---

---

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

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

|OR
|--

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

|For
the fiscal year ended December 31, 2006 
OR
|-----------------------------------------------

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

|For
the transition period from ____ to _____ 
Commission File No. 000-50867 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
|-----------------------------------------------------------------

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, P.O.B. 550, Israel 
(Address of principal
executive offices)

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

|Title of Each Class                           | Name of Each Exchange on which Registered
|--------------------------------------------- | -----------------------------------------
|Ordinary shares, par value NIS 0.01 per share | Nasdaq Global Market                     

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

None

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

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, 2006, the Registrant had 27,522,740 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.

Yes x No o

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
financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

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

o Yes   x No

As
used herein, and unless the context suggest otherwise, the terms we,
us or ours refer to Syneron Medical Ltd. and its consolidated
subsidiaries.

This annual report on Form 20-F contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1933 and section 21e of the securities exchange act
of 1934, as amended relating to future events or our future performance. The use of the
words projects, may, plans or intends, or words
of similar import, identifies a statement as forward looking. The
forward-looking statements included herein are based on current expectations that involve
a number of known and unknown risks and uncertainties. These forward-looking statements
are based on certain assumptions, including 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 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 forecasts
will accurately anticipate market demand and that 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. 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 at Item 3.D Risk Factors.

We
undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions, the forward-looking events discussed in this annual
report might not occur.



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# TABLE OF CONTENTS

|          |                                                                             | Page
|--------- | --------------------------------------------------------------------------- | ----
|
|
|
|
|PART I    |                                                                             | 1   
|         
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                       | 1   
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                     | 1   
|ITEM 3.   | KEY INFORMATION                                                             | 1   
|ITEM 4.   | INFORMATION ON THE COMPANY                                                  | 14  
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                   | 26  
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                | 26  
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                  | 36  
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                           | 43  
|ITEM 8.   | FINANCIAL INFORMATION                                                       | 45  
|ITEM 9.   | THE OFFER AND LISTING                                                       | 47  
|ITEM 10.  | ADDITIONAL INFORMATION                                                      | 48  
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  | 65  
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      | 65  
|         
|PART II   |                                                                             | 65  
|         
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             | 65  
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OFPROCEEDS | 65  
|ITEM 15T. | CONTROLS AND PROCEDURES                                                     | 65  
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                            | 66  
|ITEM 16B. | CODE OF ETHICS                                                              | 66  
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 67  
|ITEM 16D. | EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES                      | 67  
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATE PURCHASERS           | 67  
|         
|PART III  |                                                                             | 67  
|         
|ITEM 17.  | FINANCIAL STATEMENTS                                                        | 67  
|ITEM 18.  | FINANCIAL STATEMENTS                                                        | 68  
|ITEM 19.  | EXHIBITS                                                                    | 68  

- i -

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# 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 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, 2002, 2003 and 2004 and the
selected consolidated statement of operations data for the full years ended December 31,
2002 and 2003 have been derived from our audited financial statements not included in this
annual report. The selected consolidated balance sheet data as of December 31, 2005 and
2006 and the selected consolidated statements of income data for each of the years ended
December 2004, 2005 and 2006 have been derived from our audited consolidated financial
statements, included elsewhere in this annual report, which have been prepared in
accordance with accounting principles generally accepted in the United States and audited
by Kost, Forer, Gabay & Kasierer, an independent registered public accounting firm,
and a member firm of Ernst & Young Global.

|                                                                             | Year ended December 31,
|---------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Consolidated Statement of Operations Data:                                   |                        
|                                                                             |                        
|Revenues                                                                     |                        
|Cost of revenues(1)                                                          |                        
|                                                                             |                        
|                                                                             |                        
|Gross profit                                                                 |                        
|Operating expenses:                                                          |                        
|Research and development, net(1)                                             |                        
|Selling and marketing, net(1)                                                |                        
|General and administrative(1)                                                |                        
|Other expenses(2)                                                            |                        
|                                                                             |                        
|                                                                             |                        
|Total operating expenses(1)(2)                                               |                        
|                                                                             |                        
|                                                                             |                        
|Operating income (loss)(1)(2)                                                |                        
|Financial income (expense), net                                              |                        
|                                                                             |                        
|                                                                             |                        
|Income (loss) before taxes on income                                         |                        
|Taxes on income                                                              |                        
|                                                                             |                        
|                                                                             |                        
|Net income (loss)                                                            |                        
|                                                                             |                        
|                                                                             |                        
|Net earnings (loss) per share:                                               |                        
|Basic                                                                        |                        
|                                                                             |                        
|                                                                             |                        
|Diluted                                                                      |                        
|                                                                             |                        
|                                                                             |                        
|Weighted-average number of shares used in actual 
   per share calculations: |                        
|Basic                                                                        |                        
|                                                                             |                        
|                                                                             |                        
|Diluted                                                                      |                        
|                                                                             |                        
|                                                                             |                        
|(1) Includes the following stock-based compensation 
   charges:             |                        
|                                                                             |                        
|Cost of revenues                                                             |                        
|Research and development                                                     |                        
|Selling and marketing                                                        |                        
|General and administrative                                                   |                        
|                                                                             |                        
|                                                                             |                        
|Total stock-based compensation charge                                        |                        
|                                                                             |                        

(2)
          Consists of settlement and litigation costs in 2002, 2003 and 2005 associated
          with litigation with competitors as set forth in Note 11(d) of the Notes to our
          Consolidated Financial Statements, and of follow-on secondary offering expenses
          set forth in Note 1(c) of the Notes to our Consolidated Financial Statements.

1

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---

|                                                   | As of December 31,
|-------------------------------------------------- | ------------------
|
|
|
|
|Consolidated Balance Sheet Data                    |                   
|Cash and cash equivalents, deposits and securities |                   
|Working capital                                    |                   
|Total assets                                       |                   
|Total liabilities                                  |                   
|Retained earnings (deficit)                        |                   
|Shareholders' equity                               |                   

|B. | CAPITALIZATION
AND INDEBTEDNESS
|-- | -------------------------------

Not
applicable.

|C. | REASONS
FOR OFFER AND USE OF PROCEEDS
|-- | -------------------------------------

Not
applicable.

|D. | RISK
FACTORS
|-- | ------------

This annual report 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 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

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 apply our technology to rejuvenate the skins appearance
through the treatment of superficial benign vascular and pigmented lesions, hair removal,
wrinkle reduction, the treatment of acne and leg veins and the treatment for the temporary
reduction in the appearance of cellulite. We introduced our first product in December
2001, the Aurora, and have expanded our product offerings to include eight additional
product platforms, the Pitanga, Polaris, Galaxy, Comet, Vela, eLight, eLaser and eMax. It
is difficult for us to predict the success of our recently introduced products over the
long term. Our failure to significantly penetrate current or new markets with our 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 adoption and acceptance of our proprietary Electro-Optical Synergy, or ELOS
 technology. The rate of adoption and acceptance may be affected adversely by
perceived issues relating to quality 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 that we can sell to new and existing users of our products and
that we will be able to identify new markets for our existing ELOS technology.

2

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---

To
successfully increase our revenues, we must:

| |  | 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/gynecologists, ear, nose and throat
specialists, other specialists and non-medical professionals;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | develop
or acquire new products that either add to or significantly improve our
                  current products;
| | - | -------------------------------------------------------------------------------------------------------------------

| |  | 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 affect adversely 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. Demand for our
products could be diminished by equivalent or superior products and technologies offered
by competitors.

We may have difficulty managing
our growth which could limit our ability to increase sales and cash flow.

We
have been experiencing significant growth in the scope of our operations and the number of
our employees. This growth has placed significant demands on our management, as well as
our financial and operational resources. In order to achieve our business objectives, we
anticipate that we will need to continue to grow. Continued growth would increase the
challenges involved in:

| |  | implementing
appropriate operational and financial systems;
| | - | -----------------------------------------------------------

| |  | expanding
manufacturing capacity and scaling up production;
| | - | -----------------------------------------------------------

| |  | expanding
our sales and marketing infrastructure and capabilities;
| | - | ------------------------------------------------------------------

| |  | providing
adequate training and supervision to maintain high quality standards; and
| | - | -----------------------------------------------------------------------------------

| |  | preserving
our culture and values.
| | - | ----------------------------------

If
this growth occurs, it will continue to place additional significant demands on our
management and our financial and operational resources, and will require that we continue
to develop and improve our operational, financial and other internal controls. If we
cannot scale and manage our business appropriately, we will not experience our projected
growth and our financial results will suffer.

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
predict sales for subsequent periods accurately. 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 payers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | continued
availability of attractive equipment leasing terms for our customers, which
                  may be negatively influenced by interest rate increases;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

3

---

---

| |  | changes
in our ability to obtain and maintain regulatory approvals;
| | - | -------------------------------------------------------------------

| |  | increases
in the length of our sales cycle;
| | - | -------------------------------------------

| |  | performance
of our 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 31, 2007, our patent portfolio consisted of six issued
U.S. patents, one of which we purchased in December 2004 (with the corresponding US and
international family members), and 23 patent applications pending in the United States
(with an additional 22 applications pending internationally and 7 international patents),
related to 24 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.

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 United States 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.

New
patent applications may be pending or may be filed in the future by third parties covering
technology that we currently use or may ultimately use. Third parties 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. For example, one of our competitors, Lumenis Ltd., sued us
for unfair competition, misappropriation of trade secrets and alleged infringement in
2002. In March 2004, without admitting liability or any infringement of any of Lumenis
Ltds patents, we entered a settlement to resolve this litigation and entered a
license agreement for certain Lumenis patents, under which license fees were capped at
$4.2 million. We paid in full the total amount during 2005. Another competitor, Thermage,
Inc. sued us for patent infringement in 2004. We filed a counterclaim, also alleging
patent infringement, and this litigation was settled with the parties entering into a
cross-licensing agreement in June 2005. Legal fees and our settlement costs in connection
with our settlement with Thermage amounted to $2.2 million.

4

---

---

On
July 29, 2004, Shaldot Metal Works Ltd. (Shaldot), a privately owned Israeli
company, sued us and Dr. Eckhouse, in the District Court in Haifa, claiming that in 1999
Dr. Eckhouse had access to confidential material regarding an Israeli patent, which he
allegedly used in violation of a confidentiality agreement in connection with forming
Syneron. The complaint alleges that our products infringe Shaldots Israeli patent.
In its lawsuit Shaldot is suing us for $2.3 million (NIS 10 million) and has requested an
injunction against us which will prohibit manufacturing, marketing and selling some or all
of our products, which, if successful, could have a material adverse effect on our
business in Israel. On October 10, 2004, we submitted our Statements of Defense to the
court, claiming that Shaldots patent is invalid due to the existence of prior art,
lack of novelty and no improvement over existing art in the field. Shaldots patent
is under review by the Israeli Patent Office, based on a request submitted to the Patent
Office by a third party claiming that Shaldots patent is invalid. Moreover, we
claimed that even if the patent would have been valid, none of our devices infringe any of
Shaldots patents. The dispute was referred by the court to mediation and the parties
attempted to resolve the dispute. The mediation process was not successful and was
terminated by Shaldot. In January 2007, we learned that Shaldot had transferred all of its
rights to the patent to a subsidiary, Qray Ltd. We submitted a motion to dismiss
Shaldots lawsuit, claiming that due to the transfer of rights, Shaldot no longer had
standing to continue the proceedings. A hearing on our motion was held on February 19,
2007. At the hearing, the court ordered that Qray be added as an additional plaintiff to
the lawsuit and that the parties submit revised statements of claims and defenses. On
February 25, 2007, Shaldot submitted its revised statement of claims. On March 14, 2007,
we submitted our revised statement of defense and also a revised statement of
counterclaim. We are in the process of ongoing evidentiary hearings with the next hearing
scheduled to take place on June 18, 2007. We believe that Shaldots lawsuit is
without merit, and we intend to defend ourselves vigorously. Therefore, we do not believe
that this lawsuit will result in a loss to us and accordingly, no reserve was recorded in
the financial statement with respect to this claim.

We
also may become involved in intellectual property litigation in the future. Although we
may try to resolve any potential future claims or actions as we did with the competitors
described above, 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 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 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. We do not know whether others will assert that
our company name infringes their trademark rights. 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 company or 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.

We compete against companies that
have longer operating histories, more established products and greater resources, which
may prevent us from achieving significant market penetration or maintaining or improving
operating results.

Our
products compete against products offered by public companies, including Candela
Corporation, Lumenis Ltd., Cutera, Inc., Cynosure, Inc. , Thermage, Inc. and Palomar
Medical Technologies, Inc., as well as by private companies such as Sciton, Inc., Radiancy
Inc., Reliant Technologies, Inc. UltraShape, 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, liposuction and chemical peels, 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;
| | - | ----------------

5

---

---

| |  | 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 more established products and customer relationships than we do,
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.

Due to our limited history of
operations, we may not be able to predict our future performance or continue our revenue
growth and profitability.

We
were incorporated in July 2000 and commercially launched our first product in the fourth
quarter of 2001. Consequently, we have a limited history of operations. The future success
of our business will depend on our ability to increase product sales, successfully
introduce new products, expand our sales force and distribution network, and control
costs, which we may be unable to do. As a result, we may not be able to continue our
revenue growth and profitability.

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 to four subcontractors located in Israel.
These subcontractors have limited manufacturing capacity that may be inadequate if our
customers place orders for unexpectedly large quantities of our products. In addition,
because our 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, 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.

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. 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 in a timely
manner, could impair our ability to meet the demand of our customers, which would have an
adverse effect on our business.

6

---

---

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 the United States, Canada, Germany and
Hong-Kong. We depend on third-party distributors in Europe, except in Germany and
Austria, and in Asia, Australia, South America and Japan. We also depend on relatively
new direct sales operations to sell our products in North America, Germany and Austria.
Therefore, we are subject to risks associated with having worldwide operations.
Substantially all of our revenue in 2004, 2005 and 2006 was generated outside of Israel,
primarily in North America and to a lesser extent in Western Europe and Asia. Only an
immaterial amount of our revenues in 2004, 2005 and 2006 was generated in countries in
the Middle East other than Israel. 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;
| | - | --------------------------------------------------

| |  | lengthy
payment cycles and difficulty in collecting accounts receivable;
| | - | ------------------------------------------------------------------------

| |  | customs
clearance and shipping delays;
| | - | --------------------------------------

| |  | import
and export controls;
| | - | ---------------------------

| |  | multiple
and possibly overlapping tax structures;
| | - | -------------------------------------------------

| |  | greater
difficulty in safeguarding intellectual property in some countries;
| | - | ---------------------------------------------------------------------------

| |  | difficulties
staffing and managing our international operations;
| | - | ----------------------------------------------------------------

| |  | difficulties
in penetrating markets in which our competitors' products are more established; and
| | - | ------------------------------------------------------------------------------------------------

| |  | economic
instability.
| | - | ---------------------

In
addition, we face particular risks associated with doing business in international
markets, including, political instability and the threat of terror attacks. 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 may
decrease our earnings if we are not able to hedge our currency exchange risks
successfully.

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
and the Euro. Inflation in Israel or Europe may have the effect of increasing the U.S.
dollar cost of our operations in that country. If the U.S. dollar declines in value in
relation to one or more of these currencies, it will become more expensive for us to fund
our operations in the countries that use those other currencies. During 2006, the exchange
rate of U.S. dollar to the New Israeli Shekel has decreased 8.2%, the exchange rate of
U.S. dollar to the Euro has decreased -11.4%. The net effect was a net gain of $1 million
in our financial results.

Although
we may use hedging techniques 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.

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 United States
by the Food and Drug Administration, or FDA, for manufacturing, labeling, sale, promotion,
distribution and shipping. Before a new medical device, or a new use of, or claim for, an
existing product can be marketed in the United States, it must first receive either 510(k)
clearance or premarket approval from the FDA, unless an exemption applies. Either process
can be expensive and lengthy. The FDAs 510(k) clearance process usually takes from
three to twelve months, but it can last longer. The process of obtaining premarket
approval 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. We believe that very few of our existing or currently planned products
are subject to FDA premarket approval. All products that we currently market in the United
States have received 510(k) clearance for the uses for which they are marketed. 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.
In March 2006, the FDA granted 510(k) clearance to our new ST applicator for non-invasive
wrinkle treatment a technique based on our ReFirme procedure. As a result of these
510(k) clearances we are now able to sell the Vela platform and our ReFirme
procedure using our new ST applicator in the United States to physicians. In October 2006,
the FDA granted 510(k) clearance to our new LiteTouch product for Dental Laser treatment.
As a result of this 510(k) clearance we are now able to sell our LiteTouch products to
dentists in the United States.

7

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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 premarket approval. We may not be able to
obtain additional 510(k) clearances or premarket approvals 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:

| |  | warning
letters, fines, injunctions, consent decrees and civil penalties;
| | - | -------------------------------------------------------------------------

| |  | repair,
replacement, refunds, 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 or partial suspension or total shutdown of production;
| | - | -----------------------------------------------------------------------------

| |  | refusing
our requests for 510(k) clearance or premarket approval of new products, new intended
         uses, or modifications to existing products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | withdrawing
510(k) clearance or premarket approvals that have already been granted; and
| | - | ---------------------------------------------------------------------------------------

| |  | 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 regulatory 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 shutdown of manufacturing operations, a recall 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 United States, such as obtaining
KEMA certification (electrical safety testing and certification in Europe) and the
Standards Institution of Israel (imposed on our activities in Israel), and failure to
comply with such standards could adversely impact our business.

8

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We may be unable to obtain or
maintain international regulatory qualifications or approvals for our current or future
products and indications, which could harm our business.

Sales
of our products outside the United States 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 to obtain 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 United
States, such as approvals for the use of our Aurora, Polaris, VelaSmooth, Galaxy and Comet
product platforms in Korea or approvals for the use of our Aurora and Polaris product
platforms in China, 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 United States, 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, outside the United States, to aestheticians. In
addition, we sell our products in the developing U.S. medical spa market, where aesthetic
procedures are being performed at dedicated facilities by non-physicians under physician
supervision. However, U.S., state and 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.

Because we do not require training
for users of our products, and sell our products to non-physicians, there exists potential
for misuse of our products, which could harm our reputation and our business.

In
the United States, federal regulations allow us to sell our products to or on the order of
licensed practitioners. The definition of licensed practitioners
varies from state to state. As a result, depending on state law, our products may be
purchased or operated by physicians or other licensed practitioners, including nurse
practitioners, chiropractors and technicians. Outside the United States, 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,
nor do we require that direct medical supervision occur. While we offer our users the
opportunity to receive on-site clinical training through our Ultimate Customer
Care program, we and our distributors do not require purchasers or operators of our
products to attend training sessions. 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 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 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. We have been involved in a number of disputes or legal claims between our customers
and their patients that involved potential product liability claims since inception. To
date, none of these disputes resulted in legal verdicts against us, although in some cases
payments were made or might be made by an insurance carrier. 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.

9

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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:

| |  | loss
of customer orders and delay in order fulfillment;
| | - | -------------------------------------------------------

| |  | damage
to our brand reputation;
| | - | -------------------------------

| |  | increased
cost of our warranty program due to product repair or replacement;
| | - | ----------------------------------------------------------------------------

| |  | inability
to attract new customers;
| | - | -----------------------------------

| |  | diversion
of resources from our manufacturing and research and development departments into our
service          department;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | product
recalls; and
| | - | --------------------

| |  | 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.

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. Our limited historical experience may not
provide us with enough data to accurately predict future demand. 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 P&G, we may divert the attention of key technical personnel and
management from the core business. If P&G terminates the agreement, our stock price
could fall, and we may be unable to bring a home-use device to the market.

Effective
February 25, 2007, we entered into a Joint Development and Supply Framework Agreement
with the Proctor & Gamble Company (NYSE: PG) 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 will be 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. Procter & Gamble has
the option under certain circumstances to terminate the agreement, including following
the failure to successfully complete two milestones. We cannot be sure that P&G will
not terminate the agreement. If Procter & Gamble terminates the agreement, the price
of our common stock could fall significantly, and we will not receive certain royalty and
other payments provided for in the agreement. If P&G 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 a home-use device to the market.

10

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The failure to attract and retain
key personnel could adversely affect our business.

Our
success also will depend in large part on our ability to continue to attract, retain and
motivate qualified engineering and other 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.

Under current U.S. and Israeli
law, 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 agreements 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. Under current U.S. and
Israeli law, 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 our former
employees gained while working for us. For example, Israeli courts have required in the
past employers seeking to enforce non-compete undertakings of a former employee to
demonstrate that the competitive activities of the former employee will harm one of a
limited number of material interests of the employer which have been recognized by the
courts, such as the secrecy of a companys confidential commercial information or its
intellectual property. If we cannot demonstrate that harm would be caused to us under this
limited number of material interests, we may be unable to prevent our competitors from
benefiting from the expertise of our former employees.

# 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 and our principal executive offices and research and
development facilities are located in Israel. In addition, all of our subcontractors are
located in Israel. Accordingly, political, economic and military conditions in Israel may
affect directly our business. 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.

Following
the recession and the instability that characterized the Israeli economy during the years
2001 and 2003, the Israeli economy showed signs of improvement during 2004 and 2005. The
Israeli economy has also been subject to significant changes, as a result of
implementation of new economic policies and privatization. If the results of these changes
are unsuccessful or the economic deterioration in Israel continues, it may also adversely
affect our financial conditions, the results of operations and our ability to obtain
financing from Israeli banks.

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. Since October 2000, terrorist violence in
Israel has increased significantly, primarily in the West Bank and Gaza Strip, and Israel
has experienced terrorist incidents within its borders. Recently, there has been a further
escalation in violence among Israel, Hamas, the Palestinian Authority and other groups. In
addition, in July 2006 there have been extensive hostilities along Israels northern
border with Lebanon and to a lesser extent in the Gaza Strip. 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 limit seriously our ability to sell our
products in these countries.

11

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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 United States. Therefore, a judgment obtained against us or any of
them in the United States, including one based on the civil liability provisions of the
U.S. federal securities laws, may not be collectible in the United States 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.

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 exemptions and reductions
resulting from the Approved Enterprise and Benefited 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, and financing a percentage of investments with share capital. 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. In
recent years, the Israeli government has reduced the benefits available and has indicated
that it may further reduce or eliminate some of these benefits in the future. 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. In 2006, the tax benefit derived from our approved enterprise status was
approximately $20.3 million, which represents approximately 49.3% of our income before
taxes. Under our first tax benefit plan, we have invested approximately $720,000 in fixed
assets of which $223,000 was from paid-in capital as required by the financing condition
of the approved plan. We are required under our second tax benefit plan, which was
approved under the amendment to the law of the engorgement of capital investment 1959, to
invest an additional $71,000 in fixed assets. During 2005 we invested the required amount
to allow us to benefit from the tax exemptions. See Item 10.E Taxation 
Israeli Taxation  Law for the Encouragement of Capital Investments, 1959 for
more information about these programs.

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

From
2000 to 2003, we received grants totaling $397,000 from the government of Israel through
the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor for
the financing of a portion of our research and development expenditures for our Polaris
and Galaxy product platforms. The terms of the Chief Scientist grants limit us from
manufacturing products or transferring technologies developed using these grants outside
of Israel without special approvals. We have no current plan to manufacture products or
transfer technologies developed using these grants outside of Israel. Even if we receive
approval to manufacture our products outside of Israel, we may be required to pay an
increased total amount of royalties, which may be up to 300% of the grant amount plus
interest, depending on the manufacturing volume that is performed outside of Israel. This
restriction may impair our ability to outsource manufacturing or engage in similar
arrangements for those products or technologies. In addition, if we fail to comply with
any of the conditions imposed by the Office of the Chief Scientist, we may be required to
refund any grants previously received together with interest and penalties, and may be
subject to criminal charges. In addition, in recent years, the government of Israel has
accelerated the rate of repayment of Chief Scientist grants and may further accelerate
them in the future. We have not applied for any new grants since 2004 and currently have
no plans to apply for such grants.

Provisions of our articles of
association and Israeli law may delay, prevent or make difficult an acquisition of
Syneron, which could prevent a change of control and, therefore, depress the price of our
shares.

Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above
specified thresholds, requires special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. In addition, our articles of association contain provisions
that may make it more difficult to acquire our company, such as classified board
provisions. Furthermore, Israeli tax considerations may make potential transactions
unappealing to us or to some of our shareholders. See Item 7.B Related Party
Transactions and Item 10.E Taxation  Israeli Taxation for
additional discussion about some anti-takeover effects of Israeli law.

12

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These
provisions of Israeli law may delay, prevent or make difficult an acquisition of Syneron,
which could prevent a change of control and therefore depress the price of our shares.

# 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 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;
| | - | ----------------------------------------------------------------------------------

| |  | announcements
regarding clearance or non-clearance of regulatory approval;
| | - | --------------------------------------------------------------------------

| |  | quarterly
variations in our or our competitors' results of operations;
| | - | ----------------------------------------------------------------------

| |  | announcements
related to litigation;
| | - | ------------------------------------

| |  | changes
in earnings estimates, investors' perceptions, recommendations by securities analysts or
our          failure to achieve analysts' earning estimates;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | developments
in our industry; and
| | - | ---------------------------------

| |  | general
market conditions and other factors unrelated to our operating performance or the
operating          performance of our competitors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

In
addition, 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 are controlled by a small
number of existing shareholders, who may make decisions with which you may disagree.

Our
directors and officers, along with our five largest shareholders, in the aggregate,
beneficially owned or controlled approximately 16% of our outstanding ordinary shares as
of May 31, 2007. These shareholders are not prohibited from selling a controlling interest
in us to a third party. While these shareholders do not have the right to appoint board
members directly, these shareholders, acting together, could exercise significant
influence over our operations and business strategy and may have sufficient voting power
to influence all matters requiring approval by our shareholders, including the ability to
elect or remove directors, to approve or reject mergers or other business combination
transactions, the raising of future capital and the amendment of our articles of
association, which govern the rights attached to our ordinary shares. In addition, this
concentration of ownership may delay, prevent or deter a change in control, or deprive you
of a possible premium for your ordinary shares as part of a sale of our company.

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 stock.

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, the payment of dividends may be considered as income which is non
tax-exempt under the Approved Enterprise status of our facilities in Israel.
We may only pay dividends in any fiscal year out of profits, as defined by the
Israeli Companies Law, or 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 stock may be less valuable because a return
on your investment will only occur if our stock price appreciates. We have decided to
reinvest the amount of tax exempt income derived from our Approved Enterprise
status and not to distribute that income as dividends.

13

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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. 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
shares in a passive foreign investment company may not receive a step-up in
basis on shares acquired from a decedent. 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. Taxation  United
States Federal Income Tax Considerations  Passive Foreign Investment Company
Considerations.

|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, P.O.B. 550, Israel. Our phone number is
(972-4) 909-6200. The agent for service of process in the United States is Syneron Inc.,
incorporated in the State of Delaware and located at 1104 Heinz Drive, Unit B, East
Dundee, Illinois 60118. Our website address is www.syneron.com.

We
first offered our shares to the public in August, 2004. Upon the closing of our initial
public offering, all our then outstanding preferred shares automatically converted into
ordinary shares and we affected a 3.4 for one split of our ordinary shares.

We
design, develop and market innovative aesthetic medical products based on our proprietary
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 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. 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
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.

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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.

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.

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 able to sell the
Vela in the United States to physicians.

In
the third quarter of 2005, we had entered into an agreement with EuropeLab, Inc.s
Platinum Equipment Division, or EuropeLab, as our North American distributor for the
dental spa, day spa, aesthetic and chiropractic spa markets. Under this agreement,
EuropeLab, which is a distributor of specialized equipment for the spa market, will
distribute our VelaSmooth and the Pitanga systems to the spa market in North
American. In April 2006, we launched our new cosmetic division, Syneron Cosmedics to
target our products to aesthetic practitioners, spas and the cosmetic market. Our products
for these markets incorporate the safety feature of active dermal monitoring, as well as
contact cooling which are very important for these professionals and medical spas.

In
the first quarter of 2006, we have formed strategic alliances in Canada with two of the
countrys large medical equipment and supply distributors  Medical Mart
Supplies Ltd. and Dufort & Lavigne Ltee.

Also,
in the first quarter of 2006, we launched three new platforms to address medical aesthetic
applications based on our ELOS technology. The new eLight platform combines Broad
Spectrum Light with Bi-Polar Radio Frequency. 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 system
also includes a new skin tightening modality using wrinkle reduction  the ST, which
received FDA clearance in March 2006.

The
new eLaser platform combines Diode Laser technology with Bi-Polar Radio Frequency
and offers ultra fast hair removal, as well as upgradeability to Synerons leg vein
and wrinkle reduction treatments. Finally, the new eMax platform combines Bi-Polar
Radio Frequency with multiple forms of Broad Spectrum Light energy and Diode Laser energy
to deliver the complete range of Synerons 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 October 2006, the FDA granted 510(k) clearance to our LiteTouch platform
which is a Dental Laser system. As a result of this 510(k) clearance we are now able to
sell the LiteTouch in the United States to Dentist.

Effective
February 25, 2007, we entered into an exclusive Joint Development and Supply Framework
Agreement with the Proctor & Gamble Company 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 successfully
complete two milestones.

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# Principal Capital
Expenditures

We
had capital expenditures of $1.0 million in 2006, $1.1 million in 2005, $1.5 million in
2004, $0.3 million in 2003 and $0.2 million in 2002. We expect that our capital
expenditures will be approximately $1.5 million in 2007. We have financed our capital
expenditures with cash generated from operations.

Our
capital expenditures in 2006 consisted primarily of purchases of a patent family,
software, manufacturing equipment and general equipment. We expect our capital
expenditures in 2007 to consist of the same types of capital expenditures that we had in
2006. Our capital expenditures in 2005, 2004 and 2003 consisted primarily of purchases of
patent families (including applications for such patents), software, manufacturing
equipment, lab equipment, test equipment, computers, software and ERP software.

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

# Overview

We
design, develop and market innovative aesthetic medical products based on our proprietary
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 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. 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 have grown from $11.5 million in 2002 to $35.0 million in 2003
to $57.9 million in 2004 to $87.4 million in 2005 and to $117.0 million in 2006.

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. Our products can be easily upgraded by the user to perform additional
applications by adding hand pieces and installing a software plug 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 ongoing disposable and maintenance expenses and providing a parts and services
warranty. We support our users with our Ultimate Customer Care program, which
includes on-site clinical training, customized practice development consultations and a
product maintenance program that offers next-day delivery of replacement products to
eliminate unnecessary downtime.

We
launched the Aurora, our first product platform, in December 2001. We introduced the
Pitanga and the Polaris product platforms in 2003. In 2004, we introduced the Galaxy and
the Comet platforms.

In
2005, we introduced the VelaSmooth platform in the US and a few upgrades for the Aurora,
Galaxy and Comet. Our products address traditional applications, including rejuvenating
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, permanent reduction of hair and the temporary
reduction in the appearance of cellulite. Also, in the first quarter of 2006, we launched
three new platforms to address medical aesthetic applications based on our ELOS
technology. The new eLight platform combines Broad Spectrum Light with Bi-Polar
Radio Frequency. 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 system also includes a new
skin tightening modality  the ST. The new eLaser platform combines Diode Laser
technology with Bi-Polar Radio Frequency and offers ultra fast hair removal, as well as
upgradeability to Synerons leg vein and wrinkle reduction treatments. Finally, the
new eMax platform combines Bi-Polar Radio Frequency with multiple forms of light
energy and diode laser energy to deliver the complete range of Synerons elos
modalities in one multi-platform system. All the applications on the eLight, eLaser and
eMax have received 510(k) clearance from the FDA.

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In
the first quarter of 2007 we launched the LiteTouch platform that can be used for
treatment of oral soft and hard tissue. The LiteTouch is a compact, lightweight and
portable device, it has a small footprint, which saves important floor space and is easily
integrates into any dental clinic. The LiteTouch offers both high energy and high
frequency, thus providing a wide envelope of treatment parameters.

Effective
February 25, 2007, we entered into an exclusive Joint Development and Supply Framework
Agreement with the Proctor & Gamble Company for the commercialization of patented and
patent pending, ELOS based, home-use devices and topical 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, 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 successfully complete two milestones.

We
have received 510(k) clearances from the FDA for all the professional applications
mentioned above. We sell our products in 46 countries through a direct sales force of
approximately 50 employees in North America and 39 distributors in Europe, the Middle
East, Asia, Australia, New Zealand, Canada and South America. As of May 31, 2007, we had
an installed base of over 6,700 products.

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# The Syneron Solution

Our
ELOS technology combines electrical and optical energy, each of which has unique
characteristics when used alone and, 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 sources or solely
on radiofrequency energy.

Optical
energy is absorbed in blood, hair follicles and skin pigments, resulting in 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 epidermis. 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, 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
temperature, 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 and less risk of burning the skin.

Our ELOS technology is embedded in
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 Products

Our
ELOS-based platform of products addresses a wide range of treatment alternatives.

|Product 
Platform                                       | Applications(1)                                                                                                                                                                                                | Intended Users                                                                                 | Energy Sources                                                               | Market
Introduction                                                                                                                                        
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Aurora 
       
       
       
Pitanga
       
Polaris | Hair Removal          
Rejuvenating the      
skin's appearance(2)  
Acne                  
Hair Removal          
Acne                  
Wrinkles              
Leg Veins             
Other Vascular Lesions | Physicians   
             
             
             
Aestheticians
Medical Spas 
Physicians | Light + RF
          
          
          
Light + RF
          
Laser + RF | U.S.: Third Quarter
2002
Rest of World:
Fourth Quarter 2001
Rest of World:
Fourth Quarter 2003
U.S.: Fourth Quarter
2003
Rest of World:
Second Quarter 2003

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|Product  
Platform                                                                                                                                                                                                                                                                                                                                                        | Applications(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Intended Users                                                                                                                                                                                                                                           | Energy Sources                                                                                                                                                                                                                              | Market
Introduction                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Galaxy    
          
          
          
          
          
          
Comet     
          
          
          
          
VelaSmooth
          
          
          
eLight    
          
          
          
eLaser    
          
          
eMax      
          
          
          
          
          
          
          
          
LiteTouch | Hair Removal              
Rejuvenating the          
skin's appearance(2)      
Acne
Wrinkles
Leg Veins
Other Vascular Lesions
Fast Hair Removal         
                          
                          
                          
                          
Appearance of Cellulite   
                          
                          
                          
Hair Removal              
Rejuvenating the
skin's appearance(2)
Acne and Wrinkles (ST)
Wrinkles Leg Veins        
Other Vascular
Lesions; fast hair removal
Hair Removal              
Rejuvenating the          
skin's appearance(2)
Acne
Wrinkles
Leg Veins
Other Vascular
Lesions and wrinkles
with the ST applicator
Dental Laser | Physicians    
              
              
Physicians    
Aestheticians 
              
              
              
Physicians    
Aestheticians 
Medical Spas  
              
Physicians    
Physicians    
Physicians    
              
Dentists | Light + RF /  
Laser + RF    
              
Laser + RF    
              
              
              
              
Light + RF+   
Vacuum Shaping
              
              
Light + RF    
Laser + RF    
Light + RF /  
Laser + RF | U.S.: Second Quarter 2004
Rest of World:
Second Quarter 2004
U.S.: Fourth
Quarter 2004
Rest of World:
Fourth
Quarter 2004
U.S.: Second
Quarter 2005
Rest of World:
First Quarter 2005
First quarter of 2006
First quarter of 2006
First quarter of 2006
First quarter of 2007

|(1) | Regulatory
clearance has been received in the United States and Europe for each           indicated
application for all products, and in China for the Aurora and Polaris           products.
In each market in which our products are sold, other than the United           States and
most European countries, the distributors are responsible for           obtaining other
regulatory approval.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Rejuvenating
the skins appearance through the treatment of superficial           benign vascular
and pigmented lesions.
|--- | ------------------------------------------------------------------------------------------------------------------------

Our products provide our customers
with a broad range of applications among both traditional procedures and emerging
applications. Among others, the application we offer include hair removal, rejuvenating
the skins appearance, treatment of vascular lesions and leg veins, wrinkle and acne
treatments and also temporary reduction in the appearance of cellulite.

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# Sales and Marketing

Our
strategy to achieve market penetration is to market initially to dermatologists, plastic
surgeons and other cosmetic physicians in North America and medical and non-medical
practitioners outside North America. Secondarily, in North America, we will continue to
target the larger market of primary care physicians, obstetricians/gynecologists, ear,
nose and throat specialists, and other practitioners who have started incorporating
aesthetic procedures into their practices, along with the developing medical spa market.
We also will 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 46 countries around the world through a combination of 39
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 57 individuals. Our U.S. and Canadian sales efforts are
headquartered in Toronto and we manage several separate territories in the United Stated
and Canada. We rely on a limited, direct sales force to market and sell our products in
Germany and Austria. In addition, we have agreements with distributors to market and sell
our products throughout the rest of Europe, the Middle East, eleven countries in
Asia-Pacific and five countries in Latin America.

Our
customer support strategy is to provide customers with a comprehensive program of services
and a predictable cost of ownership. To achieve this, we launched our Ultimate
Customer Care initiative. The first component of our initiative is to provide
responsive customer service. Following the sale of a system, we offer customers an on-site
practice development consultation to analyze practitioner office workflow and marketing
efforts. In North America, we typically follow the consultation with the delivery of a
customized marketing and business plan to guide users on how to effectively integrate our
products into their practice. We also provide a trainer to conduct on-site clinical
training for our customers and their staff. We also offer Continuing Medical Education
accredited offsite training courses such as our advanced fotofacial workshop
for physicians and office staff.

The
second component of our initiative is to provide our customers with a predictable cost of
ownership, including minimal ongoing maintenance and disposable costs. 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.

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# Manufacturing

Our
strategy is to use outsourced manufacturing to produce our devices while maintaining full
control over every step of the production process. Outsourcing allows us to carry low
inventory levels and maintain fixed unit costs without incurring significant capital
expenditures. We use four separate 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 and EN46001 as well as the FDAs
quality system regulation. 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 installing one of our quality control employees full-time at each of our
subcontractors facilities.

The
contracts we have with these manufacturers do not have minimum purchase requirements and
allow us to purchase end products from the manufacturers on a purchase order basis. The
contracts have one-year terms that automatically renew for successive one-year terms
unless either we or the manufacturer give three 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. To date,
we have not experienced any significant manufacturing delays.

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.

# Research and Development

Our
research and development activities are conducted internally by a research and development
staff consisting of 48 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 non-invasive aesthetic medical market. We intend to develop products
and product line extensions that leverage our existing ELOS platform. 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 2007:
non-invasive fat reduction; a new product line for aestheticians and the cosmetic market;
and products for home use using Synerons proprietary elos technology.

To
date, our research and development efforts have been focused on the development of
products that leverage our existing ELOS platform rather than developing new technologies.
Our gross research and development expenditures were $3.1 million in 2004, $ 5.0 million
in 2005 and $ 8.5 million in 2006. We expect to continue to increase our expenditures on
research and development, but to keep them at a similar level as percentage of revenue in
the range of 6-8%.

# 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 March 31, 2007, our patent portfolio consisted of six issued U.S. patents,
one of which we purchased in December 2004 (with the corresponding US and international
family members), and 23 patent applications pending in the United States (with an
additional 22 applications pending internationally and 7 international patents), related
to 24 patent families relating to our technology and products. One of our patents relates
to treating the skin by deforming it, applying RF energy to it, and massaging it. This
patent was issued in December 2003 and it will remain in force until March 2022, subject
to payment of maintenance fees. Our second patent, which relates to skin treatments using
a combination of RF and optical energy, covers our ELOS technology. This patent will
remain in force until October 2020, subject to payment of maintenance fees. Our third
patent, acquired in December 2004, covers, among other things, methods for the controlled
contraction of collagen using RF energy. It will remain in force until May 2014, subject
to payment of maintenance fees. Our fourth patent, which was issued in May 2005, is
directed to systems and methods for treating the skin using RF energy. This patent will
remain in force until November 2021, subject to payment of maintenance fees. Our fifth
patent is directed to systems and methods for treating the skin with electromagnetic
radiation, in which an electrical response of the skin to an applied voltage is measured,
and a parameter of the radiation is adjusted based on the measurement. This patent issued
in September 2005, and, subject to the payment of maintenance fees, will remain in force
until August 2021. Our sixth patent issued in May 2006, and concerns methods for selective
thermal destruction of a skin target by RF current. This patent will remain in force until
June 2024, subject to payment of maintenance fees. During 2006, we purchased a patent
family from PolyOptics Ltd, (and the inventor, Henry Israel) which included a pending US
application and a PCT application. The latter application has since been filed in multiple
countries internationally.

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All
of these patent applications are currently pending. All of our patent applications have
been filed, and we expect to file future patent applications in the United States for our
intellectual properties. We have also filed, or intend to file, foreign counterpart
applications in Europe, certain countries in South America and Japan, as well as in
Canada, Israel, Australia, Peoples Republic of China, Korea 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 Syneron,
the Syneron logo, elos, Active Dermal Monitoring, Aurora, Polaris, Pitanga, VelaSmooth,
Syner-Cool, Galaxy, Comet, eLight, eLaser and eMax. All other trademarks, trade names and
service marks appearing in this annual report 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.

In
March 2004, we entered into a settlement and license agreement with Lumenis Ltd., one of
our competitors, pursuant to which, among other things, we have a non-exclusive license to
utilize Lumenis patents relating to the use of incoherent light or gel in aesthetic
and medical applications. Our license fee under this agreement is limited to $4.2 million,
which as of December 31, 2005, has been fully paid.

In
June 2005, we reached an agreement with Thermage which settled patent-related claims of
the parties against each other. Under this agreement each party grants the other a
non-exclusive paid-up license under the patents in suit and related patents. Legal fees
and our settlement costs in connection with our settlement with Thermage amounted to $2.2
million. The license granted to Thermage excludes the right to utilize our ELOS technology
and the license granted to us excludes the right to utilize Thermages monopolar RF
and capacitive electrical coupling.

All
professional employees and technical consultants are required to execute confidentiality
agreements in connection with their employment and consulting relationships with us. 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 agreements will be enforceable or that they will provide us with adequate
protection.

# Competition

Our
industry is subject to intense competition. We compete against products offered by public
companies, including Candela Corporation, Lumenis Ltd., Thermage, Inc., Cutera, Inc.,
Cynosure, Inc. and Palomar Medical Technologies, Inc., as well as by private companies
such as Sciton, Inc., Radiancy Inc., Reliant Technologies, Inc. and by 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 to 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.

22

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# Revenues by Geographic
Market

|Region         | Year ended December 31
|-------------- | ----------------------
|
|
|
|
|North America  |                       
|Western Europe |                       
|Asia-Pacific   |                       
|Other          |                       
|Total          |                       

# 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;
| | - | ----------------

| |  | product
manufacturing;
| | - | ----------------------

| |  | product
safety;
| | - | ---------------

| |  | product
labeling;
| | - | -----------------

| |  | product
storage;
| | - | ----------------

| |  | record
keeping;
| | - | ---------------

| |  | premarket
clearance or approval;
| | - | --------------------------------

| |  | advertising
and promotion;
| | - | --------------------------

| |  | production;
and
| | - | ---------------

| |  | product
sales and distribution.
| | - | -------------------------------

Each
of our products currently marketed in the United States has received 510(k) clearance for
the uses for which they are being marketed.

FDAs
Premarket 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 premarket approval from the FDA. 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 premarket
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 premarket approval.
All of our current products that are being marketed in the United States are class II
devices.

510(k)
Clearance Pathway.When a 510(k) clearance is required, we must           submit a
premarket 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 premarket approval applications. By regulation,
the           FDA is required to clear or deny a 510(k) premarket 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.

23

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---

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.

These
510(k) clearances also provide the regulatory basis for the marketing of our Galaxy
product platform for all of the above mentioned applications and for the Comet products
for hair removal. We received FDA clearance for our Aurora and Comet products for
permanent hair reduction in October 2004.

Premarket
Approval Pathway.A premarket approval application must be submitted to the FDA if the
device cannot be cleared through the 510(k) process. A premarket approval 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

24

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---

| |  | operating
restrictions, partial suspension or total shutdown of production;
| | - | ---------------------------------------------------------------------------

| |  | refusing
our requests for 510(k) clearance or premarket approval of new products or new intended
uses;
| | - | ------------------------------------------------------------------------------------------------------

| |  | withdrawing
510(k) clearance or premarket 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.

In
May 2005, the Chinese State Food & Drug Administration granted regulatory approval to
sell our Aurora and Polaris products in China. A similar regulatory approval was granted
by the Korea Food & Drug Administration to sell our Aurora, Polaris, VelaSmooth,
Galaxy and Comet products in Korea.

The
primary regulatory environment in Europe is that of the European Union, which consists of
25 countries encompassing most of the major countries in Europe. Three 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, 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. ISO 9001
and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the
presumption of conformity with the essential requirements for a CE Marking. In the third
quarter of 2001, our facility was awarded the ISO 9001 and EN 46001 certification. In the
first quarter of 2003, we received our ISO 9001: 2000 updated certification as well as EN
46001. In the second quarter 2003 we received certification for ISO 13485. All those
certifications are valid until 2006.

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.

25

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

We
have four active subsidiaries: Syneron GmbH, a wholly-owned subsidiary, was established in
Germany in August 2001, to market and sell the Companys products in Europe; Syneron
Inc. and Syneron Canada Corp., also wholly-owned subsidiaries, were established during
2002 in Delaware and Toronto, Canada, respectively, to market and sell the Companys
products in North America. Syneron Medical (HK) Ltd, also a wholly-owned subsidiary, 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 in January 2007. In July 2005, we also
purchased a 51% interest in Light Instruments Ltd., an Israeli start-up specializing in
the development of advanced dental laser devices.

|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 2010. We occupy
approximately 33,422 square feet in this leased facility in Yokneam. Our Canadian
subsidiary leases a 9,820 square feet facility in Richmond Hill, Ontario, Canada pursuant
to leases that expire in April 2007. Our U.S. subsidiary leases a 2,200 square foot
facility in Schaumburg, Illinois pursuant to a lease that expires in May 2010. Our U.S.
subsidiary also leases a 5,350 square foot facility and another 15,204 square foot
facility, both in Irvine, California pursuant to a lease that expires in October 2007 and
October 2011, respectively. Our German subsidiary leases a 1,500 square foot facility in
Germany pursuant to a lease renewable on a yearly basis. 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 Selected Financial Data and our consolidated
financial statements and the related notes to those statements included elsewhere in this
annual report. 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 theses forward-looking statements as a result of many
factors, including those discussed under Item 3.D Risk Factors and elsewhere
in this annual report.

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

# Overview

We
design, develop and market innovative aesthetic medical products based on our proprietary
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 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. 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.

We
were incorporated in July 2000. 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.

26

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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.

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.

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 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
the third quarter of 2005, we had entered into an agreement with EuropeLab, Inc.s
Platinum Equipment Division, or EuropeLab, as our North American distributor for the
dental spa, day spa, aesthetic and chiropractic spa markets. Under this agreement,
EuropeLab, which is a distributor of specialized equipment for the spa market, will
distribute our VelaSmooth and the Pitanga systems to the spa market in North
American. In April 2006, we launched our new cosmetic division, Syneron Cosmedics to
target our products to aesthetic practitioners, spas and the cosmetic market. Our products
for these markets incorporate the safety feature of active dermal monitoring, as well as
contact cooling which are very important for these professionals and medical spas

In
the first quarter of 2006, we have also reorganized the structure of our North American
sales force. Our organization now consists of 60 salespeople in North American organized
in seven territories, each with a dedicated regional manager. During this period, we also
formed strategic alliances in Canada with two of the countrys large medical
equipment and supply distributors  Medical Mart Supplies Ltd. and Dufort &
Lavigne Ltee.

Also,
in the first quarter of 2006, we launched three new platforms to address medical aesthetic
applications based on our elos (Electro-Optical Synergy) combined energy technology.
The new eLight platform combines Broad Spectrum Light with Bi-Polar Radio Frequency.
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 system also includes a new skin tightening modality 
the ST, which received FDA clearance in March 2006. The new eLaser platform combines
Diode Laser technology with Bi-Polar Radio Frequency and offers ultra fast hair removal,
as well as upgradeability to Synerons leg vein and wrinkle reduction treatments.
Finally, the new eMax platform combines Bi-Polar Radio Frequency with multiple forms
of light energy and diode laser energy to deliver the complete range of Synerons
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 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 new 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 is easily integrates into any clinic. The LiteTouch
offers both high energy and high frequency, thus providing a wide envelope of treatment
parameters.

27

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# Revenues

Generally,
we recognize revenue when persuasive evidence of an arrangement exists, delivery of the
product has occurred, the fee is fixed or determinable, collectibility is probable and we
do not have any obligation to customers after the date on which products are delivered.

We
generate our revenues primarily from the sales of our ELOS-based medical aesthetic
equipment. For the year ended December 31, 2006 our revenues totaled $117 million. From
inception through December 31, 2006, we sold over 6,700 products worldwide. In 2006, we
derived approximately 6.2% of our revenue from the recognition of service revenue. We
expect product service revenue to increase over time as our installed base continues to
grow.

We
sell our products directly in the United States, Canada, Germany and Austria and 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, 2006, we derived
43.1% of our revenue from sales of our products outside North America through a
combination of direct and distributor sales. As of December 31, 2006, we had approximately
60 salespeople in North America and distributors in more than 43 countries. We believe
that our sales will increase over time as we continue to introduce new products with new
applications.

The
following table provides information regarding the breakdown of our sales by geographical
region for the years ended December 31, 2005 and 2006:

|              | Percent of Sales
|------------- | ----------------
|
|
|
|
|North America |                 
|Europe        |                 
|Asia-Pacific  |                 
|Other         |                 
|Total         |                 

# Cost of Revenues

Our
cost of revenues consists of the cost of manufacture and assembly of our ELOS-based
medical products by third-party manufacturers. These costs primarily include materials,
components and labor used by our third-party manufacturers. We have been able to negotiate
competitive terms with the subcontractors that manufacture our products. Also, because our
product technology, design and engineering does not require highly sophisticated, time
intensive labor for assembly and testing and our products use the off-the-shelf discrete
components, we are able to experience low manufacturing costs and relatively high gross
margins.

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, purchasing and quality control. The cost of revenue as a percentage of
revenues increase from 2005 to 2006 due to increase in sales of products that are more
expensive to manufacture and cost of infrastructure required to run our service
operations. We anticipate that this trend may continue.

# Research and Development
Expenses

Our
research and development expenses 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. We expense all our research and
development costs as incurred. We expect our research and development expenditures to
increase significantly in absolute dollars and moderately as a percentage of revenues as
we continue to devote resources to research and develop new products and technologies.

28

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# Selling and Marketing
Expenses

Our
selling and marketing expenses 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 increase significantly in absolute dollars,
though we do not expect them to increase significantly as a percentage of revenues, as a
result of expansion of our marketing efforts.

# General and
Administrative Expenses

Our
general and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, accounting and administrative personnel,
professional fees and other general corporate expenses. We are experiencing an increase of
our general and administrative expenses in absolute dollars and as a percentage of
revenues as a result of our becoming a public company in 2004.

# 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 US dollars.

# Taxes on Income

In
2002, our facilities in Israel were granted the status of Approved Enterprise
and in 2005 the status of Benefited Enterprise (The new program under the Law
for the Encouragement of Capital Investments, 1959), both entitling us to a ten-year
exemption from Israeli corporate tax. The Approved Enterprise and
Benefited Enterprise status only allows corporate tax exemptions on profits
generated from operations, requiring regular Israeli corporate tax on income generated
from other sources, such as gains from sales of marketable securities and interest earned
on cash, cash equivalent and marketable securities. We will seek to maintain the
Approved Enterprise and the Benefited Enterprise status by meeting
the necessary conditions with respect to our future capital investment programs thus
extending our Approved Enterprise benefits beyond the first ten years. For
additional description of Israeli Tax please see Item 10.E Taxation  Israeli
Taxation.

# 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 accounting principles generally accepted in the United States. 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, warranty reserved, income taxes,
litigation and stock-based compensation. We base our estimates on historical experience,
authoritative pronouncements and various other assumptions which we believe to be
reasonable under the circumstances. Actual results could differ from those estimates. The
following are our critical accounting policies and the significant judgments and estimates
affecting the application of those policies in our consolidated financial statements. (See
Note 2 of the Notes to our Consolidated Financial Statements).

Revenue
Recognition. We recognize revenues in accordance with Staff Accounting Bulletin No.
104, or SAB 104, when each of the following four criteria are met:

| |  | delivery
has occurred;
| | - | ----------------------

| |  | there
is persuasive evidence of an agreement;
| | - | ---------------------------------------------

| |  | the
fee is fixed or determinable; and
| | - | -------------------------------------

| |  | collection
is reasonably assured.
| | - | ---------------------------------

29

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Revenue
from product sales to end users in North America usually includes multiple elements within
a single contract. We consider the sale of a product and the service element in the
agreement to be two separate accounting units of the arrangement and defer the fair value
of the service element to the period in which it is earned. Fair value is determined based
on the price charged on a stand alone basis for the service provided, and data available
from which to estimate the volume of services provided the during term of the arrangement.

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
do not maintain a general allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. 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.

Taxes
on Income. We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). This statement prescribes the use of the liability method, whereby deferred
tax assets and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. 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 carryforwards.
Currently, our relatively short history of loss operations does not allow us to record any
tax benefit resulting from our subsidiaries losses.

In
June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB SFAS No. 109, Accounting for Income
Taxes, or FIN 48. The Interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, we may recognize the 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. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. The provisions of FIN 48 are effective beginning January
1, 2007. Based on our evaluations, the FIN 48 impact on our consolidated financial
statements, is not material.

Stock-Based
Compensation. In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard SFAS 123 (revised 2004), Share-Based
Payment (SFAS 123R). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires share-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. Pro forma disclosure is no longer an alternative.

On
January 1, 2006, we adopted SFAS 123(R) using the modified prospective method as permitted
under SFAS 123(R). Under that transition method, compensation cost recognized during 2006
included: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the grant-date
fair value estimated in accordance with the provisions of Statement 123(R). In accordance
with the modified prospective method of adoption, our results of operations and financial
position for prior periods have not been restated.

30

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We
used the Black-Scholes option pricing model in 2003 and 2004 and the Binominal model for
options granted thereafter to estimate the fair value of stock option grants. Key input
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-vest cancellation 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 cancellation 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.

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. The guidance in SFAS 123R is relatively new and the application of these
principles may be subject to further interpretation and refinement over time.

Prior
to December 31, 2005, we followed the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. The provisions of SFAS No. 123 allowed companies to either
expense the estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), but disclose the pro forma effects
on net income had the fair value of the options been expensed. We elected to apply APB 25
in accounting for our stock option incentive plans.

Deferred
stock-based compensation is amortized on a straight-line basis to cost of revenues,
selling and marketing expenses, research and development expenses, and general and
administrative expenses.

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 operations.

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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. On sales to distributors, we provide a warranty on parts only.
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.

# Results of Operations

Years
Ended December 31, 2005 and December 31, 2006

Revenues.Revenues in 2006 have increased by $29.6 million, or 33.8 %, from $87.4
          million in 2005 to $117 million. The increase was primarily attributable to
          increased unit sales as a result of extensive efforts in Europe and Asia as
well           as increasing efforts in North America which resulted in an increase of
the           market share of Syneron products.

Cost
of Revenues.Cost of revenues increased by $6.5 million in 2006, from $11.4 million in
2005 to $17.9 million. The increase in cost of revenues was primarily attributable to the
increase in the number of products manufactured and sold. As a percentage of revenue, cost
of revenues increased from 13.1% in 2005 to 15.3 % in 2006 due to change in the mix of
products towards products that include Laser instead of IPL. For a detailed explanation on
the difference between Laser and IPL, please see Business
OverviewIndustry above.

Research
and development. Research and Development expenses increased by $3.5 million, from
$5.0 million in 2005 to $8.5 million in 2006. As a percentage of revenues, research and
development expenses increased from 5.8% in 2005 to 7.3% in 2006. The increase was
primarily attributable to expansion of our research and development staff and its
activities, the increased consulting services from outside engineering companies. In
addition Research and Development expenses for the year ended December 31, 2006 include $
0.6 million of stock based compensation expenses recorded under SFAS 123(R).

Selling
and Marketing Expenses.Selling and marketing expenses increased by $21.2 million,
from $25.2 million in 2005 to $46.4 million in 2006. The increase in selling and marketing
expenses was primarily attributable to an increase in personnel costs associated with the
expansion of our North American sales force and increased activities in Europe,
Asia-Pacific and South America. In addition Selling and Marketing expenses for the year
ended December 31, 2006 include $ 5.0 million of stock based compensation expenses
recorded under SFAS 123(R). As a percentage of revenues, selling and marketing expenses
increased from 28.8% in 2005 to 39.7% in 2006.

General
and Administrative Expenses.General and administrative expenses increased by $5.9
million, from $3.5 million in 2005 to $9.4 million in 2006. The increase in general and
administrative expenses was primarily attributable to an increase in personnel costs
associated with the expansion of our finance and other management functions needed to
support our overall growth. In addition General and Administrative expenses for the year
ended December 31, 2006 include $ 2.3 million of stock based compensation expenses
recorded under SFAS 123(R). As a percentage of revenues, general and administrative
expenses increased from 4.0% in 2005 to 8.0% in 2006.

Financial
Income.Financial income increased $3.4 million, from $3.1 million in 2005 to $6.5
million in 2006. The increase in financial income was primarily attributable to interest
earned on our increasing cash balances and marketable securities in 2006. As a percentage
of revenues, financial income increased from 3.5% in 2005 to 5.5% in 2006.

Taxes
on Income.Income taxes increased by $0.8 million, from $0.7 million in 2005 to $1.5
million in 2006. 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. Our
subsidiaries had loss carryforwards of approximately $50.0 million as of December 31, 2006
as compared to approximately $38.9 million as of December 31, 2005. We have recorded a
valuation allowance for the deferred taxes on these losses since it is more likely than
not that we will not be able to offset such losses against future income.

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# Years Ended December
31, 2004 and December 31, 2005

Revenues.Revenues in 2005 have increased $29.5 million, or 51%, from $57.9 million in
          2004 to $87.4 million. The increase was primarily attributable to increased
unit           sales due to increased market share of Syneron products, increased Galaxy
and           Comet sales in the United States and the rest of the world and the
commercial           launch of the VelaSmooth in the beginning of 2005 in the
international markets           and in the third quarter in United States, Cost of
Revenues.Cost of           revenues increased $4.5 million in 2005, from $6.9
million in 2004 to $11.4           million. The increase in cost of revenues was
primarily attributable to the           increase in the number of products manufactured
and sold. As a percentage of           revenue, cost of revenues increased from 11.9% in
2004 to 13.1% in 2005 due to           change in the mix of products towards products
that include Laser instead of           IPL. For a detailed explanation on the difference
between Laser and IPL, please           see Business OverviewIndustry above.

Research
and development. Research and development expenses increased $1.9 million, from $3.1
million in 2004 to $5.0 million in 2005. As a percentage of revenues, research and
development expenses increased from 5.3% in 2004 to 5.8% in 2005. The increase was
primarily attributable to expansion of our research and development staff and its
activities, as well as increased consulting services from outside engineering companies.

Selling
and Marketing Expenses.Selling and marketing expenses increased $5.6 million, from
$19.6 million in 2004 to $25.2 million in 2005. The increase in selling and marketing
expenses was primarily attributable to an increase in personnel costs associated with the
expansion of our North American sales force and increased activities in Europe,
Asia-Pacific and South America. As a percentage of revenues, selling and marketing
expenses decreased from 33.9% in 2004 to 28.8% in 2005. This decrease was primarily due to
the increase in our sales in 2005.

General
and Administrative Expenses.General and administrative expenses increased $0.8
million, from $2.7 million in 2004 to $3.5 million in 2005. The increase in general and
administrative expenses was primarily attributable to an increase in personnel costs
associated with the expansion of our finance and other management functions needed to
support our overall growth. As a percentage of revenues, general and administrative
expenses decreased from 4.7% in 2004 to 4.0% in 2005.

Other
Expenses of $3.5 million in 2005 were attributable to settlement and litigation costs
associated with Thermage Ltd in the amount of 2.7 million and expenses related to the
secondary follow-on offering in the amount of $0.8 million.

Financial
Income.Financial income increased $0.5 million, from $2.4 million in 2004 to $3.1
million in 2005. The increase in financial income was primarily attributable to interest
earned on our increasing cash balances and marketable securities in 2005. As a percentage
of revenues, financial income decreased from 4.1% in 2004 to 3.5% in 2005.

Taxes
on Income.Income taxes increased $0.1 million, from $0.6 million in 2004 to $0.7
million in 2005. As an Approved Enterprise in Israel, we are exempt from tax
on any income derived from our Approved Enterprise and we pay taxes only on
income from other sources which are not integral to our approved enterprise such as
interest on marketable securities. Our subsidiaries had loss carryforwards of
approximately $38.9 million in 2005 as compared to approximately $4.0 million in 2004. We
have recorded a valuation allowance for these losses since it is more likely than not that
we will not be able to offset such losses against future income.

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

From
December 31, 2002 through August 10, 2004, we funded our operations principally from
private placements of 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. On March 8, 2005, we
completed a follow-on secondary offering resulting in net proceeds of $1.6 million from
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 exercise of
options. As of May 31, 2007, we did not have any outstanding or available debt financing
arrangements. As of December 31, 2006, we had working capital of $127.2 million, and our
primary source of liquidity was $171.6 million in cash, cash equivalents and marketable
securities and cash flow from operations.

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We
believe that our cash balances and cash generated from operations will be sufficient to
meet our anticipated cash requirements for the foreseeable future. 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 beyond the amounts currently forecasted by us, nor that any such
required additional capital will be available on reasonable terms, if at all.

Net
Cash Provided By Operating Activities.Net cash provided by operating activities was
$22.6 million in 2004, $31.3 million in 2005 and $37.3 million in 2006. The change in net
cash provided by operating activities reflects the growth in sales activity as well as our
increased profitability and increasing levels of collection of accounts receivables netted
against other working capital items. During 2006, trade receivables, other account
receivables and prepaid expenses, and other accrued liabilities increased significantly as
a result of increased sales. As revenues grow, we anticipate that our trade receivables
and inventory will continue to grow, requiring an increase in our required level of
working capital.

Net
Cash Used in Investing Activities.Net cash used in investing activities $(70.0)
million in 2004, $(42.4) million in 2005 and $(34.7) million in 2006. Cash used in
investing activities is primarily attributable to marketable securities. For the year
ended December 31, 2004, we invested $1.5 million in capital expenditures, consisting
primarily of purchases of a patent family (and applications for patents), software,
manufacturing equipment and general equipment. For the year ended December 31, 2005, we
invested $1.1 million in capital expenditures, consisted primarily of purchases of a
patent family (and applications for patents), software, manufacturing equipment and
general equipment. For the year ended December 31, 2006, we invested $1.0 million in
capital expenditures, consisted primarily of purchases of a patent family, software,
manufacturing equipment and general equipment. We expect our capital expenditures in 2007
will be approximately $1 million and will consist of the same types of capital
expenditures that we had in 2006.

Net
Cash Provided By Financing Activities.Net cash provided by financing activities was
$53.7 million in 2004, $11.7 million in 2005 and $0.3 million in 2006. Net cash provided
by financing activities in 2004 was primarily attributable to the proceeds of our initial
public offering. Net cash provided by financing activities in 2005 was primarily
attributable to the proceeds of exercise on options and net cash provided by financing
activities in 2006 was primarily attributable to the proceeds of exercise of options and
the sale of Restricted Shares Units.

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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 48 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 non-invasive aesthetic medical market. We intend to develop products
and product line extensions that leverage our existing ELOS platform. We have a number of
new projects and products under development, mainly focusing on additional non-invasive
aesthetic treatments. We expect to continue and develop four major product initiatives in
2006: dental lasers; non-invasive fat reduction; a new product line for aestheticians and
the cosmetic market; and products for home use using Synerons proprietary elos
technology.

To
date, our research and development effort has been focused on the development of products
that leverage our existing ELOS platform rather than developing new technologies. Our
gross research and development expenditures were $3.1 million in 2004, $ 5.0 million in
2005, and $8.5 million in 2006. We expect to continue to increase our expenditures on
research and development.

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

In
2006, we continued our sales momentum and increased sales from $87 million in 2005 to $117
million in 2006. The increase in sales is attributed to the expansion of our marketing and
sales network in Asia, Europe and South America. In 2006, we received a 510(k) premarket
clearance from the FDA for our ST Applicator and our LiteTouch Dental Laser products and
believe that our ability to market and sell this platform in the United States would
further increase our sales in the future.

In
2006, we increased our production capacity through all three outsourcing companies that
are serving Syneron as sub-contractors and added a forth sub-contactor. In 2006, we did
not increase the average selling price of our platforms.

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. We currently do not
foresee any change in a major trend that can have a material affect on our revenue,
profitability and liquidity.

|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

We
do not have off-balance sheet arrangements (as such term is defined in Item E(2) of the
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, 2006 and the
effect those commitments are expected to have on our liquidity and cash flow in future
periods:

|                 | Payments Due by Period
|---------------- | ----------------------
|
|
|
|
|Operating leases |                       

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|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 May 31, 2007:

|Name                 | Age | Position(s)                                             
|-------------------- | --- | --------------------------------------------------------
|
|
|
|
|Dr. Shimon Eckhouse  | 62  | Chairman of the Board of Directors                      
|Doron Gerstel        | 47  | Chief Executive Officer                                 
|Donald Lee Fagen     | 54  | President of Syneron Inc. and Syneron Canada Corporation
|Dr. Michael Kreindel | 40  | Chief Technology Officer and Director                   
|Fabian Tenenbaum     | 34  | Chief Financial Officer                                 
|Dr. Michael Anghel   | 68  | External Director                                       
|Marshall Butler      | 80  | Director                                                
|Yaffa Krindel        | 52  | Director                                                
|David Schlachet      | 62  | Director                                                
|Dan Suesskind        | 63  | External Director                                       

Dr.
          Shimon Eckhouse has served as the chairman of our board of directors since
          May 2004. Dr. Eckhouse is the chairman of OrSense Ltd., CardioDex Ltd.,
NanoCyte           Ltd. and Edge Medical Devices Ltd. and a director of WideMed Ltd.,
ColorChip           Ltd., Ventor Medical Technologies Ltd. and Matteris Ltd. Dr. Eckhouse
was a           co-founder of ColorChip and served as its active chairman from 2003 to
January           2004 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. Dr. Eckhouse           is the uncle of Amit
Meridor, our Vice President of Sales.

Doron
Gerstel was appoint our Chief Executive Officer on May 14, 2007 and has served as our
President of Syneron North America since June 2006. Prior to that Mr. Gerstel was a
co-founder of Zend Technologies, Inc., a private technology company that creates modern
open source web applications, where he served as Chief Executive Officer from its
inception in 1999 until May 2006. Prior to his founding of Zend, Mr. Gerstel was Chief
Operating Officer for Lumenis Ltd. (formerly ESC Medical Systems), a public company that
develops, manufacturers and sells laser and light-based devices for medical, aesthetic,
ophthalmic, dental and veterinary applications. Mr. Gerstel serves on the advisory board
of Fritz, Inc. (acquired by UPS), the third largest logistics provider in the U.S. Mr.
Gerstel holds a Bachelor of Science in Economics and Information Systems from the
Technion, and an M.B.A. from Tel Aviv University.

Donald
Lee Fagen was appointed the President of Syneron Inc. and Syneron Canada Corporation
on May 14, 2007. Mr. Fagen joins Syneron from VISX, Incorporated, a manufacturer of
devices in laser vision correction, where he served as the Vice President of Global Sales
and Marketing since January 2001. Mr. Fagen holds a Bachelor of Science in Education and
Sociology from Texas A&M.

Dr.
          Michael Kreindel has served as our chief technology officer and a member of
          our board of directors since our inception in July 2000. From 1994 to 2000, Dr.
          Kreindel was first a senior scientist and then project and program manager in
          ESC Sharplan. Dr. Kreindel was leader of a scientific group in the Institute of
          Electrophysics in Russia. Dr. Kreindel has an M.A. in experimental and plasma
          physics from the Ural Politechnical Institute in Russia and a Ph.D. in pulsed
          power, gas discharge and plasma physics from the Institute of Electrophysics in
          Russia.

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Fabian
Tenenbaum was appointed our Chief Financial Officer on May 14, 2007. Mr. Tenenbaum
served as our Vice President for Business Development since September 2006 and was
responsible for developing the growth strategy for our home-use product, which culminated
in the exclusive worldwide joint development and supply agreement with Procter and Gamble.
From April 2002 to September 2006, Fabian was Vice President at Radiancy Inc., where he
managed the U.S. subsidiary of a late-stage med-tech start-up with the third largest
global installed base for light-based devices in the field of dermatology and aesthetic
medicine. Mr. Tenenbaum holds a Bachelors degree in Medicine from Ben Gurion
University and an MBA from Columbia Business School.

Dr.
          Michael Anghel has served as a director since November 2004. Since 2004,
Dr.           Anghel has 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 1980, Dr.           Anghel has been directly involved in founding, managing and
directing a variety           of industrial, technology and financial enterprises. Dr.
Anghel also served as a           director of major publicly listed corporations and a
number of financial           institutions and providence funds. Dr. Anghel is currently
a director of           PowerDsine Ltd. and Orbotech Ltd. 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 teaching in the areas of finance and corporate strategy.
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 has served as a director since October 2003. Mr. Butler is a co-founder and has
served as chairman of both First Israel Mezzanine Investors Fund and Israeli Infinity
Venture Capital Fund since 1996. Mr. Butler is a director of Shellcase Ltd., Galil Medical
Ltd., New York State Council of Humanities 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 Venture Capital from 1990 to 1994. Mr. Butler is on the board of governors of
the Technion Institute in Haifa, Israel. In 1998, Mr. Butler received the Israeli Prime
Ministers award for his contribution to Israeli industry. In 2001, he received an
Honoree Doctorate from the Technion Institute.

Yaffa
Krindel has served as a director since November 2005. She is currently serving as a
partner in the Herzlia, Israel office of STAR Ventures, a private venture capital
partnership headquartered in Munich, Germany. Ms. Krindel joined Star Ventures in 1997 as
the managing partner of Star Ventures in Israel. 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 data
communication systems company for the enterprise market. From 1993 to 1997 she served as
CFO of BreezeCOM Ltd. (now part of Alvarion Ltd.), a Point-to-Multipoint (PMP) Broadband
Wireless Access company headquartered in Tel Aviv. Ms. Krindel currently serves on the
boards of OrSense Ltd., Trivnet Inc., Negevtech Ltd., Siano Mobile Silicon Inc., Alfy Inc.
and Broadlight Incorporated. 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.

David
Schlachet resigned as our chief executive officer and was appointed to our board of
directors on May 14, 2007. Mr. Schlachet has served as our chief executive officer since
November 2005. 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 chocolate and confectionary company
which is a subsidiary of Strauss Elite Holdings, in addition to his position in Straus
Elite Holdings. 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 companies Pharmos Inc., LanOptics Ltd and Compugen Ltd.. In addition,
Mr. Schlachet serves as a director for Tel-Aviv Stock Exchange listed companies Taya
Investments Ltd. and Edgar Investments and Developments Ltd., as well as a director of
several privately owned Israeli companies. Mr. Schlachet holds a B.Sc. degree in chemical
engineering and an M.B.A. from the Tel-Aviv University.

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Dan
Suesskind has served as a director since November 2004. Mr. Suesskind has held
numerous positions with Teva Pharmaceutical Industries Ltd. since 1976, including as a
director, from 1981 until 2001, and chief financial officer since 1978. From 1970 until
1976, Mr. Suesskind was a consultant and securities analyst with I.C. International
Consultants Ltd. Mr. Suesskind is a member of the Jerusalem Foundation, Investment
Advisory Committee, Board of Trustees of Hebrew University, board member of First
International Bank and a board member of 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.

Our
Chief Executive Officer and Chief Technology Officer serve 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. Other executive officers, in their 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.

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

The
aggregate direct compensation we paid to our directors who are not officers for their
services as directors as a group (five out of the six directors) for the year ended
December 31, 2006 was approximately $288,410. 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 officers as a group for
the year ended December 31, 2006 was approximately $1.1 million. This amount includes
approximately $0.1 million which was set aside or accrued to provide for pension,
retirement or similar benefits. 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 2006, other than reimbursements for travel expenses.

As
of May 31, 2007, there were outstanding options to purchase 603,751 ordinary shares
granted to our directors and officers (eight persons), at exercise prices ranging from
$0.01 to $27.73, 24,000 of these options shall expire in the year 2011, 4,000 of these
option shall expire in the year 2012, and 575,751 of these options shall expire in the
year 2013.

For
a description of the plans pursuant to which such options were granted please see Item 6.E
below.

|C. | BOARD
PRACTICES
|-- | ---------------

# Board of Directors

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 7 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 and entitled to vote. 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 to be held in 2007, the term of
the third class, consisting of Dr. Eckhouse, will expire and the director elected at that
meeting will be elected for a three-year term. The external directors will not be assigned
a class. 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 Companies Law).

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 six
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.

38

---

---

# External Directors

We
are subject to the Israeli Companies Law. Under the Companies Law, Israeli companies whose
shares have been offered to the public in or outside of Israel are required to appoint at
least two external directors to serve on their board of directors. Each committee of the
board of directors entitled to exercise any powers of the board is required to include at
least one external director. The audit committee must include all the external directors.
Our external directors are Dr. Anghel and Mr. Suesskind.

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,
employees 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 or control or service as an office
holder, however, service as a director for a period of no more than three months during
which we first offer our shares to the public is not considered a prohibited affiliation.

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 an external director or may otherwise interfere with the persons ability
to serve as an external 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.

External
directors are elected by a majority vote at a shareholders meeting, as long as
either:

| |  | the
majority of shares voted for the election includes at least one-third of the shares of
                  non-controlling shareholders voted at the meeting; 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 the
company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companies Law provides for an initial three-year term for an external director which may
be extended for one additional three-year term. Election of external directors requires a
special majority, as described above. 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 the 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 as soon as practicable.

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 external directors must be determined prior to their consent to serve as
an external director.

39

---

---

# 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 Market, we also are required to maintain an audit committee of at least three
members, all of whom are independent directors under the Nasdaq Global Market listing
requirements. The rules of the Nasdaq Global Market also require that at least one member
of the audit committee be a financial expert.

Our
audit committee, acting pursuant to a written charter, is comprised of Dr. Anghel, who has
been designated as the audit committee financial expert, Mr. Suesskind and Ms. Yaffa
Krindel. The audit committee meets the requirements of the Sarbanes-Oxley Act of 2002 and
the rules and regulations thereunder.

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. Yaffa Krindel and Mr. Butler. The composition and
functions of the compensation committee meet the requirements of the Nasdaq Global Market
rules, with which we comply voluntarily. 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 executive
officers 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. Yaffa 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 rules of the Nasdaq Global Market, with which we comply voluntarily.

# 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. 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 be an employee of the company employed
specifically to perform internal audit functions but 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 an employee
of the Company, but the managing partner of an accounting firm which specializes in
internal auditing.

40

---

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

The
breakdown of our employees by department and geographic location is as follows:

|                                          | As of December 31
|----------------------------------------- | -----------------
|
|
|
|
|Management, administration and operations |                  
|Research and development                  |                  
|Selling and marketing                     |                  
|Total                                     |                  
|                                          |                  
|                                          |                  
|Israel                                    |                  
|North America                             |                  
|Asia-Pacific                              |                  
|Europe                                    |                  
|Latin America                             |                  

The
increase in the number of our employees during the year 2006 is associated with a
previously announced effort to build the needed infrastructure necessary to support the
rapid growth we have and anticipate to experience. Most of the increase is for Selling and
Marketing personnel in North America and from Research and Development personnel in
Israel.

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 Labor and
Welfare. 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, insurance for work-related accidents, 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, 2006,
our accrued severance pay funds totaled $0.4 million. 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 16.0% of wages, up to a specified amount of which the employee
contributes approximately 10.0% and the employer contributes approximately 6.0%.

|E. | SHARE
OWNERSHIP
|-- | ---------------

The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of May 31, 2007 by our 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 May 31, 2007 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.

41

---

---

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 27,722,735 ordinary shares outstanding on May 31, 2007.

|                                                            | Number | Percent
|----------------------------------------------------------- | ------ | -------
|
|
|
|
|Executive Officers and Directors:                           |        |        
|Dr. Shimon Eckhouse(1)                                      |        |        
|Dr. Michael Kreindel (2)                                    |        |        
|Yaffa Krindel                                               |        |        
|Marshall Butler                                             |        |        
|Dan Suesskind                                               |        |        
|Dr. Michael Anghel                                          |        |        
|David Schlachet(3)                                          |        |        
|David Seligman(3)                                           |        |        
|Doron Gerstel                                               |        |        
|Fabian Tenenbaum                                            |        |        
|All directors and executive officers as a group (9 persons) |        |        

---

* 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. Includes
          33,336 ordinary shares issuable upon exercise of options immediately
exercisable           or exercisable within 60 days of May 31, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes
1,629,721 shares held by Cititrust Bahamas Ltd. as Trustee for           TR-30777, for
which Dr. Kreindel is the beneficiary. Includes 33,336 ordinary           shares issuable
upon exercise of options immediately exercisable or exercisable           within 60 days
of May 31, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr.
Schlachet resigned as our Chief Executive Officer on May 14, 2007, and Mr.
          Seligman resigned as our Chief Financial Officer on May 14, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# Employee Benefit Plans

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.

As
of December 31, 2006, we had 145,657 options outstanding, all of which were issued under
the 2003 Plan or conformed to the terms of the 2003 Plan. On May 12, 2004, our board of
directors cancelled the unallocated options under the 2003 Plan.

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, 2006, we had 1,725,479 options and RSUs outstanding.

We
adopted both the 2003 Plan and the 2004 Israel Plan under Section 102 of the Israeli
Income Tax Ordinance.

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.

42

---

---

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 option grants to our non-Israeli employees have been issued under the
2004 United States, Canada and Rest of World Plan and, unless we adopt a new plan, all
such grants in the future will be issued 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. 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,
2005. 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 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.

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.

|ITEM 7. | MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- | -------------------------------------------------

|A. | Major
Shareholders
|-- | ------------------

The
following table sets forth information, as of May 31, 2007, regarding the beneficial
ownership of our ordinary shares by each person or entity that we know beneficially owns
5% or more of our outstanding ordinary shares.

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 27,722,735 ordinary shares outstanding as of May 31, 2007.

|                              | Shares | Percentage
|----------------------------- | ------ | ----------
|
|
|
|
|Starlight Capital Ltd.(1)     |        |           
|Dr. Michael Kreindel (2)      |        |           
|The Baupost Group, L.L.C. (3) |        |           

|(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. Dr. Eckhouse
          disclaims beneficial ownership of these shares as well and 33,336 ordinary
          shares issuable upon exercise of options immediately exercisable or exercisable
          within 60 days of May 31, 2007 held by Dr. Eckhouse.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43

---

---

|(2) | Includes
1,629,721 shares held by Cititrust Bahamas Ltd. as Trustee for           TR-30777, for
which Dr. Kreindel is the beneficiary and 33,336 ordinary shares           issuable upon
exercise of options immediately exercisable or exercisable within           60 days of
May 31, 2007 held by Dr. Kreindel.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The
information is solely based upon Schedule 13G filed with the Commission on
          February 13, 2007 by The Baupost Group, L.L.C. (Baupost), SAK Corporation and
          Seth A. Klarman. SAK Corporation is the Manager of Baupost. Seth A. Klarman, as
          the sole Director of SAK Corporation and a controlling person of Baupost, may
be           deemed to have beneficial ownership of the securities beneficially owned by
          Baupost. Securities reported on the Schedule 13G as being beneficially owned by
          Baupost include securities purchased on behalf of various investment limited
          partnerships.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To
our knowledge, the only significant changes in the percentage ownership by our major
shareholders during the past three years have been the dilution in their percentage
ownership as a result of our initial public offering in 2004, sales by major shareholders
in our underwritten secondary offering in March, 2005, the purchases and sale by FMR Corp.
and Sprott Asset Management Inc. in the public market subsequent to our underwritten
secondary offering, the purchases and sale by Veredus Asset Management LLC in the public
market of our ordinary shares in the first quarter of 2006, the sale by Lintech
International Inc., which is wholly owned by a trust that was created for the benefit of
the issue of Beryl Levey, of its holdings in June 2005, the sale by Israel HealthCare
Ventures LP, which is affiliated with our past director, Dr. Hadar Ron, of its holdings in
June 2005, the sale by M.N.M.M. Holdings Ltd., which is controlled by our past director
and former CEO Mr. Moshe Mizrahy, of its holdings in November 2005, and the sale by
Cititrust Bahamas Ltd., which is a trust that was created for the benefit of our Chief
Technology Officer and director, Dr. Michael Kreindel, of part of its holdings pursuant to
10b5-1 plans.

Our
major shareholders have the same voting rights pursuant to their share ownership as our
other shareholders.

To
our knowledge, as of May 31, 2007, we had 8* stockholders of record who were registered
with addresses in the United States. These United States holders were as of such date, the
holders of record of approximately 84.52* of our outstanding shares.

---

* Includes the Depository
Trust Company

|B. | Related
Party Transactions
|-- | --------------------------

# Registration Rights

Prior
to our going public, 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, our chairman of the board of directors. Dr.
Eckhouse disclaims beneficial ownership of 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 to
ordinary shares when we went public. As of May 31, 2007, 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 Form F-3, subject to
conditions and limitations.

44

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|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, 2006 are
included in this annual report under Item 18.

Legal
Proceedings.

On
July 29, 2004, Shaldot Metal Works Ltd. (Shaldot), a privately owned Israeli
company, sued us and Dr. Eckhouse, in the District Court in Haifa, claiming that in 1999
Dr. Eckhouse had access to confidential material regarding an Israeli patent, which he
allegedly used in violation of a confidentiality agreement in connection with forming
Syneron. The complaint alleges that our products infringe Shaldots Israeli patent.
In its lawsuit Shaldot is suing us for $2.3 million (NIS 10 million) and has requested an
injunction against us which will prohibit manufacturing, marketing and selling some or all
of our products, which, if successful, could have a material adverse effect on our
business in Israel. On October 10, 2004 we submitted our Statements of Defense to the
Court, claiming that Shaldots patent is invalid due to the existence of prior art,
lack of novelty and no improvement over existing art in the field. Shaldots patent
is under review by the Israeli Patent Office, based on a request submitted to the Patent
Office by a third party claiming that Shaldots patent is invalid. Moreover, we
claimed that even if the patent would have been valid, none of our devices infringe any of
Shaldots patents. The dispute was referred by the court to mediation and the parties
attempted to resolve the dispute. The mediation process was not successful and was
terminated by Shaldot. In January 2007, we learned that Shaldot had transferred all of its
rights to the patent to a subsidiary, Qray Ltd. We submitted a motion to dismiss
Shaldots lawsuit, claiming that due to the transfer of rights, Shaldot no longer had
standing to continue the proceedings. A hearing on our motion was held on February 19,
2007. At the hearing, the court ordered that Qray be added as an additional plaintiff to
the lawsuit and that the parties submit revised statements of claims and defenses. On
February 25, 2007, Shaldot submitted its revised statement of claims. On March 14, 2007,
we submitted our revised statement of defense and also a revised statement of
counterclaim. We are in the process of ongoing evidentiary hearings, with the next hearing
scheduled to take place on June 18, 2007. We believe that Shaldots lawsuit is
without merit and we intend to defend ourselves vigorously. Therefore, we do not believe
that this lawsuit will result in a loss to us and accordingly, no reserve was recorded in
the financial statement with respect to this claim.

In
September 2005 and further dates thereafter, nine plaintiffs filed complaints in which we
and our subsidiary, Syneron Inc., are named as defendants along with other named
defendants. Eight of the plaintiffs are African-American women who allege they sustained
burn and/or other complications after hair removal or skin rejuvenation treatments were
administered by one of our customers with one of our products. In addition to traditional
product liability and negligence theories, the complaint alleges theories of fraud,
negligent misrepresentation, illegal sale of a dangerous prescriptive device and
intentional race discrimination. We and our subsidiary have appeared in the litigation. A
vigorous defense to all of the allegations is being funded and controlled by an insurance
company that issued an insurance policy to our subsidiary and under which we are an
additional insured through a controlling interest endorsement. The insurance company has
reserved the right to deny coverage on some of the claims (product liability-intentional
failure to warn, product liability-fraud, and intentional racial discrimination) which
means there is a possibility that these claims would not be covered by the insurance
policy. In addition, the complaint seeks recovery for punitive damages which the insurance
company has advised us are not covered by the insurance policy. In May 2007 we appeared at
a mediation in an attempt to resolve these claims. Following the mediation, we resolved
the claims with most of the plaintiffs, and we are in the process of resolving the claims
with the remaining plaintiffs. We anticipate that most of the settlement costs will be
paid by the insurance company and we estimate that the portion of the settlement costs
that will be paid by us will not be material and therefore no reserves have been made in
our financial statements.

45

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---

On
November 10, 2005 a class action was filed against our subsidiary, Syneron Inc. The
plaintiff seeks injunctive relief, statutory damages and attorneys fees and costs as a
result of the alleged violations of the Telephone Consumer Protection Act
(TCPA). Syneron Inc.s insurance carrier has accepted tender of defense
of this litigation subject to a reservation of rights. Although there appears to be a
likelihood that Syneron Inc. will have insurance coverage for this lawsuit and it is
currently being provided a defense through its insurance carrier, there is the possibility
that these TCPA claims against Syneron Inc. will not be covered by the insurance policy.
Syneron Inc. has answered the Complaint and the parties have engaged in discovery relating
to the appropriateness of proceeding with the action on behalf of a class, as well as
discovery on the merits of the claim. On February 7, 2007, Syneron Inc. filed a motion to
dismiss the action for lack of federal jurisdiction. All further discovery is stayed
pending a ruling on this motion. Should this motion to dismiss be denied, Syneron Inc.
plans vigorously to challenge class certification. We cannot predict the outcome of the
claim, nor can we estimate the amount of damage, if we are held responsible. Accordingly
no reserve was included in the financial statements with respect to this claim.

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

Not
applicable.

46

---

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|ITEM 9. | THE
OFFER AND LISTING
|------- | ---------------------

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

Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol ELOS.

The
following table sets forth, for the periods indicated since August 5, 2004, when we were
listed on the Nasdaq Global Market, the high and low sales prices of our ordinary shares
as reported by the Global National Market.

|                               | PRICE PER ORDINARY
SHARE (USD)(NASDAQ)
|------------------------------ | --------------------------------------
|
|
|
|
|During the last two years:     |                                       
|2005                           |                                       
|2006                           |                                       
|                               |                                       
|During the last nine quarters: |                                       
|First quarter of 2005          |                                       
|Second quarter of 2005         |                                       
|Third quarter of 2005          |                                       
|Forth quarter of 2005          |                                       
|First quarter of 2006          |                                       
|Second quarter of 2006         |                                       
|Third quarter of 2006          |                                       
|Forth quarter of 2006          |                                       
|First quarter of 2007          |                                       
|                               |                                       
|During the last six months:    |                                       
|                               |                                       
|December 2006                  |                                       
|January 2007                   |                                       
|February 2007                  |                                       
|March 2007                     |                                       
|April 2007                     |                                       
|May 2007                       |                                       

|B. | PLAN
OF DISTRIBUTION
|-- | --------------------

Not
applicable.

|C. | MARKETS
|-- | -------

Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol ELOS.

|D. | SELLING
SHAREHOLDERS
|-- | --------------------

Not
applicable.

|E. | DILUTION
|-- | --------

Not
applicable.

|F. | EXPENSES
OF THE ISSUE
|-- | ---------------------

Not
applicable.

47

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|ITEM 10. | ADDITIONAL
INFORMATION
|-------- | ----------------------

|A. | SHARE
CAPITAL
|-- | -------------

Not
applicable.

|B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
|-- | --------------------------------------

# 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 Articles of Association 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 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 the 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 articles of association 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 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.

48

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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;
| | - | --------------------------------------------------------------------------------

| |  | 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
articles of association 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 articles of association.

Under
the Companies Law, shareholders meetings require prior notice of at least 21 days.

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:

| |  | the
majority of shares voted for the election includes at least one-third of the shares of
                  non-controlling shareholders voted at the meeting; 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 in the
company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See
Item 6.C 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.

49

---

---

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.

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 50% 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  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 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 Management  Executive Officers and Directors is an office
holder under the Companies Law.

50

---

---

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.

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 shareholder 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.

51

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

| |  | 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
articles of association 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 articles of association 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.

52

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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.

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 articles of association
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 description of the material terms of our Patent License and Settlement Agreement with
Lumenis Inc. and Lumenis Ltd., and of our Patent License and Settlement Agreement with
Thermage, Inc., please see Item 4.B Business Overview  Intellectual
Property.

For
a short description of the material terms of our agreements with our manufacturers, please
see Item 4.B Business Overview  Manufacturing.

Effective
February 25, 2007, we entered into an exclusive Joint Development and Supply Framework
Agreement with the Proctor & Gamble Company 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, 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 successfully complete two milestones.

|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.

53

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# 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 acts 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 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.

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

Until
December 31, 2003, the regular tax rate applicable to income of companies (which are not
entitled to benefits due to investments in approved enterprise, as described
below) was 36%. In June 2004 and in July 2005, the Knesset (Israeli
parliament) passed amendments to the Income Tax Ordinance (No. 140 and Temporary
Provision), 2004 and (No. 147), 2005 respectively, which determine, among other things,
that the corporate tax rate is to be gradually reduced to the following tax rates: 2004
 35%, 2005  34%, 2006  31%, 2007  29%, 2008  27%, 2009
 26% and 2010 and thereafter  25%.

However,
the effective tax rate payable by a company that derives income from an approved
enterprise, discussed further below, may be considerably less. See Law for the
Encouragement of Capital Investments, 1959.

# Special Provisions
Relating to Taxation under Inflationary Conditions

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

| |  | Where
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
the depreciated cost of its Fixed Assets (as defined in the Inflationary Adjustments
Law), a deduction from taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted in any single tax
year is 70% of taxable income, with the unused portion permitted to be carried forward,
linked to the Israeli consumer price index. The unused portion that was carried forward
may be deductible in full in the following year.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Where
a companys depreciated cost of Fixed Assets exceeds its equity, then the excess
multiplied by the applicable annual rate of inflation is added to taxable income. We
refer to this additional amount as inflation supplement. The inflation supplement will
only be added to the corporate income but not to other incomes, such as capital gain.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to specified limitations, depreciation deductions on Fixed Assets and losses carried
forward are adjusted for inflation based on the change in the consumer price index.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Minister of Finance may, with the approval of the Knesset Finance Committee, determine by
decree, during a certain fiscal year (or until February 28th of the following
year) in which the rate of increase of the Israeli consumer price index would not exceed
or did not exceed, as applicable, 3.0%, that some or all of the provisions of the
Inflationary Adjustments Law shall not apply with respect to such fiscal year, or that the
rate of increase of the Israeli consumer price index relating to such fiscal year shall be
deemed to be 0%, and to make the adjustments required to be made as a result of such
determination.

54

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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, as amended (effective as of April
1, 2005) or the Investments Law, provides that a proposed capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of Industry and
Commerce of the State of Israel, be granted the status of an approved enterprise. The
Investment Center bases its decision as to whether or not to approve an application, among
other things, on the criteria set forth in the Investments Law and related regulations,
the then prevailing policy of the Investment Center, and the specific objectives and
financial criteria of the applicant. 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.

The
Investments Law provides that a company investing in an approved enterprise is eligible
for tax benefits (tax benefits) on taxable income derived from the operations
under the approved enterprise programs. 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.

The
Investments Law also provides that a company investing in an approved enterprise is
entitled to accelerated depreciation on its property and equipment that are included in an
approved enterprise program in the first five years of using the equipment.

The
tax benefits call for taxable income of a company that has been granted the status of
approved enterprise on a specific investment program to be subject to corporate tax at the
maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period.
This period is ordinarily seven years, commencing with the year in which the approved
enterprise first generates taxable income, and is limited to 12 years from commencement of
production or 14 years from the date of approval, whichever is earlier (hereinafter
the Time Limit).

Additionally,
a company that has been granted the status of an approved enterprise on all or part of its
operations may elect to receive a grant of money from the government or an alternative
package of benefits under the Investments Law. Under the alternative package of benefits,
a companys undistributed income derived from the approved enterprise will be exempt
from corporate tax (tax exemption) 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. After this exemption lapses, the
company will be eligible for the reduced tax rate discussed in the previous paragraph for
the remainder of the benefit period. The Time Limit imposed on the tax benefit discussed
above does not limit this exemption under the alternative package of benefits. If the
exemption period extends beyond the Time Limit, the company will continue to enjoy the tax
exemption until the end of the exemption period.

We
have elected the alternative package of benefits. A company that has elected the
alternative package of benefits 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 package of benefits, which is generally 10%-25%, depending on the percentage
of the companys ordinary shares held by foreign shareholders. Dividends paid out of
income derived from an approved enterprise (or out of dividends received from a company
whose income is derived from an approved enterprise) are generally subject to withholding
tax at the reduced rate of 15%, if the dividend is distributed during the tax exemption
period or within twelve years thereafter. The company must withhold this tax.

55

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A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company where more than 25% of its share capital and combined share and loan capital is
owned by non-Israeli residents. A company that qualifies as a foreign investors
company and has an approved enterprise program is eligible for tax benefits for a ten-year
benefit period. As specified above, depending on the geographic location of the approved
enterprise within Israel, income derived from the approved enterprise program, if
undistributed, may be exempt from tax for a period of between two to ten years, and will
be subject to a reduced tax rate for the remainder of the benefit period. The tax rate for
the remainder of the benefit period will be 25%, unless the level of foreign investment
exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than
49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.

Under
the alternative package of benefits, 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 package of benefits 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 from our approved enterprise program and not to distribute
such income as a dividend.

Tax
benefits under the 2005 Amendment

A
recent amendment to the Investments Law, which has been officially published and is
effective as of April 1, 2005, has changed certain provisions of the Investments Law. The
amendment includes revisions to the criteria for investments qualified to receive tax
benefits as an approved enterprise. This amendment applies to new investment programs and
investment programs commencing after 2004, and does not apply to investment programs
approved prior to December 31, 2004. However, a company that was granted benefits
according to section 51 of the Investments Law prior to the amendment would not be allowed
to apply for benefits under the new amendment for a period of 3 years from the date of
approval. This amendment simplifies the approval process for the approved enterprise.
According to the amendment, only approved enterprises receiving cash grants require the
approval of the Investment Center. The Investment Center will be entitled to approve such
programs only until December 30, 2007.

The
Amendment does not apply to benefits included in any certificate of approval that was
granted before the amendment came into effect, which will remain subject to the provisions
of the Investments Law as they were on the date of such approval.

Tax
benefits are generally available, under this amendment, to production facilities (or other
eligible facilities) if they derive more than 25% of their business income from export (a
Benefited Enterprise). In order to receive the tax benefits, the amendment
states that a company must make an investment in the Benefited Enterprise exceeding a
certain percentage or a minimum amount specified in the Investments Law. Such investment
may be made over a period of no more than three years, ending at the end of the year in
which the company requested to have the tax benefits apply to the Benefited Enterprise
(the Year of Election). Where the company requests to have the tax benefits
apply to an expansion of existing facilities, then only the expansion will be considered a
Benefited Enterprise and the companys effective tax rate will be the result of a
weighted combination of the applicable rates. In this case, the minimum investment
required in order to qualify as a Benefited Enterprise is required to exceed a certain
percentage or a minimum amount of the companys production assets before the
expansion.

The
duration of these tax benefits is limited to the earlier of 7 to 10 years from the
Commencement Year or 12 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 income
for tax purposes from the Benefited Enterprise, or the year of election which is the year
in which a company requested to have the tax benefits apply to the Benefited Enterprise.
The tax benefits granted to a Benefited Enterprise are determined, depending on the
geographic location of the Benefited Enterprise within Israel, according to one of the
following, which may be applicable to us:

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| |  | Similar
to the currently available alternative package of benefits, 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 Benefited 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 Benefited Enterprise during the tax
exemption period, such income will be subject to corporate tax at the applicable rate
(10%-25%) with respect to the gross amount of the dividend that we may distribute. The
company is required to withhold tax on such distribution at a rate of 15%; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax option, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefit period is 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 $20M in the Benefited
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.

The
amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the aforementioned definition will
take effect retroactively from 2003.

The
amendment will apply to approved enterprise programs in which the year of election under
the Investments Law is 2004 or later, unless such programs received approval from the
Investment Center on or prior to December 31, 2004, in which case the amendment provides
that terms and benefits included in any certificate of approval already granted will
remain subject to the provisions of the Investments Law as it was on the date of such
approval.

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 two approved programs under the Investments Law, which entitles us to some tax
benefits. The first program under the Law before the amendment (Approved
Enterprise) and the second after the amendment (Benefited Enterprise). The
above mentioned approved programs are subject to the alternative package of benefits,
which allows for a ten years period of exemption of taxes for undistributed income.

# 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 a company resident in
Israel, of which 90% or more of its income in any tax year, other than of income from
defense loans, capital gains, interest and dividends, is derived from an Industrial
Enterprise owned by it. An Industrial Enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production activity.

The
following corporate tax benefits, among others, are available to Industrial Companies:

| |  | deduction
of purchased of know-how and patents and/or right to use a patent over an eight-year
period;
| | - | ------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings;
| | - | ----------------------------------------------------------

| |  | under
specified conditions, an election to file consolidated tax returns with additional
related Israeli Industrial Companies and an industrial holding company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | expenses
related to a public offering on recognized stock markets, are deductible in equal amounts
over three years.
| | - | --------------------------------------------------------------------------------------------------------------------

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure that we qualify or will
continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.

# Capital Gains Tax on
Sales of Our Ordinary Shares

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by both residents and non-residents of
Israel, unless a specific exemption is available or unless a tax treaty between Israel and
the shareholders country of residence provides otherwise. The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price which is attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the date of
purchase and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.

Generally,
until the 2006 tax year, capital gains tax was imposed on Israeli resident individuals at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares
in, among others, Israeli companies publicly traded on Nasdaq or on a recognized stock
exchange or regulated market in a country that has a treaty for the prevention of double
taxation with Israel. This tax rate was contingent upon the shareholder not claiming a
deduction for financing expenses in connection with such shares (in which case the gain
was generally be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to
a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by
dealers in securities; (iii) the sale of shares by shareholders that report in accordance
with the Inflationary Adjustments Law (that were taxed at corporate tax rates for
corporations and at marginal tax rates for individuals); or (iv) the sale of shares by
shareholders who acquired their shares prior to an initial public offering (who may be
subject to a different tax arrangement).

As
of January 1, 2006, the tax rate applicable to capital gains derived from the sale of
shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless
such shareholder claims a deduction for financing expenses in connection with such shares,
in which case the gain will generally be taxed at a rate of 25%. Additionally, if such
shareholder is considered a material shareholder at any time during the
12-month period preceding such sale, i.e., such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the tax rate
shall be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains
derived from the sale of shares, unless such companies were not subject to the Adjustments
Law (or certain regulations) at the time of publication of the aforementioned amendment to
the Tax Ordinance that came into effect on January 1, 2006. In that case, the applicable
tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in
securities; and (ii) shareholders who acquired their shares prior to an initial public
offering (that may be subject to a different tax arrangement).

The
tax basis of shares acquired prior to January 1, 2003, will be determined in accordance
with the average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided however that such capital gains are not derived from a
permanent establishment in Israel, such shareholders are not subject to the Adjustments
Law, and such shareholders did not acquire their shares prior to an initial public
offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or
profits of such non-Israeli corporation, whether directly or indirectly.

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In
some instances where our shareholders may be liable to Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

Pursuant
to the Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended (the U.S.-Israel
Tax Treaty), the sale, exchange or disposition of ordinary shares by a person who
holds the ordinary shares as a capital asset, qualifies as a resident of the United States
within the meaning of the U.S.-Israel Tax Treaty and is entitled to claim the benefits
afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to
the Israeli capital gains tax. Such exemption will not apply if that Treaty U.S. Resident
holds, directly or indirectly, shares representing 10% or more of our voting power during
any part of the 12-month period preceding such sale, exchange or disposition, subject to
certain conditions, or the capital gains from such sale, exchange or disposition can be
allocated to a permanent establishment in Israel. In such case, the sale, exchange or
disposition of ordinary shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to
claim a credit for such taxes against the U.S. federal income tax imposed with respect to
such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local
taxes.

# Taxation of Non-Resident
Holders of Shares

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
Such sources of income include passive income such as dividends, royalties and interest,
as well as non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares, or stock dividends, income tax is withheld at the
source at the following rates:

| |  | for
dividends distributed prior to January 1, 2006 - 25%;
| | - | ---------------------------------------------------------

| |  | for
dividends distributed on or after January 1, 2006  20%, or 25% for a shareholder
that is considered a material shareholder at any time during the 12-month
period preceding such distribution, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a Treaty U.S. Resident is 25%. However, under the Investments Law, dividends
generated by an approved enterprise (or Benefited Enterprise) are taxed at the rate of
15%. Furthermore, dividends not generated by an approved enterprise (or Benefited
Enterprise) paid to a U.S. corporation holding at least 10% of our issued voting power
during the part of the tax year which precedes the date of payment of the dividend and
during the whole of its prior tax year, are generally taxed at a rate of 12.5%.

For
information with respect to the applicability of Israeli capital gains taxes on the sale
of ordinary shares by United States residents, see above  Capital Gains Tax on
Sales of Our Ordinary Shares.

# 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
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.

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# 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.

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 ordinary shares. 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:

| | n | 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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | n | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | an
estate, the income of which is subject to U.S. federal income taxation regardless of its
source;
| | - | ---------------------------------------------------------------------------------------------------

| | n | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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.

# 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, 2011, 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 United
States. 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 foreign investment company or a passive foreign
investment company for U.S. federal income tax purposes. We do not believe that we
will be classified as a foreign investment company or 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.

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# Foreign Tax Credit

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, which may be relevant in calculating such holders foreign tax
credit limitation. 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. The rules relating to the determination of foreign source income
and the foreign tax credit are complex, and the availability of a foreign tax credit
depends on numerous factors. Each prospective purchaser who would be a 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
purchaser would be entitled to the credit.

# 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, 2011, 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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.

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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 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 Market or that the shares will be regularly traded for this
purpose.

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.

# 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.

63

---

---

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. | DIVDENDS
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.

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.

64

---

---

|I. | SUBSIDIARY
INFORMATION
|-- | ----------------------

Not
applicable.

|ITEM 11. | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Exchange
Rate Risk. A significant portion of our operations is conducted through operations in
countries other than the United States and Israel. Revenues from our international
operations which were recorded in U.S. dollars represented 73.8% of our total revenues for
the year ended December 31, 2006. Substantially all of the remaining 26.2% were sales in
Euros. Since we conduct our business in U.S. dollars, our main exposure, if any, results
from changes in the exchange rate between the Euro and the U.S. dollar and NIS and U.S.
dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to
exchange rate fluctuations by having most of our assets and liabilities, as well as most
of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. Therefore, we
believe that the potential loss that would result from an increase or decrease in the
exchange rate is immaterial to our business and net assets.

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 12% 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.

|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, 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 of our ordinary shares on August 11, 2004, we sold
5,000,000 ordinary shares at a per share price of $12. 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 National Market listing fees, Israel stamp duty and legal and
accounting fees. Payment of these expenses were not 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 and
have not been used. We still intend to use the proceeds in the manner set forth in our
prospectus of August 5, 2004.

|ITEM 15T. | CONTROLS
AND PROCEDURES
|--------- | -----------------------

(a)       
          Our management, including our chief executive officer and chief financial
          officer, has evaluated the effectiveness of our disclosure controls and
          procedures as of December 31, 2006. Based on such review, our chief executive
          officer and chief financial officer have concluded that we have in place
          effective controls and procedures designed to ensure that information required
          to be disclosed by us in the reports that we file or submit under the Securities
          Exchange Act of 1934, as amended, is accumulated and communicated to our
          management, including our principal executive and principal financial officers,
          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.

65

---

---

(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 Securities Exchange Act of 1934, as amended. 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 generally accepted accounting principles. 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 principal
executive officer and principal financial officer, we evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2006 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, 2006.

This
management report on internal control over financial reporting shall not be deemed to be
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or
otherwise subject to the liabilities of that Section.

This
annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only
managements report in this Annual report.

(c)       
          There were no changes in our internal controls over financial reporting
          identified with the evaluation thereof that occurred during the period covered
          by this annual report that have materially affected, or are reasonable likely to
          materially affect our internal control over financial reporting.

|ITEM 16. | 
|-------- | 

|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 4200(a)(15) of the NASD market rules) and serves on our audit
committee, qualifies as an audit committee financial expert as defined in Item
16A of Form 20-F.

|ITEM 16B. | CODE
OF ETHICS
|--------- | --------------

In
2004, we adopted a Code of Business Conduct and Ethics, which applies to the
Companys directors, officers and employees, including the Companys Chief
Executive Officer, Chief Financial Officer, principal accounting officer or controller,
and persons performing similar functions. This Code has been posted on our website,
www.syneron.com.

66

---

---

|ITEM 16C. | PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

During
the years 2005 and 2006, we paid the following fees for the professional services rendered
by Ernst & Young, independent registered public accounting firm:

|                   | 2005
(in thousands) | 2006
(in thousands)
|------------------ | ------------------- | -------------------
|
|
|
|
|Audit Fees         |                     |                    
|Tax Fees           |                     |                    
|Audit Related Fees |                     |                    
|Total              |                     |                    

Audit
related services rendered by Ernst & Young during 2005 were in connection with our
follow-on secondary offering. During 2006 audit related services were mostly in connection
with review and supervision of our first year of complying with Section 404 of the
Sarbanes-Oxley Act of 2002. Tax services rendered by our auditors were for tax compliance
and for tax consulting associated with international transfer pricing.

Our
Audit Committee has adopted a policy for pre-approval of audit and non-audit services
provided by the independent auditor. Under the policy, such services must require the
specific pre-approval of the Audit Committee followed by ratification of the full Board of
Directors. Any proposed services exceeding the Pre-approval amounts for all services to be
provided by the independent auditor require an additional specific pre-approval by the
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
|--------- | ----------------------------------------------------------------------

Not
applicable.

# PART III

|ITEM 17. | FINANCIAL
STATEMENTS
|-------- | --------------------

Not
applicable.

67

---

---

|ITEM 18. | FINANCIAL
STATEMENTS
|-------- | --------------------

The
following consolidated financial statements and related auditors report is filed as
part of this annual report.

|                                                           |    
|---------------------------------------------------------- | ---
|
|
|
|
|Report of Independent Registered Public Accounting Firm    | F-2
|Consolidated Balance Sheets                                | F-3
|Consolidated Statements of Income                          | F-5
|Consolidated Statements of Changes in Shareholders' Equity | F-6
|Consolidated Statements of Cash Flows                      | F-8
|Notes to Consolidated Financial Statements                 | F-9

|ITEM 19. | EXHIBITS
|-------- | --------

The
following exhibits are filed as part of this annual report on Form 20-F:

|1.1 |  | Articles
of Association of Registrant, as amended.
|--- |  | --------------------------------------------------

|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 R.F.L. Technologies Ltd. and A' to Z' Electronics
Ltd.          (incorporated by reference to Exhibit 10.1 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 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)^
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | 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)^
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 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)^
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | 2003
Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Form F-1 filed July
14, 2004)
|--- |  | ------------------------------------------------------------------------------------------------------

|4.6 |  | 2004
Israel Stock Option Plan (incorporated by reference to Exhibit 10.6 to our Registration
Statement          on Form F-1 filed July 14, 2004)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | 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)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 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 4.8 to our Annual
Report on Form 20-F for the          year ended December 31, 2004)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Joint
Development and Supply Framework Agreement dated as of February 25, 2007 by and between
The          Procter & Gamble Company and Syneron Medical Ltd. ^
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

68

---

---

|8.1 |  | List
of Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to our Form
F-1 filed          July 14, 2004)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|12.1 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|---- |  | -----------------------------------------------------------------

|12.2 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|---- |  | -----------------------------------------------------------------

|13.1 |  | Section
1350 certifications of Periodic Financial Reports
|---- |  | ---------------------------------------------------------

|15.1 |  | Consent
of Independent Registered Public Accounting Firm
|---- |  | --------------------------------------------------------

---

^ 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.

69

---

---

# SYNERON MEDICAL
LIMITED AND ITS 
SUBSIDIARIES

# Consolidated 
Financial Statements

# As of December 31, 2006



---

---

# SYNERON MEDICAL LIMITED
AND ITS 
SUBSIDIARIES

# Consolidated 
Financial Statements 
As of December 31, 2006

# U.S. dollars in
thousands

# C O N T E N T S

|                                                        | P a g e     
|------------------------------------------------------- | ------------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F-2         
|                                                       
|Consolidated Statements of income                       | F-3         
|                                                       
|Consolidated Balance Sheets                             | F-4 - F-5   
|                                                       
|Statements of Changes in Shareholder's Equity           | F-6 - F-8   
|                                                       
|Consolidated Statements of Cash Flows                   | F-9         
|                                                       
|Notes to the Consolidated Financial Statements          | F-10 - F- 39

F - 1

---

---

# REPORT OF 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, 2006 and 2005, and the
related consolidated statements of income, changes in shareholders equity and cash
flows for each of the three years in the period ended December 31, 2006. 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. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. 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, 2006 and 2005, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the
consolidated financial statements, effective January 1, 2006 the Company adopted Statement
of Financial Accounting Standards Board No. 123 (revised 2004) Share-Based
Payment.

|Haifa, Israel 
 June 12, 2007 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|----------------------------- | -------------------------------------------------------------

F - 2

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES    
|------------------------------------------------
|                                                
|CONSOLIDATED STATEMENTS OF INCOME               
|                                                
|U.S. dollars in thousands, except per share data

|                                                    |  | Year Ended December 31,
|--------------------------------------------------- |  | -----------------------
|
|
|
|
|Revenues                                            |  |                        
|Cost of revenues                                    |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Gross profit                                        |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Operating expenses                                  |  |                        
|Research and development                            |  |                        
|Selling and marketing                               |  |                        
|General and administrative                          |  |                        
|Other operating expenses                            |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Total operating expenses                            |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Operating income                                    |  |                        
|Financial income, net                               |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Income before taxes on income                       |  |                        
|Taxes on income                                     |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Net income                                          |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Basic net earnings per share                        |  |                        
|                                                    |  |                        
|Diluted net earnings per share                      |  |                        
|                                                    |  |                        
|                                                    |  |                        
|Weighted average number of shares used in per share |  |                        
|calculations (in thousands):                        |  |                        
|Basic                                               |  |                        
|                                                    |  |                        
|Diluted                                             |  |                        
|                                                    |  |                        

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

F - 3

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES
|--------------------------------------------
|                                            
|CONSOLIDATED BALANCE SHEETS                 
|                                            
|U.S. dollars in thousands                   

|                                                                                                                             | Note | December 31
2006 | December 31
2005
|---------------------------------------------------------------------------------------------------------------------------- | ---- | ---------------- | ----------------
|
|
|
|
|CURRENT ASSETS                                                                                                               |      |                  |                 
|Cash and cash equivalents                                                                                                    |      |                  |                 
|Short-term bank deposits                                                                                                     |      |                  |                 
|Available for sale marketable securities                                                                                     |      |                  |                 
|Trade receivables (net of allowance for doubtful accounts of $1,582 and
$222 as of December 31, 2006 and 2005, respectively) |      |                  |                 
|Other accounts receivable and prepaid expenses                                                                               |      |                  |                 
|Inventories                                                                                                                  |      |                  |                 
|                                                                                                                             |      |                  |                 
|                                                                                                                             |      |                 
|Total current assets                                                                                                         |      |                  |                 
|                                                                                                                             |      |                  |                 
|                                                                                                                             |      |                 
|Severance pay fund                                                                                                           |      |                  |                 
|Long-term deposits and others                                                                                                |      |                  |                 
|Long-term available for sale marketable securities                                                                           |      |                  |                 
|Long-term trade receivables                                                                                                  |      |                  |                 
|Property and equipment, net                                                                                                  |      |                  |                 
|Intangible assets, net                                                                                                       |      |                  |                 
|                                                                                                                             |      |                  |                 
|                                                                                                                             |      |                 
|Total long term assets                                                                                                       |      |                  |                 
|                                                                                                                             |      |                  |                 
|                                                                                                                             |      |                 
|Total assets                                                                                                                 |      |                  |                 
|                                                                                                                             |      |                  |                 

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

F - 4

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES              
|----------------------------------------------------------
|                                                          
|CONSOLIDATED BALANCE SHEETS                               
|                                                          
|U.S. dollars in thousands, except share and per share data

|                                                                    | Note | December 31,
2006 | December 31,
2005
|------------------------------------------------------------------- | ---- | ----------------- | -----------------
|
|
|
|
|CURRENT LIABILITIES                                                 |      |                   |                  
|Trade payables                                                      |      |                   |                  
|Other accounts payable and accrued expenses                         |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|Total current liabilities                                           |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|LONG-TERM LIABILITIES                                               |      |                  
|Deferred revenues                                                   |      |                   |                  
|Warranty Accruals                                                   |      |                   |                  
|Accrued severance pay                                               |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|Total long-term liabilities                                         |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|SHAREHOLDERS' EQUITY                                                |      |                  
|Ordinary shares of NIS 0.01 par value;                              |      |                  
|Authorized - 100,000,000 ordinary shares; Issued and outstanding -  |      |                  
|27,522,589 and  26,521,148 shares as of December 31, 2006 and 2005, |      |                  
|respectively;                                                       |      |                   |                  
|Additional paid-in capital                                          |      |                   |                  
|Treasury shares - 662,874 Ordinary shares                           |      |                   |                  
|Deferred stock based compensation                                   |      |                   |                  
|Accumulated other comprehensive loss                                |      |                   |                  
|Retained earnings                                                   |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|Total shareholders' equity                                          |      |                   |                  
|                                                                    |      |                   |                  
|                                                                    |      |                  
|Total liabilities and shareholders' equity                          |      |                   |                  
|                                                                    |      |                   |                  

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

F - 5

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES 
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                                                                                       | Ordinary
Shares | Additional
Paid-in
Capital | Accumulated
Other
Comprehensive
Income (loss)* | Deferred
Stock based
Compensation | Treasury
Shares | Retained
Earnings | Total
Shareholders'
Equity | Total
Comprehensive
Income
|---------------------------------------------------------------------------------------------------------------------- | --------------- | -------------------------- | ---------------------------------------------- | --------------------------------- | --------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2006                                                                                          |                 |                            | $                                              | 61                                |                 | $                 | 70,254                     |                           
|Exercise of stock options                                                                                              |                 |                            |                                                | 1                                 |                 |                   | 329                        |                           
|Issuance of shares as a result of
exercise of restricted stock units (RSU)                                             |                 |                            |                                                | 1                                 |                 |                   | 1                          |                           
|Reclassification of deferred stock based  
compensation to additional paid in 
capital  due to adoption of FAS 123 (R) |                 |                            |                                                | -                                 |                 |                   | (177                       | )                         
|Equity based compensation expenses                                                                                     |                 |                            |                                                | -                                 |                 |                   | 8,256                      |                           
|Other comprehensive income:                                                                                            |                 |                           
|Unrealized gain on available for sale 
    securities                                                                  |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|Reclassification to income statement 
    for loss realized                                                            |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|Net income                                                                                                             |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|                                                                                                                       |                 |                            |                                                |                                   |                 |                   |                            |                           
|                                                                                                                       |                 |                           
|Total comprehensive income                                                                                             |                 |                            |                                                |                                   |                 |                   |                            |                           
|                                                                                                                       |                 |                            |                                                |                                   |                 |                   |                            |                           
|Balance as of December 31, 2006                                                                                        |                 |                            | $                                              | 63                                |                 | $                 | 78,663                     |                           
|                                                                                                                       |                 |                            |                                                |                                   |                 |                   |                            |                           

|*
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 - 6

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES 
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                     | Ordinary
Shares | Additional
Paid-in
Capital | Accumulated
Other
Comprehensive
Income (loss)* | Deferred
Stock based
Compensation | Treasury
Shares | Retained
Earnings | Total
Shareholders'
Equity | Total
Comprehensive
Income
|---------------------------------------------------- | --------------- | -------------------------- | ---------------------------------------------- | --------------------------------- | --------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2005                        |                 |                            | $                                              | 54                                |                 | $                 | 58,595                     |                           
|Exercise of stock options                            |                 |                            |                                                | 7                                 |                 |                   | 11,659                     |                           
|Amortization of deferred stock based
compensation    |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|Other comprehensive income:                          |                 |                           
|Unrealized loss on available for sale
    securities |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|Reclassification to income statement                 |                 |                           
|for gain realized                                    |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|Net income                                           |                 |                            |                                                | -                                 |                 |                   | -                          |                           
|                                                     |                 |                            |                                                |                                   |                 |                   |                            |                           
|                                                     |                 |                           
|Total comprehensive income                           |                 |                            |                                                |                                   |                 |                   |                            |                           
|                                                     |                 |                            |                                                |                                   |                 |                   |                            |                           
|Balance as of December 31, 2005                      |                 |                            | $                                              | 61                                |                 | $                 | 70,254                     |                           
|                                                     |                 |                            |                                                |                                   |                 |                   |                            |                           

|*
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 - 7

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES 
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                           | Share Capital | Additional
Paid-in
Capital | Accumulated
Other
Comprehensive
Income (loss)* | Deferred
Stock based
Compensation | Treasury
Shares | Retained
Earnings | Total
Shareholders'
Equity | Total
Comprehensive
Income
|---------------------------------------------------------- | ------------- | -------------------------- | ---------------------------------------------- | --------------------------------- | --------------- | ----------------- | -------------------------- | --------------------------
|
|
|
|
|Balance as of January 1,                                   |               |                            |                                                |                                   |                 |                   |                            |                           
|2004                                                       |               |                            | $                                              | 3                                 |                 | $                 | 7                          |                           
|Issuance of Ordinary shares,                               |               |                           
|net of issuance costs of $6,299                            |               |                            |                                                | 39                                |                 |                   | -                          |                           
|Exercise of stock options                                  |               |                            |                                                | 3                                 |                 |                   | -                          |                           
|Conversion of Preferred A and                              |               |                           
|B Shares into Ordinary shares                              |               |                            |                                                | 9                                 |                 |                   | (7                         | )                         
|Issuance of Preferred A shares
net of Issuance costs of $1 |               |                            |                                                | -                                 |                 |                   | -                          |                           
|Repurchase of Preferred A                                  |               |                           
|shares from a shareholder                                  |               |                            |                                                | -                                 |                 |                   | -                          |                           
|Amortization of deferred stock
based compensation          |               |                            |                                                | -                                 |                 |                   | -                          |                           
|Other comprehensive income:                                |               |                           
|                                                           |               |                           
|Unrealized loss on available
    for sale securities       |               |                            |                                                | -                                 |                 |                   | -                          |                           
|Reclassification to income                                 |               |                           
|statement for loss realized                                |               |                            |                                                | -                                 |                 |                   | -                          |                           
|Net income                                                 |               |                            |                                                | -                                 |                 |                   | -                          |                           
|                                                           |               |                            |                                                |                                   |                 |                   |                            |                           
|                                                           |               |                           
|Total comprehensive income                                 |               |                            |                                                |                                   |                 |                   |                            |                           
|                                                           |               |                            |                                                |                                   |                 |                   |                            |                           
|Balance as of December 31,
2004                            |               |                            | $                                              | 54                                |                 | $                 | -                          |                           
|                                                           |               |                            |                                                |                                   |                 |                   |                            |                           

|*
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
|--------------------------------------------
|                                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS       
|                                            
|U.S. dollars in thousands                   

|                                                                              | Year Ended December 31,
|----------------------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES                                          |                        
|Net income                                                                    |                        
|Adjustments to reconcile net income to net cash provided by                   |                        
|operating activities:                                                         |                        
|Depreciation and amortization                                                 |                        
|Increase in accrued severance pay, net                                        |                        
|Increase in short-term and long-term trade receivables                        |                        
|Decrease (increase) in other accounts receivables and
prepaid expenses        |                        
|Increase in inventories                                                       |                        
|Increase (decrease) in trade payables                                         |                        
|Increase (decrease) in other account payables and accrued                     |                        
|expenses                                                                      |                        
|Increase (decrease) in long-term litigation settlement fee                    |                        
|Realized loss (gain) and changes in accrued interest from                     |                        
|marketable securities                                                         |                        
|Equity based compensation                                                     |                        
|Increase in deferred revenues                                                 |                        
|Increase (decrease) in warranty accruals                                      |                        
|Loss on sales of property and equipment                                       |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by operating activities                                     |                        
|                                                                              |                        
|                                                                              |                        
|CASH FLOWS FROM INVESTING ACTIVITIES                                          |                        
|Maturity of (investment in) short-term deposits, net                          |                        
|Purchase of available-for-sale marketable securities                          |                        
|Proceeds from sale and redemption of available for sale
marketable securities |                        
|Investment in long-term loans and others                                      |                        
|Purchase of property and equipment                                            |                        
|Purchase of intangible assets                                                 |                        
|Proceeds from sale of property and equipment                                  |                        
|                                                                              |                        
|                                                                              |                        
|Net cash used in investing activities                                         |                        
|                                                                              |                        
|                                                                              |                        
|CASH FLOWS FROM FINANCING ACTIVITIES                                          |                        
|Proceeds from issuance of ordinary and preferred shares, net                  |                        
|Exercise of stock options and RSUs                                            |                        
|Repurchase of preferred A shares from shareholders                            |                        
|                                                                              |                        
|                                                                              |                        
|Net cash provided by financing activities                                     |                        
|                                                                              |                        
|                                                                              |                        
|Increase in cash and cash equivalents                                         |                        
|Cash and cash equivalents at the beginning of the year                        |                        
|                                                                              |                        
|                                                                              |                        
|Cash and cash equivalents at the end of the year                              |                        
|                                                                              |                        
|                                                                              |                        
|Cash paid during the period for:                                              |                        
|                                                                              |                        
|Income taxes                                                                  |                        
|                                                                              |                        

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

F - 9

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 1 |  | GENERAL
|------ | - | -------

| | A. | Syneron
Medical Ltd. (the Company) 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 esthetic                medical industry and systems for dermatologists, plastic
surgeons and other                qualified practitioners worldwide.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Syneron
GmbH, a wholly-owned subsidiary in Germany, was established in August
               2001, for the purpose of marketing and sales of the Companys
products in                Europe. Syneron Inc. and Syneron Canada Corp., also
wholly-owned subsidiaries,                were established during 2002 for the purpose of
marketing and sales of the                Companys products in North America.
Syneron Medical (HK), also a                wholly-owned subsidiary, 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 in January 2007
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | During
2005 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 $1,500, in two portions, in
consideration                for 51% of LI and exercised its right to increase the number
of directors to                three out of five members of LIs board of directors.
As such, the company                is consolidating LI since the third quarter of 2005.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the agreement the Company has an option to invest an additional $2,000, for a period
of two years from the first investment and to increase its holding to 63% of the Ordinary
Shares of LI. If during that period LI meets certain milestones, the Company will be
obligated to invest the additional $2,000. According to the agreement, the two founders
of LI have the option, for a period of two years, to sell their holdings (49%) to the
Company for $5,000 in the Companys share, after meeting certain milestones. As part
of the investment agreement the Company will have the exclusive right to sell LI products
in North America for 10 years following FDA approval. The initial value of the
contingently puttable minority interests described above was immaterial to the Companys
financial statements. As of December 31, 2006 and 2005 it was not probable that the
required conditions to enable the founders to sell their interest in LI to the Company
would be met. Therefore, the aforementioned puttable minority interest rights did not
have an effect on the Companys financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is the sole financing source of LI and it was granted preference in receiving its
investment in case of LIs liquidation.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | D. | On
August 11, 2004, the Company completed an initial public offering                (IPO or
Offering) in the US NASDAQ national market.                Pursuant to the
IPO, the Company issued 5 million Ordinary shares and received                net
proceeds of approximately $54 million (net of underwriting commissions and
               expenses of approximately $6 million). Trading in the Companys
Ordinary                shares commenced on August 6, 2004. The underwriters were granted
an option,                exercisable within 30 days from the date of the IPO, to
purchase up to 750,000                additional Ordinary shares at the public offering
price of $12 per share less                underwriting discounts. The option was solely
for the purpose of covering any                over-allotments in connection with the
Offering. The underwriters did not                exercise the option.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 8, 2005 a follow-on secondary offering was completed. In the offering the
shareholders of the Company sold 7,937,809 ordinary shares, including 1,264,174 shares
that were exercised by options holders. The consideration received by the Company for the
stock options exercise was $1,588. As the offering was for the sale of shares by the
Companys shareholders, the total cost of the offering in the amount of $815 was
expensed and included in other operating expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES
|------ | - | -------------------------------

| | The
consolidated financial statements are prepared in accordance with United States Generally
Accepted Accounting Principles (U.S. GAAP).
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | A. | USE
OF ESTIMATES
| | -- | ----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | FINANCIAL
STATEMENTS IN U.S. DOLLARS
| | -- | ------------------------------------

| | The
Companys consolidated revenues are generated mainly in U.S. dollars (dollars).
In addition, a substantial portion of the Groups costs are incurred in dollars. The
Companys management believes that the dollar is the primary currency of the
economic environment in which the Company and its subsidiaries operate. Thus, the dollar
is the functional and reporting currency of the Company and its subsidiaries. 
Transaction
and balances in currencies other than the US dollars have been re-measured into dollars
in accordance with the principles set forth in Statement of Financial Accounting Standard
No. 52 Foreign Currency Translation. All exchange gains and losses from
re-measurement are reflected in the consolidated income statements in financial income or
expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | PRINCIPLES
OF CONSOLIDATION
| | -- | ---------------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions and balances including profit from inter-company
sales not yet realized outside the Group, have been eliminated upon consolidation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | RECLASSIFICATION
| | -- | ----------------

| | Certain
amounts from prior years have been reclassified to conform to the current period
presentation.
| | ------------------------------------------------------------------------------------------------------

| | The
reclassification had no effect on previously reported net loss, shareholders equity
or cash flows.
| | -------------------------------------------------------------------------------------------------------

| | E. | CASH
AND CASH EQUIVALENTS
| | -- | -------------------------

| | Cash
equivalents are short-term highly liquid investments that are readily convertible into
cash with original maturities of less than three months at the date acquired.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | SHORT-TERM
DEPOSITS
| | -- | -------------------

| | Short-term
bank deposits are deposits with maturities of more than three months but less than one
year. The short-term deposits are presented at their cost. Accrued interest is included
in other receivables
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | MARKETABLE
SECURITIES
| | -- | ---------------------

| | The
Company accounts for investments in marketable securities in accordance with Statement of
Financial Accounting Standard No. 115 Accounting for Certain Investments in Debt
and Equity Securities. Management determines the classification of investments in
marketable securities with fixed maturities at the time of purchase and re-evaluates such
designations as of each balance sheet date. In 2005 and 2006 investments in marketable
securities were designated as available for sale securities. Accordingly, the securities
are stated at fair value, with unrealized gains and losses reported in accumulated other
comprehensive income, a separate component of shareholders equity. Realized gains
and losses on sales of investments are included in the consolidated income statements.
Interest and amortization of premium and discount on debt securities are recorded as
financial income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | G. | MARKETABLE
SECURITIES (Continued)
| | -- | ---------------------------------

| | Investments
in corporate structured notes are classified as available for sale and accounted for
under the provision of Emerging Issue Task Force No. 96-12, Recognition of Interest
Income and Balance Sheet Classification of Structured Notes (EITF No. 96-12).
Under EITF No. 96-12, the retrospective interest method is used for recognizing interest
income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | INVENTORIES
| | -- | -----------

| | Inventories
are stated at the lower of cost or market value.
| | ------------------------------------------------------------

| | Cost
is determined as follows:
| | ------------------------------

| | Raw
materials: first in, first out (FIFO) method.
| | ---------------------------------------------------

| | Finished
 products:  raw  material as  explained  above,  with the addition of the specific
           manufacturing costs.
| | ---------------------------------------------------------------------------------------------------------------------------

| | 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 |  
| | Office furniture, equipment                                 |  

| | J. | INTANGIBLE
ASSET, NET
| | -- | ---------------------

| | Intangible
assets are stated at cost, net of accumulated amortization. The intangible assets are
being amortized over their useful life using a method of straight line amortization. As
per management opinion this method reflects best the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used up.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | IMPAIRMENT
OF LONG-LIVED ASSETS
| | -- | -------------------------------

| | The
Companys long-lived assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal
of Long-Lived Assets 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 2004, 2005 and
2006, no impairments were recorded.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | L. | REVENUE
RECOGNITION
| | -- | -------------------

| | The
Company and its subsidiaries generate revenues mainly from product sales. The Company
also generates revenues from services. The Company sells its products primarily through
its subsidiaries to end users and distributors.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
are recognized in accordance with Staff Accounting Bulletin No. 104 Revenue
Recognition when delivery has occurred, persuasive evidence of an agreement exists,
the fee is fixed and determinable, collectibility is probable and no further obligations
exist. The Company does not grant a right of return to its products.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
than from 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 product sales to end users in North America usually includes multiple elements
within a single contract. The Companys accounting policy complies with the
requirements set forth in EITF 00-21, relating to the separation of multiple deliverables
into individual accounting units with determinable fair values.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company considers the sale of a product and the service element in the agreement to be
two separate accounting units of the arrangement and defers the fair value of the service
element to the period in which it is earned. Fair value is determined based on the price
charged by third parties on a stand alone basis for the service provided, and data
available from which to estimate the volume of services provided during the term of the
arrangement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | RESEARCH
AND DEVELOPMENT COSTS
| | -- | ------------------------------

| | Research
and development costs are charged to the income statement as incurred.
| | -------------------------------------------------------------------------------

F - 13

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | N. | STOCK-BASED
COMPENSATION
| | -- | ------------------------

| | At
December 31, 2006, the Company has 2 stock-based employee compensation plans, which are
described more fully in Note 12. Prior to January 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees (Opinion 25), and related
Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation (Statement 123). Under APB 25 compensation expense was
measured based on the intrinsic value of the options granted at the grant date or other
measurement date. Expenses in respect of stock-based employee compensation cost amounted
to $148 in the Statement of Income for the years ended December 31, 2005 and 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment (Statement 123(R)),
using the modified-prospective transition method. Under that transition method,
compensation cost recognized during 2006 included: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions of
Statement 123, and (b) compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of Statement 123(R). Results for prior periods have not been restated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting Statement 123(R) on January 1, 2006, the Companys income
before taxes on income and net income for the year ended December 31, 2006 was $ 8,108
lower than if it had continued to account for share-based compensation under Opinion 25.
Basic and diluted earnings per share for the year ended December 31, 2006, were $ 0.30
and $ 0.29 lower, respectively, than if the Company had continued to account for
share-based compensation under Opinion 25.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net income and earnings per share for the years
ended December 31, 2005 and 2004 if the Company had applied the fair value recognition
provisions of Statement 123 to options granted under the Companys stock option
plans after the original effective date of SFAS 123. For purposes of this pro forma
disclosure, the value of the options is estimated using the Black-Scholes options pricing
model for options granted prior to January 1, 2005 and the Binomial model for options
granted thereafter. The fair value of the options granted is amortized to expense over
the options vesting periods using the straight line method:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | O. | STOCK-BASED
COMPENSATION (Continued)
| | -- | ------------------------------------

| |                                                                                                                 | Year ended December 31,
| | --------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| | Net Income, as reported                                                                                         |                        
| | Add: Stock-based employee compensation expense included in                                                      |                        
| | reported net income                                                                                             |                        
| | Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards |                        
| |                                                                                                                 |                        
| |                                                                                                                 |                        
| | Pro forma net income                                                                                            |                        
| |                                                                                                                 |                        
| |                                                                                                                 |                        
| | Earnings per share
Basic - as reported                                                                          |                        
| |                                                                                                                 |                        
| | Basic - pro forma                                                                                               |                        
| |                                                                                                                 |                        
| | Diluted - as reported                                                                                           |                        
| |                                                                                                                 |                        
| | Diluted -  pro forma                                                                                            |                        
| |                                                                                                                 |                        
| | Weighted average number of shares used in per share                                                             |                        
| | calculations (in thousands):                                                                                    |                        
| | Basic                                                                                                           |                        
| |                                                                                                                 |                        
| | Diluted                                                                                                         |                        
| |                                                                                                                 |                        

| | The
pro forma effects of estimated equity-based compensation expense on net income and
earnings per share for the years ended December 31, 2005 and 2004 were estimated at the
date of grant using the Black-Scholes options pricing model for options granted prior to
January 1, 2005 and the Binomial model for options granted thereafter, based on the
following assumptions (annualized percentages):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | Year ended December 31,
| | ----------------------- | -----------------------
|
|
|
|
| | Black-Scholes model     |                        
| | Volatility              |                        
| | Risk-free interest rate |                        
| | Dividend yield          |                        
| | Expected life (years)   |                        
| |                        
| | Binomial model         
| | Dividend yield          | 0%                     
| | Expected volatility     | 65%                    
| | Risk-free interest rate | 4.41%                  
| | Early exercise multiple | 2                      
| | Expected life           | 2.13                   

| | As
of December 31, 2006, the total unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $ 16,069. This cost is
expected to be recognized over a weighted average period of 1.45 years. The Company
recorded cash received from the exercise of stock options and RSU of $ 332.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | P. | BASIC
AND DILUTED NET EARNINGS PER SHARE
| | -- | ----------------------------------------

| | Basic
net earnings per share is computed based on the weighted average number of Ordinary
shares outstanding during each year. Diluted net earning per share is computed based on
the weighted average number of ordinary shares outstanding during each year, plus the
dilutive effect of options considered to be outstanding during each year, in accordance
with Statement of Financial Standard No. 128, Earnings Per Share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | FAIR
VALUE OF FINANCIAL INSTRUMENTS
| | -- | -----------------------------------

| | The
following methods and assumptions are used by the Company in estimating fair values: The
carrying amount reported in the consolidated balance sheet for cash and cash equivalents,
short-term bank deposits, trade and other receivables, and trade and other payables
approximate their fair values due to the short-term maturities of such instruments.
Marketable securities are presented at fair value based on quoted market prices. The
value of long-term bank deposits approximates fair value due to the variable interest
rate on these deposits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | INCOME
TAXES
| | -- | ------------

| | The
Company and its subsidiaries account for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes(SFAS
No. 109). This statement prescribes the use of the liability method, whereby
deferred tax assets and liability account balances are calculated for temporary
differences between financial reporting and tax bases of assets and liabilities and for
net operating loss carryforwords. The deferred tax assets and liabilities are measured
using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiaries provide a valuation allowance if
necessary, to reduce deferred tax assets to their estimated realizable value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Severance
expenses for the years ended December 31, 2006, 2005 and 2004 amounted to approximately
$200, $106 and $100, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | T. | ADVERTISING
EXPENSES
| | -- | --------------------

| | Advertising
expenses are charged to the statements of income, as incurred. Advertising expenses for
the years ended December 31, 2006, 2005 and 2004 were $2,019, $1,244 and $1,196,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | U. | CONCENTRATION
OF CREDIT RISK
| | -- | ----------------------------

| | Financial
instruments that potentially subject the Group to concentrations of credit risk consist
principally of cash and cash equivalents, 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 financially sound and,
accordingly, minimal credit risk exists with respect to these investments
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys trade receivables are derived from sales to large independent distributors
located mainly in Western Europe, Asia Pacific region and to end-users in North America.
The Company performs ongoing credit evaluations of its customers and to date has not
experienced any material losses. An allowance for doubtful accounts is determined with
respect to those specific amounts that the Company has determined to be doubtful of
collection.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in highly rated debentures of
Israeli, U.S., Scotch and Austrian 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries have no significant off-balance sheet concentration of
financial instruments subject to credit risk such as foreign exchange contracts, option
contracts or other hedging arrangements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table provides the detail of the change in the Company provision for doubtful
debts for the years ended December 31, 2006 and 2005:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| |                                      | December 31,
| | ------------------------------------ | ------------
|
|
|
|
| | Balance at the beginning of the year |             
| | Additions                            |             
| | Deductions                           |             
| |                                      |             
| | Balance at end of the year           |             
| |                                      |             

F - 17

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | V. | CONCENTRATION
OF OPERANTIONAL RISK
| | -- | ----------------------------------

| | The
Company outsources the manufacturing of its products to four 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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | WARRANTY
| | -- | --------

| | The
Company generally provides a one year to three years standard warranty with its products,
depending on the type of product and the country in which the Company does business. On
sales to distributors, the Company provides a warranty on parts only. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2006, short term and long term accrued warranty amounted to $931 and $512
respectively. At December 31, 2005, short term and long term accrued warranty amounted to
$1,328 and $1,032, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | X. | COMPREHENSIVE
INCOME
| | -- | --------------------

| | The
Company reports comprehensive income in accordance with SFAS No. 130, Reporting
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
stockholders equity during the period except those resulting from investments by,
or distributions to, stockholders. The Company determined that their items of other
comprehensive income relate to unrealized gains and losses on available for sale
securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 2 |  | SIGNIFICANT
ACCOUNTING POLICIES (Continued)
|------ | - | -------------------------------------------

| | Y. | IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
| | -- | ----------------------------------------------

| | 1. | In
July 2006, the FASB issued FASB Interpretation No. 48 Accounting for
          Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109          (FIN
48). FIN 48 clarifies the accounting for income taxes by           prescribing the
minimum recognition threshold a tax position is required to meet           before being
recognized in the financial statements. FIN 48 utilizes a two-step           approach for
evaluating tax positions. Recognition (step one) occurs when an           enterprise
concludes that a tax position, based solely on its technical merits,           is
more-likely-than-not to be sustained upon examination. Measurement (step two)
          is only addressed if step one has been satisfied (i.e., the position is
          more-likely-than-not to be sustained). Under step two, the tax benefit is
          measured as the largest amount of benefit, determined on a cumulative
          probability basis that is more-likely-than-not to be realized upon ultimate
          settlement.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 is effective for the fiscal years beginning after December 15, 2006. The Company
believes the adoption of FIN 48 will not have a material impact on its financial
condition, results of operations and liquidity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
               No. 157). This Statement defines fair value, establishes a framework for
               measuring fair value and expands the required disclosure on fair value
               measurements. SFAS No. 157 applies under other accounting pronouncements
that                require or permit fair value measurements and accordingly, does not
require any                new fair value measurement. SFAS No. 157 is effective for
financial statements                issued for fiscal years beginning after November 15,
2007. The Company is                currently analyzing SFAS No. 157 and believes the
adoption of SFAS No. 157 will                not have a material impact on its financial
condition, results of operations or                liquidity.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
February, 2007, the FASB issued SFAS No. 159, The fair value of option
               for Financial Assets and Financial Liabilities (SFAS No. 159).
               SFAS No. 159 permits entities to choose to measures many financial assets
and                financial liabilities at fair value. Unrealized gain and losses on
items for                which the fair value option has been elected are reported in
earnings. SFAS No.                159 is effective for fiscal years beginning after
November 15, 2007. The Company                is currently assessing the impact of SFAS
No. 159 on its consolidated financial                position and results of operations.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 3 |  | SHORT-TERM
BANK DEPOSITS
|------ | - | ------------------------

| | At
December 31, 2006, short term deposits bear a 5.1%  5.17% annual interest rate.
| | -----------------------------------------------------------------------------------

| | At
December 31, 2005  see Note 11D.
| | ------------------------------------

|Note 4 |  | AVAILABLE
FOR SALE  MARKETABLE SECURITIES
|------ | - | ------------------------------------------

|                                                    | December 31, 2006
|--------------------------------------------------- | -----------------
|
|
|
|
|Equity securities                                   |                  
|                                                    |                  
|Available for sale - matures within one             |                  
|year:                                               |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available for sale - matures after one              |                  
|year through three years:                           |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available for sale - matures after three            |                  
|years through five years:                           |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Available for sale - matures after five             |                  
|years:                                              |                  
|Government debentures - fixed interest rate         |                  
|Corporate debentures - fixed interest rate          |                  
|Corporate structured notes - floating interest
rate |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|Reclassification of certain securities to Long Term |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  
|                                                    |                  

F - 20

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 4 |  | AVAILABLE
FOR SALE  MARKETABLE SECURITIES (Continued)
|------ | - | ------------------------------------------------------

|                                                                    | December 31, 2005
|------------------------------------------------------------------- | -----------------
|
|
|
|
|Equity securities                                                   |                  
|                                                                    |                  
|Available for sale - matures within one 
year:                      |                  
|Government debentures - fixed interest rate                         |                  
|Corporate debentures - fixed interest rate                          |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|Available for sale - matures after one 
year through three years:   |                  
|Government debentures - fixed interest rate                         |                  
|Corporate debentures - fixed interest rate                          |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|Available for sale - matures after three 
years through five years: |                  
|Government debentures - fixed interest rate                         |                  
|Corporate debentures - fixed interest rate                          |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|Available for sale - matures after five 
years:                     |                  
|Government debentures - fixed interest rate                         |                  
|Corporate debentures - fixed interest rate                          |                  
|Corporate structured notes - floating interest 
rate                |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  
|                                                                    |                  

| | For
the year ended December 31, 2006, unrealized loses in the Companys investments in
available for sale securities instruments are mainly attributed to interest rate
fluctuations. The contractual cash flows of these investments are either guaranteed by
U.S. government or an agency of the U.S. government or were issued by highly rated
corporations and other governments. As the Company has the ability to hold these
investments until maturity, it is expected that these securities would not be settled at
a price less than the amortized cost of the Companys investments. Therefore, the
securities were not considered to be other than temporarily impaired at December 31,
2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 5 |  | OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------ | - | ----------------------------------------------

| |                           | December 31,
| | ------------------------- | ------------
|
|
|
|
|
| | Government authorities    |             
| | Prepaid expenses          |             
| | Tax withholding Deposit * |             
| | Other receivables         |             
| |                           |             
| |                           |             
| |                           |             
| |                           |             

| | * | Employees
options withholding tax, held in deposit until the time of remitting funds to tax
authorities. See Note 10.
| | - | ----------------------------------------------------------------------------------------------------------------------

|Note 6 |  | INVENTORIES
|------ | - | -----------

| |                   | December 31,
| | ----------------- | ------------
|
|
|
|
| | Raw materials     |             
| | Finished products |             
| |                   |             
| |                   |             
| |                   |             
| |                   |             

|Note 7 |  | LONG-TERM
BANK DEPOSITS AND OTHERS
|------ | - | ----------------------------------

| |                     | December 31,
| | ------------------- | ------------
|
|
|
|
| | Structured note (1) |             
| | Others              |             
| |                     |             
| |                     |             
| |                     |             
| |                     |             

| | (1) | The
structured note is redeemable by the Bank at the earlier of (a) the end of
               10 years or (b) when the aggregate interest amount reaches 12% but not
earlier                than the end of 1.5 years. The interest rate in the first year is
10% and from                the second year to maturity the interest rate will be 9.25%
minus twice LIBOR                for 6 months.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to increase in the interest rate and the LIBOR, the Company does not anticipate redeeming
the structured note in the following year, as such the structured note was classified to
long term bank deposits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 8 |  | PROPERTY
AND EQUIPMENT, NET
|------ | - | ---------------------------

| |                                                             | December 31,
| | ----------------------------------------------------------- | ------------
|
|
|
|
| | Cost                                                        |             
| | Computers, software, manufacturing and laboratory equipment |             
| | Office furniture and equipment                              |             
| |                                                             |             
| |                                                             |             
| | Total cost                                                  |             
| |                                                             |             
| |                                                             |             
| | Accumulated depreciation                                    |             
| | Computers, software, manufacturing and laboratory equipment |             
| | Office furniture and equipment                              |             
| |                                                             |             
| |                                                             |             
| | Total accumulated depreciation                              |             
| |                                                             |             
| |                                                             |             
| | Depreciated cost                                            |             
| |                                                             |             

| | Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 were $422, $278 and $143,
respectively.
| | -----------------------------------------------------------------------------------------------------------------

|Note 9 |  | INTANGIBLE
ASSETS, NET
|------ | - | ----------------------

| | (1) | In
December 2004 the Company purchased a U.S. patent, in the amount of $1,000.
               Additional cost in the amount of $466, in connection with the purchase of
the                patent, was recorded in the beginning of 2005. The Company estimated
the useful                life of the patent at five years from the purchase date.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006 the amortization expenses related to the patent were $293. The annual amortization
expense relating to the patent as of December 31, 2006 for each of the three years in the
period ending December 31, 2009 is estimated to be approximately $293.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In
November 2006 the Company purchased a U.S. patent, in the amount of $250. The
               Company estimated the useful life of the patent at five years from the
purchase                date.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006 the amortization expenses related to the patent were $4. The annual amortization
expenses relating to the patent as of December 31, 2006 for each of the five years in the
period ending December 31, 2011 is estimated to be approximately $50.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 10 |  | OTHER
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Deferred revenues              |             
| | Warranty accruals              |             
| | Accrued expenses               |             
| | Accrued commission             |             
| | Employees and related expenses |             
| | Tax authorities                |             
| | Tax Withholding *              |             
| | Other payables                 |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

| | * | See
note 5
| | - | ----------

|Note 11 |  | COMMITMENTS
AND CONTINGENCIES
|------- | - | -----------------------------

| | A. | ROYALTY
| | -- | -------

| | In
June 2004 the Company has entered into an agreement effective from December 1, 2003, for
using know-how of a third party, in which 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 $1,311, $370 and $79 for the years ended December 31,
2006, 2005 and 2004 respectively, and were recorded as part of cost of revenues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | LEASES
| | -- | ------

| | The
Company operates from leased facilities in Canada, United States, Germany and Israel
leased for periods expiring in years 2006 through 2011.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | The
future minimum lease commitments of the Group under various non-cancelable operating
lease agreements in respect of premises and motor vehicles, that are in effect as of
December 31, ? 2006, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year ended
December
31, | 
|----------------------- | 
|
|
|
|
|2007                    | 
|2008                    | 
|2009                    | 
|2010                    | 
|2011                    | 
|                        | 
|                        | 
|                        | 
|                        | 

| | Rent
expenses amounted to $546, $336 and $347 for the years ended December 31 2006, 2005 and
2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------

F - 24

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 11 |  | COMMITMENTS
AND CONTINGENCIES (Continued)
|------- | - | -----------------------------------------

| | C. | LEGAL
CLAIMS
| | -- | ------------

| | 1. | On
July 23, 2004, Thermage, Inc. sued the Company in the United States District
          Court in the Northern District of California, for patent infringement, seeking
          an injunction against infringing their patent rights and unspecified damages.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2005, the Company reached an agreement with Thermage which settled patent-related
claims of the parties against each other. This settlement did not include an admission of
liability. Under this agreement each party grants the other a non-exclusive paid-up
license under the patents in suit and related patents. Total legal fees in connection
with the lawsuit and the settlement and settlement costs in connection with the
settlement with Thermage amounted to $2.7 million and were recorded as part of other
operating expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
license granted to Thermage excludes the right to utilize the ELOS technology and the
license granted to the Company excludes the right to utilize Thermages monopolar RF
and capacitive electrical coupling. The agreement includes a consent, of the parties, not
to sue each other on current or future devices.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
July 29, 2004, Shaldot Metal Works Ltd. (Shaldot), a privately
          owned Israeli company, sued the Company and Dr. Eckhouse (the chairman of the
          board of directors of the Company), in the District Court in Haifa, claiming
          that in 1999 Dr. Eckhouse had access to confidential material regarding an
          Israeli patent, which he allegedly used in violation of a confidentiality
          agreement in connection with forming Syneron. The complaint alleges that the
          Companys products infringe Shaldots Israeli patent. In its lawsuit
          Shaldot is suing the Company for $2.3 million (NIS 10 million) and has
requested           an injunction against the Company which will prohibit manufacturing,
marketing           and selling some or all of the Companys products, which, if
successful,           could have a material adverse effect on the Companys business
in Israel.           On October 10, 2004 the Company submitted its Statements of Defense
to the           Court, claiming that Shaldots patent is invalid due to the
existence of           prior art, lack of novelty and no improvement over existing art in
the field.           Shaldots patent is under review by the Israeli Patent Office,
based on a           request submitted to the Patent Office by a third party claiming
that           Shaldots patent is invalid. Moreover, the Company claimed that even
if the           patent would have been valid, none of the Companys devices
infringe any of           Shaldots patents. The dispute was referred by the court
to mediation and           the parties attempted to resolve the dispute. The mediation
process was not           successful and was terminated by Shaldot.  In January
2007, the Company           learned that Shaldot had transferred all of its rights to the
patent to a           subsidiary, Qray Ltd.  The Company submitted a motion to
dismiss           Shaldots lawsuit, claiming that due to the transfer of rights,
Shaldot no           longer had standing to continue the proceedings. A hearing on the
Companys           motion was held on February 19, 2007.  At the hearing, the
court ordered           that Qray be added as an additional plaintiff to the lawsuit and
that the           parties submit revised statements of claims and defenses.  On
February 25,           2007, Shaldot submitted its revised statement of claims. On March
14, 2007, The           Company submitted its revised statement of defense and also a
revised statement           of counterclaim. The lawsuit is in the process of ongoing
evidentiary hearings           with the next hearing scheduled to take place on June 18,
2007.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 11 |  | COMMITMENTS
AND CONTINGENCIES (Continued)
|------- | - | -----------------------------------------

| | C. | LEGAL
CLAIMS (Continued)
| | -- | ------------------------

| | The
Company believes that Shaldots lawsuit is without merit, and the Company intends to
defend itself vigorously. Therefore, the Company does not believe that this lawsuit will
result in a loss to the Company and accordingly, no accrual was recorded in the financial
statement with respect to this claim.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
September 2005 and further dates thereafter, nine plaintiffs filed           complaints
in which the Company and its subsidiary, Syneron Inc., are named as           defendants
along with other named defendants. Eight of the plaintiffs are           African-American
women who allege they sustained burn and/or other complications           after hair
removal or skin rejuvenation treatments were administered by one of           the Companys
customers with one of its products. In addition to           traditional product
liability and negligence theories, the complaint alleges           theories of fraud,
negligent misrepresentation, illegal sale of a dangerous           prescriptive device
and intentional race discrimination. The Company and its           subsidiary have
appeared in the court hearings. A vigorous defense to all of the           allegations is
being funded and controlled by an insurance company that issued           an insurance
policy to the Companys subsidiary and under which the Company           is also
additionally insured through a controlling interest endorsement. The           insurance
company has reserved the right to deny coverage on some of the claims           (product
liability-intentional failure to warn, product liability-fraud, and           intentional
racial discrimination) which means there is a possibility that these           claims
would not be covered by the insurance policy. In addition, the complaint           seeks
recovery for punitive damages which the insurance company has advised the
          Company that it is not covered by the insurance policy.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
mediation the Company has resolved the claims with most of the plaintiffs and the Company
is in the process of finalizing the mediation process with the rest of the plaintiffs.
Most of the settlement costs will be paid by the insurance company and the Company
estimates that the portion of the settlement that will be paid by the Company will not be
material; therefore no provision has been made in the financial statements in respect of
this claim.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | On
November 10, 2005 a class action was filed against one of the Companys
          subsidiaries, Syneron Inc. The plaintiff seeks injunctive relief, statutory
          damages and attorneys fees and costs as a result of the alleged violations of
          the Telephone Consumer Protection Act (TCPA). Syneron Inc.s
          insurance carrier has accepted tender of defense of this litigation subject to
a           reservation of rights. Although there appears to be a likelihood that Syneron
          Inc. will have insurance coverage for this lawsuit and it is currently being
          provided a defense through its insurance carrier, there is the possibility that
          these TCPA claims against Syneron Inc. will not be covered by the insurance
          policy. Syneron Inc. has answered the Complaint and the parties have engaged in
          discovery relating to the appropriateness of proceeding with the action on
          behalf of a class, as well as discovery on the merits of the claim. On February
          7, 2007, Syneron Inc. filed a motion to dismiss the action for lack of federal
          jurisdiction. All further discovery is stayed pending a ruling on this motion.
          Should this motion to dismiss be denied, Syneron Inc. plans vigorously to
          challenge class certification.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 11 |  | COMMITMENTS
AND CONTINGENCIES (Continued)
|------- | - | -----------------------------------------

| | C. | LEGAL
CLAIMS (Continued)
| | -- | ------------------------

| | The
Company cannot predict the outcome of the claim, nor can it estimate the amount of damage
or the range of such an amount, if it is held responsible. Accordingly no accrual was
included in the financial statements with respect to this claim.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | From
time to time, the Company may become involved in litigation relating to           claims
arising in the ordinary course of business. Management does not believe           the
final disposition of these matters will have a material adverse effect on           the
financial position, results of operations or cash flows of the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | GUARANTEE
| | -- | ---------

| | In
July 2005 the Company signed a Bank Guarantee agreement with a commercial bank as a
guarantee of a loan to a customer of Syneron Inc. The amount of the guarantee amounted to
$3.5 million.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
guarantee was in the form of a deposit Syneron has deposited in the lending bank bearing
annual interest of 6.75%. The terms of the interest for the deposit were favorable to the
Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a first degree collateral a major shareholder of this customer gave a personal guarantee
to the bank.
| | --------------------------------------------------------------------------------------------------------

| | On
February 1, 2006 the bank released the assignment on the deposit used as collateral for
the loan granted to the customer. The guarantee was then made null and void.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company follows the provisions of FASB Interpretation No. 45. However, it did not
recognize a liability for the guarantee as of December 31, 2005 since the risk of
execution of the Companys guarantee as of that date was insignificant and any fair
value would be immaterial.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 12 |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | A. | SHARE
CAPITAL
| | -- | -------------

| | 1. | On
July 12, 2004, the board of directors and shareholders approved an increase           in
the authorized ordinary shares to 100,000,000 NIS 0.01 par value each, and a
          3.4 for 1 stock split of all outstanding ordinary shares. All ordinary share
and           per share amounts as well as the outstanding stock options included in the
          financial statements, for periods prior to the stock split, have been
          retroactively restated to reflect the stock split. Prior to this action the
          Company had 4,007,801 preferred shares authorized and 5,992,199 ordinary shares
          authorized. Upon closing of the Offering (See Note 1D.), each outstanding
          preferred share was converted into 3.4 ordinary shares.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 12 |  | SHAREHOLDERS EQUITY
(Continued)
|------- | - | --------------------------------

| | A. | SHARE
CAPITAL (Continued)
| | -- | -------------------------

| | 3. | During
2005 3,232,328 stock options were exercised into ordinary shares, in
          consideration of $11,666, including options exercised in the secondary offering
          (see Note 1D.)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | During
2006 1,001,543 stock options and RSU were exercised into ordinary           shares, in
consideration of $332.
| | -- | --------------------------------------------------------------------------------------------------------------------

| | 5. | Certain
of our officers, directors and major shareholders 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | STOCK
OPTION PLAN
| | -- | -----------------

| | In
2001, the Companys board of directors approved the grant of options to employees,
consultants and directors of the Company, and reserved 2,614,158 ordinary shares for
issuance pursuant to such grant of stock options. All options granted prior to 2003 were
granted pursuant to specific option agreements rather than under a stock option plan. In
2003, the shareholders of the Company approved a stock option plan and an increase in the
number of ordinary shares reserved for option issuances to up to 5,440,000 shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exercise price of the options granted in 2001-2003 was equal to or was below the fair
market value of the Companys shares at the date of grant. Options granted generally
vested over a period of two to four years, and will expire between 2008 and 2010. Any
option which is cancelled or forfeited before expiration becomes available for future
grants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2004, the Company decided to cancel the remaining un-allocated 279,783 options under
the 2003 option pool. Upon expiry of any allocated options, such options and any ordinary
shares previously reserved in the option pool for such options shall be automatically
cancelled.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, the Company 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 what ever number it seems fit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006 there were 2,768,607 options available for future grant.
| | --------------------------------------------------------------------------------

| | Under
the Companys 2004 equity incentive plans (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 three years of employment. Any options that are cancelled or forfeited before
expiration 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, 2005. 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 three 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 12 |  | SHAREHOLDERS EQUITY
(Continued)
|------- | - | --------------------------------

| | B. | STOCK
OPTION PLAN (Continued)
| | -- | -----------------------------

| | The
following is a summary of activities relating to the Companys stock options and
RSUs granted to employee among the Companys various plans:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | Year ended December 31,
|-------------------------------- | -----------------------
|
|
|
|
|Options outstanding at beginning |                        
|of year                          |                        
|Changes during the year:         |                        
|Granted                          |                        
|Exercised                        |                        
|Forfeited and cancelled          |                        
|                                 |                        
|                                 |                        
|Options outstanding at end of    |                        
|year                             |                        
|                                 |                        
|                                 |                        
|Options exercisable at end of    |                        
|year                             |                        
|                                 |                        

| | The
intrinsic value of options and RSU exercised by employees during the years ended on
December 31, 2006, 2005 and 2004 was $26,164, $78,228 and $1,213 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the total unrecognized estimated compensation cost related to
non-vested stock options granted prior to that date was $ 16,069 which is expected
to be recognized over a weighted average period of 1.45 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
information regarding the options and RSUs outstanding as of December 31, 2006, is as
follows:
| | --------------------------------------------------------------------------------------------------

|        | Outstanding | Weighted
average
remaining
contractual
life (years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price | Exercisable | Weighted
average
remaining
contractual
life (years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- | ----------- | --------------------------------------------------- | ----------------------------- | ------------------------------- | ----------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |             |                                                     |                               | 130,927                         |             |                                                     | 6.50                          |                                
|Options |             |                                                     |                               | 1,631,224                       |             |                                                     | 5.75                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                
|        |             |                                                    
|        |             |                                                     |                               | 1,762,151                       |             |                                                     | 5.80                          |                                
|        |             |                                                     |                               |                                 |             |                                                     |                               |                                

|        | Vested or
expected to vest | Weighted
average
remaining
contractual
life (years) | Aggregate
intrinsic
value (*) | Weighted
average
exercise
price
|------- | -------------------------- | --------------------------------------------------- | ----------------------------- | -------------------------------
|
|
|
|
|RSU     |                            |                                                     |                               | 130,927                        
|Options |                            |                                                     |                               | 1,605,504                      
|        |                            |                                                     |                               |                                
|        |                            |                                                    
|        |                            |                                                     |                               | 1,736,431                      
|        |                            |                                                     |                               |                                

| | (*) | Calculation
of aggregate intrinsic value is based on the share price of the                Companys
common stock as of December 29, 2006 ($ 27.13 per share).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 12 |  | SHAREHOLDERS EQUITY
(Continued)
|------- | - | --------------------------------

| | B. | STOCK
OPTION PLAN (Continued)
| | -- | -----------------------------

| | The
following table summarizes information relating to RSUs granted to employee, as well as
changes to such awards during 2006:
| | -------------------------------------------------------------------------------------------------------------------------------

| |                                          | Year Ended December 31, 2006
| | ---------------------------------------- | ----------------------------
|
|
|
|
| | Outstanding at the beginning of the year |                             
| |                                          |                             
| | Granted                                  |                             
| | Exercised                                |                             
| | Forfeited                                |                             
| |                                          |                             
| |                                          |                             
| | Outstanding as of  December 31, 2006     |                             
| |                                          |                             

| | The
Companys outstanding options and RSUs to consultants as of December 31, 2006 are as
follows:
| | -------------------------------------------------------------------------------------------------

| |         | Issuance date | Options for
Ordinary Shares | Exercise
Price per
Share | Options
Exercisable | Exercisable Through
| | ------- | ------------- | --------------------------- | ------------------------ | ------------------- | -------------------
|
|
|
|
| | Options |               |                             | October 20, 2003         |                     |                    
| | RSU     |               |                             | May 8, 2006              |                     |                    
| | RSU     |               |                             | November 2, 2006         |                     |                    
| |         |               |                             |                          |                     |                    
| |         |               |                            
| |         |               |                             |                          |                     |                    
| |         |               |                             |                          |                     |                    

| | The
weighted average fair values of options granted (including those granted to non-employees
but excluding RSUs) during the years ended December 31, 2006, 2005 and 2004 were:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                           | Year Ended December 31,
| | ----------------------------------------- | -----------------------
|
|
|
|
| | Weighted average exercise prices          |                        
| |                                           |                        
| | Weighted average fair value on grant date |                        
| |                                           |                        

F - 30

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 12 |  | SHAREHOLDERS EQUITY
(Continued)
|------- | - | --------------------------------

| | B. | STOCK
OPTION PLAN (Continued)
| | -- | -----------------------------

| | The
weighted-average estimated fair value of employee stock options granted during the 12
months ended December 31, 2006, was calculated using the binomial model with the
following weighted-average assumptions (annualized percentages):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | Year ended December 31, 2006
| | ------------------------------ | ----------------------------
|
|
|
|
| | Volatility                     |                             
| | Risk-free interest rate        |                             
| | Dividend yield                 |                             
| | Post-vest cancellation rate *) |                             
| | Suboptimal exercise factor **) |                             
| | Expected life                  |                             

| | *) | The
post-vest cancellation rate was calculated on a monthly basis and is           presented
here 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, i.e. profitability, for calculating volatility in accordance with SFAS
123(R). 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,
2006 was 65 %.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2006 was 4.68 %.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2006 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 for options
granted during the 12 months ended December 31, 2006 derived from the binomial model was
a weighted average of 4.07 years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. Statement 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 12 |  | SHAREHOLDERS EQUITY
(Continued)
|------- | - | --------------------------------

| | B. | STOCK
OPTION PLAN (Continued)
| | -- | -----------------------------

| | Pre-vesting
forfeitures were estimated, in 2006 to be approximately 5.71%, for the full term of the
award on a weighted average basis, based on historical experience.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys aggregate compensation cost for the 12 months ended December 31, 2006
totaled $ 8,256 thousand.
| | -------------------------------------------------------------------------------------------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for 12 months ended December 31, 2006, was comprised as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | Year ended
December 31,
| | ---------------------------------------------------- | -----------------------
|
|
|
|
| | Cost of goods sold                                   |                        
| | Research and development                             |                        
| | Sales and Marketing                                  |                        
| | General and administrative                           |                        
| |                                                      |                        
| |                                                      |                        
| | Total equity-based compensation expense before taxes |                        
| |                                                      |                        

| | A
summary of the status of the Companys nonvested RSU granted to employees as of
December 31, 2006, and changes during the year ended December 31, 2006, is
presented below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nonvested shares                | Shares | Weighted average grant date
fair value
| | ------------------------------- | ------ | --------------------------------------
|
|
|
|
| | Non-vested at January 1, 2006   |        |                                       
| |                                 |        |                                       
| | Granted                         |        |                                       
| | Vested                          |        |                                       
| | Forfeited                       |        |                                       
| |                                 |        |                                       
| |                                 |        |                                       
| | Non-vested at December 31, 2006 |        |                                       
| |                                 |        |                                       

| | C. | 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.
dollars subject to any statutory limitations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 13 |  | INCOME
TAXES
|------- | - | ------------

| | A. | ISRAELI
TAXATION
| | -- | ----------------

| | 1. | Corporate
Tax Rate
| | -- | ------------------

| | Taxable
income of Israeli companies is subject to tax at the rate of 31% in 2006, 29% in 2007 27%
in 2008, 26%, in 2009 and in 2010 and thereafter  25%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Measurement
of taxable income under Israels Income Tax (Inflationary           Adjustments)
Law,1985:
| | -- | ------------------------------------------------------------------------------------------------------

| | Results
for tax purposes for the Company are measured and reflected in accordance with the change
in the Israeli Consumer Price Index (CPI). As explained above in Note 2B, the
consolidated financial statements are presented in U.S. dollars. The differences between
the change in the Israeli CPI and in the NIS/US. dollar exchange rate cause a difference
between taxable income and the income before taxes reflected in the consolidated
financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with paragraph 9(f) of SFAS No. 109, 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
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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 33

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 13 |  | INCOME
TAXES (Continued)
|------- | - | ------------------------

| | A. | ISRAELI
TAXATION (Continued)
| | -- | ----------------------------

| | 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 Beneficiating Enterprise, such as provisions
generally requiring that at least 25% of the Beneficiating 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 certificate
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. As a result of the
amendment, tax-exempt income generated under the provisions of the new law, as part of a
new Beneficiating 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 Beneficiating
Enterprise according to the Amendment to the Law, for investments in 2005 (Programs).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Law and the Amendment, Syneron Medical Ltd. has chosen to enjoy an
Alternative benefits program status. Accordingly, Syneron Medical Ltds
income attributed to the Programs is tax exempt from taxes on income derived there from
for a period of ten years starting in the year in which the Company first generates
taxable income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the Companys retained earnings as of December 31, 2006 approximately $116
million are tax-exempt earnings attributable to its Approved Enterprise programs and $40
million are tax-exempt earnings attributable to its Beneficiating Enterprise program. The
tax-exempt income attributable to the Approved and Beneficiating Enterprise cannot be
distributed to shareholders without subjecting the Company to taxes. If these retained
tax-exempt profits are distributed, the Company would be taxed at the reduced corporate
tax rate applicable to such profits (currently  25% According to the implementation
of the Law effectively 33%). According to the Amendment, tax-exempt income generated
under the Beneficiating Enterprise status will be taxed upon dividend distribution or
complete liquidation, whereas tax exempt income generated under the Approved Enterprise
status will be taxed only upon dividend distribution (and not upon complete liquidation,
where the tax liability will be incurred by the shareholders). As of December 31, 2006,
if the income attributed to the Approved Enterprise were distributed as dividend, the
Company would incur a tax liability of approximately $ 38 million. If income
attributed to the Beneficiating Enterprise were distributed as dividend, including upon
liquidation, the Company would incur a tax liability in the amount of $ 13 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
amounts will be recorded as an income tax expense in the period in which the Company
declares the dividend.
| | -----------------------------------------------------------------------------------------------------------------

F - 34

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 13 |  | INCOME
TAXES (Continued)
|------- | - | ------------------------

| | A. | ISRAELI
TAXATION (Continued)
| | -- | ----------------------------

| | The
Companys board of directors has determined that it will not distribute any amounts
of its undistributed tax exempt income as 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 Beneficiating 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 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise is subject to tax at regular
Israeli corporate tax rate of 31%.
| | ------------------------------------------------------------------------------------------------------------------------

| | B. | NON-ISRAELI
SUBSIDIARIES
| | -- | ------------------------

| | Non-Israeli
subsidiaries are taxed based on tax laws in their countries of residence.
| | -------------------------------------------------------------------------------------

| | C. | DEFERRED
INCOME 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,
| | ---------------------------------------------------------------- | ------------
|
|
|
|
| | Deferred tax assets, net                                         |             
| | Net operating loss carryforward of subsidiaries                  |             
| | FAS 123R- compensation costs                                     |             
| | Deferred tax asset from available for sale marketable securities |             
| | Temporary differences                                            |             
| |                                                                  |             
| |                                                                  |             
| | Total deferred tax asset before valuation allowance              |             
| | Valuation allowance                                              |             
| |                                                                  |             
| |                                                                  |             
| | Net deferred tax liabilities                                     |             
| |                                                                  |             

F - 35

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 13 |  | INCOME
TAXES (Continued)
|------- | - | ------------------------

| | C. | DEFERRED
INCOME TAXES (Continued)
| | -- | ---------------------------------

| | In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences are deductible and net operating
losses are utilized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Israeli subsidiaries have available carryfoward tax loss of $1,928 to offset against
future tax profits for an indefinite period.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
Canadian subsidiary estimated total available carryforward tax losses of $764 to offset
against future tax profits for an indefinite period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys subsidiary in the United States has estimated total available carryforward
tax losses of $47,353 to offset against future tax profits for periods of 15-20 years
expiring between 2017-2022.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
currently believes that since the aforementioned subsidiaries have a history of losses it
is more likely than not that the deferred tax regarding the loss carryforward and other
temporary differences will not be realized in the foreseeable future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Utilization
of U.S. loss carryforwards may be subject to substantial annual limitation due to the
change in ownership provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitations may result in the expiration of losses
before utilization.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | INCOME
BEFORE TAXES ON INCOME
| | -- | -----------------------------

| |          | Year Ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | E. | TAXES
ON INCOME
| | -- | ---------------

| |                          | Year Ended December 31,
| | ------------------------ | -----------------------
|
|
|
|
| | Domestic (current taxes) |                        
| | Foreign (current taxes)  |                        
| |                          |                        
| |                          |                        
| |                          |                        
| |                          |                        

F - 36

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 13 |  | INCOME
TAXES (Continued)
|------- | - | ------------------------

| | F. | A
reconciliation between the theoretical tax expense, assuming all income is
               taxed at the statutory tax rate applicable to income of the Company and
the                actual tax expense as reported in the income statements, is as
follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    | Year Ended December 31,
| | -------------------------------------------------- | -----------------------
|
|
|
|
| | Income before taxes, as reported in the            |                        
| | consolidated statements of income                  |                        
| |                                                    |                        
| | Statutory tax rate                                 |                        
| |                                                    |                        
| | Theoretical tax expenses (benefits) on the above   |                        
| | amount at the  Israeli Statutory tax rate          |                        
| | Decrease in taxes resulting from "Approved         |                        
| | Enterprise" benefits (1)                           |                        
| | Difference in basis of measurement for tax
purpose |                        
| | Change in valuation allowance, net                 |                        
| | Non-deductible stock based compensation            |                        
| | Non-deductible expenses                            |                        
| | Others                                             |                        
| |                                                    |                        
| |                                                    |                        
| | Actual tax expense                                 |                        
| |                                                    |                        

| |     |                                      |  |  |  
| | --- | ------------------------------------ |  |  | -
|
|
|
|
| | (1) | Per share amounts (basic) of the tax |  |  |  
| |     | benefit resulting from the exemption |  |  |  
| |     |                                      |  |  |  
| |     | Per share amounts (diluted) of the   |  | 
| |     | tax benefit Resulting from the       |  | 
| |     | exemption                            |  |  | $
| |     |                                      |  |  |  

F - 37

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 14 |  | FINANCIAL
INCOME, NET
|------- | - | ---------------------

| |                                                               | Year Ended December 31,
| | ------------------------------------------------------------- | -----------------------
|
|
|
|
| | Income:                                                       |                        
| | Interest on cash equivalents                                  |                        
| | Gain and interest on available for sale marketable securities |                        
| | Interest on short-term deposits and structured note           |                        
| | Foreign currency translation adjustments                      |                        
| |                                                               |                        
| | Expenses:                                                     |                        
| | Interest on short-term credit and bank commissions            |                        
| | Loss on available for sale marketable securities              |                        
| |                                                               |                        
| |                                                               |                        
| |                                                               |                        
| |                                                               |                        

|Note 15 |  | MAJOR
CUSTOMERS AND GEOGRAPHIC INFORMATION
|------- | - | ------------------------------------------

| | The
Company applies Statement of Financial Accounting Standard No. 131 Disclosures
About Segments of an Enterprise and Related Information, (SFAS No. 131).
The Company operates in one reportable segment (see Note 1 for a brief description of the
Companys business). The total revenues are attributed to geographic areas based on
the location of the end customer.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following presents total revenues for the years ended and long-lived assets as of
December 31, 2006, 2005 and 2004:
| | -----------------------------------------------------------------------------------------------------------------------

| |               | 2006 | 2005 | 2004
| | ------------- | ---- | ---- | ----
|
|
|
|
| | North America |      |      | $   
| | Europe        |      |      |     
| | Asia Pacific  |      |      |     
| | Israel        |      |      |     
| | Others        |      |      |     
| |               |      |      |     
| |               |      |     
| |               |      |      | $   
| |               |      |      |     

| | Major
customers data as a percentage of total revenues:
| | --------------------------------------------------------

| |            | Year Ended December 31,
| | ---------- | -----------------------
|
|
|
|
|
| | Customer A |                        

| | *
Less than 10%
| | ---------------

F - 38

---

---

|SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES             
|---------------------------------------------------------
|                                                         
|Notes to the Consolidated Financial Statements           
|                                                         
|U.S. dollar in thousands, except share and per share data

|Note 16 |  | EARNINGS
PER SHARE
|------- | - | ------------------

| | The
following table sets forth the computation of basic and diluted net earnings per share:
| | -------------------------------------------------------------------------------------------

| |                                                          | Year Ended December 31,
| | -------------------------------------------------------- | -----------------------
|
|
|
|
| | Numerator:                                               |                        
| | Net income                                               |                        
| |                                                          |                        
| | Denominator:                                             |                        
| | Weighted-average number of shares outstanding used in    |                        
| | computing basic net earnings per share                   |                        
| | Dilutive effect: stock options and RSUs                  |                        
| |                                                          |                        
| |                                                          |                        
| | Total weighted-average number of share used-in Computing |                        
| | diluted net earnings per share                           |                        
| |                                                          |                        
| |                                                          |                        
| | Basic net earning per share                              |                        
| | Diluted net earning per share                            |                        

| | Anti-dilutive
securitiesThe
following outstanding options (prior to the application of the treasury shares method)
were excluded from the computation of diluted net earnings per ordinary share for the
periods presented because including them would have had an anti-dilutive effect.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | Year Ended December 31,
| | ----------------------------------- | -----------------------
|
|
|
|
|
| | Options to purchase ordinary shares |                        
| |                                     |                        

F - 39

---

---

# SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.

| |  | SYNERON MEDICAL LTD.By:  /s/ Doron Gerstel
Doron GerstelChief Executive Officer
| |  | ---------------------------------------------------------------------------------------------

Date: June 15, 2007



---

---

# EXHIBIT INDEX

|1.1 |  | Articles
of Association of Registrant, as amended.
|--- |  | --------------------------------------------------

|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 R.F.L. Technologies Ltd. and A' to Z' Electronics
Ltd.          (incorporated by reference to Exhibit 10.1 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 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)^
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | 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)^
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | 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)^
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | 2003
Stock Option Plan (incorporated by reference to Exhibit 10.5 to our Form F-1 filed July
14, 2004)
|--- |  | ------------------------------------------------------------------------------------------------------

|4.6 |  | 2004
Israel Stock Option Plan (incorporated by reference to Exhibit 10.6 to our Registration
Statement          on Form F-1 filed July 14, 2004)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | 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)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | 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 4.8 to our Annual
Report on Form 20-F for the          year ended December 31, 2004)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Joint
Development and Supply Framework Agreement dated as of February 25, 2007 by and between
The          Procter & Gamble Company and Syneron Medical Ltd. ^
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to our Form
F-1 filed          July 14, 2004)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|12.1 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|---- |  | -----------------------------------------------------------------

|12.2 |  | Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|---- |  | -----------------------------------------------------------------

|13.1 |  | Section
1350 certifications of Periodic Financial Reports
|---- |  | ---------------------------------------------------------

|15.1 |  | Consent
of Independent Registered Public Accounting Firm
|---- |  | --------------------------------------------------------

---

^ 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



---

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