of the Company and the rights.
 
 F - 53
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 b.
Syneron's option plan:



In 2004, Syneron adopted the 2004 Israel Stock Option Plan (for Israeli residents) and the 2004 Incentive Stock Option Plan (for United States, Canada and the rest of the world) (collectively "the 2004 Plans"). The number of options approved under the 2004 Plans was 2,000,000 options, increasing annually according to the evergreen provision included in each of the 2004 Plans. The evergreen provision calls for the annual increase by the lesser of 2,000,000 options or 3% of the share capital, provided however that the Board of Directors may at its sole discretion decrease, at any given year, the increase of the number of options to whatever number it sees fit.



As of December 31, 2010, there were 3,480,753 options available for future grant.



Under the 2004 Plans, options are granted to employees, officers, directors and consultants at an exercise price equal to at least the fair market value at the date of grant and are granted for periods not to exceed seven years. Options granted under the 2004 Plans generally vest over a period of one to four years of employment. Any options that are cancelled or forfeited before expiration become available for future grants. In addition to granting stock options during 2006, the Company started to routinely grant Restricted Stock Units (RSUs) under the 2004 Plans. RSUs usually vest over a period of employment of up to four years. Upon vesting, the RSU beneficiary is entitled to receive a share per one RSU for no consideration ($ 0.01 per share). RSUs that are cancelled or forfeited become available for future grants.
  
 c.
Candela's option plan:



In January 2010, upon the consummation of the merger agreement with Candela (see also Note 1i), the Company assumed Candela's Third Amended and Restated 1998 Candela Corporation Stock Option Plan (1998 Plan), Candela's 2008 Candela Corporation Stock Plan (2008 Plan) and each of the following options to purchase Candela's common stock, stock appreciation rights or similar rights granted on Candela's common stock that were outstanding at such time, whether vested or unvested (Candela Awards):
  1.
Candela Awards with an exercise or strike price less than or equal to $ 3.16, which is the product of (x) the price per our ordinary share on Nasdaq immediately prior to the effective time of the merger, which was $ 10.86, and (y) the exchange ratio of our ordinary share for each share of Candela common stock, which was 0.2911; and
 
 2.
All Candela Awards subject to, and in accordance with the existing terms of, Candela's executive retention agreements.
 
 All such options and stock appreciation rights became fully vested and continued in effect in all material respects on the same terms and conditions as in effect immediately prior to the effective time of the merger.
 
 F - 54
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 c.
Candela's option plan (Cont.):



As of December 31, 2010, there were 780,779 outstanding options and stock appreciation rights (SARs), granted under the 1998 Plan and the 2008 Plan, or Candela Plans.



Options and SARs granted under the 1998 Plan become exercisable on the date of grant or vest over a period of time, as specified by the committee established by Candela's board of directors, and expire ten years from the date of the grant. Upon exercise of a SAR, only the net number of ordinary shares issued in connection with such exercise shall be deemed "issued" for this purpose. The SARs granted to employees under the 1998 Plan vest over one to four years, while the SARs granted to directors vest over two years. Under the 1998 Plan, there were 560,920 outstanding options and SARs at December 31, 2010. The 1998 Plan expired pursuant to its terms on September 18, 2008. As such, there were no options/SARs available for grant under this plan at December 31, 2010.



On October 27, 2008, the board of directors of Candela adopted the 2008 Plan. The 2008 Plan was approved by Candela's stockholders on December 12, 2008. Under the 2008 Plan, Candela was permitted to grant incentive stock options, non-qualified stock options, SARs, restricted stock awards and RSUs (collectively, Stock Rights). The SARs granted to employees under the 2008 Plan vest over one to two years. Under the 2008 Plan incentive stock options were granted to employees of Candela and non-qualified options, SARs, restricted stock and RSUs were granted to employees, officers, directors and consultants of Candela. Following the merger with Candela, Candela's board of directors administers the 2008 Plan.



Under the 2008 Plan, there were 219,859 outstanding options/SARs at December 31, 2010.



Each option or SAR granted under this plan, expires on the date specified by the compensation committee of Candela, but not more than (i) ten years from the date of grant in the case of options and SARs generally, and (ii) five years from the date of grant in the case of incentive stock options granted to an employee possessing more than ten percent of the total combined voting power of all classes of stock of Candela. Options and SARs are subject to early termination in certain circumstances. The 2008 Plan shall automatically expire on October 27, 2018, except as to options and SARs outstanding on that date.



Stock options provide the holder with the right to purchase common stock. The exercise price per share of "incentive stock options" within the meaning of Section 422 of the U.S Internal Revenue Code of 1986, as amended, may not be less than the fair market value per share of common stock on the date of grant.
 
 F - 55
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 15:-     SHAREHOLDERS' EQUITY (CONT.):
 
 c.
Candela's option plan (Cont.):



Stock Appreciation Rights ("SARs") provide the holder the right to receive an amount, payable in stock, cash or in any combination of these, as specified by a Committee established by the Board of Directors, equal to the excess of the market value of Candela common shares on the date of exercise over the grant price at the time of the grant. The grant price of a SAR may not be less than the fair market value per share of common stock on the date of grant, provided that the grant price of SARs granted in tandem with stock options shall equal the exercise price of the related stock option.
  d.
The following is a summary of activities relating to the Company's stock options, and SAR's granted to employee and directors among the Company's various plans:



Transactions related to the grant of options and SAR's (as part of the acquisition of Candela) to employees and directors under the above plans during the years ended December 31, 2010, 2009 and 2008, were as follows:
  Year ended December 31,2010


2009


2008Weighted





Weighted





Weightedaverage





average





averageNumber

of options


exercise

price


Number

of options


exercise

price


Number

of options


exercise

priceOutstanding at beginning of year


3,225,126


$
12.22



3,843,001


$
14.2



1,276,380


$
23.87Granted


1,066,150


$
10.52



700,000


$
7.28



3,156,466


$
11.5Issued pursuant to  the acquisition of Candela (see Note 1i)


952,055


$
16.29



-


$
-



-


$
-Exercised


(413,391
)

$
5.7



(68,625
)

$
7.96



(61,650
)

$
0.0737Forfeited


(1,193,154
)

$
12.11



(1,249,250
)

$
15.77



(528,195
)

$
23.12Outstanding at end of year


3,636,786


$
13.57



3,225,126


$
12.22



3,843,001


$
14.2Exercisable options at end of year


2,178,037


$
16.08



994,578


$
17.16



802,499


$
24.14Vested and expected to vest


3,206,783


$
13.59



2,035,754


$
12.23



1,825,367


$
15.38
 
 F - 56
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 d.
(Cont.):



The intrinsic value of exercisable options (the difference between the Company's closing share price on the last trading day in fiscal 2010 and the exercise price, multiplied by the number of in-the-money options) included below represents the amount that would have been received by the option holders had all option holders exercised their options on December 31, 2010. This amount changes based on the fair market value of the Company's Ordinary shares. Total intrinsic value of outstanding options, exercisable options and vested and expected to vest options as of December 31, 2010 was $ 5,557, $ 3,765 and $ 5,414, respectively.



The following table summarizes information relating to awards of RSUs:
  Year ended December 31,2010


2009


2008WeightedNumber


Fair


Number


Fair


Number


averageof

RSUs


value

of grant date


of

RSUs


value

of grant date


of

RSUs


exercise

priceOutstanding at beginning of year


47,079


$
16.57



110,310


$
20.28



271,301


$
24.17Granted


153,392


$
10.27



-


$
-



29,155


$
12.13Exercised


(23,950
)

$
19.47



(55,066
)

$
23.16



(124,220
)

$
24.05Forfeited


(26,469
)

$
9.89



(8,165
)

$
22.29



(65,926
)

$
25.57Outstanding at end of year


150,052


$
10.85



47,079


$
16.57



110,310


$
20.28
 
 Aggregate intrinsic value, at the date of exercise, of options SAR's and RSUs that were exercised during the years ended on December 31, 2010, 2009 and 2008 was $ 2,049, $ 667 and $ 3,320, respectively.
 
 The options and SAR's outstanding as of December 31, 2010, grouped by exercise prices, were as follows:
 
 Exercise price


Options

outstanding

as of December 31, 2010


Weighted

average

remaining contractual life years of options outstanding


Options exercisable

as of December 31, 2010


Weighted

average

remaining contractual life years of options exercisable


Intrinsic value of options exercisable

as of December 31, 2010$
1.41



147,104



8.05



147,104



8.05


$
1,292$
4.81



73,081



8.63



73,081



8.63



393$
7.25-11.31



2,270,071



5.62



991,325



5.39



2,080$
14.0-15.51



324,097



5.30



144,094



6.77



-$
18.69-52.67



822,433



3.29



822,433



3.29



-3,636,786



5.23



2,178,037



4.98


$
3,765
 
 F - 57
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 d.
(Cont.):
 
 The weighted average fair values of options granted (including those granted to non-employees but excluding RSUs) during the years ended December 31, 2010, 2009 and 2008 were:
 
 Year ended December 31,2010


2009


2008Weighted average exercise prices

$
10.51


$
7.28


$
11.50Weighted average fair value on grant date

$
5.40


$
3.82


$
5.65
 
 The weighted-average estimated fair value of employee stock options granted during the year ended December 31, 2010, 2009 and 2008 was calculated using the binomial model with the following weighted-average assumptions:
 
 Year ended December 31,2010

2009

2008Volatility

57%

65%

56%Risk-free interest rate

2.76%

2.43%

3.06%Dividend yield

0%

0%

0%Post-vest cancellation rate *)

7%

5%

5%Suboptimal exercise factor **)

2.8

2

2Expected life (in years)

5.30

5.10

4.45
 
 *)
The post-vest cancellation rate was calculated on a monthly basis and is presented on an annual basis.
 
 **)
The ratio of the stock price to strike price at the time of exercise of the option.
 
 The Company used volatility data of comparable companies' with similar characteristics to the Company for calculating volatility in accordance with ASC 718. The computation of historical volatility was derived from the comparable companies' historical volatility for similar contractual terms. As a result of the above-mentioned calculations, the weighted-average volatility used for the 12 months ended December 31, 2010 and 2009 was 57% and 65%, respectively.
 
 The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company's employee stock options. Weighted average interest rate used for the 12 months ended December 31, 2010 and 2009 was 2.76% and 2.43%, respectively.
 
 F - 58
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 d.
(Cont.):
 
 The Company is required to assume a dividend yield as an input in the binomial model. The dividend yield assumption is based on the Company's historical and expectation of future dividend payouts and may be subject to substantial change in the future. The dividend yield used for the twelve months ended December 31, 2010 and 2009 was 0%.
 
 The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the binomial model. The expected life of employee stock options is impacted by all of the underlying assumptions used in the Company's model.
 
 The binomial model assumes that employees' exercise behavior is a function of the option's remaining contractual life and the extent to which the option is in-the-money (i.e., the average stock price during the period is above the strike price of the stock option). The binomial model estimates the probability of exercise as a function of these two variables based on the history of exercises and factors in also the post vesting termination rate of employees, as termination triggers the truncation of employee awards shortly thereafter. The expected life derived from the binomial model was a weighted average of 5.3 and 5.1 years for options granted during the 12 months ended December 31, 2010 and 2009, respectively.
 
 As equity-based compensation expense recognized in the consolidated statement of income is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
 The Company's aggregate compensation cost for the years ended December 31, 2010, 2009 and 2008 totaled $ 3,196, $ 4,264 and $ 7,592, respectively.
 
 The total equity-based compensation expense related to all of the Company's equity-based awards, recognized for years ended December 31, 2010, 2009 and 2008, was comprised as follows:
 
 Year ended December 31,2010


2009


2008Cost of goods sold

$
28


$
28


$
51Research and development


808



528



295Sales and marketing


809



1,421



3,860General and administrative


1,551



2,287



3,386Total equity-based compensation expense before taxes

$
3,196


$
4,264


$
7,592
 
 
 F - 59
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 15:-      SHAREHOLDERS' EQUITY (Cont.):
 
 d.
(Cont.):



As of December 31, 2010, there was $ 5,985 of total unrecognized stock-based compensation cost related to non-vested stock-based compensation granted under the Company's stock option plans. That cost is expected to be recognized over a weighted average period of 1.63 years.
  e.
Dividends:



The Company has never paid cash dividends to shareholders.  The Company intends to retain future earnings for use in its business and does not anticipate paying cash dividends on its shares in the foreseeable future. Any future dividend policy will be determined by the Board of Directors and will be based upon conditions then existing, including results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions as the Board of Directors may deem relevant. In the event that cash dividends are declared in the future, such dividends will be paid in U.S. dollar subject to any statutory limitations.
 
 
 F - 60
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 16:-       OTHER INCOME, NET
 
 Year ended December 31,2010


2009


2008Legal settlement, net of legal cost (*)

$
-


$
3,975


$
-Bargain purchase price related to the acquisition of Candela (see also Note 1i)


8,525



-



-Impairment of Intangibles assets (**)


(1,319
)


-



-Reevaluation of contingent consideration (see also Note 1g)


(1,625
)


-



-Impairment of investment in an affiliated company(see also Note 7)


(850
)


-



-Other


(193
)


-



-Total

$
4,538


$
3,975


$
-
 
 (*)
On March 27, 2009, the Company reached a settlement agreement with a financial institution resolving a dispute filed with FINRA in 2008 with regard to certain ARS securities managed by this institution. The parties reached an agreement to amicably settle the dispute for a total amount of $ 3,975 in return for a Dismissal with Prejudice and a signed release. The Company continues to hold the part of the ARS securities related to this claim (see also Note 4).
 
 (**)
In accordance with the provisions of the impairment or disposal of long lived assets subsections of FASB codification sub topic 360-10, long live assets held and used with a carrying amount of $2,124 were written down to their fair value of $805 resulting in an impairment charge of $1,319 which was included in other operating income, net in the statement of operations for the year ended December 31, 2010. The fair value for such assets was calculated by a third party appraisal using the discounted cash flow which uses significant unobservable inputs (level 3) (see also Notes 2j and 9).
 
 
 F - 61
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-     INCOME TAXES
 
 a.
Israeli taxation:
 
 1.
Corporate tax rate



For tax year 2010, Israeli companies are subject to "Corporate Tax" on their taxable income at the rate of 25%.



During July 2009, an additional reduction in the corporate tax rate was approved in the Israeli parliament ("the Knesset"), according to which the corporate tax rate is scheduled to decrease as follows:



24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter.
  2.
Measurement of taxable income:



On February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law (Inflationary Adjustments) (Amendment 20) (Restriction of Effective Period), 2008, which the Company refers to as the Inflationary Adjustments Amendment.  In accordance with the Inflationary Adjustments Amendment, the effective period of the Inflationary Adjustments Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions of the law shall no longer apply, other than the transitional provisions intended at preventing distortions in the tax calculations.  In accordance with the Inflationary Adjustments Amendment, commencing with the 2008 tax year, income for tax purposes will no longer be adjusted to a real (net of inflation) measurement basis.  Furthermore, the depreciation of inflation immune assets and carried forward tax losses will no longer be linked to the Israeli Consumer Price Index.



In accordance with ASC 740, the Company has not provided deferred income taxes on the above difference between the reporting currency and the tax basis of assets and liabilities.
  3.
Tax benefits under Israel's Law for the Encouragement of Industry (Taxes), 1969:



The Company is "Industrial Company", as defined by the Law for the Encouragement of an Industry (Taxes), 1969, and as such, the Company is entitled to certain tax benefits, mainly amortization of costs relating to know-how and patents over eight years, accelerated depreciation and the right to deduct public issuance expenses for tax purposes.
 
 F - 62
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 17:-      INCOME TAXES (Cont.):
 
 a.
Israeli taxation (Cont.):
 
 4.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959 (the "Law"):



The Investment Law empowers the Israeli Investment Center to grant Approved Enterprise status to capital investments in production facilities that meet certain relevant criteria ("Approved Enterprise") specified by the Law and the regulations specified thereafter. The tax benefits derived from any Approved Enterprise relate only to taxable income attributable to the specific program of investment to which the status was granted.



On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise's income will be derived from export.



Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.



In addition, the Investment Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company's existing Approved Enterprise will generally not be subject to the provisions of the Amendment. Following the amendment to the law, it was clarified that tax-exempt income generated under the provisions of the new law, as part of a new Privileged enterprise, will subject the Company to taxes upon distribution or liquidation.



The Company has been granted the status of "Approved Enterprises", under the Law, for an investments program for the period ending in 2004, and the status of "Privileged Enterprise" according to the Amendment to the Law, for investments in 2005, 2007 and 2009 ("Programs").



In accordance with the Law and the Amendment, Syneron Medical Ltd. has chosen to enjoy an "alternative benefits track" status. Accordingly, Syneron Medical Ltd.'s income attributed to the Programs is exempt from taxes on income derived therefrom for a period of ten years starting in the year in which the Company first generates taxable income.
 
 F - 63
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-      INCOME TAXES (Cont.):
 
 a.
Israeli taxation (Cont.):
  4.
(Cont.)



Out of the Company's retained earnings as of December 31, 2010, approximately $ 144,459 is tax-exempt earnings attributable to its Approved Enterprise programs and $ 60,573 is tax-exempt earnings attributable to its Privileged Enterprise program. The tax-exempt income attributable to the Approved and Privileged Enterprise cannot be distributed to shareholders without subjecting the Company to taxes. If dividends are distributed out of tax-exempt profits, the Company will then become liable for tax at the rate applicable to its profits from the approved enterprise in the year in which the income was earned, as if it was not under the "Alternative benefits track" (tax at the rate of 10%-25%). Under the law, tax-exempt income generated under the Approved or Privileged Enterprise status will be taxed upon dividend distribution or complete liquidation, whereas in accordance with the law, tax exempt income generated under the Approved Enterprise status will be taxed upon dividend distribution.



As of December 31, 2010, if the income attributed to the Approved Enterprise were distributed as dividend, the Company would incur a tax liability of approximately up to $ 21,700 (depending on the tax rate as described above). If income attributed to the Privileged Enterprise is distributed as a dividend, including upon liquidation, the Company would incur a tax liability in the amount of approximately up to $ 9,086 (depending on the tax rate as described above). These amounts will be recorded as an income tax expense in the period in which the Company declares the dividend.



The Company's board of directors has determined that it will not distribute any amounts of its undistributed tax exempt income as a dividend. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company's Approved and Privileged Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.



The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law, regulations published there under and the certificates of approval for the specific investments in approved enterprises.



Should Syneron Medical Ltd. fail to meet such requirements in the future, income attributable to its programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such program. The Company's management believes that the Company is meeting the aforementioned conditions.
 F - 64
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-      INCOME TAXES (Cont.):
 
 a.
Israeli taxation (Cont.):
  4.
(Cont.)



Income from sources other than the "Approved Enterprise" is subject to tax at regular Israeli corporate tax rate of 25%.



On January 2, 2011, new legislation amending to the Investment Law was adopted. Under this new legislation, a uniform corporate tax rate will apply to all qualifying income of certain Industrial Companies, as opposed to the current law's incentives, which are limited to income from Approved Enterprises during their benefits period. Under the new law, the uniform tax rate will be 10% in areas in Israel designated as Development Zone A and 15% elsewhere in Israel during 2011-2012, 7% and 12.5%, respectively, in 2013-2014, and 6% and 12%, respectively thereafter. The profits of these Industrial Companies will be freely distributable as dividends, subject to a 15% withholding tax (or lower, under an applicable tax treaty).



Under the transition provisions of the new legislation, the Company may elect to irrevocably implement the new law while waiving benefits provided under the current law or to remain subject to the current law. Changing from the current law to the new law is permitted at any time. The Company does not expect the new law to have a material effect on the tax payable on its Israeli operations in the foreseeable future.



The Company does not expect the new law to have a material effect on the tax payable on its Israeli operations in the foreseeable future.
  b.
Non-Israeli subsidiaries:



Non-Israeli subsidiaries are taxed based on tax laws in their countries of residence.
 
 F - 65
 
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-      INCOME TAXES (Cont.):
 
 c.
Deferred Taxes:



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
  December 31,2010


2009Net operating loss carryforward of subsidiaries

$
31,374


$
16,279Tax Credits


1,895



-Share-based compensation costs


2,944



4,826Deferred tax asset from unrealized losses on available-for-sale marketable securities


26



2Impairment of available-for-sale marketable securities


493



1,884Company's capital losses carryforward (*)


7,886



8,114Bad debt reserve


1,898



-Deferred Revenues


1,463



-Accrued warranty reserve


2,658



-Other temporary differences


1,158



1,859Total deferred tax asset before valuation allowance


51,795



32,964Valuation allowance


(32,493
)


(32,701
)Total deferred tax asset


19,302



263Intangibles assets acquired


(12,984
)


(5,919
)Total deferred tax liability


(12,984
)


(5,919
)Net deferred tax asset (liability)(**)

$
6,318


$
(5,656
)
 
 (*)
The Company has a capital loss carryforward resulting from the difference between the reporting currency and the tax basis of the investments in Marketable securities.
 (**)
Net deferred tax asset (liability) is recorded in the following balance sheet line items:
 
 December 31,2010


2009Other receivables

$
7,603


$
263Deferred taxes


4,930



-Deferred tax liability


(6,215
)


(5,919
)Net deferred tax asset (liability)

$
6,318


$
(5,656
)
 
 F - 66
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-      INCOME TAXES (Cont.):
 
 c.
Deferred Taxes (Cont.):



At December 31, 2010, the Company had cumulative net operating losses ("NOL") for US federal and state income tax return purposes of $82 million and $64 million, respectively. The federal NOL carryforwards expire in 2029 and 2030.  The state NOL carryforwards begin to expire in 2013.  The federal and state NOL carryforwards for tax return purposes is $9.4 million greater than its NOL for financial reporting purposes due to unrecognized tax benefits.  The Company also has foreign NOLs of approximately $0.1 million with an unlimited carryforward period.



Such losses are subject to limitations of Internal Revenue Code, Section 382, which in general provides that utilization of NOL's is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.  The annual limitations may result in the expiration of losses before utilization.



The Israeli subsidiaries has an  available carryforward operating tax loss of $ 11,136 and $ 9,224 in 2010 and 2009, respectively to offset against future tax profits for an indefinite period.



At December 31, 2010, the Company had available federal research and development ("R&D") tax credit carryforwards of approximately $ 1.5 million expiring between 2020 and 2025 and other tax credits of approximately $ 0.9 million with an unlimited carryforward period. The Company also had available state research and development tax credits of approximately $ 1.1 million expiring between 2014 and 2021 including $ 0.3 million with an unlimited carryforward period. Federal and state R&D credit carryforwards for tax return purposes is $ 0.5 million greater than its federal and state R&D credit carryforwards for financial reporting purposes due to unrecognized tax benefits.



ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company evaluated the net deferred tax assets for each separate tax entity.  For certain entities, the Company concluded that it is not more likely than not that the net deferred tax assets will be realized and a valuation allowance has been recorded against these assets. Based on a consideration of these factors, the Company has established a valuation allowance of $ 32,493 and $ 32,701 at December 31, 2010 and 2009, respectively.
 
 F - 67
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 NOTE 17:-      INCOME TAXES (Cont.):
 
 c.
Deferred Taxes (Cont.):



For other entities, the Company has determined that the positive evidence outweighs the negative evidence for other deferred tax assets and concluded that these deferred tax assets are realizable on a "more likely than not" basis.  This determination was based on many factors, including the following:  (i) the net temporary differences resulting in the deferred tax assets and in the deferred tax liabilities are expected to reverse in similar time periods; (ii) the history of utilizing tax benefits, (iii) certain significant costs that are not expected to occur in future period contributing to the current year net operating loss, and (iv) expected future results of operations.



No amount for U.S. income tax has been provided on undistributed earnings of the Company's foreign subsidiaries because the Company considers the approximately $ 14.3 million of accumulated foreign earnings to be indefinitely reinvested. In the event of distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes, subject to an adjustment, if any, for foreign tax credits and foreign withholding taxes payable to certain foreign tax authorities. Determination of the amount of U.S income tax liability that would be incurred is not practicable because of the complexities associated with this hypothetical calculation; however, unrecognized foreign tax credit carry forwards may be available to reduce some portion of the U.S. tax liability, if any.
  d.
Tax contingencies for unrecognized tax benefits:



Included in the balance of tax contingencies for uncertain tax positions at December 31, 2010 was approximately $ 7,846 of unrecognized tax benefits (including interest and penalties) that, if recognized, would affect the annual effective income tax rate.  The unrecognized tax benefits and interest are recorded in deferred taxes and long-term obligations on the balance sheet.



The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The liability for unrecognized tax benefits at December 31, 2010 included accrued interest and penalties of $ 611. Tax expense recorded against the liability for unrecognized tax benefits for the year ended December 31, 2010, included reversal of interest and penalties of $ 288 million.
  F - 68
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-       INCOME TAXES (Cont.):
  d.
Tax contingencies for unrecognized tax benefits (Cont.):



The changes to unrecognized tax benefits from January 1, 2010 through December 31, 2010, were as follows:
  Gross tax liabilities at January 1, 2009

$
5,052Additions based on tax positions related to the current year


155Additions for tax positions of prior years


1,135Gross tax liabilities at December 31, 2009


6,342Additions resulted from acquisition of Candela


2,076Additions based on tax positions related to the current year


129Additions for tax positions of prior years


1,645Reductions for positions of prior years


(2,346
)Gross tax liabilities at December 31, 2010

$
7,846
 
 The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited or subject to review by both domestic and foreign authorities. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2010:
 
 Israel
-
2007 - presentUnited States
-
2003 - presentGermany
-
2006 - presentCanada
-
2005 - presentJapan
-
2005 - presentSpain
-
2006 - present
 
 The Company's subsidiary, Candela, is currently under audit by the Internal Revenue Service ("IRS") for fiscal years 2003 through 2010. It is likely that the examination phase of this audit will be completed within 12 months; however, it is not possible to estimate the potential net increase or decrease, if any to the Company's unrecognized tax benefits during the next twelve months.
 
 F - 69
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-     INCOME TAXES (Cont.):
 
 e.
Income (loss) before taxes:
 
 Year ended December 31,2010


2009


2008Domestic

$
(23,116
)

$
(23,955
)

$
1,136Foreign


(9,329
)


2,558



2,482$
(32,445
)

$
(21,397
)

$
3,618
 
 f.
Taxes on income:
 
 Year ended December 31,Current taxes

2010


2009


2008Domestic

$
(2,414
)

$
1,489


$
(*) (600)Foreign


643



202



403(1,771
)


1,691



(197
)Deferred taxesDomestic


(198
)


1,549



(1,812
)Foreign


(3,141
)


-



-(3,339
)


1,549



(1,812
)Total (benefit from) provision for income taxes

$
(5,110
)

$
3,240


$
(2,009
)
 
 (*)
Includes the effect of a final tax assessment with the Israeli tax authorities for the years 2003-2005 in the amount of ($ 2,003).
 
 
 F - 70
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 17:-      INCOME TAXES (Cont.):
 
 g.
The reconciliation from the federal statutory tax rate to the effective tax rate is as follows:
 
 Year ended December 31,2010


2009


2008Income (loss) before taxes, as reported in the consolidated statements of income

$
(32,445
)

$
(21,397
)

$
3,618Statutory tax rate


25
%


26
%


27
%Theoretical tax expenses (benefits) on the above amount at the Israeli Statutory tax rate

$
(8,111
)

$
(5,563
)

$
977Increase (decrease) in taxes resulting from "Approved  Enterprise" benefits (1)


4,987



4,602



161Difference in basis of measurement for tax purpose


452



408



(7,155
)Change in valuation allowance, net


(208
)


1,842



4,309Non-deductible stock based compensation


471



1,109



1,056Non-deductible expenses


1,256



646



185Bargain purchase price


(3,101
)


-



-Decrease in taxes resulting from tax settlement with tax authorities


-



-



(1,506
)Difference in tax rates


(933
)


-



-Others


77



196



(36
)Actual tax (income) expense

$
(5,110
)

$
3,240


$
(2,009
)(1)       Per share amounts (basic) of the tax benefit resulting from the exemption

$
0.15


$
0.17


$
0.01Per share amounts (diluted) of the tax benefit Resulting from the exemption

$
0.15


$
0.17


$
0.01
 
 F - 71
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
  NOTE 18:-       FINANCIAL INCOME, NET
 
 Year ended December 31,2010


2009


2008Income:Interest on cash equivalents

$
27


$
25


$
373Gain and interest on available-for-sale marketable securities


1,884



3,274



7,561Interest on short-term deposits and structured note


-



-



510Expenses:Interest on short-term credit and bank  commissions


(331
)


(280
)


(337
)Loss on available-for-sale marketable securities


(380
)


(458
)


(540
)Impairment of investments in marketable securities


(119
)


(173
)


(1,553
)Foreign currency  transaction adjustments


(364
)


(291
)


(2,152
)$
717


$
2,097


$
3,862
  NOTE 19:-      SEGMENT REPORTING
 
 a.
General:



The Company's segment information has been prepared in accordance with ASC 280, "Segment Reporting." Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the Company's chief operating decision-maker in deciding how to allocate resources and assess performance. The Company's chief operating decision-maker (CODM) is a combination of both its chief executive officer and its chief financial officer, who evaluates the Company's performance and allocates resources based on segment revenues and operating profit (loss).
  b.
In 2010, following a change in the manner the CODM evaluates the financial information the Company has determined that it operates under two reportable segments in accordance with ASC 280 "Disclosure about Segments of an Enterprise and Related Information", The Company's operating segments are as follows:
 
 1.
Professional Aesthetic Devices ("PAD"), in which the Company engaged in research, development marketing and sales of aesthetic medical equipment for the treatment of body and face for dermatologists, plastic surgeons and other qualified practitioners worldwide (professional market).
 
 F - 72
 
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 19:-     SEGMENT REPORTING (Cont.):
 
 b.
(Cont):
 
 2.
Emerging Business Units ("EBU"), includes RBT, LI, Pharos, Fluorinex and Syneron's home use products. The Company provides these products in various countries throughout North America, Europe, Israel and Asia Pacific.
 
 c.
Financial data relating to reportable operating segments:



The following financial information is the information that management uses for analyzing its results. The figures are presented on a consolidated basis as presented to management. In 2009 and 2008, the Company's reporting segments were based on geographical unit (see d. below). Commencing 2010, following the change in the manner the company's CODM evaluates the financial information, the Company presents the segment information based on its reporting business units. Earlier periods, have been restated to present the information based upon those business units as required by ASC 280.



Segment operating profit (loss) is defined as income (loss) from operations. Expenses included in segment operating profit (loss) consist principally of cost of goods sold direct selling, delivery, general and administrative costs and research and development costs.



The tables below present financial information for the Company's two reportable segments:
  Year ended December 31, 2010PAD


EBU


TotalRevenues from external customers

$
185,601


$
3,927


$
189,528Operating loss


(27,285
)


(6,117
)


(33,402
)Financial income (expenses), net


813



(96
)


717Other income


240



-



240Loss before taxes on income


(26,232
)


(6,213
)


(32,445
)Segment goodwill


8,206



10,373



18,579Segment identifiable assets

$
360,619


$
14,166


$
374,785
 
 F - 73
 SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 19:-      SEGMENT REPORTING (Cont.):
 
 c.
(Cont):
 
 Year ended December 31, 2009PAD


EBU


TotalRevenues from external customers

$
51,818


$
2,908


$
54,726Operating loss


(20,845
)


(3,211
)


(24,056
)Financial income (expenses), net


2,207



(110
)


2,097Other income


-



562



562Loss before taxes on income


(18,638
)


(2,759
)


(21,397
)Segment goodwill


8,206



6,904



15,110Segment identifiable assets

$
256,528


$
13,739


$
270,267
  Year ended December 31, 2008PAD


EBU


TotalRevenues from external customers

$
111,340


$
3,639


$
114,979Operating income (loss)


88



(332
)


(244
)Financial income (expenses), net


3,984



(122
)


3,862Other income


-



-



-Income (Loss) before taxes on income


4,072



(454
)


3,618Segment goodwill


-



2,822



2,822Segment identifiable assets

$
278,075


$
3,211


$
281,286
 
 d.
The Company's total revenues are attributed to geographic areas based on the location of the end customer.



The following table presents total revenues and long lived assets for the years ended December 31, 2010, 2009 and 2008. Other than as shown, no foreign country contributed materially to revenues or long-lived assets for these periods.
 
 
 2010


2009


2008Total revenue


Long-lived assets


Total revenue


Long-lived assets


Total revenue


Long-lived assetsNorth America

$
66,123


$
1,808


$
27,978


$
339


$
60,202


$
642Europe


58,348



145



10,919



-



33,005



-Asia Pacific


25,888



48



8,362



-



12,686



-Japan


27,604



24



3,000



-



4,281



-Israel


1,318



2,004



1,127



2,546



581



3,014Others


10,247



-



3,340



-



4,224



-$
189,528


$
4,029


$
54,726


$
2,885


$
114,979


$
3,656
 
 F - 74
  SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands,expect share and per share data
 
 NOTE 20:-        EARNINGS PER SHARE
 
 The following table sets forth the computation of basic and diluted net earnings per share:
 
 Year ended December 31,2010


2009


2008Numerator:Net income (loss) attributable to Syneron's shareholders

$
(25,536
)

$
(23,587
)

$
5,627Denominator:Weighted-average number of shares outstanding used in computing basic net earnings per share


34,369,105



27,526,401



27,410,187Dilutive effect: stock options and RSUs


-



-



110,576Total weighted-average number of shares used in computing diluted net earnings (loss) per share


34,369,105



27,526,401



27,520,763Basic net (loss) earnings per share

$
(0.74
)

$
(0.86
)

$
0.21Diluted net (loss) earnings per share

$
(0.74
)

$
(0.86
)

$
0.20
 
 Anti-dilutive securities:



The following number of shares was excluded from the computation of diluted net earnings loss per Ordinary share for the periods presented because including them would have had an anti-dilutive effect.
  Year ended December 31,2010


2009


2008Ordinary shares


3,811,838



3,272,205



2,202,853
  NOTE 21:-
SUBSEQUENT EVENTS



In February 2011, the Company closed an additional investment of $308 in consideration of 15,664 of RBT's Preferred A-1 shares constituting an aggregate of 2.55% of RBT's share capital on a fully diluted basis. The Company accounted for the additional investment and the increase in the holding percentage in RBT in accordance with ASC 810. Additionally, the Company provided RBT a loan in the aggregate amount of $308.
   F - 75
  SIGNATURES
  The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
  Dated: March 28, 2011
 Syneron Medical Ltd.By:
/s/ Louis ScafuriLouis ScafuriChief Executive Officer