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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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, 2005                                                    
|  | 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.
  0001291364                                                                 
|  | 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
|                    |  |                                            
|                    |  |                                            
|None                |  | None                                       

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

Ordinary shares,
par value NIS 0.01 per share 
(Title of Class)

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

None 
(Title of Class)

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, 2005, the Registrant had 26,521,148 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.

oYes     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.

oYes     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 YesxNo

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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 21E of the Securities Exchange Act of 1934, as amended. 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 risks and uncertainties. These forward-looking statements are based
on 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.

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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                                                     |      | 16
|ITEM 5.  |  | OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS                                 |      | 34
|ITEM 6.  |  | DIRECTORS, SENIOR MANAGEMENT AND
  EMPLOYEES                                   |      | 45
|ITEM 7.  |  | MAJOR SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS                            |      | 52
|ITEM 8.  |  | FINANCIAL INFORMATION                                                          |      | 53
|ITEM 9.  |  | THE OFFER AND LISTING                                                          |      | 55
|ITEM 10. |  | ADDITIONAL INFORMATION                                                         |      | 56
|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE
  DISCLOSURES ABOUT MARKET RISK                   |      | 73
|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN
  EQUITY SECURITIES                       |      | 73
|         |  |                                                                                |      |   
|PART II  |  |                                                                                |      | 74
|         |  |                                                                                |      |   
|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                              |      | 74
|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS
  OF SECURITY HOLDERS AND USE OF PROCEEDS |      | 74
|ITEM 15. |  | CONTROLS AND PROCEDURES                                                        |      | 74
|ITEM 16. |  |                                                                                |      | 74
|         |  |                                                                                |      |   
|PART III |  |                                                                                |      | 76
|         |  |                                                                                |      |   
|ITEM 17. |  | FINANCIAL STATEMENTS                                                           |      | 76
|ITEM 18. |  | FINANCIAL STATEMENTS                                                           |      | 76
|ITEM 19. |  | EXHIBITS                                                                       |      | 76

-i-

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[SYNERON LOGO]

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, 2000, 2001, 2002
and 2003 and the selected consolidated statement of operations data for the
full years ended December 31, 2001, 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, 2004 and 2005 and the
selected consolidated statements of income data for each of the years ended
December 2003, 2004, and 2005 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,                               |       
|                                                                           |  |                                                       |       
|                                                                           |  | 2001                                                  |        | 2002 |   | 2003   |  | 2004 |        | 2005 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |  
|                                                                           |  | (U.S.
  Dollars, in thousands, except per share data) |       
|Consolidated Statement of
  Operations Data:                               |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Revenues                                                                   |  | $                                                     | 458    |      | $ | 11,500 |  | $    | 35,021 |      | $ | 57,918 |   | $ | 87,406 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Cost of revenues(1)                                                        |  |                                                       | 79     |      |   | 2,024  |  |      | 4,439  |      |   | 6,914  |   |   | 11,428 |  
|Gross profit                                                               |  |                                                       | 379    |      |   | 9,476  |  |      | 30,582 |      |   | 51,004 |   |   | 75,978 |  
|Operating expenses:                                                        |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Research and
  development, net(1)                                         |  |                                                       | 606    |      |   | 1,004  |  |      | 1,701  |      |   | 3,078  |   |   | 5,030  |  
|Selling and
  marketing, net(1)                                            |  |                                                       | 306    |      |   | 5,819  |  |      | 13,900 |      |   | 19,625 |   |   | 25,188 |  
|General and
  administrative(1)                                            |  |                                                       | 610    |      |   | 342    |  |      | 878    |      |   | 2,725  |   |   | 3,534  |  
|Other
  expenses(2)                                                        |  |                                                       | -      |      |   | 612    |  |      | 6,225  |      |   | -      |   |   | 3,494  |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Total operating
  expenses(1)(2)                                           |  |                                                       | 1,522  |      |   | 7,777  |  |      | 22,704 |      |   | 25,428 |   |   | 37,246 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           | 
|Operating income
  (loss)(1)(2)                                            |  |                                                       | (1,143 | )    |   | 1,699  |  |      | 7,878  |      |   | 25,576 |   |   | 38,732 |  
|Financial income
  (expense), net                                          |  |                                                       | 26     |      |   | 272    |  |      | 881    |      |   | 2,384  |   |   | 3,081  |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Income (loss)
  before taxes on income                                     |  |                                                       | (1,117 | )    |   | 1,971  |  |      | 8,759  |      |   | 27,960 |   |   | 41,813 |  
|Taxes on income                                                            |  |                                                       | -      |      |   | -      |  |      | (170   | )    |   | (620   | ) |   | (750   | )
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Net income
  (loss)                                                        |  | $                                                     | (1,117 | )    | $ | 1,971  |  | $    | 8,589  |      | $ | 27,340 |   | $ | 41,063 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Net earnings
  (loss) per share:                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Basic                                                                      |  | $                                                     | (0.24  | )    | $ | 0.12   |  | $    | 0.51   |      | $ | 1.45   |   | $ | 1.65   |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Diluted                                                                    |  | $                                                     | (0.24  | )    | $ | 0.10   |  | $    | 0.42   |      | $ | 1.14   |   | $ | 1.48   |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Weighted-average
  number of shares used in actual per share calculations: |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Basic                                                                      |  |                                                       | 4.692  |      |   | 16,398 |  |      | 16,814 |      |   | 18,917 |   |   | 24,888 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  
|Diluted                                                                    |  |                                                       | 4,692  |      |   | 18,780 |  |      | 20,512 |      |   | 24,083 |   |   | 27,664 |  
|                                                                           |  |                                                       |        |      |   |        |  |      |        |      |   |        |   |   |        |  

1

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|                                                               |  |   |     |  |   |    |  |   |     |  |   |     |  |   |     | 
|-------------------------------------------------------------- |  | - | --- |  | - | -- |  | - | --- |  | - | --- |  | - | --- | 
|(1) Includes the following
  stock-based compensation charges: |  |   |     |  |   |    |  |   |     |  |   |     |  |   |     | 
|                                                              
|Cost of revenues                                               |  | $ | -   |  | $ | -  |  | $ | -   |  | $ | -   |  | $ | -   | 
|Research and
  development                                     |  |   | -   |  |   | -  |  |   | -   |  |   | 16  |  |   | 16  | 
|Selling and
  marketing                                        |  |   | 43  |  |   | 34 |  |   | 363 |  |   | 112 |  |   | 112 | 
|General and
  administrative                                   |  |   | 478 |  |   | -  |  |   | 32  |  |   | 20  |  |   | 20  | 
|                                                               |  |   |     |  |   |    |  |   |     |  |   |     |  |   |     | 
|                                                               |  |   |     |  |   |    |  |   |     |  |   |     |  |   |     | 
|Total
  stock-based compensation charge                        |  | $ | 521 |  | $ | 34 |  | $ | 295 |  | $ | 148 |  | $ | 148 | 
|                                                               |  |   |     |  |   |    |  |   |     |  |   |     |  |   |     | 

(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.

|                                                     |  |                              |  |  |      |        |      |   |       |  |      |        |      |   |         |  |   |         | 
|---------------------------------------------------- |  | ---------------------------- |  |  | ---- | ------ | ---- | - | ----- |  | ---- | ------ | ---- | - | ------- |  | - | ------- | 
|                                                     |  | As of
  December 31,         | 
|                                                     |  |                              | 
|                                                     |  |                              |  |  | 2001 |        | 2002 |   | 2003  |  | 2004 |        | 2005 |  
|                                                     |  |                              |  |  |      |        |      |   |       |  |      |        |     
|                                                     |  | (U.S. Dollars, in thousands) | 
|Consolidated Balance Sheet Data                      |  |                              |  |  |      |        |      |   |       |  |      |        |      |   |         |  |   |         | 
|Cash and cash
  equivalents, deposits and securities |  |                              |  |  | $    | 858    |      | $ | 4,126 |  | $    | 17,563 |      | $ | 858     |  | $ | 134,059 | 
|Working capital                                      |  |                              |  |  |      | 1,152  |      |   | 4,966 |  |      | 14,513 |      |   | 95,071  |  |   | 144,490 | 
|Total assets                                         |  |                              |  |  |      | 1,749  |      |   | 8,650 |  |      | 26,999 |      |   | 109,546 |  |   | 170,281 | 
|Total liabilities                                    |  |                              |  |  |      | 381    |      |   | 4,182 |  |      | 13,558 |      |   | 15,145  |  |   | 25,117  | 
|Retained earnings (deficit)                          |  |                              |  |  |      | (1,288 | )    |   | 683   |  |      | 9,272  |      |   | 36,612  |  |   | 77,675  | 
|Shareholders equity                                 |  |                              |  |  |      | 1,368  |      |   | 4,468 |  |      | 13,441 |      |   | 94,401  |  |   | 145,164 | 

2

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

Not applicable.

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

Not applicable.

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

From
time to time, information provided by us, statements made by our employees or
information included in our filings with the Securities and Exchange Commission
(including this Form 20-F) may contain statements that are not historical
facts, so-called forward-looking statements, which involve risks and
uncertainties. The Companys actual future results may differ significantly
from those stated in any forward-looking statements. If operating results are
below the expectations of public market analysts or investors, then the market
price of the Companys common stock could decline. 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 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.

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

3

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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;
| |   |                                                                                                                                                   
| |  | 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.

4

---

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Our
success and ability to compete depends in large part upon our ability to
protect our proprietary technology. As of May 31, 2006, our patent portfolio
consisted of six issued U.S. patents, one of which we purchased in December
2004, and ten patent applications pending in the United States 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 caped 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.

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. Recently, the
dispute was referred, by the court, to mediation and the parties are attempting
to resolve the dispute. There can be no assurance that the mediation could
successfully resolve the dispute or if resolution was reached, that the outcome
is favorable to us. We and our legal advisors believe that we have good
defenses against Shaldots claims, and we intend to defend Syneron vigorously.
No reserve was recorded in the financial statement with respect to this claim.

5

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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. 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. 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 which would have a material
adverse effect on our business, results of operations and financial condition.

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, Laserscope, Lumenis Ltd., Cutera, Inc., Cynosure, Inc. and
Palomar Medical Technologies, Inc., as well as by private companies such as
Sciton, Inc., Radiancy Inc., Thermage, Inc., Reliant Technologies, Inc. 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;                                                      
| |   |                                                                       
| |  | 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.

6

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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 three 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.

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 2003,
2004 and 2005 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 2003, 2004 and 2005 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:

7

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|  |                                                                                                     
|- | ----------------------------------------------------------------------------------------------------
| | 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 Western
Europe, 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 2005, the
exchange rate of U.S. dollar to the New Israeli Shekel has increased 6.85%,
which benefited our financial results by $0.1 million.

To
date, we have not found it necessary to hedge the risks associated with
fluctuations in currency exchange rates. In the future, if we do not
successfully engage in hedging transactions, our results of operations may be
subject to losses from fluctuations in foreign currency exchange rates.

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 a 510(k) marketing clearance to our
new ST applicator for non-invasive wrinkle treatment using 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.

8

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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 are
  violative of 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
subcontractors facilities, we do not have complete control over our
subcontractors 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.

9

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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 intend to introduce 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.

10

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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 small number of disputes or legal claims
between our customers and their patients that involved potential product
liability claims since inception. 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.

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.

11

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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
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 recently required
employers seeking to enforce non-compete undertakings of a former employee to
demonstrate that the competitive activities of the former employee will harm
one of a limited number of material interests of the employer which have been
recognized by the courts, such as the secrecy of a companys confidential
commercial information or its intellectual property. If we cannot demonstrate
that harm would be caused to us, we may be unable to prevent our competitors
from benefiting from the expertise of our former employees.

The expense and potential unavailability of
insurance coverage for our customers and our company could adversely affect our
ability to sell our products and our financial condition.

Some
of our customers and prospective customers are required to maintain liability
insurance to cover their operations and use of our products. Medical
malpractice carriers are withdrawing coverage in certain U.S. states or
substantially increasing premiums. If this trend continues or worsens, our
customers may discontinue using our products and, industry-wide, potential
customers may opt against purchasing laser or light-based products due to the
cost and inability to procure insurance coverage.

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.

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. 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. 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.

12

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Our operations may be disrupted by the
obligations of our personnel to perform military service.

Many
of our male employees in Israel, including some members of senior management,
are obligated to perform up to 36 days of military reserve duty annually until
they reach age 48 and, in the event of a military conflict, could be called to
active duty. Our operations could be disrupted by the absence of a significant
number of our employees related to military service or the absence for extended
periods of military service of one or more of our key employees. A disruption
could materially adversely affect our business.

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 status of our facilities in
Israel. To remain eligible for these tax benefits, we must continue to meet
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.
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 2005, the tax benefit derived from our approved
enterprise status was approximately $13.1 million, which represents
approximately 34% 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 on
January 23, 2005, to invest an additional $485,000 in fixed assets. During 2005
we invested approximately $410,000 and intend to invest the rest through 2006.
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 prohibit 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 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.

13

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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.

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.

14

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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 25.11% of our
outstanding ordinary shares as of March 31, 2006. 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.

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.

15

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|        |                           
|------- | --------------------------
|ITEM 4. | INFORMATION ON THE COMPANY

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

Our History

Syneron
Medical Ltd. was incorporated in the State of Israel in July 2000. Our
headquarters are located at Industrial Zone, Yokneam Illit, 20692, 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 Electro-Optical Synergy, or ELOS, technology, which uses the
synergy between electrical energy and optical energy to provide effective, safe
and affordable aesthetic medical treatments. Our products, which we sell primarily
to physicians and other 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.

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.

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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 55 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.

Principal Capital
Expenditures

We
had capital expenditures of $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 million in 2006. We have financed our
capital expenditures with cash generated from operations.

Our
capital expenditures in 2005 consisted primarily of purchases of a patent,
software, manufacturing equipment and general equipment. We expect our capital
expenditures in 2006 to consist of the same types of capital expenditures that
we had in 2005. Our capital expenditures in 2004 and 2003 consisted primarily
of purchases of patent, 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 Electro-Optical Synergy, or ELOS, technology, which uses the
synergy between electrical energy and optical energy to provide effective, safe
and affordable aesthetic medical treatments. Our products, which we sell
primarily to physicians and other 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.

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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. We have received 510(k) clearances from the FDA for
all the applications mentioned above. We sell our products in 46 countries
through a direct sales force of approximately 43 employees in North America and
42 distributors in Europe, the Middle East, Asia, Australia, New Zealand,
Canada and South America. As of March 31, 2006, we had an installed base of
over 4,500 products.

Industry

Aesthetic
Market Opportunity.Aesthetic procedures have
traditionally been performed by dermatologists, plastic surgeons and other
cosmetic surgeons, of whom there are approximately 30,000 in the United States
alone based on published membership numbers of professional medical
organizations. Although no industry estimates are available, based on our
marketing efforts and interviews with physicians, we believe that a broader
group of approximately 200,000 physicians in the United States, including
primary care physicians, obstetricians/gynecologists, ear, nose and throat
specialists, ophthalmologists and other specialists, are candidates for
incorporating aesthetic procedures into their practices. Outside the United
States, aesthetic procedures also are performed by non-medical professionals,
which we refer to as aestheticians. In the United States, a medical spa market
also is developing, where aesthetic procedures are performed at dedicated
facilities by non-physicians under physician supervision.

|  |                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | Growth in
  the aesthetic procedure market is driven by:                                                                                                                                                
|  |                                                                                                                                                                                                         
| | the aging of
  the population in the western world;                                                                                                                                                     
|  |                                                                                                                                                                                                         
| | the
  increasing desire of many individuals to improve their appearance;                                                                                                                                
|  |                                                                                                                                                                                                         
| | the impact
  of managed care and reimbursement on physician economics, which has motivated
  physicians to establish or expand the menu of elective, private-pay aesthetic
  procedures that they offer;
|  |                                                                                                                                                                                                         
| | the growing
  number of conditions, including acne, wrinkles and cellulite, that can be
  treated non-invasively; and                                                                                   
|  |                                                                                                                                                                                                         
| | the
  reduction in costs per procedure, which has attracted a broader base of
  consumers.                                                                                                              

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The
price, profitability and demand for aesthetic medical products and services are
not dependent on the reimbursement policies of public or private third-party
payers. These products and services generally are not subject to reimbursement
by third-party payers and, therefore, companies engaged in this industry face
limited risk from changes in governmental and third-party payer methodologies
and reimbursement rates.

The
June 2004 Medical Insight, Inc. Global Aesthetic Market Study estimated that
over 40 million non-invasive aesthetic medical procedures would be performed
worldwide in 2004, and projected that this number will increase to over 60
million in 2006, representing a compounded annual growth rate of over 20%.We
estimate that the annual expenditures on non-invasive aesthetic medical
equipment were $750 million in 2005 for both the replacement and new equipment
markets. We believe this estimate to be reasonable since it is based on
published revenue figures for public companies, and on our conversations with
the management of private companies, that we compete with in the non-invasive
aesthetic medical equipment market and target the same customer base as us. We
believe the market is poised for growth based on improvements in technology, a
significant increase in the user base and improved treatment results.

Laser
and other light-based aesthetic procedures typically have included hair
removal, rejuvenating the skins appearance through the treatment of
superficial benign vascular and pigmented lesions and the treatment of leg
veins. In addition to these traditional procedures, new and emerging
applications are being introduced to the market, including the treatment of
acne and wrinkles and the temporary reduction in the appearance of cellulite.

The
Structure of Human Skin and Aesthetic Treatment Alternatives.The
human skin consists of several layers. The epidermis is the outer layer and
contains the cells that determine pigmentation, or skin color. The dermis, which
is underneath the epidermis, is approximately 2.0 millimeters thick and
contains hair follicles and large and small blood vessels at various depths.
Beneath the dermis is a layer which includes subdermal fat and collagen, which
provides strength and flexibility to the skin.

The
appearance of the skin may change over time due to a variety of factors
including age, sun damage, circulatory changes, deterioration of collagen, and
the human bodys diminished ability to repair and renew itself. These changes
may include undesirable hair growth, uneven pigmentation, wrinkles, and blood
vessels and veins which are visible at the skins surface. People with
undesirable skin conditions or unwanted hair growth often seek aesthetic
treatments.

Invasive
Aesthetic Procedures.Common aesthetic procedures include
skin rejuvenation through microdermabrasion, hair removal, the treatment of leg
veins and, more recently, the treatment of wrinkles. Many alternative aesthetic
therapies are available to treat each of these conditions. Invasive aesthetic
procedures, which utilize injections or abrasive agents to reach different
depths of the dermis and the epidermis, include:

|  |                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | electrolysis for hair removal, a procedure which
  involves an electric current flowing through a needle inserted into
  individual hair follicles;                                   
|  |                                                                                                                                                                                       
| | sclerotherapy for vein treatments, a procedure which
  involves saline or a detergent-based solution inserted into a target vein to
  break down and collapse the targeted vessel; and
|  |                                                                                                                                                                                       
| | chemical peels, Botox and collagen injections and
  microdermabrasions for skin rejuvenation and temporary facial wrinkle
  removal.                                                  

Each
of these invasive procedures has varying degrees of effectiveness. Further,
each of the procedures has limitations resulting from the degree of difficulty
of the procedure and skill level required of the user, the cost and length of
the procedure, the required number of treatments necessary to achieve the
desired result, the level of pain and discomfort experienced by the patient,
the post-procedure side effects and complications and whether the procedure
results in temporary versus permanent changes.

Non-Invasive
Aesthetic Procedures.In addition to invasive alternatives,
non-invasive aesthetic treatments have been developed using lasers and other
light-based technologies to achieve therapeutic outcomes which are similar to
or better than those achieved using invasive treatments. These technologies
work by producing intense bursts of highly focused light, or optical energy, to
selectively target hair follicles, veins or collagen in the dermis, as well as
cells responsible for pigmentation in the epidermis. Safe and effective laser
and other light-based treatments require an appropriate combination of the following
four parameters:

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|  |                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Energy Level:the
  amount of light emitted to heat a target;                                                                                                    
|  |                                                                                                                                                                 
| | Pulse Duration:the
  time interval over which the energy is delivered;                                                                                          
|  |                                                                                                                                                                 
| | Spot Size: the
  diameter of the energy beam, which affects treatment depth, due to frequent
  deflection of light energy during skin penetration, and area; and
|  |                                                                                                                                                                 
| | Wavelength: the
  color of the light, which impacts the effective depth and absorption of the
  energy delivered.                                               

The
treatment of different aesthetic conditions requires the use of different types
of lasers and light-based technologies. As a result, an active aesthetic
practice typically requires multiple light or laser-based technologies to offer
patients access to a broad range of procedures.

The
Evolution of Light or Laser-Based Technologies in Non-Invasive Aesthetic
Medicine.Lasers were first used for medical applications in
the 1960s. First generation aesthetic medical lasers introduced in the 1970s
and 1980s were characterized by single wavelengths, small spot sizes and depth
of skin penetration generally limited to 0.5 millimeters. The optical energy
was heavily absorbed by blood and moderately absorbed by the epidermis, with
much heavier epidermal absorption in darker pigmented skins. These lasers were
used primarily for the treatment of shallow and small vessel vascular lesions,
including port wine stains and hemangiomas. While effective in selective
applications, these initial first generation technologies appealed to only a
small group of users and often required an extended treatment recovery period.

In
the mid-1990s, a second generation technology called intense pulsed light
(IPL) was introduced. These multiple wavelength, broad spectrum light sources
had variable pulse durations, a larger spot size, and were able to penetrate
into the skin approximately 1.0 to 2.0 millimeters. These technologies expanded
the range of applications to include the treatment of pigmented lesions and
small leg veins, and the removal of hair follicles, but were not effective in
the treatment of large leg veins, the removal of light hair follicles or the
treatment of patients with naturally dark skin tones.

Limitations of Existing Technologies

While
the use of light or laser-based aesthetic procedures has grown over the last
two decades, many limitations remain.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Challenge of Penetrating Epidermal
  Barrier to Consistently and Predictably Control Treatment Depth.Non-invasive
  light or laser-based aesthetic treatments use optical energy to heat target
  tissue in the skin selectively. Efficacy depends on the level of optical
  energy that penetrates through the epidermis and dermis to the target area.
  Epidermal pigmentation may limit the amount of optical energy that can be
  used without damage. The depth of penetration is approximately 1.0 to 2.0
  millimeters for IPL technologies and approximately 0.5 to 2.0 millimeters for
  longer wavelength (in the range of 0.7 to 1.3 microns) lasers. Many
  treatments for aesthetic conditions require energy to penetrate deeper than
  2.0 millimeters into the layer of subdermal fat and collagen. Increasing the
  amount of optical energy applied to the surface of the skin in order to
  achieve enough heating at the required depth significantly increases the risk
  of damaging or burning the epidermis.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Poor Selectivity.Success
  of light or laser-based aesthetic treatments depends on the technologys
  ability to target blood vessels, hair follicles and deeper lying pigments
  selectively without heating surrounding tissue and other structures. Despite
  technological advances over the years, there are still significant
  limitations in selectivity. A particular limitation exists in the treatment
  of non-pigmented targets, including white hair and collagen.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

20

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lack of Real-Time Temperature
  Feedback During Treatment Compromises Safety and Efficacy.Prior
  to a laser or light-based aesthetic procedure, the user must set the amount
  of light and pulse duration depending on the characteristics of the patients
  skin. Any adjustments to treatment parameters must be made manually by the
  user since the equipment does not adjust the parameters automatically. The
  user does not have access to real-time information about skin temperature
  necessary to adjust these parameters appropriately during the procedure. The
  lack of both real-time temperature feedback and automated parameter
  adjustments can result in ineffective treatments, safety problems or the need
  for multiple procedures to treat the affected area.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Certain Types of Patients and
  Aesthetic Procedures are Not Well Suited for Treatment.Current
  technologies have been unable to treat all patients safely and effectively,
  particularly those with naturally dark or tanned skin tones. There also are
  limitations on the effectiveness of treating light hair and large leg veins
  of more than 2.0 millimeters in depth. To date, most light or laser-based
  products have not been able to treat several other prevalent aesthetic
  conditions, including acne, wrinkles and cellulite.                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Reliance on High Power Optical
  Energy Imposes Engineering and Design Constraints.High
  power optical energy requires larger and heavier equipment than electrical
  energy. The cost of manufacturing equipment using optical-based energy
  sources increases exponentially with the amount of power required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Prior
to the introduction of our products, we believe that the market was poised to
accept new sophisticated technology that can address the shortcomings of the
then available products. We also believe that in selecting solutions, users are
increasingly focusing on the economics of owning aesthetic treatment equipment,
including the likelihood of increased revenues, as well as the predictability
of ownership costs and are placing greater emphasis on product reliability, the
quality of service provided by the manufacturer, minimization of downtime
required for maintenance, the length of warranty coverage, and the ongoing cost
of purchasing disposables and hand pieces following the initial console
purchase.

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.

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.

21

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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.Epidermal pigmentation limits the
  amount of optical energy a user can deliver without causing pain or skin
  damage. Because our ELOS technology uses both optical and conducted RF
  energy, our products achieve greater skin penetration with lower levels of
  optical energy and offer more control than conventional light-based systems.
  In addition to enhanced safety, the less powerful light-based energy source
  increases patient comfort and reduces the need for anesthetics. Additionally,
  the use of bipolar RF energy effectively controls the penetration depth and
  reduces impact on surrounding tissue. We believe this provides more effective
  treatments and an increased array of applications. Our ELOS technology
  overcomes limitations common to previous technologies, including more
  effective treatment of dark skin toned patients, light and gray hair, and
  large leg veins as well as the ability to penetrate into sub-dermal layers.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Continuous Temperature Measurement
  and Automated Parameter Adjustment.We believe that our
  products, with our proprietary dual-electrode RF hand piece, are the only
  non-invasive aesthetic systems that enable continuous temperature measurement
  and feedback. The hand piece measures the temperature and resistance of the
  dermis every millisecond, unlike other technologies which do not provide
  continuous measurements. This measurement capability enables fine-tuning and
  automatic adjustments for different areas of the body, reducing the risk of
  burns. Our products contain sophisticated software which guides the
  adjustment of the treatment parameters to help ensure that the temperature of
  the skin does not exceed predetermined limits.                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Wide Range of Applications in a
  Single System.Our products permit users to perform
  multiple procedures with a single device. Our Galaxy system and our newer
  eMax system (see below for detailed description), for example, allows users
  to offer a wide variety of procedures, including hair removal, treatment of
  superficial benign vascular lesions and superficial benign pigmented lesions,
  and the treatment of acne, wrinkles and leg veins. Increasing the types and
  number of procedures that users can perform with a single system allows users
  to spread the fixed cost of the system over a greater number of procedures.
  This treatment versatility is an important feature for users who have not yet
  established large aesthetic treatment practices or who have space
  limitations.                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Easily Upgradeable Technology
  Platform.We design our products to allow users to
  cost-effectively upgrade their existing products to perform additional
  applications. Users can purchase and easily install software plugs and hand
  pieces required to perform additional applications, providing us with
  multiple sources of revenue from our installed base. This upgradeability also
  provides our customers with the opportunity to own the latest technological
  innovations at a fraction of the cost of purchasing a new system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Cost Effectiveness and Reliable
  Performance.Our products require minimal ongoing service
  and disposable expenses, providing our customers with predictable costs of
  ownership. Also, because our products utilize less optical energy than
  competing laser or light-based systems, our hand pieces are able to deliver
  more pulses during the life of each hand piece, thereby requiring fewer
  replacements over the life of a system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | User Friendly Design.Our
  consoles are lightweight and have a small footprint. This enables us to ship
  replacement consoles overnight to customers requiring system maintenance in
  North America. The small design of our consoles maximizes the flexibility of
  limited space in the users offices. Our hand pieces are lightweight and
  ergonomically designed, enabling long-term use by our customers with minimal
  fatigue or discomfort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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Our Strategy

Our
objective is to position ourselves as the leading provider of non-invasive
aesthetic solutions. The key elements of our strategy are:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maintain Technological Leadership.Our patented ELOS technology enables users to offer their
  patients efficient, safe and cost-effective aesthetic procedures. During the
  past four years we have used this core technology to launch nine product platforms,
  the Aurora, Pitanga, Polaris, Galaxy, Comet, Vela, eLight, eLaser and eMax.
  We plan to build upon this technology platform through the introduction of
  new product platforms and new aesthetic applications. We plan to complement
  our internal development programs with acquisitions and licensing of
  complementary technologies and products. We also have a strong intellectual
  property portfolio which includes six issued U.S. patents, one of which we
  purchased in December 2004, and ten pending patent applications in the United
  States. We believe that this strategy will allow us to broaden our product
  lines and leverage our existing distribution network.                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Provide Customers with a
  Comprehensive Program and Predictable Costs.A critical
  component of our aesthetic solutions is providing responsive customer
  service. Our Ultimate Customer Care initiative offers our prospective
  customers an on-site practice development consultation. In North America, we
  also provide a customized marketing and business plan to guide users on how
  to best incorporate our products into their practice. Following the users
  purchase of our system, a skilled clinical trainer visits the customers
  facility to conduct on-site clinical training. We also seek to provide
  predictable costs to users of ownership by minimizing ongoing disposable and
  maintenance expenses and providing a parts and services warranty. Our
  Ultimate Customer Care program also includes a product maintenance program
  that offers next-day delivery of replacement products to eliminate
  unnecessary downtime.                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Expand Our Customer Base Beyond
  Traditional Users.We intend to maintain our primary sales
  and marketing focus on the approximately 30,000 dermatologists, plastic
  surgeons and other cosmetic surgeons we have estimated are in the United
  States. However, we will continue focusing on the approximately 200,000
  physicians who have not traditionally incorporated aesthetic treatments into
  their practices, including primary care physicians,
  obstetricians/gynecologists, ear, nose and throat specialists, and other
  specialists in the United States. In addition to the U.S. medical community,
  we plan to reach the aesthetician market throughout the world, the newly
  developing medical spa market in the United States (where aesthetic
  procedures are being performed at dedicated facilities by non-physicians
  under physician supervision) and, ultimately, consumers. We may choose to
  explore distribution partnerships to expand our reach to these emerging
  markets.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Expand Into New, Non-Invasive
  Aesthetic Applications.Our ELOS technology enables users
  to treat multiple conditions more effectively than with traditional, single
  energy source devices. We will continue to offer products for the temporary
  reduction in the appearance of cellulite and the treatment of acne, wrinkles
  and other conditions that have not been effectively treated by light or
  laser-based aesthetic procedures. We believe that the ability of our products
  to penetrate deeply into the skin and selectively target desired areas
  without burning the epidermis will differentiate our technology and enable us
  to expand into these new, non-invasive aesthetic applications.                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Focus on Maintaining Attractive
  Operating Margins.Systems using our ELOS technology are
  less expensive to manufacture than systems using optical energy alone. Using
  a light source that requires less energy significantly reduces the systems
  overall cost because RF technology components are relatively inexpensive,
  while the price of light-based energy sources increases exponentially with
  power. In addition, we use outsourced manufacturing to produce our products
  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 significant capital expenditures. As a result, we believe our
  profit margins are higher than those of manufacturers of traditional
  aesthetic treatment devices. We plan to continue to focus on products and
  applications that will enable us to maintain and enhance attractive operating
  margins.                                   

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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               |  | Hair Removal 
  Rejuvenating the 
  skins appearance(2) 
  Acne                                              |  | Physicians                                  |  | Light + RF                    |  | U.S.: Third Quarter
  2002
  Rest of World:
  Fourth Quarter 2001   
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|Pitanga              |  | Hair Removal 
  Acne                                                                                          |  | Aestheticians 
  Medical Spas               |  | Light + RF                    |  | Rest of World:
  Fourth Quarter 2003                                
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|Polaris              |  | Wrinkles 
  Leg Veins 
  Other Vascular Lesions                                                               |  | Physicians                                  |  | Laser + RF                    |  | U.S.: Fourth Quarter
  2003 
  Rest of World:
  Second Quarter 2003 
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|Galaxy               |  | Hair Removal 
  Rejuvenating the 
  skins appearance(2) 
  Acne 
  Wrinkles Leg Veins Other Vascular Lesions |  | Physicians                                  |  | Light + RF /
  Laser + RF     |  | U.S.: Second Quarter 2004
  Rest of World:
  Second Quarter 2004    
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|Comet                |  | Fast Hair Removal                                                                                             |  | Physicians
  Aestheticians                  |  | Laser + RF                    |  | U.S.: Fourth
  Quarter 2004
  Rest of World:
  Fourth
  Quarter 2004
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|VelaSmooth           |  | Appearance of Cellulite                                                                                       |  | Physicians 
  Aestheticians 
  Medical Spas |  | Light + RF+ 
  Vacuum Shaping |  | U.S.: Second
  Quarter 2005
  Rest of World:
  First Quarter 2005   
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|eLight               |  | Hair Removal 
  Rejuvenating the 
  skins appearance(2) 
  Acne and Wrinkles (ST)                            |  | Physicians                                  |  | Light + RF                    |  | First quarter of 2006                                               
|                     |  |                                                                                                               |  |                                             |  |                               |  |                                                                     
|eLaser               |  | Wrinkles Leg Veins 
  Other Vascular
  Lesions; fast hair removal                                             |  | Physicians                                  |  | Laser + RF                    |  | First quarter of 2006                                               

24

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|                    |  |                                                                                                                                                             |  |                |  |                           |  |                      
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------------------- |  | ---------------------
|Product 
  Platform |  | Applications(1)                                                                                                                                             |  | Intended Users |  | Energy Sources            |  | Market
  Introduction
|                    |  |                                                                                                                                                             |  |                |  |                           |  |                      
|eMax                |  | Hair Removal 
  Rejuvenating the 
  skins appearance(2) 
  Acne 
  Wrinkles
  Leg Veins
  Other Vascular 
  Lesions and wrinkles 
  with the ST applicator |  | Physicians     |  | Light + RF /
  Laser + RF |  | First quarter of 2006



---

|    |                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                                                                                                                                                                                                    

Components of Our System

Each of our products
consists of the following components:

|  |                                
|- | -------------------------------
| | a compact, lightweight console;
|  |                                
| | one or more hand pieces; and   
|  |                                
| | our proprietary software.      

Control
Console.Our lightweight control console contains all
electronic components, including the RF and optical energy modules, a 110/220
volt power supply and a water cooling unit that cools the optical energy
source. The control console also houses the operator interface which consists
of a digital display and a user-friendly set-up mechanism.

Hand
pieces.Our hand pieces deliver RF and optical energy to the
treatment area and include the following components:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An optical energy source, either a diode laser or a
  flashlamp, as well as a mechanism to deliver the optical energy to the skin.                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | A bi-polar RF energy delivery mechanism consisting
  of two electrodes that enable the delivery of RF energy to the skin. The use
  of these RF electrodes allows for the continuous measurement of the
  temperature and resistance of the dermis, allowing real-time monitoring of
  the level of energy delivered in each individual pulse and minimizing patient
  discomfort as well as potential damage to the skin.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | An internal cooling mechanism consisting of a thermo
  electric component that provides an integrated cooling of the treatment area,
  thereby protecting the outer layer of the skin.                                                                                                                                                                                                                                    

The weight of the hand
piece is between one and two pounds, generally light enough to be held in one
hand. The lightweight nature and the ergonomic
design of the hand piece help prevent user fatigue, a problem typical of many
competing systems.

25

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Proprietary
Software.Our software permits the user to define treatment
parameters to be communicated throughout the system and controls the delivery
of RF and optical energy through the hand piece to the patient. In addition,
our software controls and manages system performance, system self-calibration,
system setup and detection of any malfunction of the system. Our users upgrade
their products through the purchase of additional treatment applicators and
corresponding software plugs.

Applications and Procedures

Our
products provide our customers with a broad range of applications among both
traditional procedures and emerging applications.

Hair
Removal.In a typical hair removal treatment, the target area
is first cleaned and shaved. The user, who is not generally a physician, then
applies either a water based spray or gel to help ensure optimal contact and
conductivity between the hand piece and the skin. Topical anesthetics are not
normally necessary in hair removal treatments. The user next applies the hand
piece to the target area and delivers an RF and optical pulse to the selected
area. Our ELOS technology uses the RF and optical energy to destroy the hair
follicles located in the dermis and sub-dermal layers. This procedure is
continued over the target area and can last from a few minutes to 45 minutes
depending on the size of the treatment area and the applicator in use. For
example, our continuous glide Comet system for high-volume hair removal centers
can complete an area the size of a persons back in 20 minutes. In general,
hair removal requires four to six treatments spaced three weeks apart for
permanent reduction. Our RF technology may be more effective for the removal of
all hair colors across all skin types. We received 510(k) FDA clearance for our
Aurora products for hair removal treatments in July 2002. Users perform hair
removal procedures with our Aurora, Pitanga, Polaris, Comet, Galaxy, eLight,
eLaser and eMax products. We received 510(k) FDA clearance for our Aurora and
Comet products for permanent hair reduction in October 2004.

Rejuvenating
the Skins Appearance.Generally performed by a physician,
rejuvenating the skins appearance through the treatment of superficial benign
vascular and pigmented lesions does not require the application of a topical
anesthetic. As a result of the externally applied energy, epidermal and dermal
pigmented and vascular lesions are destroyed. The skins appearance is
rejuvenated through the improvement of abnormalities in skin texture and the
elimination of sun damage, as well as other pigmented abnormalities and
superficial vascular lesions. Patients generally receive between four to five
treatments of approximately 30 minutes each. Treatments are spaced two to three
weeks apart. We received 510(k) FDA clearance for superficial vascular and
pigmented lesion treatments in October 2002. Users rejuvenate the skins
appearance with the Aurora, Pitanga, Galaxy, eLight, eLaser and eMax products.

Leg
Veins.The treatment of leg veins, which is generally
performed by a physician, sometimes requires topical anesthetic. Bi-polar RF
energy, when combined with optical pulse energy, selectively heats the target
in the dermis and damages the vein. Deeper veins are generally larger in
diameter. The enhanced depth of penetration of our technology enables the treatment
of visible veins up to 5 millimeters in diameter, compared to existing optical
technologies which typically treat veins of up to 2 millimeters in diameter.
Depending on the size and number of leg veins, procedures last between 20 and
30 minutes per treatment. Patients generally receive between two and four
treatments spaced over two to three weeks. We received 510(k) FDA clearance for
treatment of vascular lesions with the Polaris products in April 2003 (Polaris
LV). Users can treat vascular lesions with the Polaris and Galaxy as well as
eLaser and eMax products.

Our
products also treat aesthetic conditions not effectively treated by traditional
laser or light-based technologies. These conditions include:

Wrinkles.The treatment of wrinkles generally is performed by a
physician. Patients seeking treatment for wrinkles sometimes require topical
anesthetic. The combination of bi-polar RF and optical energies enables higher
selectivity to target the epidermis, deep dermis and connective tissues and
reduces the appearance of wrinkles in the face, neck and chest. Treatment for
wrinkles requires three to five sessions of approximately 30 minutes each,
spaced two to three weeks apart. We received 510(k) FDA clearance for wrinkle
treatments with the Polaris products in December 2003. Users can treat wrinkles
through our Polaris, Galaxy, eLight, eLaser and eMax products.

26

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Acne.The treatment of acne generally is performed by a physician
or a nurse. Our unique solution delivers a combined pulse of blue and infrared
light, and RF energy. This dual energy selectively targets overactive sebaceous
glands and acne bacteria, which are the primary causes of acne. Infrared light
and RF energy heat the sebaceous gland and reduce their activity and the
delivery of blue light photochemically damages acne bacteria, resulting in a
reduction in acne. Patients generally receive between six and ten treatments of
approximately 15 minutes each over a course of four to six weeks, and sometimes
undergo a periodic maintenance program. We received 510(k) FDA clearance for
acne treatments with the Aurora and the Pitanga products in January 2004. Users
can treat acne with our Aurora, Pitanga, Galaxy, eLight, and eMax products.

Cellulite.The treatment for the temporary reduction in the appearance
of cellulite generally will be performed by a non-physician trained
professional under the medical direction of a physician. The treatment for
temporary reduction in the appearance of cellulite combines the delivery of:

|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
| | RF energy  to gently heat the superficial layers
  below the skin;                              
|  |                                                                                                  
| | infrared optical energy  to heat the outer layer of
  the skin;                                 
|  |                                                                                                  
| | dynamic (pulsed) vacuum suction to massage the skin
  for safe and effective energy delivery; and
|  |                                                                                                  
| | tissue mobilization by rotating metal electrodes to
  help ensure optimal energy delivery.       

We
expect that treatment for temporary reduction in the appearance of cellulite
will require between six and ten treatments of approximately 30 to 45 minutes
each, depending on the treatment area.

In
June 2005, the FDA granted 510(k) clearance to our Vela platform for the
temporary reduction in the appearance of cellulite. The Vela also received
clearance for the relief of minor muscle aches, pain and spasm as well as the
temporary improvement of local blood circulation. In addition to the 510(k)
clearance, the FDA created a new product code for the Vela due to its technical
innovation. The Vela was cleared as a medical device and may therefore be only
sold in the United States to physicians for use by trained professionals under
a physicians medical direction.

Product Upgrades

Our
product design enables our customers to add additional applications and new
technologies without incurring the cost of purchasing a new system. This
provides our customers with a cost effective method of adding new applications
to their existing products and provides us with a source of recurring revenue.
When we introduce a new product application, we notify our customers of the
upgrade opportunity. Our products allow our customers to quickly install the
upgrade through the removal and replacement of a small software plug and the
installation of a new hand piece without the need for an on-site service technician.
The use of a software plug provides a significant advantage over competing
products, which typically require a field service representative to install the
upgrade at the customer site and results in downtime for the customer.

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.

27

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We
sell our products in 46 countries around the world through a combination of 42
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 55 individuals. Our U.S.
and Canadian sales efforts are headquartered in Toronto and we manage seven
separate territories through New York, Louisiana, Chicago, Illinois, Los Angeles,
Orange county, and Toronto. 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 four countries in
Latin America.

In
2005, we have entered into a strategic distribution agreement with Miracle
Laser, a powerful distributor of high-end light technologies for aesthetic
medicine in China

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.

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 three 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 subcontractors 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.

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Research and Development

Our
research and development activities are conducted internally by a research and
development staff consisting of ­­24 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 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 $1.2 million
in 2002, $1.7 million in 2003, $3.1 million in 2004, and $ 5 million in 2005.
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. We own six issued U.S. patents, one of which was purchased in
December 2004, and we have ten patent applications pending in the United
States. 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, it 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. All of our patent applications have
been filed, and we expect to file our future patent applications, in the United
States, and we also have filed, or intend to file, foreign counterpart
applications in Europe, certain countries in South America and Japan. 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.

29

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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, Laserscope, Lumenis Ltd.,
Cutera, Inc., Cynosure, Inc. and Palomar Medical Technologies, Inc., as well as
by private companies such as Sciton, Inc., Radiancy Inc., Thermage, 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.

Revenues by Geographic Market

|                 |  |                        |                  |      |            |      |      |                  |  |            |        |  |                  |  |            |   |  |   |        |  |  |  |      |   | 
|---------------- |  | ---------------------- | ---------------- | ---- | ---------- | ---- | ---- | ---------------- |  | ---------- | ------ |  | ---------------- |  | ---------- | - |  | - | ------ |  |  |  | ---- | - | 
|Region           |  | Year ended December 31 |                 
|                 |  |                        |                 
|                 |  |                        |                  |      |            |      |      |                  |  |            |        |  |                  |  |            |   |  |   |        |  | 
|                 |  | 2003                   |                  | 2004 |            | 2005 |     
|                 |  |                        |                  |      |            |      |     
|                 |  |                        |                  |      |            |      |      |                  |  |            |        |  |                  |  |            |   |  |   |        |  | 
|                 |  |                        | USD in
thousands |      | Percentage |      |      | USD in
thousands |  | Percentage |        |  | USD in
thousands |  | Percentage |  
|                 |  |                        |                  |      |            |      |      |                  |  |            |        |  |                  |  |            |   |  |   |        |  | 
|North
  America  |  | $                      | 21,247           |      |            |      | 60.7 | %                |  | $          | 32,550 |  |                  |  | 56.2       | % |  | $ | 54,406 |  |  |  | 62.2 | % | 
|Asia-Pacific     |  |                        | 7,130            |      |            |      | 20.4 |                  |  |            | 14,327 |  |                  |  | 24.7       |   |  |   | 16,609 |  |  |  | 19.0 |   | 
|Western
  Europe |  |                        | 6,410            |      |            |      | 18.3 |                  |  |            | 9,915  |  |                  |  | 17.1       |   |  |   | 13,984 |  |  |  | 16.0 |   | 
|Israel           |  |                        | 160              |      |            |      | 0.4  |                  |  |            | 625    |  |                  |  | 1.1        |   |  |   | 1,730  |  |  |  | 2.0  |   | 
|Other            |  |                        | 74               |      |            |      | 0.2  |                  |  |            | 501    |  |                  |  | 0.9        |   |  |   | 677    |  |  |  | 0.8  |   | 
|Total            |  |                        | 35,021           |      |            |      | 100  |                  |  |            | 57,918 |  |                  |  | 100        |   |  |   | 87,406 |  |  |  | 100  |   | 

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;         

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| |   |                                 
| | - | --------------------------------
| |  | 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.

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. 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.

One
device that we have developed, the Vela, required 510(k) clearance or premarket
approval. 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.

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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 are violative of applicable regulatory
  requirements;
| |   |                                                                                                                                          
| |  | 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.

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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.

|   |                           
|-- | --------------------------
|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 May 2006. 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.

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|   |                                 
|-- | --------------------------------
|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 2006. We occupy approximately 9,400 square feet in this leased
facility in Yokneam. We also lease another approximately 1,200 square feet
facility in the town of Binyamina under a lease that expires in May 2007. Our
Canadian subsidiary leases a 6,244 square feet facility and another 2,667
square feet facility, both in Richmond Hill, Ontario, Canada pursuant to leases
that expire in October 2006 and October 2010, respectively. 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 5,100 square foot
facility in Irvine, California pursuant to a lease that expires in June 2007.
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 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 Electro-Optical Synergy, or ELOS, technology, which uses the
synergy between electrical energy and optical energy to provide effective, safe
and affordable aesthetic medical treatments. Our products, which we sell
primarily to physicians and other 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.

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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 55 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 have received 510(k) clearance from the FDA.

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.

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We
generate our revenues primarily from the sales of our ELOS-based medical
aesthetic equipment. For the year ended December 31, 2005 our revenues totaled
$87.4 million. From inception through December 31, 2005, we sold over 4,500
products worldwide. In 2005, we derived approximately 6.8% of our revenue from
the recognition of product warranty and 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, 2005, we derived 37.8% of our revenue from sales of our products
outside North America through a combination of direct and distributor sales..
As of December 31, 2005, we had approximately 43 salespeople in North America,
and distributors in more than 40 countries and as of March 31, 2006, we had
approximately 55 salespeople in North America, and distributors in more than 42
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, 2004 and 2005:

|              |  |                                  |                                  |   |  |       |  
|------------- |  | -------------------------------- | -------------------------------- | - |  | ----- | -
|              |  | Percent of Sales                
|              |  |                                  |                                 
|Region        |  | Year ended
  December
  31, 2004 | Year ended
  December
  31, 2005
|              |  |                                  |                                  |   | 
|North America |  |                                  | 56.2                             | % |  | 62.2  | %
|Asia-Pacific  |  |                                  | 24.7                             |   |  | 19.0  |  
|Europe        |  |                                  | 17.1                             |   |  | 16.0  |  
|Other         |  |                                  | 2.0                              |   |  | 2.8   |  
|Total         |  |                                  | 100.0                            | % |  | 100.0 | %

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 2004 to 2005 due to increase
in sales of products that are more expensive to manufacture. 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.

36

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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

Interest
income and other income consists primarily of interest earned on cash, cash equivalents,
deposits and marketable securities, as well as the remeasurement of our
subsidiaries financial statements in Germany into U.S. dollars.

Taxes on Income

In
2002, our facilities in Israel were granted the status of Approved
Enterprise, entitling us to a ten-year exemption from Israeli corporate tax.
The Approved Enterprise status only allows corporate tax exemptions on
profits generated from operations, requiring regular Israeli corporate tax on
income generated from other sources. We will seek to maintain the Approved
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 and service costs, income taxes 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.            

37

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Revenue
from product sales to end users in North America usually includes multiple
elements within a single contract. We 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 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.

Stock-Based
Compensation. In
December 2004, the Financial Accounting Standards Board issued Statement No.
123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which replaces SFAS 123 and supersedes
APB 25. SFAS No. 123(R) requires
all share-based compensation to employees, including grants of employee stock
options, to be recognized in the financial statements based upon fair value,
beginning with the first interim or annual period after December 15, 2005, with
early adoption encouraged. We have the option to choose either the modified
prospective or modified prospective method. We have adopted SFAS No.
123(R), using the modified
prospective method of adoption which requires that compensation expense be
recorded over the expected remaining life of all unvested stock options and
restricted stock and for any new grants thereof at the beginning of the first
quarter of adoption of SFAS No. 123(R). We are currently evaluating the impact FAS 123(R) will have on our
financial statements, and based on our preliminary analysis, we expect that,
the adoption of this standard will reduce our net income in 2006 by $2.8
million. This estimate is based on the number of options currently outstanding
and exercisable and could change based on the number of options granted or
forfeited in fiscal 2006.

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.

38

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Warranty
and Service Costs We
generally provide a one- to three-years standard warranty with our products
with no service obligation attached, 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 to repair or replace products under warranty at the time of
sale.

Results of Operations

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 Expenses.

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.

39

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Years Ended December 31, 2003 and December 31, 2004

Revenues.Revenues increased $22.9 million, from $35.0 million in 2003
to $57.9 million in 2004, or 65%. The increase was primarily attributable to
increased unit sales due to increased market acceptance of Syneron products and
increased Polaris sales in the United States and the rest of the world, the
commercial launch of the Galaxy and the Comet, increased unit sales in Europe
due to the addition of more European countries to the sales and marketing
network, and increased sales in Asia-Pacific due to the establishment of a
distributors network in 11 Asian-Pacific countries.

Cost
of Revenues.Cost of revenues increased $2.5 million, from
$4.4 million in 2003 to $6.9 million in 2004. The increase in cost of revenues
was primarily attributable to the increase in the number of products
manufactured and sold in 2004. As a percentage of revenue, cost of revenues
decreased from 12.9% in 2003 to 11.7% in 2004 due to lower average fixed costs
and improved pricing from suppliers as a result of an increase in sales volume.

Research
and Development Expenses.Research and development expenses
increased $1.4 million, from $1.7 million in 2003 to $3.1 million in 2004. As a
percentage of revenues, research and development expenses increased from 4.9%
in 2003 to 5.3% in 2004. 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 $5.7 million, from $13.9 million in 2003 to
$19.6 million in 2004. 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 39.7% in 2003 to 33.9% in 2004. This decrease
was primarily due to the increase in our sales in 2004 and to the investment in
our North American selling and marketing operations in 2003.

General
and Administrative Expenses.General and administrative
expenses increased $1.8 million, from $0.9 million in 2003 to $2.7 million in
2004. 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 and to litigation expenses in
connection with the Thermage litigation. As a percentage of revenues, general
and administrative expenses increased from 2.5% in 2003 to 4.7% in 2004.

Settlement
and Legal Costs.Expenses of $6.2 million in 2003 were
attributable to settlement and litigation costs associated with Lumenis Ltd. Of
the $6.2 million in 2003, $4.2 million related to license fees under the
license and settlement agreement with Lumenis Ltd. The balance consisted of
legal expenses related to the litigation.

Financial
Income.Financial income increased $1.5 million, from $0.9
million in 2003 to $2.4 million in 2004. The increase in financial income was
primarily attributable to interest earned on our increasing cash balances and
investments in 2004. As a percentage of revenues, financial income increased
from 2.5% in 2003 to 4.1% in 2004.

Taxes
on Income.Income taxes increased $0.4 million, from $0.2
million in 2003 to $0.6 million in 2004. 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. Our subsidiaries had loss
carryforwards of approximately $4.0 million in 2004 as compared to
approximately $5.8 million in 2003. 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.

40

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Deferred Stock-Based Compensation

We
record deferred stock-based compensation for financial reporting purposes under
the guidance of Accounting Principles Board Statement No. 25, Accounting for
Stock Options Issued to Employees and provide pro forma information under
Statement for Financial Accounting Standards No. 123 Accounting for
Stock-Based Compensation. (See Note 2(m) to the Notes to our Consolidated
Financial Statements). We grant options to our employees, directors and
consultants. 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. Deferred
stock-based compensation granted from 2001 through December 31, 2005 was $1.35
million, with accumulated amortization of $1.0 million. The remaining $0.20
million will be amortized over the vesting periods of the options, generally
three to four years from the date of grant. We expect to record amortization
expense for employee and director deferred stock-based compensation as follows:

|     |  |        |              | 
|---- |  | ------ | ------------ | 
|Year |  | Amount |             
|     |  |        |             
|     |  |        |              | 
|2006 |  | $      | 0.10 million | 
|2007 |  | $      | 0.10 million | 

In
2006, we implemented Financial Accounting Standards Board (FASB) Statement No.
123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). Pursuant to SFAS No. 123(R) we will recognize compensation
costs related to employee stock option plans based on the fair value of the
options, which increased the expenditures associated with our incentive stock
option plan.

Quarterly Results of Operations

The
following table presents our unaudited quarterly results of operations for the
eight quarters in the period ended December 31, 2005. This unaudited
information has been prepared on the same basis as our annual audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the unaudited
information for the quarters presented. You should read this information
together with the audited consolidated financial statements and the related
notes included elsewhere in this annual report. The operating results for any
quarter are not necessarily indicative of the results for any future quarters
or for a full year. As an accommodation to our customers we sell accessory
devices manufactured, sold and serviced by others at the same prices that such
devices can be purchased from the manufacturers representatives. In connection
with preparing our 2004 financial statements, we decided to include the net
amount received from such sales in revenues in accordance with EITF 99-19.
Prior to this decision, revenues for the quarters ended March 31, June 30 and
September 30, 2004 had been reported on the basis of including the full sales
price of accessories in revenues and the associated cost in cost of revenues.
As a result, revenues and cost of revenues as previously reported were each
$180 greater in the quarter ended March 31, 2004, $350 greater in the quarter
ended June 30, 2004 and $236 greater in the quarter ended September 30, 2004.
Sales of accessories were not significant prior to the quarter ended March 31,
2004.

41

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|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|-------------------------------------------------------------------------- |  | ---------------------------- | ------ | --------------- | - | --------------- | - | --------------- | ------ | -------------- | - | --------------- | - | --------------- | ------ | --------------- | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                           |  | Three months ended           |       
|                                                                           |  | Mar 31,
  2004               |        | June 30,
  2004 |   | Sept 30,
  2004 |   | Dec 31, 
  2004 |        | Mar 31,
  2005 |   | June 30,
  2005 |   | Sept 30,
  2005 |        | Dec 31, 
  2005 |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |  
|                                                                           |  | (unaudited)
  (in thousands) |       
|Revenues                                                                   |  | $                            | 12,130 |                 | $ | 13,367          |   | $               | 14,908 |                | $ | 17,513          |   | $               | 18,509 |                 | $ | 20,132 |   | $ | 25,030 |   | $ | 23,735 |  
|Cost of revenues                                                           |  |                              | 1,440  |                 |   | 1,409           |   |                 | 1,715  |                |   | 2,350           |   |                 | 2,581  |                 |   | 2,658  |   |   | 3,091  |   |   | 3,098  |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Gross profit                                                               |  |                              | 10,690 |                 |   | 11,958          |   |                 | 13,193 |                |   | 15,163          |   |                 | 15,928 |                 |   | 17,474 |   |   | 21,939 |   |   | 20,637 |  
|Operating expenses:                                                        |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Research and development,
  net                                            |  |                              | 647    |                 |   | 506             |   |                 | 806    |                |   | 1,119           |   |                 | 991    |                 |   | 1,256  |   |   | 1,450  |   |   | 1,333  |  
|Selling and marketing, net                                                 |  |                              | 4,455  |                 |   | 4,736           |   |                 | 4,866  |                |   | 5,568           |   |                 | 5,850  |                 |   | 6,615  |   |   | 5,990  |   |   | 6,733  |  
|General and administrative                                                 |  |                              | 243    |                 |   | 396             |   |                 | 852    |                |   | 1,234           |   |                 | 716    |                 |   | 751    |   |   | 883    |   |   | 1,184  |  
|Settlement and legal costs                                                 |  |                              |       |                 |   |                |   |                 |       |                |   |                |   |                 | 1,124  |                 |   | 2,370  |   |   |        |   |   | -      |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Total operating expenses                                                   |  |                              | 5,345  |                 |   | 5,638           |   |                 | 6,524  |                |   | 7,921           |   |                 | 8,681  |                 |   | 10,992 |   |   | 8,323  |   |   | 9,250  |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Operating income (loss)                                                    |  |                              | 5,345  |                 |   | 6,320           |   |                 | 6,669  |                |   | 7,242           |   |                 | 7,247  |                 |   | 6,482  |   |   | 13,616 |   |   | 11,387 |  
|Financial income (expense),
  net                                          |  |                              | 163    |                 |   | 235             |   |                 | 756    |                |   | 1,230           |   |                 | 354    |                 |   | 494    |   |   | 1,177  |   |   | 1,056  |  
|Income (loss) before taxes
  on income                                     |  |                              | 5,508  |                 |   | 6,555           |   |                 | 7,425  |                |   | 8,472           |   |                 | 7,601  |                 |   | 6,976  |   |   | 14,793 |   |   | 12,443 |  
|Taxes on income                                                            |  |                              | 45     |                 |   | 120             |   |                 | 175    |                |   | 280             |   |                 | 100    |                 |   | 100    |   |   | 150    |   |   | 400    |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Net income (loss)                                                          |  | $                            | 5,463  |                 | $ | 6,435           |   | $               | 7,250  |                | $ | 8,192           |   | $               | 7,501  |                 | $ | 6,876  |   | $ | 14,643 |   | $ | 12,043 |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Net earnings (loss) per
  share:                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Basic                                                                      |  | $                            | 0.32   |                 | $ | 0.39            |   | $               | 0.37   |                | $ | 0.37            |   | $               | 0.32   |                 | $ | 0.28   |   | $ | 0.58   |   | $ | 0.46   |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Diluted                                                                    |  | $                            | 0.26   |                 | $ | 0.30            |   | $               | 0.29   |                | $ | 0.30            |   | $               | 0.27   |                 | $ | 0.25   |   | $ | 0.53   |   | $ | 0.43   |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Weighted-average number of
  shares used in actual per share calculations: |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Basic                                                                      |  |                              | 17,006 |                 |   | 16,534          |   |                 | 19,719 |                |   | 22,001          |   |                 | 23,616 |                 |   | 24,634 |   |   | 25,105 |   |   | 26,162 |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Diluted                                                                    |  |                              | 21,232 |                 |   | 21,113          |   |                 | 25,006 |                |   | 27,207          |   |                 | 27,380 |                 |   | 27,555 |   |   | 27,605 |   |   | 27,742 |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|As a
  Percentage of Total Sales:                                          |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Revenues                                                                   |  |                              | 100    | %               |   | 100             | % |                 | 100    | %              |   | 100             | % |                 | 100    | %               |   | 100    | % |   | 100    | % |   | 100    | %
|Cost of revenues                                                           |  |                              | 11.9   |                 |   | 10.5            |   |                 | 11.5   |                |   | 13.4            |   |                 | 13.9   |                 |   | 13.2   |   |   | 12.3   |   |   | 13.1   |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Gross profit                                                               |  |                              | 88.1   |                 |   | 89.5            |   |                 | 88.5   |                |   | 86.6            |   |                 | 86.1   |                 |   | 86.8   |   |   | 87.7   |   |   | 86.9   |  
|Operating expenses:                                                        |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Research and development,
  net                                            |  |                              | 5.3    |                 |   | 3.8             |   |                 | 5.4    |                |   | 6.4             |   |                 | 5.4    |                 |   | 6.2    |   |   | 5.8    |   |   | 5.6    |  
|Selling and marketing, net                                                 |  |                              | 36.7   |                 |   | 35.4            |   |                 | 32.6   |                |   | 31.8            |   |                 | 31.6   |                 |   | 32.9   |   |   | 23.9   |   |   | 28.4   |  
|General and administrative                                                 |  |                              | 2      |                 |   | 3               |   |                 | 5.7    |                |   | 7               |   |                 | 3.9    |                 |   | 3.7    |   |   | 3.5    |   |   | 5.0    |  
|Settlement and legal costs                                                 |  |                              |       |                 |   |                |   |                 |       |                |   |                |   |                 | 6.1    |                 |   | 11.8   |   |   |       |   |   |       |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Total operating expenses                                                   |  |                              | 44.1   |                 |   | 42.2            |   |                 | 43.8   |                |   | 45.2            |   |                 | 46.9   |                 |   | 54.6   |   |   | 33.3   |   |   | 39.0   |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Operating income (loss)                                                    |  |                              | 44.1   |                 |   | 47.3            |   |                 | 44.7   |                |   | 41.4            |   |                 | 39.2   |                 |   | 32.2   |   |   | 54.4   |   |   | 48.0   |  
|Financial income (expense),
  net                                          |  |                              | 1.3    |                 |   | 1.8             |   |                 | 5.1    |                |   | 7               |   |                 | 1.9    |                 |   | 2.5    |   |   | 4.7    |   |   | 4.4    |  
|Income (loss) before taxes
  on income                                     |  |                              | 45.4   |                 |   | 49              |   |                 | 49.8   |                |   | 48.4            |   |                 | 41.1   |                 |   | 34.7   |   |   | 59.1   |   |   | 52.4   |  
|Taxes on income                                                            |  |                              | 0.4    |                 |   | 0.9             |   |                 | 1.2    |                |   | 1.6             |   |                 | 0.5    |                 |   | 0.5    |   |   | 0.6    |   |   | 1.7    |  
|                                                                           |  |                              |        |                 |   |                 |   |                 |        |                |   |                 |   |                 |        |                 |   |        |   |   |        |   |   |        |  
|Net income (loss)                                                          |  |                              | 45     | %               |   | 48.1            | % |                 | 48.6   | %              |   | 46.8            | % |                 | 40.5   | %               |   | 34.2   | % |   | 58.5   | % |   | 50.7   | %

42

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We
expect that the amount and timing of our sales expenses will vary from quarter
to quarter depending on our level of actual and anticipated business
activities.

Our
sales and operating results are difficult to forecast and will fluctuate, and
we believe that period-to-period comparisons of our operating results will not
necessarily be meaningful. See Item 3.D Risk Factors  Our quarterly operating
results are likely to fluctuate, which could cause us to miss expectations
about these results and cause the trading price of our ordinary shares to
decline.

|   |                                  
|-- | ---------------------------------
|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 March 31, 2006, we did not have any outstanding or available debt financing
arrangements. As of December 31, 2005, we had working capital of $144.5
million, and our primary source of liquidity was $134.1 million in cash, cash
equivalents and marketable securities and cash flow from operations.

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 $2.3 million in 2002, is $14.4 million in 2003 and
$22.6 million in 2004 and $31.3 million in 2005. 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 2005, trade
receivables, other account receivables and prepaid expenses, and other accrued
liabilities increased significantly as a result of increased sales. In addition, other account receivable and prepaid
expenses and other accrues liabilities increased due to option exercise
withholding tax balances. 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 was $(0.3) million in 2002, $(12.0) million in 2003, $(70.0) million
in 2004 and $(42.4) million in 2005. 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, 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 patent,
software, manufacturing equipment and general equipment. We expect our capital
expenditures in 2006 will be approximately $1 million and will consist of the
same types of capital expenditures that we had in 2005.

43

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Net
Cash Provided By (Used in) Financing Activities.Net cash
provided by (used in) financing activities was $1.3 million in 2002, $(0.4)
million in 2003 and $53.7 million in 2004 and $11.7 million in 2005.  The use of cash in 2003 was primarily attributable
to the repurchase of a portion of our preferred shares and the repayment of our
outstanding indebtedness. 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.

|   |                                                       
|-- | ------------------------------------------------------
|C. | RESEARCH AND
  DEVELOPMENT, PATENTS AND LICENSES, ETC.

Our
research and development activities are conducted internally by a research and
development staff consisting of ­­24 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 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 $1.2 million
in 2002, $1.9 million in 2003, $3.1 million in 2004, and $ 5.0 million in 2005.
We expect to continue to increase our expenditures on research and development.

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

In
2005, we continued our sales momentum and increased sales from $58 million in
2004 to $88 million in 2005. The increase in sales is attributed to the
introduction of new platforms to our portfolio (the Comet, the Vela and the
Galaxy) and to the expansion of our marketing and sales network in Asia, Europe
and South America. In 2005, we received a 510(k) premarket clearance from the
FDA for our Vela platform and believe that our ability to market and sell this
platform in the United States would further increase our sales in the future.

In
2005, we increased our production capacity through all three outsourcing
companies that are serving Syneron as sub-contractors. In 2005, 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.

44

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|   |                                                
|-- | -----------------------------------------------
|F. | TABULAR
  DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table summarizes our contractual commitments as of December 31, 2005
and the effect those commitments are expected to have on our liquidity and cash
flow in future periods:

|                        |  |                          |     |                    |   |           |  |           |     |                     |   |    |  |   |   | 
|----------------------- |  | ------------------------ | --- | ------------------ | - | --------- |  | --------- | --- | ------------------- | - | -- |  | - | - | 
|                        |  | Payments
  Due by Period |    
|Contractual Commitments |  | Total                    |     | Less than
  1 year |   | 13 years |  | 35 years |     | More than
  5 years |  
|                        |  | (in
  thousands)         |    
|                        |  |                          |    
|Operating leases        |  | $                        | 986 |                    | $ | 534       |  | $         | 370 |                     | $ | 82 |  | $ |  | 

|        |                                             
|------- | --------------------------------------------
|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, 2006:

|                     |  |     |  |                                                           
|-------------------- |  | --- |  | ----------------------------------------------------------
|Name                 |  | Age |  | Position(s)                                               
|Dr. Shimon Eckhouse  |  | 61  |  | Chairman of the Board of Directors and Director           
|Dr. Michael Kreindel |  | 39  |  | Chief Technology Officer and Director                     
|David Schlachet      |  | 61  |  | Chief Executive Officer                                   
|David Seligman       |  | 47  |  | Chief Financial Officer                                   
|Doron Gerstel        |  | 46  |  | President of Syneron Inc. and Syneron Canada
  Corporation
|Marshall Butler      |  | 79  |  | Director                                                  
|Dr. Michael Anghel   |  | 67  |  | External Director                                         
|Yaffa Krindel        |  | 51  |  | Director                                                  
|Dan Suesskind        |  | 62  |  | 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.

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.

David
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.

45

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David
Seligman has served as our chief financial officer since
February 2006.  Prior to that Mr.
Seligman served as the chief financial officer of NUR Macroprinters Ltd.
(Nasdaq: NURM) from October 2003 to October 2005.  Prior to joining NUR Macroprinters, Mr. Seligman served as chief
financial officer of RADVISION Ltd. (Nasdaq: RVSN) from November 1999 until
August 2003. Prior to that, he was chief financial officer for LanOptics Ltd.
(Nasdaq: LNOP), a senior financial analyst for Fidelity Investment Systems
Company in Boston, Massachusetts, and served as a controller and financial
analyst for several hi-tech companies. Mr. Seligman holds a B.A. degree in
political science and geography, and a M.B.A. degree in accounting and finance,
both from Tel-Aviv University.

Doron
Gerstel is the 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 MBA from Tel Aviv University.

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.

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.

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.

46

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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, 2005 was approximately $213,200. 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 (four persons, including Mr. Domenic Serafino, the previous President of
Syneron Inc. and Syneron Canada Corporation, who took a leave of absence from
Syneron for personal reasons as of April 27, 2006) for the year ended December
31, 2005 was approximately $1.0 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 2005, other than reimbursements for travel expenses.

As
of March 31, 2006, there were outstanding options to purchase 373,000 ordinary
shares granted to our directors and officers (five persons), at exercise prices
ranging from $0.07 to $25.75, 300,000 of these options shall expire in the year
2010, 69,000 of these option shall expire in the year 2011, and 4,000 of these
options shall expire in the year 2012. The Board also approved options to
purchase 58,000 of our ordinary shares, subject to shareholder approval.  These options, if approved by our
shareholders and granted, will 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 11 and no fewer
than three directors. Our board of directors consists of six 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 2006, the term of the second class, consisting of Mr. Butler and Ms. Yaffa
Krindel a director elected by the Board as a replacement of Dr. Ron, who
resigned from the board of directors in May 2005, will expire and the directors
elected at that meeting will be elected for three-year terms. 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).

47

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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.

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.

48

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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 National Market, we also are required to maintain an audit committee of
at least three members, all of whom are independent directors under the Nasdaq
National Market listing requirements. The rules of the Nasdaq National 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 National 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 National
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.

49

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

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

|                                          |  |                     |    |      |  |      |  |  |     | 
|----------------------------------------- |  | ------------------- | -- | ---- |  | ---- |  |  | --- | 
|                                          |  | As of
  December 31 |   
|                                          |  |                     |   
|                                          |  | 2003                |    | 2004 |  | 2005 | 
|                                          |  |                     |    |      |  |      | 
|Management, administration and operations |  |                     | 17 |      |  | 37   |  |  | 39  | 
|Research and development                  |  |                     | 11 |      |  | 23   |  |  | 24  | 
|Selling and marketing                     |  |                     | 28 |      |  | 56   |  |  | 83  | 
|Total                                     |  |                     | 56 |      |  | 116  |  |  | 146 | 
|                                          |  |                     |    |      |  |      |  |  |     | 
|                                          |  |                     |    |      |  |      |  |  |     | 
|Israel                                    |  |                     | 20 |      |  | 34   |  |  | 40  | 
|North America                             |  |                     | 29 |      |  | 72   |  |  | 94  | 
|Asia-Pacific                              |  |                     | 1  |      |  | 2    |  |  | 3   | 
|Germany                                   |  |                     | 6  |      |  | 8    |  |  | 9   | 

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, 2005, our accrued severance pay funds totaled $0.2 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 March 31, 2006 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 March 31, 2006 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.

50

---

---



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 27,161,704 ordinary shares outstanding
on March 31, 2006.

|                                                              |  |        |           |         |  |       |  
|------------------------------------------------------------- |  | ------ | --------- | ------- |  | ----- | -
|                                                              |  | Number |           | Percent | 
|Executive
  Officers and Directors:                           |  |        |           |         |  |       |  
|Dr. Shimon Eckhouse(1)                                        |  |        | 2,629,147 |         |  | 9.68  | %
|Dr. Michael Kreindel (2)                                      |  |        | 2,079,000 |         |  | 7.65  | %
|Domenic Serafino(3)                                           |  |        | 649,286   |         |  | 2.36  | %
|Marshall Butler                                               |  |        | *         |         |  | *     | %
|David Schlachet                                               |  |        | *         |         |  | *     | %
|Dan Suesskind                                                 |  |        | *         |         |  | *     | %
|Dr. Michael Anghel                                            |  |        | *         |         |  | *     | %
|David Seligman                                                |  |        | *         |         |  | *     | %
|Yaffa Krindel                                                 |  |        | *         |         |  | *     | %
|All directors and executive officers as a group (9
  persons) |  |        | 5,477,700 |         |  | 19.90 | %

|                      | 
|--------------------- | 
|* equals less than 1% | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 2,287,331 shares held by Starlight Capital
  Ltd. and 341,816 shares held by European High-Tech Capital S.A., which are
  corporations wholly owned by foundations that were created for the benefit of
  members of Dr. Eckhouses family. Dr. Eckhouse disclaims beneficial ownership
  of these shares.                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(2) | Includes 2,079,000 shares held by Cititrust Bahamas
  Ltd. as Trustee for TR-30777, for which Dr. Kreindel is the beneficiary.                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | Includes options to purchase 300,000 ordinary shares
  that are exercisable within 60 days of March 31, 2006, with an exercise price
  of $0.08 and that expire in December 2010; and includes options to purchase
  20,000 ordinary shares that are exercisable within 60 days of March 31, 2006,
  with an exercise price of $25.75 per share and that expire in December 2011.
  Mr. Serafino took a leave of absence from Syneron for personal reasons as of
  April 27, 2006.

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, 2005, we had 1,079,897 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, 2004, we had 664,000 options outstanding.
During the year ended December 31, 2005, we granted 520,504 options under the
2004 Plans.

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 or the compensation committee. Any expired
or terminated options return to the plan and are automatically cancelled.

51

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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.

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 March 31, 2006, regarding the
beneficial ownership of our ordinary shares by each person or entity that we
know beneficially owns more than 5% 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 27,161,704 ordinary shares outstanding
as of March 31, 2006.

|                                 |  |        |           |            |  |       | 
|-------------------------------- |  | ------ | --------- | ---------- |  | ----- | 
|                                 |  | Shares |           | Percentage | 
|                                
|Dr. Michael Kreindel (1)         |  |        | 2,079,000 |            |  | 7.65% | 
|Starlight Capital Ltd.(2)        |  |        | 2,287,331 |            |  | 8.42% | 
|Sprott Asset Management Inc. (3) |  |        | 1,370,250 |            |  | 5.04% | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 2,079,000 shares held by Cititrust Bahamas
  Ltd. as Trustee for TR-30777, for which Dr. Kreindel is the beneficiary.                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | 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.

52

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|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | In April 2006, Sprott Asset Management Inc. filed a
  Schedule 13G indicating that it no longer has beneficial ownership of more
  than 5% of our outstanding ordinary shares.

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 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, and 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.

To
our knowledge, as of March 31, 2006, 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 83.18%* of our
outstanding shares.




* Includes the Depository Trust Company


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

Registration Rights

Our
underwritten secondary offering of March 2005 covered 4,701,424 of the
13,422,649 ordinary shares held by holders entitled to registration
rights.  Out of this quantity only
2,794,957 ordinary shares remain which are held by holders entitled to
registration rights, due to sales made according to applicable exemptions from
registration. 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 holders are entitled to notice of such registration and
are entitled to include their remaining ordinary shares in such registration,
subject to certain marketing cutbacks and other limitations. After our
underwritten secondary offering of March 2005, the holders of at least 50% of
these securities 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.

|   |                                   
|-- | ----------------------------------
|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, 2005
are included in this annual report under Item 18.

53

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Legal
Proceedings.

On
July 23, 2004, Thermage, Inc. sued us in the United States District Court for
the Northern District of California, for patent infringement, seeking an
injunction against infringing their patent rights and unspecified damages. A
preliminary injunction sought by Thermage against the sale of our Polaris WR
wrinkle treatment device in the United States was denied. Thermage subsequently
amended its complaint to include claims of infringement of five additional
patents. We denied Thermages allegations and filed a counterclaim for
injunctive relief and damages, alleging that Thermage is infringing a patent we
acquired in 2004. In June 2005, we reached an agreement with Thermage which
settled both parties claims 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. Both parties admitted validity of all patents
in the litigation, but neither admitted any wrongdoing or liability.

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.  Recently, the
dispute was referred, by the court, to mediation and the parties are attempting
to resolve the dispute. There can be no assurance that the mediation could
successfully resolve the dispute or if resolution was reached, that the outcome
is favorable to us. We and our legal advisors believe that we have good
defenses against Shaldots claims, and we intend to defend Syneron vigorously.
No reserve was recorded in the financial statement with respect to this claim.

In
September 2005 and in further dates hereafter, three several plaintiffs filed a
complaint in which we and Syneron Inc. are named as co-defendants along with
nine other third party defendants. The three plaintiffs are African-American women
who allege they were burned while receiving laser hair removal treatments from
one of our customers, administered using our product. In addition to
traditional product liability and negligence theories, the complaint alleges
theories of product liability fraud, negligent misrepresentation, sale of a
dangerous prescriptive device and intentional race discrimination. Defense of
this litigation is being funded and controlled by an insurance company which
issued a policy to Syneron Inc. which we are an additional insured through a
controlling interest endorsement. However, there is the possibility that the
court could conclude that the race discrimination claim is not covered by the
insurance policy. Our subsidiary has appeared in the litigation and the complaints
allegations are being vigorously contested. We have not yet been served, but
when served, we also intend to vigorously contest the complaints allegations.
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.

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 reservation of rights.
Although there appears to be a likelihood that Syneron Inc. will have indemnity
coverage for this lawsuit and it is currently being provided a defense, there
is the possibility that the court could conclude that the TCPA class action
claim against Syneron Inc. is not covered by the insurance policy. We are
unable, at this time, to determine the likely outcome of this matter. 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.

54

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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

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

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

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

The
following table sets forth, for the periods indicated, the high and low sales
prices of our ordinary shares as reported by the Nasdaq National Market.

|                            |  |                                             |       |     |   |       | 
|--------------------------- |  | ------------------------------------------- | ----- | --- | - | ----- | 
|                            |  | PRICE PER
  ORDINARY 
  SHARE (USD)(NASDAQ) |      
|                            |  |                                             |      
|                            |  | HIGH                                        |       | LOW |  
|                            |  |                                             |       |     |  
|During the last year:       |  |                                             |       |     |   |       | 
|2005                        |  | $                                           | 46.91 |     | $ | 23.05 | 
|                            |  |                                             |       |     |   |       | 
|During the last six months: |  |                                             |       |     |   |       | 
|November 2005               |  |                                             | 43.34 |     |   | 35.75 | 
|December 2005               |  |                                             | 46.91 |     |   | 31.48 | 
|January 2006                |  |                                             | 32.72 |     |   | 25.40 | 
|February 2006               |  |                                             | 29.62 |     |   | 26.51 | 
|March 2006                  |  |                                             | 31.49 |     |   | 26.62 | 
|April 2006                  |  |                                             | 30.95 |     |   | 25.67 | 
|May 2006                    |  |                                             | 27.39 |     |   | 19.20 | 

|   |                                                                                        
|-- | ---------------------------------------------------------------------------------------
|B. | PLAN OF
  DISTRIBUTION                                                                 
|   |                                                                                        
|   | Not applicable.                                                                        
|   |                                                                                        
|C. | MARKETS                                                                                
|   |                                                                                        
|   | Our ordinary shares are quoted on the Nasdaq
  National Market under the symbol ELOS.
|   |                                                                                        
|D. | SELLING
  SHAREHOLDERS                                                                 
|   |                                                                                        
|   | Not applicable.                                                                        
|   |                                                                                        
|E. | DILUTION                                                                               
|   |                                                                                        
|   | Not applicable.                                                                        

55

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|   |                        
|-- | -----------------------
|F. | EXPENSES OF THE
  ISSUE
|   |                        
|   | Not applicable.        

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

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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

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| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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 National 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.

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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.

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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 Companies Law has been amended recently
and now allows also for additional reimbursement of expenses as set forth
below, provided the Articles of Association allows such additional
reimbursement. Currently, the Articles of Association of the company do not
include such reimbursement because they were adopted prior to the Companies Law
amendment. Should Syneron wish to include such additional indemnification of
expenses it will need to amend the Articles of Association accordingly. 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.

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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.

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

Non-residents
of Israel who hold our ordinary shares are able to receive any dividends, and
any amounts payable upon the dissolution, liquidation and winding up of our
affairs, freely repatriable in non-Israeli currency at the rate of exchange
prevailing at the time of conversion. However, Israeli income tax is required
to have been paid or withheld on these amounts. In addition, the statutory
framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.

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

The
following is a general summary only and should not be considered as income tax
advice or relied upon for tax planning purposes.

ISRAELI TAXATION

The
following is a summary of the material Israeli tax laws applicable to us, and
some Israeli Government programs benefiting us. This section also contains a
discussion of some Israeli tax consequences to persons owning our ordinary
shares. This summary does not discuss all the 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.

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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.

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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 Time Limit. 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.

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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 enterprise programs under the Investments Law, which
entitles us to some tax benefits. The second program was approved on January
23, 2005. Our approved enterprise programs are subject to the alternative
package of benefits, which allows for a ten years 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;                                              

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | under
  specified conditions, an election to file consolidated tax returns with
  additional related Israeli Industrial Companies and an industrial holding
  company;
| |   |                                                                                                                                                                       
| |  | 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 discussion is a description of the material U.S. federal income tax
considerations applicable to an investment in the ordinary shares by U.S.
Holders who hold the ordinary shares as capital assets for U.S. federal income
tax purposes. As used in this section, the term U.S. Holder means a
beneficial owner of an ordinary share who is:

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

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.

This
description is based on provisions of the U.S. Internal Revenue Code of 1986,
as amended, referred to in this discussion as the Code, existing U.S. Treasury
regulations and administrative and judicial interpretations, each as available
and in effect as of the date hereof. These sources may change, possibly with
retroactive effect, and are open to differing interpretations. This description
does not discuss all aspects of U.S. federal income taxation that may be
applicable to investors in light of their particular circumstances or to
investors who are subject to special treatment under U.S. federal income tax
law, including:

| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | insurance
  companies;                                                                                                               
| |   |                                                                                                                                      
| |  | dealers in
  stocks, securities or currencies;                                                                                       
| |   |                                                                                                                                      
| |  | financial
  institutions and financial services entities;                                                                            
| |   |                                                                                                                                      
| |  | real estate
  investment trusts;                                                                                                     
| |   |                                                                                                                                      
| |  | regulated
  investment companies;                                                                                                    
| |   |                                                                                                                                      
| |  | persons that
  receive ordinary shares as compensation for the performance of services;                                              
| |   |                                                                                                                                      
| |  | tax-exempt
  organizations;                                                                                                          
| |   |                                                                                                                                      
| |  | traders in
  securities that elect to apply a mark-to-market method of accounting;                                                   
| |   |                                                                                                                                      
| |  | persons that
  hold ordinary shares as a position in a straddle or as part of a hedging,
  conversion or other integrated instrument;

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| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | individual
  retirement and other tax-deferred accounts;                                    
| |   |                                                                                             
| |  | expatriates
  of the United States;                                                         
| |   |                                                                                             
| |  | persons
  having a functional currency other than the U.S. dollar; and                      
| |   |                                                                                             
| |  | direct,
  indirect or constructive owners of 10% or more, by voting power or value, of
  us.

This
discussion also does not consider the possible application of United States
federal gift or estate tax or alternative minimum tax.

We
urge you to consult with your own tax advisor regarding the tax consequences of
investing in the ordinary shares, including the effects of federal, state,
local, foreign and other tax laws.

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. 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. shareholders 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.

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Passive Foreign Investment
Company Considerations

Special
U.S. federal income tax rules apply to U.S. Holders owning shares of a passive
foreign investment company. A non-U.S. corporation will be considered a passive
foreign investment company for any taxable year in which, after applying
look-through rules, 75% or more of its gross income consists of specified types
of passive income, or 50% or more of the average value of its assets consists
of passive assets, which generally means assets that generate, or are held for
the production of, passive income. Passive income may include amounts derived
by reason of the temporary investment of funds. If we were classified as a
passive foreign investment company, a U.S. Holder could be subject to increased
tax liability upon the sale or other disposition of ordinary shares or upon the
receipt of amounts treated as excess distributions. Under these rules, the
excess distribution and any gain would be allocated ratably over the U.S.
Holders holding period for the ordinary shares, and the amount allocated to
the current taxable year and any taxable year prior to the first taxable year
in which we were a passive foreign investment company would be taxed as
ordinary income. The amount allocated to each of the other taxable years would
be subject to tax at the highest marginal rate in effect for the applicable
class of taxpayer for that year, and an interest charge for the deemed deferral
benefit would be imposed on the resulting tax allocated to such other taxable
years. The tax liability with respect to the amount allocated to years prior to
the year of the disposition, or excess distribution, cannot be offset by any
net operating losses. In addition, holders of stock in a passive foreign
investment company may not receive a step-up in basis on shares acquired from
a decedent. U.S. Holders who hold ordinary shares during a period when we are a
passive foreign investment company will be subject to the foregoing rules even
if we cease to be a passive foreign investment company.

We
believe that we are not a passive foreign investment company for U.S. federal
income tax purposes, but we cannot be certain whether we will be treated as a
passive foreign investment company for the current year or any future taxable
year. Our belief that we will not be a passive foreign investment company for
the current year is based on our estimate of the fair market value of our
intangible assets, including goodwill, not reflected in our financial
statements under U.S. GAAP, and our projection of our income for the current
year. If the IRS successfully challenged our valuation of our intangible
assets, it could result in our classification as a passive foreign investment
company. Moreover, because passive foreign investment company status is based
on our income and assets for the entire taxable year, it is not possible to
determine whether we will be a passive foreign investment company for the
current taxable year until after the close of the year. In the future, in
calculating the value of our intangible assets, we will value our total assets,
in part, based on our total market value determined using the average of the
selling price of our ordinary shares on the last trading day of each calendar
quarter. We believe this valuation approach is reasonable. While we intend to
manage our business so as to avoid passive foreign investment company status,
to the extent consistent with our other business goals, we cannot predict
whether our business plans will allow us to avoid passive foreign investment
company status or whether our business plans will change in a manner that
affects our passive foreign investment company status determination. In
addition, because the market price of our ordinary shares is likely to
fluctuate and the market price of the shares of technology companies has been
especially volatile, and because that market price may affect the determination
of whether we will be considered a passive foreign investment company, we
cannot assure that we will not be considered a passive foreign investment
company for any taxable year.

The
passive foreign investment company rules described above will not apply to a
U.S. Holder if the U.S. Holder makes an election to treat us as a qualified
electing fund. However, a U.S Holder may make a qualified electing fund
election only if we furnish the U.S. Holder with certain tax information. We
currently do not provide this information, and we do not intend to take actions
necessary to permit you to make a qualified electing fund election in the event
we are determined to be a passive foreign investment company. As an alternative
to making this election, a U.S. Holder of passive foreign investment company
stock which is publicly traded may in certain circumstances avoid certain of
the tax consequences generally applicable to holders of a passive foreign
investment company by electing to mark the stock to market annually and
recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of
the passive foreign investment company stock and the U.S. Holders adjusted tax
basis in the passive foreign investment company stock. Losses would be allowed
only to the extent of net mark-to-market gain previously included by the U.S.
Holder under the election for prior taxable years. This election is available
for so long as our ordinary shares constitute marketable stock, which
includes stock of a passive foreign investment company that is regularly
traded on a qualified exchange or other market. Generally, a qualified
exchange or other market includes a national market system established
pursuant to Section 11A of the Securities Exchange Act of 1934. A class of
stock that is traded on one or more qualified exchanges or other markets is
regularly traded on an exchange or market for any calendar year during which
that class of stock is traded, other than in de minimis quantities, on at least
15 days during each calendar quarter. We believe that the Nasdaq National
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 National Market or that the shares will be regularly
traded for this purpose.

71

---

---



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

Holders
generally will be subject to information reporting requirements with respect to
dividends paid in the United States on ordinary shares. In addition, Holders
will be subject to back-up withholding tax on dividends paid in the United
States on ordinary shares unless the holder provides an IRS certification or
otherwise establishes an exemption. Holders will be subject to information
reporting and back-up withholding tax on proceeds paid within the United States
from the disposition of ordinary shares unless the holder provides an IRS
certification or otherwise establishes an exemption. Information reporting and
back-up withholding may also apply to dividends and proceeds paid outside the
United States that are paid by certain U.S. payors or U.S. middlemen, as
defined in the applicable Treasury regulations, including:

|  |                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | U.S. person;                                                                                                                                                                                           
|  |                                                                                                                                                                                                        
| | the government of the U.S. or the government of any
  state or political subdivision of any state (or any agency or instrumentality
  of any of these governmental units);                             
|  |                                                                                                                                                                                                        
| | a controlled foreign corporation FOR u.s. TAX
  PURPOSES;                                                                                                                                              
|  |                                                                                                                                                                                                        
| | a foreign partnership that is either engaged in a
  U.S. trade or business or whose UnITed States partners in the aggregate hold
  more than 50% of the income or capital interests in the partnership;
|  |                                                                                                                                                                                                        
| | a foreign person that derives 50% or more of its
  gross income for certain periods from the conduct of a trade or business in
  the U.S.; or                                                          
|  |                                                                                                                                                                                                        
| | a U.S. branch of a foreign bank or insurance
  company.                                                                                                                                                

The
back-up withholding tax rate is 28% for years through 2010. Back-up withholding
and information reporting will not apply to payments made to Non-U. S. Holders
if they have provided the required certification that they are not United
States persons.

The
amount of any back-up withholding will be allowed as a credit against a U.S.
Holders U.S. federal income tax liability and may entitle the holder to a
refund, provided that required information is furnished to the IRS.

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

72

---

---



A
copy of each document (or a translation thereof to the extent not in English)
concerning Syneron Medical Ltd. that is referred to in this annual report on
Form 20-F, is available for public view (subject to confidential treatment of
certain agreements pursuant to applicable law) at our principal executive
offices.

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

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

Exchange
Rate Risk. A 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 84% of our total revenues for the year ended December 31,
2005. Substantially all of the remaining 16% 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. 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. We currently do not use derivative financial instruments to hedge our
exposure to exchange rate fluctuations.

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 75% 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.

73

---

---



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.

|   |                
|-- | ---------------
|A. | USE OF PROCEEDS

The
effective date of our first registration statement, filed on Form F-1 under the
Securities Act of 1933 (No. 333-117369), relating to the initial public
offering of our ordinary shares, was August 5, 2004. The offering date was
August 5, 2004. The offering was managed by Citigroup, CIBC World Markets and
Stephens Inc. In the offering 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 offering closed on August
11, 2004. In connection with our underwritten secondary offering of March 2005,
certain of our option holders exercised options to purchase the ordinary shares
that they sold in such secondary offering. We did not receive any proceeds from
the sale of the ordinary shares offered by the selling shareholders in our
underwritten secondary offering other than proceeds from such option exercises.

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 15. | CONTROLS AND PROCEDURES

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, 2005. Based on such review, including the full adoption of the
recommendation of our audit committee concerning procedures and controls, 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 we file or submit under the
Securities Exchange Act of 1934, as amended, and the rules thereunder, is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.

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.

74

---

---



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

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

During
the years 2004 and 2005, we paid the following fees for the professional
services rendered by Ernst & Young, independent registered public
accounting firm:

|                   |  |                       |  |                       | 
|------------------ |  | --------------------- |  | --------------------- | 
|                   |  | 2004
  (in thousands) |  | 2005
  (in thousands) | 
|Audit Fees         |  | 178                   |  | 270                   | 
|Audit Related Fees |  | 175                   |  | 95                    | 
|Tax Fees           |  | 25                    |  | 38                    | 
|All Other Fees     |  | 6                     |  | 10                    | 
|Total              |  | 384                   |  | 413                   | 

Audit
related services rendered by Ernst & Young during 2004 were in
connection with our initial public offering, and in 2005 were in connection
with our follow-on secondary offering. 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.

75

---

---



PART III

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

Not
applicable.

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

The
following consolidated financial statements and related auditors report are
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 | Registrants Articles of Association (incorporated
  by reference to Exhibit 3.3 to our Form F-1 filed July 14, 2004)                                                                                                                               
|    |                                                                                                                                                                                                                                                     
|1.2 | Amendment to Articles of Association of Registrant
  (incorporated by reference to Exhibit 3.4 to our Form F-1 filed July 14,
  2004)                                                                                                               
|    |                                                                                                                                                                                                                                                     
|1.3 | Certificate Confirming Alteration of a Companies
  Name (English translation) (incorporated by reference to Exhibit 3.2 to our
  Form F-1 filed July 14, 2004)                                                                                      
|    |                                                                                                                                                                                                                                                     
|1.4 | Form of Articles of Association of Registrant
  (incorporated by reference to Exhibit 3.5 to our Form F- 1/A filed August 3,
  2004)                                                                                                                
|    |                                                                                                                                                                                                                                                     
|2.1 | Form of Share Certificate (incorporated by reference
  to Exhibit 4.1 to our 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 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 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 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
  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 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 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)     

76

---

---



|     |                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------
|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 | Certification of Chief Executive Officer                                                                                
|     |                                                                                                                         
|12.2 | Certification of Chief Financial Officer                                                                                
|     |                                                                                                                         
|13.  | Certification 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.


77

---

---



SYNERON MEDICAL LIMITED AND ITS
SUBSIDIARIES

Index of Consolidated Financial Statements

| |                                                           |  |            
| | --------------------------------------------------------- |  | -----------
| |                                                           |  | 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-37

---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the 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, 2005 and 2004, and the
related consolidated statements of income, shareholders equity and cash flows for
each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with U.S. generally accepted accounting principles.

|              |                                                             
|------------- | ------------------------------------------------------------
|
|
|
|
|Haifa, Israel | /s/ Kost Forer Gabbay & KasiererKOST FORER GABBAY & KASIERER
|June 29, 2006 | 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, |       
|                                                                                   |  |          |    |      |                           |       
|                                                                                   |  | Note     |    | 2005 |                           | 2004   |  | 2003 |       
|                                                                                   |  |          |    |      |                           |        |  |      |       
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Revenues                                                                           |  |          |    |      | $                         | 87,406 |  | $    | 57,918 |  | $     | 35,021 | 
|Cost of revenues                                                                   |  |          |    |      |                           | 11,428 |  |      | 6,914  |  |       | 4,439  | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Gross profit                                                                       |  |          |    |      |                           | 75,978 |  |      | 51,004 |  |       | 30,582 | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Operating expenses                                                                 |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Research and development                                                           |  |          |    |      |                           | 5,030  |  |      | 3,078  |  |       | 1,701  | 
|Selling and marketing                                                              |  |          |    |      |                           | 25,188 |  |      | 19,625 |  |       | 13,900 | 
|General and administrative                                                         |  |          |    |      |                           | 3,534  |  |      | 2,725  |  |       | 878    | 
|Other operating expenses                                                           |  | 1C.,11D. |    |      | 3,494                     |        |  | -    |        |  | 6,225 |       
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Total operating expenses                                                           |  |          |    |      |                           | 37,246 |  |      | 25,428 |  |       | 22,704 | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Operating income                                                                   |  |          |    |      |                           | 38,732 |  |      | 25,576 |  |       | 7,878  | 
|Financial income, net                                                              |  |          | 14 |      |                           | 3,081  |  |      | 2,384  |  |       | 881    | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Income before taxes on income                                                      |  |          |    |      |                           | 41,813 |  |      | 27,960 |  |       | 8,759  | 
|Taxes on income                                                                    |  |          | 13 |      |                           | 750    |  |      | 620    |  |       | 170    | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Net income                                                                         |  |          |    |      | $                         | 41,063 |  | $    | 27,340 |  | $     | 8,589  | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Basic net earnings per share                                                       |  |          |    |      | $                         | 1.65   |  | $    | 1.45   |  | $     | 0.51   | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Diluted net earnings per share                                                     |  |          |    |      | $                         | 1.48   |  | $    | 1.14   |  | $     | 0.42   | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Weighted average number of shares used in per share
calculations (in
  thousands): |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Basic                                                                              |  |          |    |      |                           | 24,888 |  |      | 18,917 |  |       | 16,814 | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 
|Diluted                                                                            |  |          |    |      |                           | 27,664 |  |      | 24,083 |  |       | 20,512 | 
|                                                                                   |  |          |    |      |                           |        |  |      |        |  |       |        | 

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
  2005 |         | December 31
  2004 |  
|                                                                                                                             |  |      |  |                    |         |                    |  
|CURRENT ASSETS                                                                                                               |  |      |  |                    |         |                    |   |         | 
|Cash and cash equivalents                                                                                                    |  |      |  | $                  | 13,070  |                    | $ | 12,468  | 
|Short-term bank deposits                                                                                                     |  | 3    |  |                    | 3,500   |                    |   | 57,893  | 
|Available for sale marketable securities                                                                                     |  | 4    |  |                    | 116,489 |                    |   | 23,071  | 
|Trade receivables (net of allowance for doubtful accounts of $222 and
  $263 as of December 31, 2005 and 2004, respectively) |  |      |  |                    | 19,776  |                    |   | 8,628   | 
|Other accounts receivables and prepaid expenses                                                                              |  | 5    |  |                    | 9,293   |                    |   | 1,532   | 
|Inventories                                                                                                                  |  | 6    |  |                    | 3,434   |                    |   | 3,134   | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|Total current assets                                                                                                         |  |      |  |                    | 165,562 |                    |   | 106,726 | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|Severance pay fund                                                                                                           |  |      |  |                    | 249     |                    |   | 196     | 
|Long-term deposits and others                                                                                                |  | 7    |  |                    | 1,103   |                    |   | 28      | 
|Long-term trade receivables                                                                                                  |  |      |  |                    | 1,003   |                    |   | 754     | 
|Property and equipment, net                                                                                                  |  | 8    |  |                    | 1,189   |                    |   | 842     | 
|Intangible asset, net                                                                                                        |  | 9    |  |                    | 1,175   |                    |   | 1,000   | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 
|Total assets                                                                                                                 |  |      |  | $                  | 170,281 |                    | $ | 109,546 | 
|                                                                                                                             |  |      |  |                    |         |                    |   |         | 

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,
  2005 |         | December
  31,
  2004 |  
|                                                                                                                                                        |  |      |  |                       |         |                       |  
|CURRENT LIABILITIES                                                                                                                                     |  |      |  |                       |         |                       |   |         |  
|Trade payables                                                                                                                                          |  |      |  | $                     | 2,112   |                       | $ | 1,520   |  
|Other account payables and
  accrued expenses                                                                                                           |  | 10   |  |                       | 18,960  |                       |   | 10,135  |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|Total current liabilities                                                                                                                               |  |      |  |                       | 21,072  |                       |   | 11,655  |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|LONG-TERM LIABILITIES                                                                                                                                   |  |      |  |                       |         |                       |   |         |  
|Deferred revenues and warranty                                                                                                                          |  |      |  |                       | 3,763   |                       |   | 3,276   |  
|Accrued severance pay                                                                                                                                   |  |      |  |                       | 282     |                       |   | 214     |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|Total long-term
  liabilities                                                                                                                           |  |      |  |                       | 4,045   |                       |   | 3,490   |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                    |  |      |  |                       |         |                       |   |         |  
|Ordinary shares of NIS
  0.01 par value;                                                                                                                |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|Authorized  100,000,000
  ordinary shares; Issued and outstanding  26,521,148 and 23,288,820 shares as
  of December 31, 2005 and 2004, respectively; |  |      |  |                       | 61      |                       |   | 54      |  
|Additional paid-in capital                                                                                                                              |  |      |  |                       | 70,254  |                       |   | 58,595  |  
|Treasury shares - 662,874
  Ordinary shares                                                                                                             |  |      |  |                       | (461    | )                     |   | (461    | )
|Deferred stock based
  compensation                                                                                                                     |  |      |  |                       | (177    | )                     |   | (325    | )
|Accumulated other
  comprehensive loss                                                                                                                  |  |      |  |                       | (2,188  | )                     |   | (74     | )
|Retained earnings                                                                                                                                       |  |      |  |                       | 77,675  |                       |   | 36,612  |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|Total shareholders equity                                                                                                                              |  |      |  |                       | 145,164 |                       |   | 94,401  |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  
|Total liabilities and shareholders equity                                                                                                              |  |      |  | $                     | 170,281 |                       | $ | 109,546 |  
|                                                                                                                                                        |  |      |  |                       |         |                       |   |         |  

|                                                             |  |                                               |  |                                            
|------------------------------------------------------------ |  | --------------------------------------------- |  | -------------------------------------------
|/s/ Dr.Shimon Eckhouse                                       |  | /s/ David Schlachet                           |  | /s/ Yoram Sadeh                            
|                                                             |  |                                               |  |                                            
|Dr.
  Shimon Eckhouse
  Chairman of the Board of
  Directors |  | David
  Schlachet
  Chief Executive
  Officer |  | Yoram
  Sadeh
  Vice President of
  Finance
|                                                             |  |                                               |  |                                            
|Date of approval: June 29,
  2006                            |  |                                               |  |                                            

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,
2005                          |  | $                 | 54 |                                | $ | 58,595                                               |  | $                                     | (74    | )                 | $ | (325                | ) | $                              | (461 | )                              | $ | 36,612 |  | $ | 94,401  |   |   |        |  
|Exercise of stock options                              |  |                   | 7  |                                |   | 11,659                                               |  |                                       | -      |                   |   | -                   |   |                                | -    |                                |   | -      |  |   | 11,666  |   |   |        |  
|Amortization of deferred stock based
compensation      |  |                   | -  |                                |   | -                                                    |  |                                       | -      |                   |   | 148                 |   |                                | -    |                                |   | -      |  |   | 148     |   |   |        |  
|Other comprehensive income:                            |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   |   |        |  
|Unrealized loss on available for sale
securities       |  |                   | -  |                                |   | -                                                    |  |                                       | (1,206 | )                 |   | -                   |   |                                | -    |                                |   | -      |  |   | (1,206  | ) | $ | (1,206 | )
|Reclassification to income statement for
gain realized |  |                   | -  |                                |   | -                                                    |  |                                       | (908   | )                 |   | -                   |   |                                | -    |                                |   | -      |  |   | (908    | ) |   | (908   | )
|Net income                                             |  |                   | -  |                                |   | -                                                    |  |                                       | -      |                   |   | -                   |   |                                | -    |                                |   | 41,063 |  |   | 41,063  |   |   | 41,063 |  
|                                                       |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   |   |        |  
|                                                       |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   |   |        |  
|Total comprehensive income                             |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   | $ | 38,949 |  
|                                                       |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   |   |        |  
|Balance as of December 31,
2005                        |  | $                 | 61 |                                | $ | 70,254                                               |  | $                                     | (2,188 | )                 | $ | (177                | ) | $                              | (461 | )                              | $ | 77,675 |  | $ | 145,164 |   |   |        |  
|                                                       |  |                   |    |                                |   |                                                      |  |                                       |        |                   |   |                     |   |                                |      |                                |   |        |  |   |         |   |   |        |  

*
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                      

|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|------------------------------------------------------------ |  | --------------- | -- | ------------------------------ | - | ---------------------------------------------------- | - | ------------------------------------- | -- | ----------------- | - | ------------------- |  | ------------------------------ | ---- | ------------------------------ | - | ---- | - | - | ---- | - | - | ------ |  | - | ------ | - | - | ------ | -
|                                                             |  | 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 |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                  
|                                                             |  | Ordinary        |    | Preferred                      |   |                                                      |   |                                       |    |                   |   |                    
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                    
|                                                             |  |                 |    | A                              |   | B                                                    |   |                                       |    |                   |   |                     |  |                               
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |     
|Balance as of January 1,
2004                                |  | $               | 3  |                                | $ | 7                                                    |   | $                                     | 2  |                   | $ | 4,688               |  | $                              | 168  |                                | $ | (473 | ) | $ | (226 | ) | $ | 9,272  |  | $ | 13,441 |   |   |        |  
|Issuance of Ordinary shares, net of
issuance costs of $6,299 |  |                 | 39 |                                |   | -                                                    |   |                                       | -  |                   |   | 53,663              |  |                                | -    |                                |   | -    |   |   | -    |   |   | -      |  |   | 53,702 |   |   |        |  
|Exercise of stock options                                    |  |                 | 3  |                                |   | -                                                    |   |                                       | -  |                   |   | 95                  |  |                                | -    |                                |   | -    |   |   | -    |   |   | -      |  |   | 98     |   |   |        |  
|Conversion of Preferred A and B Shares
into Ordinary shares  |  |                 | 9  |                                |   | (7                                                   | ) |                                       | (2 | )                 |   | -                   |  |                                | -    |                                |   | -    |   |   | -    |   |   | -      |  |   | -      |   |   |        |  
|Issuance of Preferred A shares net of
Issuance costs of $1   |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | 149                 |  |                                | -    |                                |   | -    |   |   | -    |   |   | -      |  |   | 149    |   |   |        |  
|Repurchase of Preferred A shares from a
shareholder          |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | -                   |  |                                | -    |                                |   | -    |   |   | (235 | ) |   | -      |  |   | (235   | ) |   |        |  
|Amortization of deferred stock based
compensation            |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | -                   |  |                                | -    |                                |   | 148  |   |   | -    |   |   | -      |  |   | 148    |   |   |        |  
|Other comprehensive income:                                  |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|Unrealized loss on available for sale
securities             |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | -                   |  |                                | (432 | )                              |   | -    |   |   | -    |   |   | -      |  |   | (432   | ) | $ | (432   | )
|Reclassification to income statement for
loss realized       |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | -                   |  |                                | 190  |                                |   | -    |   |   | -    |   |   | -      |  |   | 190    |   | $ | 190    |  
|Net income                                                   |  |                 | -  |                                |   | -                                                    |   |                                       | -  |                   |   | -                   |  |                                | -    |                                |   | -    |   |   | -    |   |   | 27,340 |  |   | 27,340 |   |   | 27,340 |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|Total comprehensive income                                   |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   | $ | 27,098 |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  
|Balance as of December 31,
2004                              |  | $               | 54 |                                | $ | -                                                    |   | $                                     | -  |                   | $ | 58,595              |  | $                              | (74  | )                              | $ | (325 | ) | $ | (461 | ) | $ | 36,612 |  | $ | 94,401 |   |   |        |  
|                                                             |  |                 |    |                                |   |                                                      |   |                                       |    |                   |   |                     |  |                                |      |                                |   |      |   |   |      |   |   |        |  |   |        |   |   |        |  

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 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |      
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |      
|                                                    |  | Ordinary        |   | Preferred |   | Additional
  Paid-in
  Capital |   | Accumulated
  Other
  Comprehensive
  Income* |   | Deferred
  Stock based
  Compensation |   | Treasury
  Convertible
  Preferred
  A Shares |  | Retained
  Earnings |     | Total
  Shareholders
  Equity |   | Total
  Comprehensive
  Income |  
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                              
|                                                    |  |                 |   |           | A |                                | B |                                               |   |                                       |   |                                               |  |                    
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |     
|Balance as of January 1, 2003                       |  | $               | 3 |           | $ | 6                              |   | $                                             | 2 |                                       | $ | 3,780                                         |  | $                   | -   |                                | $ | (6                             | ) | $ | -    |   | $ | 683   |  | $ | 4,468  |   |   |       | 
|Exercise of warrants                                |  |                 | - |           |   | 1                              |   |                                               | - |                                       |   | 146                                           |  |                     | -   |                                |   |                                |   |   | -    |   |   | -     |  |   | 147    |   |   |       | 
|Deferred stock based compensation                   |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | 531                                           |  |                     | -   |                                |   | (531                           | ) |   | -    |   |   | -     |  |   | -      |   |   |       | 
|Amortization of deferred stock based compensation   |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | -                                             |  |                     | -   |                                |   | 64                             |   |   | -    |   |   | -     |  |   | 64     |   |   |       | 
|Non-Employee stock-based compensation               |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | 231                                           |  |                     | -   |                                |   | -                              |   |   | -    |   |   | -     |  |   | 231    |   |   |       | 
|Repurchase of Preferred A shares from a shareholder |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | -                                             |  |                     | -   |                                |   | -                              |   |   | (226 | ) |   | -     |  |   | (226   | ) |   |       | 
|Other comprehensive income:                         |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   |   |       | 
|Unrealized gain on available for sale securities    |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | -                                             |  |                     | 168 |                                |   | -                              |   |   | -    |   |   | -     |  |   | 168    |   | $ | 168   | 
|Net income                                          |  |                 | - |           |   | -                              |   |                                               | - |                                       |   | -                                             |  |                     | -   |                                |   | -                              |   |   | -    |   |   | 8,589 |  |   | 8,589  |   |   | 8,589 | 
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   |   |       | 
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   |   |       | 
|Total comprehensive income                          |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   | $ | 8,757 | 
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   |   |       | 
|Balance as of December 31, 2003                     |  | $               | 3 |           | $ | 7                              |   | $                                             | 2 |                                       | $ | 4,688                                         |  | $                   | 168 |                                | $ | (473                           | ) | $ | (226 | ) | $ | 9,272 |  | $ | 13,441 |   |   |       | 
|                                                    |  |                 |   |           |   |                                |   |                                               |   |                                       |   |                                               |  |                     |     |                                |   |                                |   |   |      |   |   |       |  |   |        |   |   |       | 

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, |        
|                                                                                    |  |                           |        
|                                                                                    |  | 2005                      |         | 2004 |   | 2003    |  
|                                                                                    |  |                           |         |      |   |         |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                |  |                           |         |      |   |         |   |   |         |  
|Net income                                                                          |  | $                         | 41,063  |      | $ | 27,340  |   | $ | 8,589   |  
|Adjustments to reconcile net income to net cash provided by operating
  activities: |  |                           |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                       |  |                           | 569     |      |   | 143     |   |   | 84      |  
|Increase in accrued severance pay, net                                              |  |                           | 15      |      |   | 3       |   |   | 5       |  
|Increase in short-term and long-term trade receivables                              |  |                           | (11,397 | )    |   | (4,049  | ) |   | (2,233  | )
|Increase in other accounts receivables and prepaid
expenses                         |  |                           | (7,761  | )    |   | (575    | ) |   | (693    | )
|Increase in inventories                                                             |  |                           | (300    | )    |   | (1,647  | ) |   | (1,211  | )
|Increase (decrease) in trade payables                                               |  |                           | 592     |      |   | (688    | ) |   | 1,363   |  
|Increase in other account payables and accrued expenses                             |  |                           | 7,542   |      |   | 389     |   |   | 4,552   |  
|Increase (decrease) in long-term litigation settlement fee                          |  |                           | -       |      |   | (900    | ) |   | 900     |  
|Realized gain and interest from marketable securities                               |  |                           | (908    | )    |   | (396    | ) |   | (341    | )
|Amortization of deferred stock based compensation                                   |  |                           | 148     |      |   | 148     |   |   | 295     |  
|Increase in deferred revenues and warranty                                          |  |                           | 1,770   |      |   | 2,843   |   |   | 3,090   |  
|Loss on sales of property and equipment                                             |  |                           | 12      |      |   | 3       |   |   | 5       |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Net cash provided by operating activities                                           |  |                           | 31,345  |      |   | 22,614  |   |   | 14,405  |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|CASH FLOWS FROM INVESTING ACTIVITIES                                                |  |                           |         |      |   |         |   |   |         |  
|Maturity of (investment in) short-term deposits, net                                |  |                           | 53,393  |      |   | (56,873 | ) |   | -       |  
|Purchase of available-for-sale marketable securities                                |  |                           | (98,880 | )    |   | (17,759 | ) |   | (11,258 | )
|Proceeds from sale of marketable securities                                         |  |                           | 4,256   |      |   | 6,116   |   |   | 487     |  
|Investment in long-term loans and others                                            |  |                           | (75     | )    |   | (13     | ) |   | (1,031  | )
|Purchase of property and equipment                                                  |  |                           | (645    | )    |   | (484    | ) |   | (258    | )
|Purchase of intangible assets                                                       |  |                           | (466    | )    |   | (1,000  | ) |   | -       |  
|Proceeds from sale of property and equipment                                        |  |                           | 8       |      |   | -       |   |   | 34      |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Net cash used in investing activities                                               |  |                           | (42,409 | )    |   | (70,013 | ) |   | (12,026 | )
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|CASH FLOWS FROM FINANCING ACTIVITIES                                                |  |                           |         |      |   |         |   |   |         |  
|Short-term bank credit, net                                                         |  |                           | -       |      |   | -       |   |   | (273    | )
|Proceeds from issuance of ordinary and preferred shares,
net                        |  |                           | -       |      |   | 53,851  |   |   | -       |  
|Exercise of stock options and warrants                                              |  |                           | 11,666  |      |   | 98      |   |   | 147     |  
|Repurchase of preferred A shares from shareholders                                  |  |                           | -       |      |   | (235    | ) |   | (226    | )
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Net cash provided by (used in) financing activities                                 |  |                           | 11,666  |      |   | 53,714  |   |   | (352    | )
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Increase in cash and cash equivalents                                               |  |                           | 602     |      |   | 6,315   |   |   | 2,027   |  
|Cash and cash equivalents at the beginning of the year                              |  |                           | 12,468  |      |   | 6,153   |   |   | 4,126   |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Cash and cash equivalents at the end of the year                                    |  | $                         | 13,070  |      | $ | 12,468  |   | $ | 6,153   |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                   
|Cash paid during the period for:                                                    |  |                           |         |      |   |         |   |   |         |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  
|Income taxes                                                                        |  | $                         | 12      |      | $ | 3       |   | $ | 4       |  
|                                                                                    |  |                           |         |      |   |         |   |   |         |  

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                        

|          |        
|--------- | -------
|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 through distributors of
  advanced equipment for the esthetic medical industry and systems for
  dermatologists, plastic surgeons and other qualified practitioners worldwide.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|B. | Syneron GmbH, (Sy-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. (Sy-Inc.) and Syneron Canada Corp. (Sy-Can), also wholly-owned
  subsidiaries, were established during 2002 for the purpose of marketing and
  sales of the Companys products in North America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|C. | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|D. | Investment
  In Light Instruments Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In June 2005, with the
  establishment of Light Instrument LTD. (LI), an Israeli development stage
  company engaged in the development of advanced dental laser devices, the
  Company invested $750 in consideration for 25.5% of LIs Ordinary Shares,
  with an option to invests an additional investment amount of $750 in consideration
  for additional 25.5% of LIs ordinary shares. In the third quarter of 2005
  the Company exercised its option and invested an additional $750 increasing
  its holding to 51%, and exercised its right to increase the number of
  directors to three out of five members of LIs board of directors. The
  Company is consolidating LI commencing from the third quarter of 2005.
  According to the agreement the Company has an option to invest an additional
  $2,000 and to increase its holding to 67% of the Ordinary Shares of LI. 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 Company is the sole
  financing source of LI and it was granted preference in receiving its
  investment in case of LIs liquidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-10

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|          |                                  
|--------- | ---------------------------------
|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 then 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.                                                                                                                                          | CASH AND CASH EQUIVALENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                            | Cash equivalents are
  short-term highly liquid investments that are readily convertible into cash
  with maturities of less than three months at the date acquired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|E.                                                                                                                                          | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|F.                                                                                                                                          | 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
  2004 and 2005 investments in marketable securities were designated as
  available for sale securities. Accordingly, the securities 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.

F-11

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|F. | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|G. | INVENTORIES                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | Inventories are stated at
  the lower of cost or market value. Cost is determined as follows:                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | Raw materials: parts and
  supplies  first in, first out (FIFO) method.                                                                                                                                                                                                                                                                                                       
|   | Finished products: raw
  material as explained above, with the addition of the specific manufacturing
  costs.                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|H. | PROPERTY AND EQUIPMENT,
  NET                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                  
|   | Property and equipment are
  stated at cost, net of accumulated depreciation. Depreciation is calculated
  by the straight-line method over the estimated useful lives of the assets at
  the following annual rates:                                                                                                                                                            

| |                                                               |  |      
| | ------------------------------------------------------------- |  | -----
| |                                                               |  | %    
| |                                                               |  |      
| | Computers, software,
  manufacturing and laboratory equipment |  | 10-33
| | Office furniture,
  equipment                                 |  | 7-15 
| | Motor vehicles                                                |  | 15   

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|I. | 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. To management opinion this method reflects best the pattern in
  which the economic benefits of the intangible assets are consumed or
  otherwise used up.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|J. | 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 2003, 2004 and 2005, no impairments were
  recorded.

F-12

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|K. | 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 revenue
  determination 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 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.                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|L. | RESEARCH AND DEVELOPMENT
  COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Research and development
  costs, net of grants received from the Government of Israel through the
  Ministry of Industry and Trade Office of the Chief Scientist, are charged to
  the income statement as incurred.                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|M. | ROYALTY BEARING GRANTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Royalty-bearing grants
  from the Government of Israel for funding approved research and development
  projects are recognized at the time the Company is entitled to such grants,
  on the basis of the costs incurred and applied as a deduction from research
  and development costs. Research and development grants amounted to $0, $0 and
  $153 in 2005, 2004 and 2003, respectively. Total royalties accrued or paid amounted
  to $0, $0 and $294 in 2005, 2004 and 2003, respectively, and were recorded as
  part of cost of revenues.

F-13

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|N. | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company has elected to
  follow Accounting Principles Board Opinion No. 25, Accounting for Stock
  Issued to Employees (APB No. 25) and the FASB Interpretation No. 44, Accounting
  for Certain Transactions Involving Stock Compensation in accounting for its
  employee stock option plans.                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | According to APB No. 25,
  compensation expense is measured under the intrinsic value method, whereby
  compensation expense is equal to the excess, if any, of the quoted market
  price of the share at the date of grant of the award over the exercise price.                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Financial Accounting
  Standards Board Statement No. 148, Accounting for Stock-Based Compensation -
  Transition and Disclosure (SFAS 148) amended certain provisions of
  Statement of Financial Accounting Standards No. 123, Accounting for
  Stock-Based Compensation (SFAS 123) to provide alternative methods of
  transition for an entity that voluntarily changes to the fair value based method
  of accounting for stock-based employee compensation. The Company continues to
  apply the provisions of APB No. 25, in accounting for stock-based
  compensation.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Pro forma information
  regarding the Companys stock based employee compensation expenses, net
  income and net earnings per share is required by SFAS No. 123 and SFAS 148
  and has been determined as if the Company had accounted for its employee
  stock options under the fair value method prescribed by SFAS No. 123.                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | For pro forma purpose, the
  fair value for options granted in 2005, 2004 and 2003 is amortized over their
  vesting period on a straight line basis and estimated at the date of grant
  using the Black-Scholes options pricing model in 2004 and 2003 and the
  Binominal model for options granted thereafter, with the following
  assumptions (using the Binominal model in 2004 and 2003 will not have a
  material effect of the fair value of the options granted in those years):                                                                                          

| |                         |  |                           |       |      |  |             |  |  |           | 
| | ----------------------- |  | ------------------------- | ----- | ---- |  | ----------- |  |  | --------- | 
| |                         |  | Year Ended
  December 31, |      
| |                         |  |                           |      
| |                         |  | 2005                      |       | 2004 |  | 2003        | 
| |                         |  |                           |       |      |  |             | 
| | Black-Scholes model     |  |                           |       |      |  |             |  |  |           | 
| | Dividend yield          |  |                           |       |      |  | 0%          |  |  | 0%        | 
| | Expected volatility     |  |                           |       |      |  | 80%         |  |  | 70%       | 
| | Risk-free interest rate |  |                           |       |      |  | 4.07%       |  |  | 4.06%     | 
| | Expected life of up to  |  |                           |       |      |  | 3.4
  years |  |  | 7
  years | 
| |                         |  |                           |       |      |  |             |  |  |           | 
| | Binominal model         |  |                           |       |      |  |             |  |  |           | 
| | Dividend yield          |  |                           | 0%    |      |  |             |  |  |           | 
| | Expected volatility     |  |                           | 65%   |      |  |             |  |  |           | 
| | Risk-free interest rate |  |                           | 4.41% |      |  |             |  |  |           | 
| | Early exercise multiple |  |                           | 2     |      |  |             |  |  |           | 

F-14

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|N. | STOCK-BASED COMPENSATION
  (Continue)                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                          
|   | If compensation cost had
  been determined under the fair value accounting method provided under SFAS
  No. 123, the Companys stock-based employee compensation cost, net income and
  basic and diluted net earnings per share would have changed to the following
  pro forma amounts:

| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | ------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                                                       |  | Year Ended
  December 31, |       
| |                                                                                       |  |                           |       
| |                                                                                       |  | 2005                      |        | 2004 |   | 2003   |  
| |                                                                                       |  |                           |        |      |   |        |  
| | Net income as reported                                                                |  | $                         | 41,063 |      | $ | 27,340 |   | $ | 8,589  |  
| | Add - Stock based compensation expense, as reported (intrinsic value
  method)        |  |                           | 148    |      |   | 148    |   |   | 64     |  
| | Deduct  Stock based compensation expense under fair value based
  method of SFAS 123 |  |                           | (6,078 | )    |   | (664   | ) |   | (76    | )
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Pro forma net income                                                                  |  | $                         | 35,133 |      | $ | 6,824  |   | $ | 8,577  |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Net Earnings per share:                                                               |  |                           |        |      |   |        |   |   |        |  
| | Basic net earnings per share as reported                                              |  | $                         | 1.65   |      | $ | 1.45   |   | $ | 0.51   |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Diluted net earnings per share as reported                                            |  | $                         | 1.48   |      | $ | 1.14   |   | $ | 0.42   |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Pro forma basic net earnings per share                                                |  | $                         | 1.41   |      | $ | 1.42   |   | $ | 0.51   |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Pro forma diluted net earnings per share                                              |  | $                         | 1.27   |      | $ | 1.11   |   | $ | 0.42   |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Weighted average number of shares used in per share calculations (in
  thousands):    |  |                           |        |      |   |        |   |   |        |  
| | Basic                                                                                 |  |                           | 24,888 |      |   | 18,917 |   |   | 16,814 |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  
| | Diluted                                                                               |  |                           | 27,532 |      |   | 24,083 |   |   | 20,512 |  
| |                                                                                       |  |                           |        |      |   |        |   |   |        |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company applies SFAS
  No. 123 and Emerging Issues Task Force No. 96-18 Accounting for Equity
  Instruments That Are Issued to Other Than Employees for Acquiring, or in
  Conjunction with Selling, Goods or Services, with respect to options and
  warrants issued to non-employees. SFAS No. 123 requires the use of option
  valuation models to measure the fair value of the options and warrants at the
  date of grant.                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|O. | 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 and warrants considered to be
  outstanding during each year, in accordance with Statement of Financial
  Standard No. 128, Earnings Per Share.

F-15

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|P. | 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. The carrying amount of long-term trade
  receivables approximates their fair value as they bear interest which is
  close to the market rate. 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.                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Q. | 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 net operating loss carryforword. 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|R. | 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 surrender value of these policies, and includes immaterial
  profits accumulated up to balance sheet dates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Severance expenses for the
  years ended December 31, 2005, 2004 and 2003 amounted to approximately $106,
  $100 and $59, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|S. | ADVERTISING EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Advertising expenses are
  charged to the statements of income, as incurred. Advertising expenses for
  the years ended December 31, 2005, 2004 and 2003 were $1,244, $1,196 and
  $1,188, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-16

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|T. | 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 high 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.                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|U. | WARRANTY AND SERVICE COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company generally
  provides a one year to three years standard warranty with its products with
  no service obligation attached, depending on the type of product and the
  country in which the Company does 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, the Company provides a
  warranty on parts only. The Company provides for the estimated cost to repair
  or replace products under warranty at the time of sale.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | At December 31, 2005,
short term and long term accrued warranty amounted to $1,328 and $1,032, respectively. At
December 31, 2004, short term and long term accrued warranty amounted to $951 and $561, respectively.                                                                                                                                                                                                                                                                                                                                 

F-17

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|V. | COMPREHENSIVE INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company accounts for
  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 comprehensive income relates to unrealized
  gains and losses on available for sale securities.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|W. | IMPACT OF RECENTLY ISSUED
  ACCOUNTING STANDARDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | On December 16, 2004, the
  Financial Accounting Standards Board (FASB) issued FASB Statement No. 123
  (revised 2004), Share-Based Payment, which is a revision of FASB Statement
  No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes
  APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
  Statement No. 95, Statement of Cash Flows. Generally, the approach in
  Statement 123(R) is similar to the approach described in Statement 123.
  However, Statement 123(R) requires all share-based payments to employees,
  including grants of employee stock options, to be recognized in the income
  statement based on their fair values. Pro forma disclosure is no longer an
  alternative. Early adoption will be permitted in periods in which financial
  statements have not yet been issued. The Company will adopt Statement 123(R)
  on January 1, 2006. Statement 123(R) permits public companies to adopt its
  requirements using one of two methods:
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | A modified prospective
  method in which compensation cost is recognized beginning with the effective
  date (a) based on the requirements of Statement 123(R) for all share based
  payments granted after the effective date and (b) based on the requirements
  of Statement 123 for all awards granted to employees prior to the effective
  date of Statement 123(R) that remain unvested on the effective date.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | A modified retrospective
  method which includes the requirements of the modified prospective method
  described above, but also permits entities to restate based on the amounts
  previously recognized under Statement 123 for purposes of pro forma
  disclosures either (a) all prior periods presented or (b) prior interim
  periods of the year of adoption.                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | The company plans to adopt
  Statement 123(R) using the modified-prospective method. As permitted by
  Statement 123, the Company currently accounts for share-based payments to
  employees using Opinion 25s intrinsic value method and, as such, generally
  recognizes no compensation cost for employee stock options. Accordingly, the
  adoption of Statement 123(R)s fair value method will have a significant
  impact on the Companys result of operations, although it will have no impact
  on the Companys overall financial position. The impact of adoption of
  Statement 123(R) cannot be predicted at this time because it will depend on
  levels of share-based payments granted in the future. However, had the
  Company adopted Statement 123(R) in prior periods, the impact of that
  standard would have approximated the impact of Statement 123 as described in
  the disclosure of pro forma net income and earnings per share in Note 2N
  above.                                          

F-18

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---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | ----------------------------------------------------------- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2    | SIGNIFICANT ACCOUNTING POLICIES (Continue)                 
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|W.         | IMPACT OF RECENTLY
  ISSUED ACCOUNTING STANDARDS (Continue)
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                             | 2. | In May 2005, the FASB
  issued SFAS No. 154, Accounting Changes and Error Corrections, a
  replacement of APB No. 20, Accounting Changes and SFAS No. 3, Reporting
  Accounting Changes in Interim Financial Statements. SFAS No. 154 provides
  guidance on the accounting for and reporting of accounting changes and error
  corrections. APB No. 20 previously required that most voluntary changes in
  accounting principles be recognized by including in net income for the period
  of the change, the cumulative effect of changing to the new accounting
  principle. SFAS No. 154 requires retroactive application to prior periods
  financial statements of a voluntary change in accounting principles unless it
  is impracticable. SFAS 154 is effective for accounting changes and corrections
  of errors made in fiscal years beginning after December 15, 2005.
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                             |    | As of December 31, 2005,
  adoption of SFAS No. 154 will not have a material impact on the Companys
  financial position or results of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                             | 3. | In November 2005, the FASB
  issued FSP FAS 115-1. The FSP addresses the determination as to when an
  investment is considered impaired, whether that impairment is other than
  temporary, and the measurement of an impairment loss. The FSP also includes
  accounting considerations subsequent to the recognition of an other
  than-temporary impairment and requires certain disclosures about unrealized
  losses that have not been recognized as other-than-temporary impairments. The
  guidance in this FSP amends SFAS No. 115, Accounting for Certain Investments
  in Debt and Equity. The FSP replaces the impairment evaluation guidance of
  EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
  Application to Certain Investments, with references to the existing
  other-than-temporary impairment guidance.                            
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                                             |    | The FSP clarifies that an
  investor should recognize an impairment loss no later than when the
  impairment is deemed other-than-temporary, even if a decision to sell an
  impaired security has not been made. The guidance in this FSP is to be
  applied to reporting periods beginning after December 15, 2005. As of
  December 31, 2005, adoption of FSP FAS 115-1 will not have a material impact
  on the Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                             |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Note 3    | SHORT-TERM BANK DEPOSITS                                   

| |                         |  |              |       |      |   |        | 
| | ----------------------- |  | ------------ | ----- | ---- | - | ------ | 
| |                         |  | December 31, |      
| |                         |  |              |      
| |                         |  | 2005         |       | 2004 |  
| |                         |  |              |       |      |  
| |                         |  |              |       |      |   |        | 
| | Short-term Deposits (1) |  | $            | 3,500 |      | $ | 56,893 | 
| | Structured note (2)     |  |              | -     |      |   | 1,000  | 
| |                         |  |              |       |      |   |        | 
| |                         |  |              |       |      |   |        | 
| |                         |  | $            | 3,500 |      | $ | 57,893 | 
| |                         |  |              |       |      |   |        | 

| |     |              
| | --- | -------------
| | (1) | See Note 11E.
| | (2) | See Note 7   

F-19

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|------------------------------------------------------------------ |  | ----------------- | ------- | -------------------------- | - | --------------------------- |  | -------------- | ------ | - | - | ------- | 
|                                                                   |  | December 31, 2005 |        
|                                                                   |  |                   |        
|                                                                   |  | Amortized
  Cost  |         | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Market
  Value |       
|                                                                   |  |                   |         |                            |   |                             |  |                |       
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Available for sale - matures within one year:                      |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Government debentures 
  fixed interest rate                      |  | $                 | 40,715  |                            | $ | 42                          |  | $              | (237   | ) | $ | 40,520  | 
|Corporate debentures 
  fixed interest rate                       |  |                   | 2,211   |                            |   | -                           |  |                | (94    | ) |   | 2,117   | 
|Equity securities                                                  |  |                   | 348     |                            |   | 2                           |  |                | -      |   |   | 350     | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   | 43,274  |                            |   | 44                          |  |                | (331   | ) |   | 42,987  | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Available for sale - matures after one year through three years:   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Government debentures 
  fixed interest rate                      |  |                   | 58,921  |                            |   | 55                          |  |                | (1,205 | ) |   | 57,771  | 
|Corporate debentures 
  fixed interest rate                       |  |                   | 508     |                            |   |                             |  |                | (18    | ) |   | 490     | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   | 59,429  |                            |   | 55                          |  |                | (1,223 | ) |   | 58,261  | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Available for sale - matures after three years through five years: |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Government debentures 
  fixed interest rate                      |  |                   | 2,459   |                            |   | -                           |  |                | (103   | ) |   | 2,356   | 
|Corporate debentures 
  fixed interest rate                       |  |                   | 3,238   |                            |   | 8                           |  |                | (99    | ) |   | 3,147   | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   | 5,697   |                            |   | 8                           |  |                | (202   | ) |   | 5,503   | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Available for sale -
  matures after five years:                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|Government debentures 
  fixed interest rate                      |  |                   | 4,404   |                            |   | 5                           |  |                | (139   | ) |   | 4,270   | 
|Corporate debentures 
  fixed interest rate                       |  |                   | 3,932   |                            |   | -                           |  |                | (214   | ) |   | 3,718   | 
|Corporate structured notes
   floating interest rate              |  |                   | 1,941   |                            |   | -                           |  |                | (191   | ) |   | 1,750   | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   | 10,277  |                            |   | 5                           |  |                | (544   | ) |   | 9,738   | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 
|                                                                   |  | $                 | 118,677 |                            | $ | 112                         |  | $              | (2,300 | ) | $ | 116,489 | 
|                                                                   |  |                   |         |                            |   |                             |  |                |        |   |   |         | 

F-20

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|-------------------------------------------------------------------- |  | ----------------- | ------ | -------------------------- | - | --------------------------- |  | -------------- | ---- | - | - | ------ | 
|                                                                     |  | December 31, 2004 |       
|                                                                     |  |                   |       
|                                                                     |  | Amortize
  d Cost |        | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Market
  Value |     
|                                                                     |  |                   |        |                            |   |                             |  |                |     
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Available for sale - matures within one year:                        |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Equity securities                                                    |  | $                 | 1,746  |                            | $ | 240                         |  | $              | -    |   | $ | 1,986  | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Available
  for sale - matures after one year through three years:   |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Corporate structured notes
   floating interest rate                |  |                   | 3,008  |                            |   | 116                         |  |                | (198 | ) |   | 2,926  | 
|Corporate debentures 
  fixed interest rate                         |  |                   | 2,691  |                            |   | 17                          |  |                | (24  | ) |   | 2,684  | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   | 5,699  |                            |   | 133                         |  |                | (222 | ) |   | 5,610  | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Available
  for sale - matures after three years through five years: |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Government debentures 
  fixed interest rate                        |  |                   | 3,799  |                            |   | 80                          |  |                | (27  | ) |   | 3,852  | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Available
  for sale - matures after five years:                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|Government debentures 
  fixed interest rate                        |  |                   | 6,802  |                            |   | 4                           |  |                | (80  | ) |   | 6,726  | 
|Corporate debentures 
  fixed interest rate                         |  |                   | 4,951  |                            |   | 40                          |  |                | (94  | ) |   | 4,897  | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   | 11,753 |                            |   | 44                          |  |                | (174 | ) |   | 11,623 | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 
|                                                                     |  | $                 | 22,997 |                            | $ | 257                         |  | $              | (423 | ) | $ | 23,071 | 
|                                                                     |  |                   |        |                            |   |                             |  |                |      |   |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The unrealized losses in
  the Companys investments in available for sale securities were mainly caused
  by temporary interest rate increases and their duration is less then 12
  months. 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. The unrealized loss does not
  result from credit deterioration of the issuers. Accordingly, it is expected
  that the securities would not be settled at a price less then the amortized
  cost of the Companys investment. As such the bonds were not considered to be
  other than temporarily impaired as of December 31, 2005.

F-21

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

| |                           |  |              |       |      |   |       | 
| | ------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                           |  | December 31, |      
| |                           |  |              |      
| |                           |  | 2005         |       | 2004 |  
| |                           |  |              |       |      |  
| |                           |  |              |       |      |   |       | 
| | Government institutions   |  | $            | 869   |      | $ | 556   | 
| | Prepaid expenses          |  |              | 735   |      |   | 624   | 
| | Withholding tax Deposit * |  |              | 6,296 |      |   | -     | 
| | Other receivables         |  |              | 1,393 |      |   | 352   | 
| |                           |  |              |       |      |   |       | 
| |                           |  |              |       |      |   |       | 
| |                           |  | $            | 9,293 |      | $ | 1,532 | 
| |                           |  |              |       |      |   |       | 

| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| | * | 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, |      
| |                   |  |              |      
| |                   |  | 2005         |       | 2004 |  
| |                   |  |              |       |      |  
| |                   |  |              |       |      |   |       | 
| | Raw materials     |  | $            | 937   |      | $ | 328   | 
| | Finished products |  |              | 2,497 |      |   | 2,806 | 
| |                   |  |              |       |      |   |       | 
| |                   |  |              |       |      |   |       | 
| |                   |  | $            | 3,434 |      | $ | 3,134 | 
| |                   |  |              |       |      |   |       | 

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

| |                     |  |              |       |      |   |    | 
| | ------------------- |  | ------------ | ----- | ---- | - | -- | 
| |                     |  | December 31, |      
| |                     |  |              |      
| |                     |  | 2005         |       | 2004 |  
| |                     |  |              |       |      |  
| |                     |  |              |       |      |   |    | 
| | Structured note (1) |  | $            | 1,000 |      | $ | -  | 
| | Others              |  |              | 103   |      |   | 28 | 
| |                     |  |              |       |      |   |    | 
| |                     |  |              |       |      |   |    | 
| |                     |  | $            | 1,103 |      | $ | 28 | 
| |                     |  |              |       |      |   |    | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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
  to redeem 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                        

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

| |                                                                                                                      |  |              |       |      |   |       | 
| | -------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- | - | ----- | 
| |                                                                                                                      |  | December 31, |      
| |                                                                                                                      |  |              |      
| |                                                                                                                      |  | 2005         |       | 2004 |  
| |                                                                                                                      |  |              |       |      |  
| | Cost                                                                                                                 |  |              |       |      |   |       | 
| | Computers, software,
  manufacturing and                                                                             |  |              |       |      |   |       | 
| | laboratory equipment                                                                                                 |  | $            | 1,487 |      | $ | 886   | 
| | Office furniture and
  equipment                                                                                     |  |              | 209   |      |   | 163   | 
| | Motor vehicles                                                                                                       |  |              | -     |      |   | 55    | 
| |                                                                                                                      |  |              |       |      |   |       | 
| |                                                                                                                      |  |              |       |      |   |       | 
| | Total
  cost                                                                                                         |  |              | 1,696 |      |   | 1,104 | 
| |                                                                                                                      |  |              |       |      |   |       | 
| |                                                                                                                      |  |              |       |      |   |       | 
| | Accumulated depreciation                                                                                             |  |              |       |      |   |       | 
| | Computers, software,
  manufacturing and                                                                             |  |              |       |      |   |       | 
| | laboratory equipment                                                                                                 |  |              | 450   |      |   | 197   | 
| | Office furniture and
  equipment                                                                                     |  |              | 57    |      |   | 32    | 
| | Motor vehicles                                                                                                       |  |              | -     |      |   | 33    | 
| |                                                                                                                      |  |              |       |      |   |       | 
| |                                                                                                                      |  |              |       |      |   |       | 
| | Total
  accumulated depreciation                                                                                     |  |              | 507   |      |   | 262   | 
| |                                                                                                                      |  |              |       |      |   |       | 
| |                                                                                                                      |  |              |       |      |   |       | 
| | Depreciated
  cost                                                                                                   |  | $            | 1,189 |      | $ | 842   | 
| |                                                                                                                      |  |              |       |      |   |       | 
| |                                                                                                                     
| | Depreciation expense for
  the years ended December 31, 2005, 2004 and 2003 were $278, $143 and $84,
  respectively.

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

| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 to 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 2005 the amortization
  expenses related to the patent was $291. The annual amortization expense
  relating to the patent as of December 31, 2005 for each of the four years in
  the period ending December 31, 2009 is estimated to be approximately $290.                                           

|            |                                            
|----------- | -------------------------------------------
|Note 10    | OTHER ACCOUNT PAYABLES AND ACCRUED EXPENSES

| |                                  |  |              |        |      |   |        | 
| | -------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
| |                                  |  | December 31, |       
| |                                  |  |              |       
| |                                  |  | 2005         |        | 2004 |  
| |                                  |  |              |        |      |  
| |                                  |  |              |        |      |   |        | 
| | Deferred revenues and warranty   |  | $            | 5,576  |      | $ | 4,151  | 
| | Litigation settlement fee
  *    |  |              | -      |      |   | 1,464  | 
| | Accrued expenses                 |  |              | 880    |      |   | 903    | 
| | Accrued commission               |  |              | 1,970  |      |   | 1,248  | 
| | Employees and related
  expenses |  |              | 1,282  |      |   | 311    | 
| | Tax authorities                  |  |              | 1,499  |      |   | 761    | 
| | Withholding tax **               |  |              | 6,296  |      |   | -      | 
| | Other current liabilities        |  |              | 1,457  |      |   | 1,297  | 
| |                                  |  |              |        |      |   |        | 
| |                                  |  |              |        |      |   |        | 
| |                                  |  | $            | 18,960 |      |   | 10,135 | 
| |                                  |  |              |        |      |   |        | 
| |                                  |  |              |        |      |   |        | 
| | * See Note 11D.1                 |  |              |        |      |   |        | 
| | ** See note 5                    |  |              |        |      |   |        | 

F-23

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | ROYALTY
  BEARING GRANTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company
  has entered into several research and development agreements, pursuant to
  which the Company is obligated to pay royalties to the Government of Israel
  at a rate of 3% of sales of product in which the Government of Israel has
  participated in financing the research and development, up to the amounts
  granted (linked to the U.S. dollar with annual interest at LIBOR as of the
  date of approval). Repayment of such grants is not required in the event that
  there are no sales of product developed within the framework of the funded
  programs. Through 2004 the Company repaid all the grants received.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|B. | 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
  $370, $79 and $0 for the years ended December 31, 2005, 2004 and 2003,
  respectively, and were recorded as part of cost of revenues.                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|C. | LEASES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company
  operates from leased facilities in Canada, United States, Germany and Israel
  leased for periods expiring in years 2006 through 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The future
  minimum lease commitments of the Group under various non-cancelable operating
  lease agreements in respect of premises and motor vehicles as of December 31,
  2005 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                            |  |   |     | 
|--------------------------- |  | - | --- | 
|Year ended
  December
  31, |  |   |     | 
|                            |  |   |     | 
|2006                        |  | $ | 534 | 
|2007                        |  |   | 247 | 
|2008                        |  |   | 123 | 
|2009                        |  |   | 65  | 
|2010                        |  |   | 17  | 
|                            |  |   |     | 
|                            |  |   |     | 
|                            |  | $ | 986 | 
|                            |  |   |     | 

Rent expenses
amounted to $336, $347 and $280 for the years 2005, 2004 and 2003,
respectively.

F-24

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                 
|-- | ------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | LEGAL CLAIMS
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | 1.           | On September
  20, 2002, a competitive company (the Competitor) filed an action in the
  Santa Clara, California Superior Court against the Companys subsidiaries in
  Canada and in the U.S. (the Syneron entities) and some of the Competitors
  former employees (the former employees) who were subsequently employed by
  the Companys subsidiaries. The Competitor asserted generally that the
  Companys subsidiaries have attempted to misappropriate the Competitors trade
  secrets and customer information, and steal its employees, representatives
  and customers.
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | The
  Competitor alleged that the former employees breached contracts they had with
  the Competitor which prohibited the former employees from disclosing confidential
  information which they acquired while employed by the Competitor. The
  Competitor further alleged that the Syneron entities induced the former
  employees to breach their contracts with the Competitor.                                                                                                                                                                                                        
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | In addition,
  the Competitor alleged that the Syneron entities and the former employees
  induced other Competitors employees, representatives and existing or
  potential customers to terminate their relationship with the Competitor.                                                                                                                                                                                                                                                                                                                                                  
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | On September
  20, 2002, the Competitor filed an action in the District Court of Tel Aviv
  against the Company, some of the Companys employees who were previously
  employed by the Competitor and some of the Companys shareholders. The
  Competitors claims in this action were basically the same as the claims
  stated above. In its action, the Competitor also demanded that all of the
  Companys activities would be ceased immediately and that the Company pay the
  Competitor an amount of $6.3 million.                                                                
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | On October
  28, 2002, the Competitor filed an action in the United States District Court
  for the Central District of California alleging that the Syneron entities
  were infringing six patents assigned to the Competitor.                                                                                                                                                                                                                                                                                                                                                             
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | In July
  2003, the United States District Court denied in part and granted in part the
  Competitors motion for a preliminary injunction, granting a preliminary
  injunction against the Company on one of the patents in dispute as to certain
  products when used in a particular manner.                                                                                                                                                                                                                                                                                             
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | In March
  2004, the Company, its subsidiaries and the Competitor signed a settlement
  agreement according to which:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |              | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | All existing
  actions between the parties and between the parties and former employees and
  shareholders were dismissed with prejudice with no admission of wrongdoing by
  either party. Each party was to bear its own costs and legal fees.
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                 
|   |              | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | In
  consideration for the settlement of the claims, the Company agreed to pay a
  fee under certain payment terms.                                                                                                                             
|   |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                 
|   |              | The entire
  settlement fee and the related direct legal costs have been recorded in the financial
  statements for 2002 and 2003. The settlement fee and related costs paid
  through December 2004 were $5,373. The rest of the balance, which amounted to
  $1,464 was paid in 2005.                                                                                                                                                                                                                                                                                                     

F-25

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | LEGAL CLAIMS
  (Continued)
|   |                           
|   | 2.                         | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | 3.                         | On July 29,
  2004, Shaldot Metal Works Ltd. (Shaldot), a privately owned Israeli
  company, sued the Company and its chairman of the board of directors
  (Chairman), in the District Court in Haifa, claiming that in 1999 the
  Chairman had access to confidential material regarding an Israeli patent,
  which he allegedly used in violation of a confidentiality agreement in
  connection with forming the Company. 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 its products, which, if successful, could have a material
  adverse effect on the Companys business is 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 claims that even if the patent would
  have been valid, none of the Companys devices infringes any Shaldots
  patent.                                                                                                                                                                                                                                                                               
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                            | On October,
  10, 2004 the Company submitted a counterclaim against Shaldot, its Chairman
  and the inventor of Shaldots patent, claiming that the Defendants conspired
  together in order to bring a baseless lawsuit against the Company trying to
  interfere with the Companys IPO, in the US, by submitting false claims
  against the Company and its Chairman. The Company also claims that the
  Defendants were trying to extort funds from the Company and its Chairman at a
  sensitive time for the Company (just 5 days before the finalization of the
  IPO) and that Shaldots lawsuit forced the Company to reduce its offering
  price from the original range $14-16
  to $12 per share, resulting in significant monetary damage to the Company.
  The Defendants submitted their Statements of Defense on December 5, 2004.     

F-26

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|D. | LEGAL CLAIMS
  (Continued)
|   |                           
|   |                            | Recently,
  the dispute was referred, by court, to mediation and the parties are
  attempting to resolve the dispute. There can be no assurance that the
  mediation could successfully resolve the dispute or if resolution was
  reached, that the out is favorable to the Company. The Company and its legal
  advisors believe that the Company has good defenses to the complaint, and the
  Company intends to defend itself vigorously and therefore it is unlikely that
  the complaint will result in a loss to the Company. As a result the Company
  did not record a provision in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | 4.                         | In September
  2005 and in further dates hereafter, three several plaintiffs filed a
  complaint in which the Company and its subsidiary Syneron Inc. are named as
  co-defendants along with nine other third party defendants. The three
  plaintiffs are African-American women who allege they were burned while
  receiving laser hair removal treatments from one of the Companys customers,
  administered using the Companys product. In addition to traditional product
  liability and negligence theories, the complaint alleges theories of product
  liability fraud, negligent misrepresentation, sale of a dangerous
  prescriptive device and intentional race discrimination. Defense of this
  litigation is being funded and controlled by an insurance company which
  issued a policy to Syneron Inc. under which the Company is an additional
  insured through a controlling interest endorsement. However, there is the
  possibility that the court could conclude that the race discrimination claim
  is not covered by the insurance policy Syneron Inc. has appeared in the
  litigation and the complaints allegations are being vigorously contested.
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                            | The Company
  has not yet been served, but when served also intends to vigorously contest
  the complaints allegations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                            | The Company
  cannot predict the outcome of the claim nor can it make any estimate of the
  amount of damage, if held responsible. Accordingly no provision was included
  in the financial statements in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | 5.                         | On November
  10, 2005 a class action was filed against 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 reservation of rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                            | Although
  there appears to be a likelihood that Syneron Inc. will have indemnity
  coverage for this lawsuit and it is currently being provided a defense, there
  is the possibility that the court could conclude that the TCPA claim against
  Syneron Inc. is not covered by the insurance policy. The Company cannot
  predict the outcome of the claim nor can it make any estimate of the amount
  of damaged, if held responsible. Accordingly no provision was included in the
  financial statements in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | 6.                         | From time to
  time, the Company may become involved in litigation relating to claims
  arising from 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-27

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|E. | 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 loaning
  bank bearing annual interest of 6.75%. The terms of the interest for the loan
  are 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, accordingly the Company recorded in
  amount in cash and cash equivalent.                                                                                                              
|   |                                                                                                                                                                                                                                     
|   | The Company
  follows FASB Interpretation No. 45 and did not recognize a liability since
  the risk of execution of The Companys guarantee as of the balance sheet date
  was insignificant and any fair value would be immaterial.

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                    
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | SHARE
  CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 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 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 1C.), each outstanding preferred share was
  converted into 3.4 ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | In 2003, two
  shareholders exercised their warrants to purchase 1,037,000 shares for a
  total consideration of $147. All other 884,000 warrants granted to purchase
  shares expired in June 30, 2003.                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                    
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | In October
  2003, the Company repurchased 408,000 shares from a shareholder for a total
  consideration of $226. In February 2004, the Company repurchased additional
  254,874 shares from another shareholder for a total consideration of $235.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                    
|   | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | In February,
  2004, a director of the Company purchased 170,000 shares for a total
  consideration of $149.                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                    
|   | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | During 2005
  3,232,328 stock options were exercised into ordinary shares, for the
  consideration of $11,666, this including options exercised in the secondary
  offering (see Note 1C.)                                                         

F-28

---

---



|                                                
|------------------------------------------------
|SYNERON MEDICAL LIMITED AND ITS
  SUBSIDIARIES  
|                                                
|Notes to the
  Consolidated Financial Statements
|                                                
|U.S. dollar in thousands                        

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

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 were 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, 2005
  there are 3,000,000 options available for future grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Under the
  Companys plans, the options granted are usually at an exercise price that
  equals the fair market value of the Company share at the date of grant.
  Options granted vest over a period of up to four years and in some instances
  fully vested options were granted. The options expire after seven years from
  the date of grant.                                                                                                                                                                                                                                                                                                                                                                

F-29

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

| |    |                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------
| | B. | STOCK OPTION PLAN
  (Continued)                                                                                    
| |    |                                                                                                                    
| |    | A summary of the Companys
  share option activity (except options to consultants) under the Plans is as
  follows:

|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 
|-------------------------------------------- |  | ----------------------- | ---------- | ------------------------------------- | - | ------------------- |  | ------------------------------------- | --------- | ------------------- | - | ------------------------------------- |  |  | --------- |  | - | ---- | 
|                                             |  | Year Ended December 31, |           
|                                             |  |                         |           
|                                             |  | 2005                    |            | 2004                                  |   | 2003                | 
|                                             |  |                         |            |                                       |   |                     | 
|                                             |  |                         |            |                                       |   |                     | 
|                                             |  | Number of
  options     |            | Weighted
  average
  exercise
  price |   | Number
  of options |  | Weighted
  average
  exercise
  price |           | Number
  of options |   | Weighted
  average
  exercise
  price | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 
|Outstanding- beginning of
  the year         |  |                         | 3,900,807  |                                       | $ | 3.01                |  |                                       | 3,281,122 |                     | $ | 0.08                                  |  |  | 1,509,600 |  | $ | 0.07 | 
|Granted                                      |  |                         | 520,504    |                                       | $ | 29.99               |  |                                       | 664,000   |                     | $ | 17.33                                 |  |  | 1,771,522 |  | $ | 0.08 | 
|Exercised                                    |  |                         | (2,801,381 | )                                     | $ | 4.13                |  |                                       | (44,030   | )                   | $ | 0.07                                  |  |  | -         |  |   |      | 
|Forfeited                                    |  |                         | (28,865    | )                                     | $ | 12.06               |  |                                       | (285      | )                   | $ | 0.07                                  |  |  | -         |  |   |      | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 
|Option outstanding at the
  end of the year  |  |                         | 1,591,065  |                                       | $ | 9.80                |  |                                       | 3,900,807 |                     | $ | 3.01                                  |  |  | 3,281,122 |  | $ | 0.08 | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 
|Options exercisable at the
  end of the year |  |                         | 1,079,668  |                                       | $ | 3.61                |  |                                       | 1,902,879 |                     | $ | 0.07                                  |  |  | 754,800   |  | $ | 0.08 | 
|                                             |  |                         |            |                                       |   |                     |  |                                       |           |                     |   |                                       |  |  |           |  |   |      | 

| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | The following table
  summarizes information about options outstanding and exercisable as of
  December 31, 2005:

| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  |  |           |  |   |       | 
| | ----------------- |  | ----------------------------------------------- | --------- | ------------------------------------------------------------- |  | ------------------------------------- |  | ----------------------------------------------- | ----- | ---------------------------------------------------------------- |  | --------- |  | - | ----- | 
| | Exercise
  Prices |  | Options
  Outstanding
  As of
  December
  2005 |           | Weighted
  Average
  Remaining
  Contractual
  Life
  (Years) |  | Weighted
  Average
  Exercise
  Price |  | Options
  Exercisable
  As of
  December
  2005 |       | Weighted
  Average
  Exercise
  Price of
  Exercisable
  options | 
| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  | 
| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  | 
| | $0.07 - $0.14     |  |                                                 | 934,890   |                                                               |  | 4.05                                  |  | $                                               | 0.08  |                                                                  |  | 934,890   |  | $ | 0.07  | 
| | $9                |  |                                                 | 12,500    |                                                               |  | 5.61                                  |  | $                                               | 9.00  |                                                                  |  | 1,250     |  | $ | 9.00  | 
| | $18.69            |  |                                                 | 240,000   |                                                               |  | 5.82                                  |  | $                                               | 18.69 |                                                                  |  | 15,250    |  | $ | 18.69 | 
| | $25.75 - $30.96   |  |                                                 | 403,675   |                                                               |  | 6.27                                  |  | $                                               | 27.08 |                                                                  |  | 128,278   |  | $ | 28.43 | 
| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  |  |           |  |   |       | 
| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  |  |           |  |   |       | 
| |                   |  |                                                 | 1,591,065 |                                                               |  | 5.44                                  |  | $                                               | 9.80  |                                                                  |  | 1,079,668 |  | $ | 3.61  | 
| |                   |  |                                                 |           |                                                               |  |                                       |  |                                                 |       |                                                                  |  |           |  |   |       | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Where the Company has
  recorded deferred stock compensation for options issued with an exercise
  price below the fair value of the Ordinary shares, the deferred stock
  compensation is amortized and recorded as compensation expense ratably over
  the vesting period of the options. Compensation expense of $148, $148 and $64
  was recognized during the years ended December 31, 2005, 2004 and 2003,
  respectively.

F-30

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

| |    |                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------
| | B. | STOCK OPTION PLAN
  (Continued)                                                                                                                
| |    |                                                                                                                                                
| |    | The weighted average fair
  values of options (including non-employees) granted during the years ended
  December 31, 2005, 2004 and 2003 were:

|                                            |  |                                               |       |                                                  |   |       |  |      |   |      |   |      |  |   |   |  |   |      | 
|------------------------------------------- |  | --------------------------------------------- | ----- | ------------------------------------------------ | - | ----- |  | ---- | - | ---- | - | ---- |  | - | - |  | - | ---- | 
|                                            |  | Equals market price
  Year Ended December 31, |       | Less than market price
  Year Ended December 31, |  
|                                            |  |                                               |       |                                                  |  
|                                            |  | 2005                                          |       | 2004                                             |   | 2003  |  | 2005 |   | 2004 |   | 2003 | 
|                                            |  |                                               |       |                                                  |   |       |  |      |   |      |   |      | 
|                                            |  |                                               |       |                                                  |   |       |  |      |   |      |   |      |  |   |   |  |   |      | 
|Weighted average exercise
  prices          |  | $                                             | 29.99 |                                                  | $ | 17.33 |  | $    | - |      | $ | -    |  | $ | - |  | $ | 0.08 | 
|                                            |  |                                               |       |                                                  |   |       |  |      |   |      |   |      |  |   |   |  |   |      | 
|                                           
|Weighted average fair
  value on grant date |  | $                                             | 8.12  |                                                  | $ | 10.59 |  | $    | - |      | $ | -    |  | $ | - |  | $ | 0.34 | 
|                                            |  |                                               |       |                                                  |   |       |  |      |   |      |   |      |  |   |   |  |   |      | 

The Companys outstanding
options to consultants as of December 31, 2005 are as follows:

| |                  |  |                                 |         |                                |   |                       |  |                       |         |  |  |                  | 
| | ---------------- |  | ------------------------------- | ------- | ------------------------------ | - | --------------------- |  | --------------------- | ------- |  |  | ---------------- | 
| | Issuance date    |  | Options for
  Ordinary
  Shares |         | Exercise
  Price
  per
  Share |   | Options
  Exercisable |  | Exercisable
  Through |        
| |                  |  |                                 |         |                                |   |                       |  |                       |        
| |                  |  |                                 |         |                                |   |                       |  |                       |         |  |  |                  | 
| | March 11, 2003   |  |                                 | 57,280  |                                | $ | 0.07                  |  |                       | 57,280  |  |  | March 11, 2010   | 
| | October 20, 2003 |  |                                 | 87,727  |                                | $ | 0.07                  |  |                       | 87,727  |  |  | October 20, 2010 | 
| |                  |  |                                 |         |                                |   |                       |  |                       |         |  |  |                  | 
|
| |                  |  |                                 | 145,007 |                                |   |                       |  |                       | 145,007 |  |  |                  | 
| |                  |  |                                 |         |                                |   |                       |  |                       |         |  |  |                  | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The Company accounted for
  options issued to consultants under the fair value method described in SFAS
  123 and EITF 96-18.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The options to consultants
  vested on the date of grant. The fair value of these options was estimated
  using Black-Scholes option-pricing model with the following weighted-average
  assumptions for 2003: risk-free interest rates of 4.06%, dividend yields of
  0%, volatility factors of the expected market price of the Companys Ordinary
  shares of 0.7, and a weighted-average contractual life of the options of
  approximately 7 years. Compensation expenses of approximately $0, $0 and $231
  were recognized in the years ended December 31, 2005, 2004 and 2003,
  respectively.                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | During 2005 and 2004
  430,947 and 1,303,141 options respectively, which were granted through 2003
  to consultants, were exercised into ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 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-31

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------- | ------------ | ---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 13   | INCOME TAXES
|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | A.           | ISRAELI TAXATION
|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |              | 1.               | Corporate
  Tax Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |              |                  | Taxable income of Israeli
  companies is subject to tax at the rate of 34% in 2005, 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 Company has been
  granted the status of Approved Enterprises, under the Law, in two
  investment programs (the Programs). The second program was approved in
  January 23, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |              |                  | In accordance with the Law,
  Syneron Ltd. has chosen to enjoy an Alternative benefits program status.
  Accordingly, Syneron Ltds income attributed to the Approved Enterprise 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.                                                                                                                                                                                                                                                                
|           |              |                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |              |                  | Tax-exempt income
  attributable to the Approved Enterprise cannot be distributed to
  shareholders without subjecting the Company to taxes except upon complete
  liquidation of the Company. As of December 31, 2005 approximately $79,000 of
  retained earnings are tax-exempt. If such tax-exempt income is distributed in
  a manner other than upon the complete liquidation of the Company, it would be
  taxed at the reduced corporate tax rate applicable to such profits (currently
  - 25%) and an income tax liability of up to approximately $26,333 would be
  incurred as of December 31, 2005.

F-32

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |                          |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | ------------------------ | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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
  Enterprise 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 Approved
  Enterprise 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 34% (see also Note 11D.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                          |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                          |                                                                                         | 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 Privileged
  Enterprise, such as provisions generally requiring that at least 25% of the
  Privileged Enterprises income will be derived from export. Additionally, the
  Amendment enacted major changes in the manner in which tax benefits are
  awarded under the Investment Law so that companies no longer require
  Investment Center approval in order to qualify for tax benefits.
|           |                          |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                          |                                                                                         | In addition, the
  Investment Law provides that terms and benefits included in any 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 privileged enterprise, will
  subject the Company to taxes upon distribution or liquidation and the Company
  may be required to record deferred tax liability with respect to such
  tax-exempt income.                                    
|           |                          |                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | B.                       | NON-ISRAELI SUBSIDIARIES                                                               
|           |                          |                                                                                        
|           |                          | Non-Israeli subsidiaries
  are taxed based on tax laws in their countries of residence.

F-33

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |                          |                                                                                                                                                                                                                                                                                                                      | 
|---------- | ------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Note 13   | INCOME TAXES (Continued)
|           |                          |                                                                                                                                                                                                                                                                                                                      | 
|           | 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, |        
| |                                                       |  |              |        
| |                                                       |  | 2005         |         | 2004 |  
| |                                                       |  |              |         |      |  
| | Deferred tax assets, net *                            |  |              |         |      |   |        |  
| | Net operating loss
  carryforward of subsidiaries     |  | $            | 15,209  |      | $ | 1,696  |  
| | Temporary differences                                 |  |              | 1,494   |      |   | 1,132  |  
| |                                                       |  |              |         |      |   |        |  
| |                                                       |  |              |         |      |   |        |  
| | Total deferred tax asset
  before valuation allowance |  |              | 16,703  |      |   | 2,828  |  
| | Valuation allowance                                   |  |              | (16,703 | )    |   | (2,828 | )
| |                                                       |  |              |         |      |   |        |  
|
| | Net deferred tax
  liabilities                        |  | $            | -       |      | $ | -      |  
| |                                                       |  |              |         |      |   |        |  

| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *                                                                                                                                                                                                                                                                                                                                                                                               | Including an amount of
  $14,408 of deferred taxes in respect of loss carryforword resulting from
  exercise of stock options. Accordingly any tax benefit to be recorded if and
  when valuation allowance is reversed it will be included in additional
  paid-in capital.
| |                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                             
| | In assessing the
  realization of deferred tax assets, management considers whether it is more
  likely then 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                
| | Management currently
  believes that since the non-Israeli 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.                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                
| | The non-Israeli
  subsidiaries in Germany and in Canada have estimated total available
  carryforward tax losses of $10 and $668, respectively, to offset against
  future tax profits for an indefinite period.                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                
| | The Companys subsidiary
  in the United States have estimated total available carryforward tax losses
  of $38,232 to offset against future tax profits for periods of 15-20 years
  expiring between 2017-2022.                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                
| | 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.                                                                                                

F-34

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |                          |                                 | 
|---------- | ------------------------ | ------------------------------- | 
|Note 13   | INCOME TAXES (Continued)
|           |                          |                                 | 
|           | D.                       | INCOME BEFORE TAXES ON
  INCOME

| |          |  |                         |        |      |   |        |   |   |        |  
| | -------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ------ | -
| |          |  | Year Ended December 31, |       
| |          |  |                         |       
| |          |  | 2005                    |        | 2004 |   | 2003   |  
| |          |  |                         |        |      |   |        |  
|
| | Domestic |  | $                       | 40,446 |      | $ | 30,719 |   | $ | 11,323 |  
| | Foreign  |  |                         | 1,367  |      |   | (2,759 | ) |   | (2,564 | )
| |          |  |                         |        |      |   |        |   |   |        |  
| |          |  |                         |        |      |   |        |   |   |        |  
| |          |  | $                       | 41,813 |      | $ | 27,960 |   | $ | 8,759  |  
| |          |  |                         |        |      |   |        |   |   |        |  

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

| |                          |  |                         |     |      |   |      |  |   |     | 
| | ------------------------ |  | ----------------------- | --- | ---- | - | ---- |  | - | --- | 
| |                          |  | Year Ended December 31, |    
| |                          |  |                         |    
| |                          |  | 2005                    |     | 2004 |   | 2003 | 
| |                          |  |                         |     |      |   |      | 
|
| | Domestic (current taxes) |  | $                       | 750 |      | $ | 620  |  | $ | 170 | 
| |                          |  |                         |     |      |   |      |  |   |     | 

| |    |                                                                                                                                                                                                                                                | 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | F. | The main reconciling items
  between the statutory tax rate of the Company and the effective tax rate is a
  decrease in taxes resulting from Approved Enterprise benefits and the
  valuation allowances in respect of subsidiaries losses.
| |    |                                                                                                                                                                                                                                                | 
| |    | 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, |        
| |                                                                                             |                                                                             |                         |        
| |                                                                                             |                                                                             | 2005                    |         | 2004  |   | 2003   |      
| |                                                                                             |                                                                             |                         |         |       |   |        |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | Income before taxes, as
  reported in the consolidated statements of income                 |                                                                             | $                       | 41,813  |       | $ | 27,960 |       | $ | 8,759  |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | Statutory tax rate                                                                          |                                                                             |                         | 34      | %     |   | 35     | %     |   | 36     | %    
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | Theoretical tax expenses
  (benefits) on the above amount at the Israeli Statutory tax rate |                                                                             |                         | 14,216  |       |   | 9,786  |       |   | 3,153  |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | Decrease in taxes
  resulting from Approved Enterprise benefits (1)                       |                                                                             |                         | (13,104 | )     |   | (9,429 | )     |   | (3,913 | )    
| | Valuation allowance                                                                         |                                                                             |                         | (533    | )     |   | 260    |       |   | 923    |      
| | Non-deductible expenses                                                                     |                                                                             |                         | 68      |       |   | 3      |       |   | 7      |      
| | Others                                                                                      |                                                                             |                         | 103     |       |   | -      |       |   | -      |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | Actual tax expense                                                                          |                                                                             |                         | 750     |       |   | 620    |       |   | 170    |      
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| | (1)                                                                                         | Per share amounts (basic) of the tax benefit resulting from the exemption   |                         |         | (0.53 | ) |        | (0.50 | ) |        | 0.19  |  
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      
| |                                                                                             | Per share amounts (diluted) of the tax benefit Resulting from the exemption |                         | $       | (0.47 | ) | $      | (0.39 | ) | $      | (0.19 | )
| |                                                                                             |                                                                             |                         |         |       |   |        |       |   |        |      

F-35

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

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

| |                                                                 |  |                         |       |      |   |       |   |   |     |  
| | --------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | --- | -
| |                                                                 |  | Year Ended December 31, |      
| |                                                                 |  |                         |      
| |                                                                 |  | 2005                    |       | 2004 |   | 2003  |  
| |                                                                 |  |                         |       |      |   |       |  
| | Income:                                                         |  |                         |       |      |   |       |   |   |     |  
| | Interest on cash
  equivalents                                  |  | $                       | 377   |      | $ | 27    |   | $ | 35  |  
| | Gain and interest on
  available for sale marketable securities |  |                         | 2,332 |      |   | 2,002 |   |   | 604 |  
| | Interest on short-term
  deposits and structured note           |  |                         | 1,011 |      |   | 483   |   |   | 20  |  
| | Foreign currency
  translation adjustments                      |  |                         | (507  | )    |   | (69   | ) |   | 284 |  
| |                                                                 |  |                         |       |      |   |       |   |   |     |  
| | Expenses:                                                       |  |                         |       |      |   |       |   |   |     |  
| | Interest on short-term
  credit and bank commissions            |  |                         | (85   | )    |   | (59   | ) |   | (62 | )
| | Loss on available for sale
  marketable securities              |  |                         | (47   | )    |   | -     |   |   | -   |  
| |                                                                 |  |                         |       |      |   |       |   |   |     |  
| |                                                                 |  |                         |       |      |   |       |   |   |     |  
| |                                                                 |  | $                       | 3,081 |      | $ | 2,384 |   | $ | 881 |  
| |                                                                 |  |                         |       |      |   |       |   |   |     |  

|           |                                           
|---------- | ------------------------------------------
|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,
  2005, 2004 and 2003:                                                                                                                                                                                                                                                              

| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       |  |   |        |  |   |     | 
| | ------------- |  | --------------- | ------ | --------------------- | - | --------------- |  | --------------------- | ------ | --------------- | - | --------------------- |  | - | ------ |  | - | --- | 
| |               |  | 2005            |        | 2004                  |   | 2003            | 
| |               |  |                 |        |                       |   |                 | 
| |               |  | Total
  Revenue |        | Long
  lived
  assets |   | Total
  Revenue |  | Long
  lived
  assets |        | Total
  Revenue |   | Long
  lived
  assets | 
| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       | 
| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       | 
| | North America |  | $               | 54,406 |                       | $ | 298             |  | $                     | 32,550 |                 | $ | 176                   |  | $ | 21,247 |  | $ | 91  | 
| | Asia Pacific  |  |                 | 16,609 |                       |   | -               |  |                       | 14,327 |                 |   | -                     |  |   | 7,130  |  |   | -   | 
| | Europe        |  |                 | 13,984 |                       |   | 39              |  |                       | 9,915  |                 |   | 40                    |  |   | 6,410  |  |   | 32  | 
| | Israel        |  |                 | 1,730  |                       |   | 2,027           |  |                       | 625    |                 |   | 1,626                 |  |   | 160    |  |   | 381 | 
| | Others        |  |                 | 677    |                       |   | -               |  |                       | 501    |                 |   | -                     |  |   | 74     |  |   | -   | 
| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       |  |   |        |  |   |     | 
| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       |  |   |        |  |   |     | 
| |               |  | $               | 87,406 |                       | $ | 2,364           |  | $                     | 57,918 |                 | $ | 1,842                 |  | $ | 35,021 |  | $ | 504 | 
| |               |  |                 |        |                       |   |                 |  |                       |        |                 |   |                       |  |   |        |  |   |     | 

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

| |            |  |                         |    |      |  |      |  |  |     | 
| | ---------- |  | ----------------------- | -- | ---- |  | ---- |  |  | --- | 
| |            |  | Year Ended December 31, |   
| |            |  |                         |   
| |            |  | 2005                    |    | 2004 |  | 2003 | 
| |            |  |                         |    |      |  |      | 
| |            |  |                         |    |      |  |      |  |  |     | 
| | Customer A |  |                         | 6% |      |  | 10%  |  |  | 12% | 

F-36

---

---



SYNERON MEDICAL LIMITED AND ITS SUBSIDIARIES

|                                                
|------------------------------------------------
|Notes to the Consolidated
  Financial Statements
|                                                
|U.S. dollar in thousands                        

|           |                                                                                               |  | 
|---------- | --------------------------------------------------------------------------------------------- |  | 
|Note 16   | EARNING PER SHARE                                                                            
|           |                                                                                               |  | 
|           | The following table sets
  forth the computation of basic and diluted net earnings per share:

| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | ---------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | 
| |                                                                                                |  | Year Ended December 31, |           
| |                                                                                                |  |                         |           
| |                                                                                                |  | 2005                    |            | 2004 |   | 2003       | 
| |                                                                                                |  |                         |            |      |   |            | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | Numerator:                                                                                     |  |                         |            |      |   |            |  |   |            | 
| | Net income                                                                                     |  | $                       | 41,063     |      | $ | 27,340     |  | $ | 8,589      | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | Denominator:                                                                                   |  |                         |            |      |   |            |  |   |            | 
| | Weighted-average number of
  shares outstanding used in computing basic net earnings per share |  |                         | 24,888,273 |      |   | 18,916,911 |  |   | 16,814,023 | 
| | Dilutive effect: employees
  stock options                                                     |  |                         | 2,775,589  |      |   | 5,166,076  |  |   | 2,892,514  | 
| | Dilutive effect: warrants
  issued to investors.                                               |  |                         | -          |      |   | -          |  |   | 805,860    | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | Total weighted-average
  number of share used-in Computing diluted net income per share        |  |                         | 27,663,862 |      |   | 24,082,987 |  |   | 20,512,397 | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | Basic net earning per
  share                                                                  |  |                         | 1.65       |      |   | 1.45       |  |   | 0.51       | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 
| | Diluted net earning per
  share                                                                |  |                         | 1.48       |      |   | 1.14       |  |   | 0.42       | 
| |                                                                                                |  |                         |            |      |   |            |  |   |            | 

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

| |                                       |  |                         |   |      |  |       |  |  |         | 
| | ------------------------------------- |  | ----------------------- | - | ---- |  | ----- |  |  | ------- | 
| |                                       |  | Year Ended December 31, |  
| |                                       |  |                         |  
| |                                       |  | 2005                    |   | 2004 |  | 2003  | 
| |                                       |  |                         |   |      |  |       | 
| |                                       |  |                         |   |      |  |       |  |  |         | 
| | Options to purchase
  ordinary shares |  |                         | - |      |  | 1,733 |  |  | 347,436 | 
| |                                       |  |                         |   |      |  |       |  |  |         | 

F-37

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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/ David Schlachet | 
|                    |                         | 
|                    | David Schlachet         | 
|                    | Chief Executive Officer | 
|                    |                         | 
|Date: June 29, 2006 |                         | 

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|              |                                                           
|------------- | ----------------------------------------------------------
|EXHIBIT INDEX
|              |                                                           
|12.1          | Certification of Chief
  Executive Officer                
|              |                                                           
|12.2          | Certification of Chief
  Financial Officer                
|              |                                                           
|13.           | Certification of Periodic
  Financial Reports             
|              |                                                           
|15.1          | Consent of Independent
  Registered Public Accounting Firm

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